Feature

 

The Pros And Cons Of Incubators  

 

DECK: Without a doubt, new businesses face numerous challenges, and chiefly among them is capital. If you are a seasoned entrepreneur, this is hardly earth-shattering news. But if you are a budding entrepreneur with an idea that will revolutionize the planet and don't know where to begin, you may want to look into the idea of incubators.

 

What Is An Incubator?

An incubator, in the business world, is similar in definition to an incubator you would find in a hospital. In this case it is a location where a fledgling business can grow in a situation that permits or encourages formation and development.

"The concept is to bring together, in one location, office space and associated services for an entrepreneur to launch their business," says T. Craig Bott, president and CEO of Grow Utah Ventures. "So consider it a little bit like a one-stop center to help and assist businesses."

Utah currently offers a handful of incubators to fledgling entrepreneurs, extending everything from office space and receptionists, to training and even mentoring.

"Generally they've been associated in some way with a public entity," Bott says. "They've been an initiative that a public or political organization has undertaken, like the colleges, the universities, applied technology centers or a county or city government. There are just a few in Utah that are privately operated."

 

Incubator History

The idea of business incubators isn't new. They have been around for decades with mixed and varied success. But don't feel left out if you've never heard the phrase or are unaware of the idea as a whole.

"It is a trend that kind of fluctuates," observes Podango Vice President of Consulting Chris Knudsen, who, as an entrepreneur, has used several Utah incubators. "As the economy picks up and especially as the technology sector picks up, what you find is that incubators tend to pop up more."

Incubators really came of age in the late 1990s as the "dot-com" empires flared up across the country. Many of these new businesses were pretty much ethereal when it came down to actual location, making it a tad bit difficult to have investors over for a presentation in one's garage or basement. The incubator industry grew almost in sync with these dot-coms because people needed a professional setting and incubators provided just that and much more.

 "People were running to get into these incubators because of the infrastructure they provided and because a lot of them were providing investment," Knudsen adds.

But once the dot-com craze cooled off and many of those companies subsequently flamed out, closing their doors, the incubators that had also so quickly flourished, simply disappeared.

"The economy blew up in 2000 and 2001, so a lot of these incubators went away because a lot of the companies that they were incubating went away, and they could no longer sustain themselves," Knudsen says.

"If you go back into that history, some of them have not done very well or do any good at all," affirms Bott. "We think there is a viable model and it's a model that is using the incubator as a center point for a wave of services."

Location within an office building with postal address, conference rooms, Internet and phone services, and resources such as fax, teleconferencing and copy machines is all fine and dandy, but there is much more to a successful incubator.

"If you bring those services and look at an incubator much like an entrepreneurial endeavor — that it has to service a customer's needs, that it has to be responsive to those needs, it continually has to innovate and be service-oriented — then I think that model has some viability to it," says Bott.

 

Advantages of an Incubator

Simply put, the advantage of using an incubator is the infrastructure.

"It's the turn-key aspect, which is I can walk in there, I can set up my laptop, I can plug it in and I'm off. I've got a phone, I've got a desk, I've got an office space and, in some cases, I have a receptionist," states Knudson. "You walk right in and you plug right into that and you're off to the races."

Besides the office space, Internet lines, phone systems and other bells and whistles, one main advantage is the overall image it provides in an instant.

"Part of initial marketing for an early stage business is you've got to look a little bigger than you are and that requires a professional image, professional presence, office space, and meeting space for your clients, customers and investors. So the appropriate incubator space offers that to them," says Bott.

 

Buyers Beware - The Cons

But even as you read this, remember that not all incubators are created equal.

"Most incubators, where they fall short is they promise much more than those things," warns Knudsen.

When researching potential incubators, be sure to ask others about their experiences in the incubator to make certain you will get what is promised.

"A previous company I helped found started out in a now-defunct Utah county incubator, we were told that if we were to come into that incubator, we would automatically have access to and get consulting from the 15 people that were financing that incubator," shares Knudsen. "Within the two month period that I was in that incubator, I met with one of the 15, and put out numerous requests to meet with a lot of the others. They never even showed up, I never even saw them come down to their own incubator to look around."

This was a potentially expensive lesson to learn.

"We were giving up equity as part of our deal," adds Knudsen. "We were there for free and so we got the infrastructure for free, but we were giving up equity in the business, which was a difficult thing for us to justify after a while."

 

Getting Into An Incubator

So you've found that getting started in an incubator is a good idea. This naturally brings up the question of price, and our second cliche that "there is no such thing as a free lunch."

"Incubators usually go through a fairly rigorous screening process," shares Knudsen. "They want to make sure they are putting businesses in there where the owners of those businesses are going to be serious about making a good run and making the business work."

Some incubators ask for partial ownership, some don't but will still offer discounted monthly rates on office space and services.

"I'm not going to say whether you should or shouldn't give up ownership to be in an incubator. You might think it is a good deal, you might not think that's a good deal, but usually there is some kind of trade off," Knudsen says. "Usually you're going to have to pay rent to be there, but usually it is really cheap."

If you think an incubator is for you, try to spend time investigating all of your options.

 "It pays to shop around," Knudsen says. "I think you can get into some incubators relatively easy. You can get into the CEDO (Center for Economic Development of Orem) incubator pretty easy, you can get into the Miller Business Innovation Center fairly easy, and if you showed up with $200, I think they'd let you right into the Provo Labs Academy. But to get into the E Station incubators at Grow Utah Ventures is different."

"The marketplace rewards those who will create value and who, in a sense, are the best, so we're taking that marketplace dynamic and putting it into the incubator and Grow Utah Ventures' set of services," said Bott. "Because of that we're very careful in our selection."

Finding an incubator that actively prescreens and examines your business in depth before allowing entry into it is indeed different. Incubators and those who run them may have invested their own capital into your business and therefore are sharing your subsequent success or failure. If that is so, they are more likely to actively provide your venture with more than just office space.

"They have a vested interest in your success at that point so they are going to see that every single thing that they've promised, every single thing that they could deliver to you, will happen because they will only get their return on that money if you're successful," says Knudsen.

The downside is they will be more judicious in the overall selection process since space and resources are limited.

 

Look Before You Leap

It is crucial to remember that having an incubator infrastructure doesn't necessarily equate to success.

"It would be a disservice to the entrepreneurial community for any of us in the incubation industry to say we've solved a problem," warns Bott. "It's not so much the space, but it needs to be mixed with a lot of other things — mentorship, training, capital and those types of things. Don't think incubators solve anything of their own, they are simply an arrow in a quiver to help entrepreneurs."

And that valuable mentoring, training and capital could be the proverbial "icing on the cake" and key point on what entrepreneurs should look for when selecting an incubator. Remember, an incubator isn't the proverbial silver bullet deciding if a business succeeds.

"It doesn't come down to whether or not they have infrastructure or not. So it is a nice service that exists, but success in entrepreneurship ultimately comes down to the entrepreneur," Knudsen says.