Business incubators and their importance

Definition of business incubators

Business incubators are systems and sets of resources that are designed to conceptualize, nurture, accelerate, cushion, support and promote development as well as growth of a business enterprise/idea by minimizing failure rates, facilitating initialization, offering financing and knowledge to such enterprises for a period of time either for profit or no profit. Incubation periods may differ depending on many factors.

Overview of business incubators and entrepreneurship

Entrepreneurship promotes innovation, intelligence, ingenuity and creativity that help us do business in any environment. On the other hand, entrepreneurship is driven by ideas. Today, any idea can be good depending on the perception. It is increasingly vital to identify, tap and nurture the ideas from conception.

Having realized the importance of incubation, many institutions both in the private and public sectors have established centers where entrepreneurs with viable ideas can be assisted in nurturing and executing them to profitable and sustainable levels. The incubators provide a wide range of services that include capacity building, provision of management expertise, sharing of knowledge and other resources such as ICT and work premises, provision of legal services and advice, mutual sharing of risks, financial support, association, networking and fellowship.

Main functions and resources of a business incubator

As defined, business incubation focuses on different aspects of entrepreneurship. Incubators should support the growth and ways of minimizing the failures of start-ups. The business incubator therefore should provide resources that support these ideas.

  1. Financing
  2. Provision of a business premise
  3. Coaching and mentoring
  4. Infrastructure
  5. Law, regulations and policy
  6. Fellowship and association
  7. Intellectual property
  8. Knowledge services
  9. Referrals/networking
  10. Administration
business incubators
steps followed by business incubators

They are described below

1. Financing

Depending on the type and nature of an incubator, capital investments are the foundation that a start-up can be easily built on. A business incubator can play roles such as offering collateral, guaranteeing loan installments, boosting equity value, and direct capital injection, providing inventory/stocks or providing cheap long-term loans. The objectives are to have a capital base for the business enterprise that is manageable, feasible, and flexible and has predictable returns. Small businesses are faced with a myriad of challenges such as inaccessible capital since many lack other investments that can act as collateral to secure loans. They are also new in the market hence cannot enjoy loyalty because their credit scores are still low. Bank financiers are investors and will always want an opportunity where they can recoup their money. Start-ups are volatile and live wires that financiers choose to avoid. We have incubators that offer low interest seed capital or long term loans to incubatees. Some government programs like the youth fund have ability to sponsor start-ups whereby a viable business plan can be used to acquire financing though that’s rarely the case in practice.

2. Provision of a business premise as a function of business incubators

Established and more financed incubators will provide a work premise that is competitive, strategic and well resourced. Availability of physical space that is already paid for will give a start-up competitive advantage since it can dramatically reduce capital costs. A strategic location ensures that the business increases sustenance, visibility and resource sharing. It is easier to share knowledge, ICT tools and work materials in a networked location. These incubators are common with ICT related projects in providing social media platforms, Skype or Google hangouts to entrepreneurs enabling them work seamlessly with other professionals. The business premise can be as small as a single floor in a building or can be as large as a business park. The advantages of working in such a set up are many. The business incubator can set standards and monitoring policies to control the quality of products originating from such a location. There is also efficiency in supply chain since it is easier to share warehouses and acquire materials in large volumes hence enjoy economies of scale.

3. Coaching and mentoring by a business incubator

Inducing knowledge, researching, guiding and training as well as providing technical skills and knowhow are critical in determining the success of an incubator and the business enterprises it sponsors. Businesses are built on concepts and ideas which need to be imparted to others. Most business incubators have successful entrepreneurs sitting in their boards as trustees. It’s not every day that an upcoming entrepreneur gets to interact with some successful members of the society. In an incubator, they provide networks, training, knowledge, experience and skills that can significantly reduce the risks of failure.

An incubator just like a sport requires a technical team that monitors performance and develops measures or targets which need to be achieved at a specific period. Small businesses by nature are fragile but again, this is where creativity and conceptualization cannot be ignored. An incubator focusing on training and research will ensure that start-ups get the knowledge and information required.

4. Infrastructure

Infrastructure is perhaps the costliest in business development. It depends on the nature of a business. While there are businesses that people can effectively effect from their homes with limited asset requirements, there are others that require proper networks in terms of ICT, quality buildings tailored for the function, access to markets, transport facilities, processing plants and other ancillary equipment. Many times we’ve heard stories of farmers not accessing the markets in time or sometimes not at all. Then there are perishables that need to be transported fast.

It can also be because of applying the concept of just-in-time marketing where inconvenience is not tolerated. Moving of supplies seamlessly reduces the cost of the final product and improves service delivery. To effectively stay in business such advantages are highly appreciated. Proper business incubators especially for-profit oriented will be equipped with high tech resources that enhance efficiency in service delivery and production. Some incubators develop parks with high-end technology. For instance, such premises can enjoy bigger bandwidth which increase the speed of processing data. Infrastructure is dependent on the type of incubator as well as the functions. Technology-based will be unique to technological demands that are different from say a mixed portfolio incubator.

