Business incubator

Business incubator definition

A business incubator is a program that gives very early-stage companies access to mentorship, investors and other support to help them get established.

Business incubators work with early-stage companies to get them to move beyond their embryonic phase. They provide support and coaching for new businesses that have a promising idea, as well as for entrepreneurs still in the idea stage.

Business incubators are designed to help early innovators achieve a minimum viable product (MVP) and create an achievable plan to take that product to market. If a start-up has already developed an MVP or launched its product, it would likely not qualify as a candidate for an incubator. A business accelerator is more suitable for those at an advanced stage of development.

In addition to mentorship and investment opportunities, a business incubator gives young companies access to logistical and technical resources as well as shared office space.

Because every company develops at its own pace, an incubator program can last anywhere from several months to a few years. In every case, the goal is to give start-ups the tools and knowledge they need to stand on their own two feet.

Some incubators operate as non-profit organizations while others provide seed capital and support in exchange for equity positions (i.e., ownership) in the companies.

An incubator helps an entrepreneur put their house in order before beginning the process of commercializing the technology they’re developing.

How do business incubators work?

There are many kinds of business incubators in Canada. Some are focused on helping early-stage companies in a specific industry, while others are affiliated with a university, such as the DMZ at Toronto Metropolitan University, The Forge at McMaster or The Bridge at Dalhousie.

“There’s often good synergy between a university and an incubator affiliated with that institution,” said Nicolas Castonguay, Senior Account Manager, Technology Industry at BDC. “If a university has a very successful incubator, it will help attract students to the university—especially students who might want to start their own business and eventually need the services of an incubator.”

There is also an important distinction to be made between for-profit and not-for-profit incubators. A for-profit incubator will take equity-in-kind from their portfolio clients, meaning they will eventually become part owners of the business.

Having an incubator hold equity in a start-up can be positive, since it will be in their interest to continue to help the company after the incubator program has been completed. On the other hand, this could have an impact on future valuations and could become costly, especially for start-ups going through multiple incubator programs at the outset.

Regardless of their specialty or revenue model, business incubators provide a range of services to those who are accepted into their programs. These services normally include access to:

  • mentors who have valuable industry experience or have built and scaled start-ups
  • business coaching and technical support
  • strategic advice on growth plans, including hiring, business development and production
  • early-stage investors through “demo days” and other events
  • in-kind services such as office space

Often, these organizations have an “entrepreneur in residence.” That person’s role is to help navigate companies in the incubator program towards their MVP, while pointing out pitfalls along the way and some potential solutions. This early-stage advice can help founders think like businesspeople.

Incubators vs. accelerators

Your need for either an incubator or accelerator will depend on where your business is at in its development.

Incubator Accelerator

Your business …

  • has no MVP
  • has no business model
  • is unsure when MVP will be ready

Your business …

  • has an MVP
  • has a business model
  • is close to product launch
  • is looking for seed or pre-seed funding
  • is already operational at some level

The main difference between incubators and accelerators is the stage of start-ups with which they work. While incubators tend to focus on the very earliest stages, even working with entrepreneurs at the idea stage, accelerators tend to choose companies that are slightly more mature. For example, if your start-up already has customers, or products and services available for sale, you may be better off in an accelerator program.

“The services entrepreneurs typically enjoy at an accelerator may also be different. Just like incubators, accelerators provide strategic advice and expert mentoring from seasoned professionals, as well as business training opportunities,” added Castonguay.

Start-ups in an accelerator may already have had pre-seed investment from friends and family. Therefore, the in-kind office space and access to certain technical services may not be necessary for them.

In some cases, a single organization can offer incubation and acceleration under the same roof, but these would be in separate programs that correspond to the needs of companies at different stages. Centech in Montreal is one example, with Waterloo’s Communitech being another. Others, such as Toronto-headquartered Creative Destruction Lab, offer specific expertise across multiple industries in various locations around the world.

Do business incubators work?

Fit is a key factor to ensure an entrepreneur gets the most out of an incubator. Idea-stage companies seeking this kind of support would do well to compare different incubators before deciding which one is right for them.

Some of the key questions for entrepreneurs to ask of an incubator include:

  • Will it take equity in my start-up and, if so, how much?
  • Who in its network could give me the advice I need to get this business off the ground?
  • Does it have strong links to my industry?
  • What are its alumni saying about its benefits?
  • Is it on the radar for investors in my field?
  • What fees are associated with it, and do I have the resources to currently take this on?
  • Have there been any significant changes in its curriculum recently, and if so, why?

“Taking part in an incubation program that is well aligned with your needs will certainly give your company a leg up, but it is still no guarantee of long-term success,” says Castonguay, noting that about 90% of start-ups fail.

At their core, incubators help entrepreneurs understand their blind spots and offer basics about running a business. Those business lessons and the networking potential are often what could help you take your start-up to the next level.

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