What’s a startup incubator?

Most startup businesses don’t start with a well defined team. Tech startups, in particular, need much less people to work on their prototype than any other type of startup. This lack of talent and creative diversity in these first days of their lives makes them exceptionally susceptible to failure. Especially when the founder – or co-founders – have not built the management or people skills required to effectively steer the boat where they need. A startup incubator can greatly help a startup business find their bearings, at a fraction of the time — and cost — needed otherwise.

What’s a startup incubator?


Why startups need an incubator

A tech startup rarely starts with a full blown operation. Typically, a small team of developers will work on a prototype, as Proof of Concept. There may be a business-oriented co-founder, or a marketing officer involved; but they will usually not have a chance to prove their worth until later on in the process.

None of the initial members know what dreams may come. But, to get there, they will need mentorship, more know-how than they can afford and a network of partners or providers to help them get exposure. Without at least some of these elements, it will be extremely difficult to yield results, if any.

Business structure and clear focus

The road to success is hard to tread and full of unexpected turns. Maintaining business focus when things get rough and the team’s morale seems to have seen better days, is really important. A startup incubator can offer some much needed business structure, reducing the fronts on which the team needs to work on improving. That way, the founding team can focus on what matters most; staying afloat, until their business model starts making sense.

A startup incubator provides a complete business infrastructure, ensuring a work environment free of distraction. That way, it can facilitate the completion of business goals and objectives. The team can work towards proving their product in the marketplace, taking one step further towards success, on the road less traveled.

Funding

Most startup incubators work with partners. And, since one essential aspect of business is funding, some of these partners are investors. Funding an idea that has yet to be realized is tricky, to say the least. For that reason, the easiest way to conduct business at that stage is to bring angel investors on board; perhaps as part of an angel network. The incubator will help the team fill out their applications and learn how to pitch their idea — or product — effectively.

A startup incubator can provide startups with access to investors, taking advantage of funding opportunities, as needed. Most of the time, an angel investor will be able to provide a startup with a lot more than funds. Typically, angel investors specialize in a certain industry or sector; they look for opportunities where they feel comfortable mitigating the risk of failure. As such, they will usually be able to help startups by providing them with some of their know-how and contacts from their network, to get them started.

Workspace and equipment

A complete business infrastructure must include a clean, well lit, temperature controlled,  noise-free work environment. And then, it must include computers, servers, gear, furniture, and comfortable chairs for all these long hours the team is going to spend developing their product. Not to mention, access to a meeting room, a call center and a printer; these are also essential.

In all ways that matter, a startup accelerator should be able to offer a complete work experience. And, it should be able to do so at low cost, with flexible options — or plans — to accommodate the needs of the team, within the available budget.

Low cost administrative, financial or legal services

Any company needs to be managed in terms of administrative tasks, operations, IT consulting and support, financial management and legal services. A newly founded startup company has not yet reached the point where they can accommodate such needs. Not in skills required and, certainly not in the costs incurred. That is where a startup accelerator helps. By providing low cost professional services as part of the incubation program, a startup incubator offers a nearly noise-free environment for the startup to focus on understanding their market and developing their solution.

Resources

A group of developers with a great idea or a newly found tech startup lack the professional resources to learn and develop a business and a healthy customer base. A startup incubator will offer the additional education and tools required to keep things moving forward. Regular workshops on roadmaps, market research and forecasting, business fundamentals, financial and legal structures and funding are also helpful, to that end. Most importantly, all these resources are found in one place. The team no longer needs to meticulously look for resources online or travel around to get valuable education on new skills and technologies; which, of course, greatly reduces costs.

Partnerships

A Proof of Concept, a Beta, an MVP and a glimmer of the future; still quite far from the scale of growth required to achieve success. A startup can build enough momentum, traction and confidence that the right solution is being developed. But, there’s nothing like a good partnership with industry experts, influencers or analysts. Industry professionals will make up the network that will boost a startup company into healthy economies of scale, growing by the minute; even exponentially. Bringing one B2C customer on board brings much less returns than bringing in a B2B customer. Let alone, bringing a partner on board that sells to their own B2C customers, en masse.

Partnerships — and networks — can form in terms of know-how transfer, specialized hardware or software provision, expertise, office or lab space, or assets. Most of the time, such partnerships are strategic in nature. Doing things more efficiently is as important as avoiding single points of failure. And there’s nothing like a joint venture, to do it faster.

What’s more, a network of partners will also bring contacts and referrals and exposure; new business opportunities, in general.


What is a startup incubator?

A startup incubator is nothing more than a company that helps newly found and early stage startup companies develop their business around their idea, product or service. To achieve that, a startup incubator offers services such as management training, a workspace and all that goes with it, for these companies to be able to focus on their product and business through their early stages.

