What Is A Tech Incubator?

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What Is A Tech Incubator?

Before tech giants like Dropbox and Airbnb became the mega-companies they are now, they were once ideas pitched to a well-known tech incubator – Y Combinator.

Consistently hailed as the best tech incubator in the world based on investments and exits, Y Combinator’s alumni have over $300B in valuation, with over 125 companies valued at $150M and have generated over 60K jobs. In addition to Dropbox and Airbnb, Y Combinator counts among its alumni other notable present-day tech standouts like live-streaming service Twitch, restaurant delivery DoorDash, payment processing Stripe, and grocery delivery pickup service Instacart.

Did the incubation program at Y Combinator contribute to their success? Is participating in an incubation program a sure way to turn an idea into an actual living and breathing business? Are there any tech incubators out there, and how does one get in? Let us dive into tech incubators’ specifics and how they can help businesses in their earliest stage thrive.

 

Definition and Origins

Much like an actual incubator helps a prematurely born baby live, a business incubator, and a tech incubator, helps tech companies survive in their earliest stage. Incubator programs help startups grow and gain traction in the market by giving them essential physical resources (i.e., actual office space) to crucial support like mentoring and acquiring real customers.

Tech incubators are often the most popular, but incubators for other industries like agriculture and, more recently, social enterprises also exist. The International Business Innovation Association (InBIA), a global non-profit with over 1,200 members of incubators, accelerators, and entrepreneurship centers in 30 countries, lists the following attributes of an incubator:

  • typically charge monthly program fees or membership dues in exchange for office/desk space and access to program offerings.
  • Offer programs to member companies that typically include mentoring, education/training, and informal learning opportunities.
  • Host events to provide networking and learning opportunities for both member companies and the local community.
  • Member companies are usually required to apply to ensure they meet the incubator’s criteria or mission (industry, stage of company, founder demographics, Etc.).
  • Usually have graduation policies that are typically based on achievement of agreed-upon milestones, growth metrics, or time-based stipulations.
  • Typically, companies join incubators on a rolling basis (non-cohort) and can reside in the incubator for 1-3 years.

India’s Impact Index based on the U.S.’s incubator and innovation network (by far the largest and most advanced in the world) gives us a glimpse of the purpose by which incubators operate. 90% of incubator and entrepreneur programs seek to grow entrepreneurial culture, 75% of programs currently or plan to provide mentorship programs, and 70% seek to encourage minorities or women. Only 12% of entrepreneurship programs directly offer seed funding.

Also, InBIA categorizes its members’ incubators by the following five incubator types:

  • academic institutions
  • non-profit development corporations
  • for-profit property development ventures
  • venture capital firms,
  • and combination of the above

The idea of incubators in general and tech incubators, in particular, may have become commonplace since the dot com era of the ’90s, but their origins date back to 1959. The formal concept of business incubation started in the U.S. in 1959 when Joseph L. Mancuso opened the Batavia Industrial Center in a Batavia, New York warehouse. It then expanded in the U.S. in the 1980s. It spread to the U.K. and Europe through various related forms like innovation centers, the French pépinières d’entreprises and technopoles, and science parks.

Today, the International Business Innovation Association (InBIA) estimates that there are over 7,000 incubators worldwide. Around 1,500 of which are in the U.S. and about 1,000 in the E.U. Incubation activities are not limited to developed countries and are increasingly popular and thriving in developing countries (e.g., Startup Chile).

 

How does it work?

The main difference between government or state-sponsored business assistance programs and incubators is that incubators do not serve any or all companies. Incubators restrict participation based on industry or community, and one must seek admission into an incubation program.

The process is competitive. Although acceptance varies from incubator to incubator, only those with the most feasible business ideas and doable business plans are accepted. Other eligibility requirements are depending on the program. For example, a tech incubator focused on food technology or mobility solutions or A.I. will only accept applicants with business ideas catering to these sectors.

As the primary goal of being in an incubation program is to build the foundation of new startups, once admitted, the support given to startups includes (but is not limited to) office space, administrative and legal support, business planning, product development, and prototyping.

