Technology Incubators: Advantages and Disadvantages

For a successful startup or the launch of innovative programs, sometimes funding is lacking, sometimes knowledge, and sometimes a working infrastructure. In such situations, the so-called "business incubators" (BIs) are intended to provide effective assistance. Every year in the U.S., most new technology startups begin their successful development with the comprehensive support of such organizations. Statistics indicate that the majority of them continue to operate in the field chosen within the incubator, experiencing significant financial growth.

Objectives of Technology Incubators

Technology incubators in the U.S. are a type of business incubator, which in turn are infrastructure entities that provide support to small businesses in the early stages of their development. More than a third of business incubators effectively support firms focused on the development and implementation of new technologies.

The main task of business incubators is to "grow" companies that are ready to implement a particular idea or innovative project. To this end, BIs create favorable conditions, finance projects, provide management training, and offer office space, but all this support is provided for a certain percentage if it involves commercial BIs.

Companies that wish to develop and promote technological innovations and products stand out in particular. They usually have enough funds only at the initial stage, and subsequently, they need financial support more than anyone else. The task of technology incubators is to provide such opportunities, that is, to ensure access to financial sources and obtain funding in the required amount. Typically, independent incubator companies have such capabilities and desires. The U.S. Economic Development Administration also participates in the "growing" of young businesses and partially finances programs until they reach the market. In general, the income of business incubators depends on federal and regional support programs for small businesses. However, in recent years, more than 600 different business incubators funded primarily by private businesses have been opened in the U.S.

The support for young companies is provided from the moment of formulating the idea to the release of a prototype product or service into the market. But one should not think that the presence in a business incubator can last forever: as a rule, a successful startup takes only a few months, during which optimal growth conditions are created for program participants. Afterward, the "graduate" startups present their projects to various investors. Some manage to find funding, some grow through their own sales, while others seek alternative funding options or sell part of the company to the same incubator.

By helping the development of small businesses, BIs increase employment, contribute to the emergence of new jobs, attract investments, and expand tax revenue, thereby leading to greater economic stability for the region and the country as a whole. The existing National Business Incubator Association (NBIA) in the U.S. defines such organizations as catalysts for the economic development of individual regions and/or the country as a whole. A study conducted in 2009 by the Economic Development Administration of the U.S. Department of Commerce clearly demonstrated how BIs can impact the economy: for every $10,000 invested, incubators created 45 jobs.

Who Can Become a BI Client?

Unlike many business assistance programs, incubators do not serve all companies. Want to join a business incubator program? Then you must submit an application for admission. The selection criteria for candidates vary from program to program, but ultimately they only admit those with viable business ideas and workable business plans. This factor complicates the comparison of success rates for incubated companies with the overall business survival statistics.

Participants in incubation programs can be new American companies or foreign ones (to a lesser extent) that are ready to operate in the conditions of the American market and within the U.S. territory. Participation can involve individuals with existing but unimplemented business ideas, or a team of specialists can be assembled for a specific idea before it appears on the market. A notable example is Bill Gross, who created his own business incubator, IdeaLab, through which he "grew" around 20 companies.

It is important that the idea or project you own is of interest to the incubator owners, as they are interested in generating profit. Each BI has its own system for selecting ideas and projects, including assessment criteria.

Incidentally, BIs practice several forms of participation in programs. For example, home-based businesses or early-stage companies with their own facilities may become partner clients and utilize the incubator’s services. For remote clients, virtual service provision can be organized in the form of consultations and any other assistance available in electronic format.

The Essence and Advantages of Technology Incubators

Recent history tells us that technology startups used to emerge under very challenging conditions. This consumed a lot of time and was not always effective. Now, idea generators have a real alternative: with the help of business incubators, they can achieve their business goals as quickly and efficiently as possible.

The essence of BIs' work is designing the services needed for clients and providing those services, essentially creating a comfortable environment and a creative atmosphere for project realization, idea testing, and bringing finished products or services to market. This requires several months during which existing or newly formed teams work with specialists such as lawyers, managers, patent experts, and marketers. The criterion for completing the program is achieving the set goals. Throughout the contract period, each attracted specialist must adhere to confidentiality principles.

Only one in 10 to 15 companies that go through an incubator receives further funding from investors attracted by the incubator. The others seek additional funding independently. However, the documentation for technology startups developed in business incubators is very helpful for future investment searches and increases the likelihood of success. More about these documents can be read in the article: "What You Need to Start Seeking Investments" ( https://usbusserv.com/invest/chto-nuzhno-imet-dlya-nachala-poiska-investiczij )

The tasks of the business incubator consist of providing companies and teams with appropriate conditions. By entering the program, you receive:

• physical space (rent on favorable terms);
• provision of furniture and equipment;
• access to the internet and other communication services;
• administrative services, including solving everyday operational issues;
• development of a business plan with the involvement of business planning specialists;
• training in business fundamentals and marketing;
• consulting;
• assistance in building mutually beneficial relationships with investors and partners;
• access to various information databases;
• financial management;
• organization and assistance in managing the company.