Startup incubators are catalytic to economic development. This is also true in terms of regional or national economies, according to the NBIA. Startup incubators are classified into 5 different types:

  1. Academic institutions
  2. For-profit property development ventures
  3. Venture capital firms
  4. Non-profit development corporation
  5. Combinations of the above

The entire concept of a business incubator began in the US, in 1959; Joseph L. Mancuso opened the Batavia Industrial Center in Batavia, New York, at a warehouse. Business incubation expended in the ‘80s and gave birth to a few similar concepts that spread to Europe later on. These were concepts such as technology or science parks, innovation centers, etc.


How a startup incubator works

In helping a company establish their business, grow and scale to success, a startup incubator provides all the important business services, pertinent to management training, basic marketing training and a well thought out, clean and practical workspace.

While providing access to funding, a startup incubator will typically not provide funds to startup companies. In accordance with that, a startup incubator will, consequently, not seek an equity stake in its portfolio companies. Their cash flow normally comes from sponsorships and other participants, IP royalties and liquidity events. And they use these proceedings to support their portfolio companies.

Business coaching

One of the co-founders is destined to be the CEO of the startup company. But, rarely have they developed the skills to properly manage a business; let alone, a team of people with distinct personalities, towards the same goals and objectives. This includes soft-skills, like empathy. And, while soft-skills can be built, it helps if anyone in the manager’s seat has a natural predisposition for them.

A business mentor or coach can train a CEO, CMO or CTO on all the matters related to business development. If they’re good enough, they may also be able to offer a few insights into some of the soft skills.

Either way, smooth operation typically boils down to a few fundamentals:

  • Constantly learning, improving and building new skills
  • Being a good listener, across the board
  • Understanding and supporting one’s customers really well
  • Supporting one’s team
  • Understanding and working towards goals and objectives, including the ones set by stakeholders
  • Managing assets vs liabilities, including available funds, extending the runway
  • Keeping an open mind to feedback and to reality — pivot if needed

Marketing principles

There are certain principles, methods and techniques to marketing a product or service. That is, depending on the type of product, the market type and the specifics of the customer segments. A startup incubator can infuse these principles into the product management process, making it almost indistinguishable from product development. This is most probably the right mindset for a team to be in, when building a business around their product.

A startup incubator will not offer marketing services. But, promoting the principles of marketing, along with some of its best practices will offer the team the basic toolset to work on the first steps of product promotion.

Low-noise environment (administrative, financial or legal services)

A low-noise environment means a work environment where the product development team can focus on understanding their customers and developing the best possible product for them. A startup incubator will take over the initial financial planning, the expenses and income management, possible regulatory compliance and Intellectual Property management, as well as the company’s needs in Human Resources.

Financial planning

A newly found company will get started researching their market before producing any results. It may be awhile before they can get started developing their product. And there’s only so much their initial funds can do to get them up and running. A startup incubator will be able to help with some much needed financial planning. That way, the team can make sure their financial resources will be well utilized and will get them as far as possible in their efforts.

Expenses & income management

Managing expenses and income is neither obvious nor easy. There are hidden costs in nearly every aspect of running a business; from payroll to selling a subscription plan to a customer. The startup incubator will be able to manage both expenses and income with ease, in these first stages. That way, the startup company will be able to handle their financials the right way, while also taking the opportunity to learn from professionals, and the time to learn how to do it right in the future.

Regulatory compliance & Intellectual Property (IP) management

Sometimes, developing a product or service to help any type of niche or long tail market solve a problem, may not be enough. Certain types of products need to observe regulatory compliance, due to local, national or universal legal requirements or restrictions. There have been cases where a startup company spiraled out of control due to regulatory red tape. That goes to say that, if regulatory compliance is not provided for from the get-go, the company may start bumping into walls until their funds are depleted.

The startup incubator can provide access to experts in such matters. They can help in drafting some sort of “code of conduct”, which in turn will help avoid regulatory red tape. It can function as an enabler towards getting things done the right way. That is, mitigating any legal risks and minimizing liabilities.

A similar matter describes managing Intellectual Property (IP) and who has rights over it. While it’s a much simpler legal matter, it still involves a considerable amount of legal jargon and certain considerations, as yet unknown to the development team. Such matters are better provided for at the beginning of the process, so that all parties know where they stand.

A startup incubator is also able to provide access to legal services, drafting all legal documents for IP rights and all legal agreements among parties. That way, it’s clear who owns what and what rights everyone has over what will be developed throughout the entire endeavor.