5. Law, regulations and policy relating to business incubation

The requirements of starting a business vary from simple documentation to complex certification depending on the nature of the business. It is important to patent and own intellectual property rights of the ideas invented. Incubators provide license fees, lawyers and intellectual property education to ensure that creators harness full benefits of their ingenuity. Legal feasibility is crucial in new concepts that might appear to contradict the law. For instance, the laws to regulate what we term as alternative medicine.

There are quacks that sell drugs as herbal medicine but cannot be successfully prosecuted due to lack of proper laws. What if there is one who has worked diligently and indeed invented a herbal drug that can say, reduce aging? There are those processes and businesses for which the law is silent, non-existent, and insufficient or requires high legal fees. Whichever way, an incubator plays a role in devising, revising and monitoring laws that are friendly to the business.

In terms of policy development, objectives and strategies need to be reconciled with the government economic policies, a fact that is new, cumbersome or unknown to the beginners in business. Incubators have knowledge and experience that limit chances of collision with the law. They also help the start-up move fast when it comes to implementation.

Where the incubator supports professional businesses, developing regulations that focus on fairness, evenness and equal opportunity increases the appeal to a specific business. Regulations improve organization and predictability hence the parties are aware of penalties. This not only supports a particular business but also manages the business environment by clearing common vices like sabotage. If the proprietor would be doing all these work independently, the cost of business would be high, the risk of failure prevalent, and the business environment would be unforgiving in such start-ups.

6. Fellowship and association in business incubation

A business incubator targets a specific form of business. It is therefore obvious that the businesses supported will have shared characteristics. Similar businesses are easy to work with hence the common services can be consolidated lowering the cost of doing business.

When businesses are bound by the same rules and regulations, it is only productive when such organizations form associations or professional bodies. Professional bodies for instance have powers to form rules and regulations that ensure standardized services and easier monitoring. In our country, professional bodies for more advanced businesses are the most preferred route. There is increased loyalty in such groups which eventually helps members access and share resources hence minimize failure.

7. Intellectual property

Abuse of intellectual property rights is rampant in small businesses. The process of generating ideas in general is informal and banks on trust which leads to many start-up ideas being copied and exploited. Business incubators can protect creativity through legal action, financing and creating awareness. Entrepreneurs also learn about trade secrets, copyrights, patents, licensing, subsidiary, joint ventures, partnerships, agency and other property rights that concern local and international law.

8. Knowledge services/consulting/expertise

Expert services cost a fortune making affordability a major issue in start-ups. Business incubators are equipped with personnel who can be accessed for free in case of not-for profit incubators and subsidized for those in for-profit incubators.

9. Referrals/networking

Due to exposure, incubators have wide contacts that members can access by networking with other partners in say, supply chain. With facilities like subsidized fees and discounts to members, the partners can practice customer lock-in as well as customer profiling that increases customer base.

10. Administration

A business incubator sponsors several smaller businesses. Administration activities like certification, supervision, planning, marketing, managing ICT resources, managing accounts, auditing, regulating or organizing can be easily shared at reduced cost and with high efficiency.

IDENTIFYING A BUSINESS INCUBATOR

Once an entrepreneur has settled on a specific business line, the next most vital step is to identify business incubators. The fact that one has an idea does not qualify him to do business. Assessment of such ideas has to be done. Young entrepreneurs should invest in good business plans that can sell and appeal to incubators.

Factors that most business incubators consider

  1. The uniqueness of the idea which influences the survival of a project or the potential for growth.
  2. Technical, social, economic, legal and political feasibility have to be weighed to evaluate the viability of such a project.
  3. The size of the project will determine the funding process, implementation time and other requirements.
  4. Project specifications will assess if the said project suits that specific incubator.
  5. Compatibility with other partners in the incubator so as to minimize conflict of interest and unfair competition for resources.

Apart from the common pillars of entrepreneurship that include creativity, intelligence, ingenuity, innovation and productivity, self-initiative is paramount in making a decision of becoming an entrepreneur. There are those that choose the path of directly getting into business and learn from the experience. It’s good to know that the advantages of choosing to use an incubator to establish a business are invaluable. What with access to funding, knowledge, tuition, professional infrastructure and networking. With this at hand, choosing an incubator is all that matters.

Factors that affect the choice of a business incubator

  1. The period of incubation
  2. Financing
  3. Laws and regulations
  4. Environment

The period of incubation

It is important to negotiate the period when the business idea needs to be supported. This helps the entrepreneur to plan and avoid inconveniences that can arise due to miscommunication.