Currently, there are about 6,000 companies in the United States providing outsourcing services within business incubators, ranging from equipment and furniture supply to accounting services.

Specifics of Participation in Technology Incubators

A significant number of business incubators are non-profit organizations supported by the government, educational institutions, and private companies. Universities support their students, while corporations select the most interesting projects for themselves, thus laying the groundwork for the future.

Recent trends indicate that in the USA, the balance is shifting in favor of commercial companies. Undoubtedly, an important task for business incubators is to finance projects, but any such organization pursues one interest—making money. How does this happen? In various ways:

• Although some services provided to incubated companies are free, incubators still charge for training or consulting services.
• In addition to financial support at the regional or federal level, incubators have certain benefits—such as tax breaks and construction incentives for incubators.

• Incubators open access to financing or sponsor incubated companies themselves, offering amounts that are not so large—ranging from $10,000 to $50,000—but they expect to receive an equity stake in the company, which can be 7-10%. What is the point of working with commercial incubators? The price is fixed. All subsequent financial matters with the incubator will be resolved based on the price fixed in the contract, not the actual value of the company, which can increase significantly as the product approaches sales readiness.

For example, the terms for using the incubator's services are 10% of your company, which the incubator owner requires in exchange for their $20,000. Thus, the company's value is fixed at $200,000. The money received will quickly run out, and by the time funding from the investor comes in, you will likely still not find any (this is not a fast process). Where will you go for money? Correct: back to your home incubator. There, you will be offered another $82,000, but for 41% of the company. That is, you receive money but lose control of the company. And this is if you're lucky and the incubator decides to finance you further. If further funding is not available, everything you have worked on will simply go to the incubator as the main shareholder. If funding from the incubator continues, your startup will no longer belong to you: your stake in it will be minority. As a result, in a year or two, your stake will be only 3% - 5%.

It is also important to remember that participation in an incubator does not guarantee you investments: only one in 10-15 startups finds an investor after the incubator, which is, of course, significantly higher than the overall industry average (1 in 40).

Many incubators are highly specialized. Those that focus on IT cannot help those involved in robotics, and incubators dealing with biotechnology are completely useless for electronics startups. Naturally, the question arises: how can one even get into a non-specialized incubator? Surprisingly, it is quite easy. The incubator has funding, and there are people working there. And what if they haven't gathered enough startups relevant to the incubator's theme? Then, funding is cut, and some employees are laid off. To avoid losing their jobs, they have to recruit applicants with different projects for the program.

Top 3 Popular Business Incubators in San Francisco

San Francisco is not only a global tourist center but also a city where aspiring talented but inexperienced entrepreneurs can find material, physical, and moral support for their innovative ideas. This is evidenced by well-known startups like Airbnb, Instacart, and Uber. Almost 1,400 firms have already raised over $10 billion to develop new businesses within business incubators.

Here are the top three leaders among those ready to support startups:

500 Startups. A company that works with residents and non-residents who have interesting and potentially successful technologies in reserve. It offers a 4-month program costing $37,500 and $150,000 in exchange for a 6% equity stake. Notable "graduates" of the incubator include Talkdesk, RealtyShares, and RapidAPI.

Y Combinator. A startup accelerator, one of the first accelerators founded in 2005, specializing in technology companies. It offers 3 months of training and funding of up to $120,000 in exchange for 7% of the company. Over 250 successful startups have graduated from Y Combinator, including well-known names like Reddit, Heroku, and OMGPOP, as well as Dropbox, Airbnb, Stripe, Loopt, Justin.tv, Weebly, and Scribd.

AngelPad. Has launched over 140 projects and focuses on selecting interesting technology companies from anywhere in the world for a six-month incubation period. Terms include an investment of $120,000 plus access to $300,000 in cloud credits. Previous clients include HireCanvas, Postmates, and SimpleReach.

Summary

If you are a poor student or a talented scientist with no money but an idea for a startup, then an incubator in the USA is a great opportunity to work with major investors and universities. In the end, it's a chance to learn and understand how this whole business works. But keep in mind that if your startup begins to rise and becomes successful, you will likely lose it while trying to pay for the experience and knowledge gained—this is the price of the issue. Our task in this case is to select the most effective and profitable incubators.

However, if you feel confident and are an experienced businessman with a good startup idea in reserve, participating in incubation programs is definitely not for you: on our site, you will find information about other options for business financing.