Human Resources

A startup company usually consists of a really small group of people of different trades and specializations. This will change really fast, as the team understands their market and customers better and better, by the day. The needs for operations, development and management are ever increasing; especially when growth kicks in. The team will need to hire new people every few months, to cover new needs.

The startup incubator can use a network of contacts and provide the company with access to new talent. Perhaps, even a pool of highly specialized and qualified people. This will save the CEO the headache of gathering CVs, talking to and evaluating hundreds of different people and selecting the right ones to join the team in their efforts.

Pitching skills

Pitching is a skill that is built over time with practice, observation and tweaking. In light of the ever evolving needs of the startup, its CEO needs to pitch the product to investors for funding, to prospects for sales and to partners for collaborations. All three scenarios require strong pitching skills.

With enough practice, useful and actionable feedback and some coaching on what should be included in a pitch deck, the startup accelerator is able to transform an otherwise introverted developer into an extrovert public speaker who can get things done.

Advisory board

By the most used paradigm, startup companies use their limited resources to develop a minimal product that will impactfully and efficiently resolve a problem for a certain audience. In other words, the company needs to be a champion in one single thing. This builds trust with customers and lets the company make the transition from a single thing into a multitude of different ones with conviction. Finding what this one thing to begin with is, actually proves to be somewhat difficult.

To help discover what people need to see in a product, startup companies often rely on two different kinds of advisory boards. One is their stakeholders and industry experts — who may form their board of directors, in the future. But, most importantly, the most useful advisory board is one formed with early adopters and really good customers. The startup incubator can help the team go through the process of forming what would be the first customer advisory board. This gets expanded in the growth stage with more advisors, and more qualified ones.

Team structuring

As part of hiring new talent and bringing them on board with the vision and values of the team, a good manager needs to structure their team(s) well, arming them to the teeth with the tools for success. Team structuring can benefit from team building activities. These can vary greatly, ranging from a simple ideation session, to celebrating a milestone, to a night out, to have some good time and exchange ideas and experiences.

A startup incubator can help a company build this kind of culture. It’s inside that incubator that this group of inexperienced people will become a well knit, roaring team that belts through its stages of evolution and development using their common goals as their guiding star.

Tech commercialization

While marketing a product is part of tech commercialization for a tech startup, there’s often more to it than meets the eye. With the decentralization and compartmentalization of different services that comes with any new complex technology, product development teams often need to create a standalone sub-product to complement their main product.

The startup incubator can help a startup company identify different tech commercialization opportunities, beyond marketing their core product. Especially when a distinct part of the product can be licensed to augment other technologies.


What are the benefits of a startup incubator?

Even for a group of inexperienced entrepreneurs that just formed a startup company, raising some funding and giving away part of their company is a big decision. The stakes are high and the need to mitigate the risk of failure. Joining a startup incubator will provide the inexperienced team with mentorship, knowledge and the network to jumpstart their business.

Mentors and experts

Every industry is different; and, along with it, come the customer segments, their buying power and problems they need to solve. Business training is no different. There are different aspects to B2C business than B2B business. Things are also different when the company is selling goods than when selling software subscription plans. A group of highly specialized mentors and industry experts — and, perhaps, influencers and analysts — can provide the new-coming entrepreneurs with what they need to know and what they need to learn in the process of developing their product and a business around it.

Know-how sharing

Business incubators can also be specialized. Tech product incubators are different from lifestyle product incubators, for example. By that token, it’s logical to conclude that most companies incubated in a startup incubator tread the same set of tracks, regardless of the nature of their product. That said, being incubated, a startup can take advantage of the collective knowledge available, consulting with different development teams and learning all the best practices, first hand. And all that is usually just a door or two away.

Networking

Due to the specialized nature of a startup incubator, it’s only natural that they have managed to build a robust and reliable network of partners, including mentors and industry experts, who are willing and able to help new startups understand their markets and how they can set up and run their companies best. Not to mention the exposure and visibility they can offer each company. 

This network usually comes as part of the incubator’s services at a very low, or at no cost. Otherwise, many of these business partners would require substantial compensation to offer the same thing; perhaps, even a financial commitment such as equity in the business in question.


How is a startup accelerator different?

A startup accelerator is probably the next logical step after a startup incubator. Once the idea is mature enough to be proven as a concept, a business model is drafted around it. This model needs to be validated before it can be used to invoke scaled growth. And it’s a rather complex process, where the team needs to painstakingly discover how each one of its components works best on its own and in conjunction with the rest of the components. That said, a startup accelerator is quite different from a startup incubator, in more than one way:

Prerequisites

A startup incubator will work on a business idea and a basic version of the business model for a startup. An accelerator will typically start with an established version of this model and at least an alpha version of a tech product. And it will work on the MVP and on to the MMP versions of a product, before scaling it into a full fledged version for mainstream audiences.