The time spent in an incubation program varies from 1 to 3 years and depends on the type of business and expertise and efforts by the participant. For example, health tech and life sciences companies and others with comprehensive research and product developments generally stay longer in incubation programs.

Typically, once agreed-upon milestones such as growth metrics like revenue targets, staffing level, Etc., are achieved, incubation participants can then graduate from the program.

 

Tech Incubator: How does it affect a business’s success?

On the macro level, incubation is a means of addressing various economic and socioeconomic policy needs. Policy needs like job creation, nurturing entrepreneurial climate, technology commercialization, and diversifying local economies.

The building or accelerating regional industry clusters, business creation and retention, encouraging minority entrepreneurship, and identifying potential spin-in or spin-out business opportunities or community revitalization are also examples of these economic and socioeconomic policies.

When it comes to support that incubators get, economic development organizations sponsor about a third of business incubation programs. Program sponsors include government entities (such as cities, counties, or economic clusters) and academic institutions, including two- and four-year colleges, universities, and technical colleges.

There are also incubation programs that are private and for-profit. In many countries, incubation programs are funded by regional or national governments as part of an overall economic development strategy.

On direct impact, a study conducted by International Business Innovation Association (InBIA) showed an 87% success rate for companies participating in business incubation, almost double the 44% success rate for companies that did not incubate.

A UK-focused study done by Wayra showed an average survival rate for businesses going through incubation is at 92%. A 2018 study conducted in Italy also showed similar results suggesting that the incubation effect is significant in shaping new ventures’ innovation performance (measured as a percentage of sales of new-to-market innovations). Incubation positively moderates the impact of internal technical capabilities and collaboration with potential business and innovation partners.

Incubators bring with them an entire support system essential for early-stage businesses to thrive. During incubation, startups will have unique opportunities to make connections, find partners, and acquire their first real customers. Incubators can provide the best for businesses in the early stages. Still, it is up to the team to make the most of this experience, using networking to connect with mentors, professionals, other startups, and investors.

 

Tech Incubator: How to choose one?

What does your business lack? The best incubator should be based on your business needs – whether short-term needs or broader goals, choose one that can best support you. Metrics to consider are the cost of joining, incubator track record and program quality, success rates, business growth, and renowned alumni.

Another important criterion, and for some, the most important one, is access to funding. Incubators provide networking events that put participants in direct contact with investors during the incubation run and even indirectly resulting from participating in the program. Startups can consider graduating from an incubation program as a “stamp of approval” – a validation of their business’s worthiness.

Choosing a tech incubator will also depend on the industry and, more specifically, the sector within that industry. For technology startups, incubators have become more segmented that there are now specific incubation programs catering to specific verticals.

For example, France’s Station F, founded in 2017 and hailed as the world’s largest startup facility, has programs for particular sectors sponsored by industry stalwarts – Microsoft’s A.I. Factory, LVMH’s La Maison des Startups for luxury tech, Shakeup Factory for food tech, L’Oreal’s Beauty Tech Atelier for beauty tech and many others. Although there is generally no “one-size-fits-all” in incubation, it is worth considering going into these segmented programs rather than going for the general tech incubation if your business is in a clearly defined vertical.

 

Tech Incubators vs. Tech Accelerators

The terms incubator and accelerator are often used interchangeably. In reality, many innovation programs are a hybrid of incubation and acceleration. Nevertheless, there are notable differences between these two. If an incubator’s primary purpose is to nurture startups in their earliest stage, an accelerator, on the other hand, is to accelerate or speed up the growth of an established startup.

The degree of how “established” a startup varies from accelerator to accelerator; some require a proven business model and minimum viable product (MVP), while others have less stringent entry requirements. Another notable difference is that accelerators often provide funding, like seed investment, for their early-stage participants.

