From the first incubator facility in Batavia, New York, about 50 years
ago, today's business incubators have evolved into complex technology-focused
settings that mirror society's own development. Now, in the U.S. alone,
there are over 1000 incubators and new ones open each week.
Why this growth? Simply, incubators help to remove risk from enterprises,
an extremely valuable outcome. Incubators are often one of the first investors
in a start-up or early-stage company. Like "angels" (high net
worth individuals, usually accredited investors), incubators provide more
than money to create and grow new companies. Most incubators invest far
more in a company than they receive in return and take on the role of a
generous angel investor. Angels, because they invest at an enterprise's
earliest stages, can find great va1ue in working closely with an incubator,
not simply for development of a deal stream but for a compatible partner
as well.
Incubators provide a structured environment for mentoring and services needed
to establish successful companies. Whether the incubator operates a facility
or delivers services in a virtual setting, all provide a set of targeted
services and a value network designed to dramatically improve a company's
chances for success. Research by the National Business Incubation Association
(NBIA) has shown a success rate (still in business after five years) of
87% for companies developed within an incubator compared to a success rate
of 20% of those outside an incubator.
Most incubators are non-profit entities focused on expanding local economies
through development of high-growth, wealth-generating companies. They can
provide client companies a range of valuable services such as on-site mentoring
by seasoned entrepreneurs and professionals; advisory teams of top experts
in the community in each area of business and technology; access to payroll
administration, employee benefits and insurance; links to a major research
university; support in applying for research and development funding; counsel
on intellectual property, licensing, and related areas; and connections
with ange1, venture, and lending financial sources.
The business incubator uses many of the tools of the angel investor to
ensure company success. Both incubators and angels begin by screening the
potential investment. Most incubators require at least a draft of a business
plan to make certain that the business is considering the major issues in
launching a new business. Along with the business incubator application,
client companies must normally supply detail on near-term financials. Then
incubator management interviews the company, and, if all goes well, the
company is either approved, or is referred to a committee of volunteer professionals
representing key business areas such as legal, accounting, technology, marketing,
and entrepreneurial experience. Typically, about 1 in 10 applicants is selected,
and an effort is made to have compatible, and not competitive, companies
and technologies. Incubator companies often develop a family structure,
based on their own interactions and programs of the incubator. This leads
to companies assisting one another in marketing and business development.
Incubators often take a royalty or equity position in the company in
return for the value-added services of mentoring, networking, and preparation
of the company for financing. Usually these interests are small, about 3-6%
in a mix, and designed to not interfere with raising capital. Many incubators
have abandoned rental agreements, and instead use either permit or license
structures.
Although the average applicant will initially state that money is only
ingredient missing for their success, the incubator view is that the money
will be there for the company if the company is properly prepared. The incubator
maintains strong ties to capital sources, especially angel investors. The
key factor for a successful incubator company is the willingness and capacity
of the company to be mentored. While the incubator always respects the private
ownership and investment of the company, it also expects to have its services
valued. In addition to the mentoring, most incubators develop strong relationships
with key large corporations that may create vertical pathways to market
for their client companies.
This matrix of incubator services is nearly impossible to duplicate on
a company's early capital, and they need to show a willingness to use the
services. Angel investors, who often want to provide the value of their
experience and insight in addition to funding, fit well with this structure.
Incubators and angels often go together. They have relationships with
the prototypical angel investor who invests either on their own or with
only a few others, and with angel groups that prefer to invest smaller individual
amounts but benefit from group due diligence. Then, rounding out these contacts,
incubators work closely with venture capitalists, banks and private equity
sources to access alternative sources of capital.
Most incubators, particularly those taking a royalty or equity interest,
focus on high-growth and wealth-creating companies. They seek companies
with a high probability for a liquidity event (either an IPO or acquisition)
as a means of providing an exit for investors. With this starting point
they can often select and mentor a strong, de-risked candidate for angel
investors. However, even with stringent criteria and efforts to create a
growth candidate for IPO or acquisition, most companies will not produce
a near term liquidity event. Instead they will evolve into a lifestyle company
with private ownership and control that has a better than average annual
growth rate. The good news is that the odds are in the angel investor's
favor that they can either benefit from a liquidity event or work out an
alternative exit if they invest in companies developing in a successful
incubator. |