Timeframe

Time is of the essence. A startup incubator will flexibly work with a startup company for up to 2 years or so. But, once the basics are established, an accelerator will only need 3-6 months to rigorously help a startup enter its growth stage.

Goal

Goals must be reached in the right order. No one wants to build a castle out of cards. For that reason, a startup incubator will help new startups build their business foundation, before an accelerator takes over to throttle the startup into scaled growth.

Types of support

A startup needs different things at different stages. While incubated, startups need their workplace, administrative, legal and financial support, business modeling, prototyping and product development. Once all these bases are covered, a startup accelerator will provide seed or series funding, resident mentors from the startup’s industry and a much more valuable network of partners to work with, using established traction as an asset.

As discussed, an incubator will not require equity in exchange for their services. But, once a startup company joins an accelerator program, things are quite different. New investors that may come on board will actually require a term sheet and some kind of equity, in exchange for their investment.


What makes for a good startup incubator?

As mentioned, there are a few different benefits one can reap when joining a startup incubator. This includes a robust and reliable business network, specialized mentors, a good tech infrastructure and workspace, access to funding and noise reduction to let the team work on what they know best.

Relevant mentors

Good mentors are not so easy — or cheap — to find. Successful entrepreneurs or plain good teachers, there’s nothing better for a wannabe entrepreneur than someone to show them the ropes, with experience.

Relevant network

Love it or hate it, networking opens the door to scaled growth. It can make a world of difference, transforming a viable business model into a multifaceted business, blown “out of proportion”. That is the power of knowing the right people. And that is what a typical startup incubator can offer.

Infrastructure

There’s workspaces and then there’s workplaces. It might be the difference between a house and a home. With all the furniture and artwork and hardware or other gear, gadgets and whatnot, what is a work environment if not welcoming, innovative, playful and motivating. A startup incubator must be able to offer such an environment, encouraging learning and growth, leveraging the entrepreneurial drive.

Sufficient funding

Bootstrapping, the 3Fs, initial funding or not, insufficient funding is like the plague. So is more than enough funding, of course. A startup incubator should be able to identify the amount of funding that is just sufficient to lead a startup company through its initial stages and into the growth stage, without problems. That’s called pre-seed capital. Seed funding, angel investors and VCs will take it from there, if all goes well.

Noise reduction

What with all the legal red tape, the financial plans, all the expenses and payroll and all that it’s hard to work on discovering a market and a product. Not to mention all these IT-related issues popping up out of nowhere. That’s why a startup accelerator offers the appropriate resources to handle all these aspects of business, so each startup has the chance to focus on learning and creating. And that makes for a virtually noise-free work environment.


Making the most of a startup incubator

A series of different events should take place before the startup company can be on their merry way with a healthy growth rate in their arsenal. During incubation, the team will have access to contacts, partners and qualified prospects that could be their customers. They need to use these opportunities to make the most of the startup incubator. And there are a few things in the way of thinking that can help work towards these goals.

Take ownership of the venture

Many teams are afraid to fail. But, failure is an integral part of success. Fear of failure makes for a team that lacks the drive needed to succeed. The founders should understand that; and the product development team should eventually do so, too. Failing a few times and changing a few things for the better before trying again is key to development.

Keep learning

Any startup company in its early stages struggles with the fact that they’re not making money. There’s a common misconception in this, as the goal of an early stage startup should be to to learn; not to earn. Knowledge is the currency, not dollars. And that’s because learning all they can about their market, their customers and themselves is of paramount importance to shaping a set of values, a mission and a culture that works. After that, everything else will gradually come into place.

Meet people

Meeting new people that are interested in our work is a great source of business opportunities and, eventually, growth. Be it an investor, an expert, an influencer, an analyst or an early adopter of our solution, they all have to offer their bit. Learning to take advantage of these opportunities, making them worthy, is really important. If one opens these doors and goes through them, they will find great things behind them. To that end, why not be ready to keep an eye out for these instances? And, having an elevator pitch ready to go, telling one’s story in a single breath, won’t harm either.


Key takeaways

A startup incubator is a logical step for every startup that lacks the knowledge, experience and skills to build a successful business around an idea or product. Selecting the right startup incubator is a different conversation, of course. But, there is a shortlist of items that one can check before joining one. These will greatly reduce the risk of making the wrong decision.

All in all, making sure that a startup incubator can offer relevant business mentors, relevant network of contacts and partners, workplace and infrastructure, access to sufficient funding and noise reduction through administrative, financial and legal services, should be enough to help a startup join the right startup incubator.

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