A business enterprise cannot remain in incubation forever and therefore it’s obvious that a contract should be signed where possible.

Business incubation period is influenced by complex and multiple factors due to the difference in the nature of the business or the incubator. For instance, if the incubator is a university institution involved in research and knowledge, the period can be long or unlimited. An example is research on malaria drug. It’s unlikely that such a venture will be short-term. On the other hand, if the business field is in telecommunication products, say, a cash transfer network, the incubator could be a corporate firm with an intention of making profit and gaining more ground. In such cases, there are shorter time-lines and most likely the business incubator intends to use the entrepreneur as an agent of the firm. Profits will motivate the whole process.

2. Financing

It is important to note that some business incubators are for-profit. In this case, it’s an arrangement of mutually benefiting from the relationship. Though they can fund the business, they might require separate arrangements on other resources like space, use of ancillary services and even demand that the capital be repaid as a low interest loan. All these requirements should be made clear and that’s why a binding contract is necessary in this type of incubation.

3. Laws and regulations

Each vocation should be encouraged to form a professional body that checks the standard of services, monitors performance, regularly reviews laws and imposes penalties that are binding to offenders to encourage development of business opportunities. Laws increase predictability, facilitate fairness, help access justice and improve the professional appeal.

4. Environment

The physical environment helps in exploiting the opportunities in a location. Environment factors like political climate, infrastructure, workforce and markets play a role in selecting an incubator.

TYPES OF BUSINESS INCUBATORS

Government incubators

They are publicly funded from government coffers. They are usually not-for-profit and can either be specialized or general in nature.

The main aims of Government incubators are:

  • Creating jobs/employment.
  • Income generation to citizens.
  • Controlling inflation or depression.
  • Distributing wealth.
  • Widening of the tax net.
  • Implementing political pledges.

The government can offer services that range from provision of extension officers, social workers, administrative, warehousing and exclusive access to markets. Once entrepreneurs have an idea, the next action is to approach the relevant government program and register. However they are plagued with insufficiencies such as being under resourced, red tape and lack of experts. Economic Stimulus Packages (ESPs) and marginalized groups initiatives are aimed at assisting this category of entrepreneurs.

Academic related/ research or scientific incubators

Just like the government sponsored incubators, these are usually non-profit since the institutions stand to gain immensely when they perform pilots, prototypes and test runs.

They are usually well funded and organized to facilitate appropriate controls and monitoring. They are sponsored by opinion leaders like Bill Clinton and international firms like Microsoft in partnership with university or tertiary education institutions.

The main aims of academic-related business incubators are:

  • Data collection that is used in analysis and evaluation.
  • Promote new inventions and discoveries in different fields such as software, pharmaceuticals or electronics.
  • Train users on the innovations to rule out error and failures in discoveries made.
  • Acceptance and familiarization of concepts to the community.

A research firm investing in say, genetically modified (GMO) technology, knows that it will meet resistance and even backlash when such a project is rolled out. The best approach therefore will be to recruit several farmers, provide them with the necessary inputs, train and popularize the technology and have the farmers own the project. Once the farmers experience the benefits they’ll fight to have the incubator retained among them hence the concept can be easily adopted.

Corporate incubators

They are generally supported by large organizations hence are well funded with high level infrastructure.

The main aims of corporate incubators are:

  • Promote entrepreneurship by franchising, outsourcing and decoupling some services to enable the parent company concentrate on the core business. The firm can also aim at locking customers by having agents who use the companies’ products making it difficult to abandon the project. Once there are smaller businesses where the users’ livelihoods depend on, it becomes hard for the small businesses to close shop and they’ll fight to survive independently.
  • Visibility: The company can easily brand its products making the logo have a wider presence when people embrace its services.
  • Social responsibility: By supporting other people through funding, infrastructure development and general business growth, the firm actively participates in social development.
  • Publicity: The firm can easily spin its image to create perceptions on what the society intends to hear.
  • Monitoring: It is easier to monitor and control activities of a group of people which have contractual or established relations with the firm. The firm can push its agenda and specific objectives using these members.

Private incubators

They can be for-profit or not-for-profit. Profit incubators are sponsored by individuals who have an interest in establishing other businesses using members’ partners or just supporting upcoming entrepreneurs with venture capital. A for-profit incubator can also be a supermarket that builds a large premise using part of it while letting out the rest at very low cost to attract members who establish unique but complementing services. In this way, more people visit the premises hence increased customers.

Not-for-profit can be sponsored by philanthropists who want to actualise by donating their services and money to the community. The business plans have to meet the specifications that these people require which are usually dependent on the individual.

Public-private partnerships

They are more sustainable because they have government backing and are privately managed hence get the best of the two sides. Examples include the Nailab Technology Incubation Centre.