Here is a side-by-side comparison between a tech incubator and accelerator:

Feature

Incubator

Accelerator

Entry Requirements

Business idea or business plan

Established business model/MVP

Application

Competitive, restricted based on industry and/or vertical/sector

Extremely competitive but open to all

Timeline

Flexible, typically 1-3 years

Rigorous, typically 3 – 6 months

Purpose

Building the foundation of a new startup

Accelerating growth of an established startup

Support

Office space, administrative and legal assistance, business planning, product development and prototyping, networking, and learning opportunities

Seed funding, networking, and mentorship from industry experts

Financial obligation

Typically, monthly fees in exchange for physical space and access to program offerings

Equity in exchange for seed funding/investment

Operational funding

Economic development organizations, non-profit and educational institutions

Private funds

 

Notable Tech Incubators and Accelerators

Y Combinator consistently ranks at the top of tech incubator lists, and it also is often classified as an accelerator. It is also among the oldest and most established, having been founded in 2005 by Paul Graham. It has produced well-known alumni that are now notable tech giants with huge valuations (Dropbox, Airbnb, etc.). Located in Palo Alto, Silicon Valley, Y Combinator is run by a 40-person team and receives around 13,000 startup applications via the internet alone every year. The company then picks out between 200 and 240 projects to back per year, adopting a rigorous selection process. It invests $125K in the early-stage startups admitted into the program. It rigorously prepares them for three months culminating in a Demo Day when they pitch to an invite-only audience.

Techstars is also Silicon Valley-based. Founded in 2007, it has grown to five cities in the U.S. – Boulder, Boston, New York, Seattle, and San Antonio. It keeps its batches small to give each startup extra attention. It hosts 12-weeks mentoring programs and helps other incubators. The Alumni count now reaches over 2,300 companies that are 85.6% active or acquired and around $11.4 funding. Notable alumni include Digital Ocean, SendGrid, and Remitly.

500 startups is a seed and early-stage venture capital fund that is also a seed accelerator; It consists of 4 significant funds and 13 micro funds invested in startups in at least 60 countries. Funded startups include Udemy and Credit Karma, and exits have included sales to Google and Rakuten.

AngelPad is a seed-stage accelerator program based in NYC and San Francisco. Since 2010 it has launched more than 150 companies. Every six months, it selects about 15 teams from a vast pool of applicants (usually around 2000). AngelPad purposely makes their batch of participants small, and as such, they have been called the “anti- Y Combinator.” They spend three intense months with their participating companies. AngelPad’s companies have raised $2.2 B in funding with average funding for all AngelPad companies of over $14 M.

Seedcamp is based in the U.K. and labels itself as Europe’s seed fund. Its startups can draw on a global network of suitable advisors to allow them to overcome all the common challenges faced by all startups in the quickest time possible. Seedcamp provides consultancy, training, and other services designed to help startups conquer their market. In the space of eight years, the incubator has provided funding for nearly 200 companies, raised an investment of over $350 million, and “created” one unicorn: Transferwise.

Axel Springer Plug and Play Accelerator is a joint venture between Axel Springer SE, a leading company in the German print business, and Plug and Play Tech Center, an international startup accelerator in California. Startups can benefit from global opportunities, including mentorship and support in a wide range of topics. Founded in 2013 and based in Berlin, Germany, it gives $30 k for 5% equity. It is industry agnostic and has funded over 100 companies with over $44M funding raised.

Station F is based in Paris, France, and is dubbed as the world’s most extensive startup campus. With more than 30 startup programs, 35 public administrations, 100 VC funds, four mentorship offices, and 600 events per year, Station F offers all these resources and knowledge to help entrepreneurs grow their companies. Established in 2017, it provides 3,000 desk spaces and private meeting facilities; the incubator also hosts a 370-seat auditorium and dining facilities open to the public. Facebook’s Startup Garage in the building will host up to 15 companies on a six-monthly cycle and represents the company’s first physical space dedicated to startups.

 

Scaling Partners – Who We Are

At Scaling Partners, we are experienced at scaling startups. With our scaling as a service, we partner startups with processes and insights that they are missing and the people who have successfully scaled their businesses. As growth strategy consultants, we provide a tailor-made approach for your business. Our end-to-end fundraising service makes raising investment easier. We offer a mentoring service that pairs you with mentors who have already been there and scaled their businesses successfully.

Scaling Partners can give you a Chief of Staff, who will ensure your ideas become actions and help you grow your business faster. We also have investor services that help investors scout for investment-worthy late-stage startups that are not visible in the press or in scouting databases.

Main Photo by Austin Distel on Unsplash

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