Business incubators support the development of start-up companies, helping them survive and grow during their early stages, when they could be the most vulnerable.
Incubation of early stage ideas and companies regains attention and is becoming a popular way to foster innovation. The idea of bringing start-ups together with external social and financial capital has proven attractive to private investors, corporations and academic institutions. Incubators as a concept have been widely explored. Today, there is already much known concerning best-practices and success factors for different types of incubators, their structure, and roles.
Setting up an incubator, besides sufficient resources, requires a good knowledge of target markets and industries, as well as local conditions. Analyzing the info-communication edge of high-tech industries, a recent study on incubation from Telekom Innovation Laboratories* identified four various major models combining the dimensions of an incubator’s focus, approach to target audience, and specific opportunities in different environments. The advisory-centric, facility-centric, management-centric and investment-centric models are described further in the following.
Advisory Centric model
The advisory-centric model is presently predominant in the United States, since there is a strong existing community of incubator founders, people with a lot of start-up management expertise, and a small amount of seed funding is applied. It acts as a type of “boot camp”, with a focus on intensive short-term coaching and mentorship for start-up entrepreneurs.
The target groups of this model are early stage start-ups with a well-balanced team and profound business ideas. Additionally to the small amount of seed funding (<200K) this model assists start-ups with attracting new investors. This model’s success is based on a high selectivity of start-ups and disposition of reputable mentors with an outstanding entrepreneurial track record. The program length of this model is typically three months.
The advantage of the advisory-centric model is the access to a large number of ideas, entrepreneurs and potential acquisition targets with relatively small investment needed. The big risk of this model is the lack of a strong brand image. The missing prestige might lessen the attraction for top start-ups and mentors (managers) to work with the company or incubator.
Still, the model works well. A prominent European incubator fitting the advisory-centric model is “HackFwd”, providing pre-seed funding to start-ups such as Infogr.am, Filmaster, or BeamApp. Another example of the advisory-centric model is Y-Combinbator, an elite boot camp and mentorship program for entrepreneurs in Mountain View, California, US. Among others, it incubated Dropbox, Reddit, Loopt, Scrib, AirBnB, and Hipmunk.
Facility Centric model
The facility-centric model is another popular way for incubation; it seems that the entry barriers to start it are low. It consists of a shared office space model that works to create a cluster of entrepreneurial activity and thereby enhance collaboration among start-ups.
The target groups of the facility-centric model are usually start-ups or SMEs. The model concentrates on the creation of clusters or events where start-ups can improve and create collaboration with other start-up enterprises and get connected to possible investors. Compared to the advisory-centric model, the level of management advisory services in this case is quite low. The program length tends to be without pre-defined limit.
This model could leverage the opportunity of existing facilities to its start-up tenants. Professional services and IT infrastructure, which already exist inside the incubating company, can also be used by start-ups to increase their productivity and efficiency. In this model, incubating companies can benefit from the perceived image of being an innovation hub. The risk of this model is no or low direct influence on start-ups’ strategy and success.
Facility-centric model is known via RocketSpace, a co-working facility in San Francisco that provides office space and by PlugandPlayTechCenter.com, which is a classic incubator providing facilities, consulting and access to investors. It has helped e.g.: Google, and Paypal.
Investment Centric model
The investment-centric model, as observed in Germany, is rather investment-focused, bringing in their own ideas and recruiting co-founders as interim managers. The model can be used by large Venture Capital firms that couple their venturing efforts with direct participation and involvement in start-up management.
This model is focusing on start-up management teams and entrepreneurial minded talents. The program length is from six months to maximum one year. In return for the incubators’ offering, they get the majority of the equity stake of incubated companies. By leveraging this model, it is required to have a significant pool of experts who act as interim managers and consultants for start-ups.
The investment-centric model can build on the opportunity of already having access to existing venture capital groups, and extend their involvement. A risk for the incubator could be the creation of conflicts with in-house development or at a later integration stage as a start-up grows.
An internationally well-known German incubator is “Rocketinternet”, operating worldwide and fitting the investment-centric model. They have invested in and accelerated successful companies such as Zalando (EUR 100 million monthly revenues in 2012), eDarling, payleven, CityDeal (sold to Groupon), and many more.
Management Centric model
The management-centric model is used often by German Incubators too (e.g. FoundersLink or Betafabrik). The incubator acts more like a “co-founder” in a start-up’s early stage, providing intensive support. Same as the investment-centric approach, this model involves initiation of the business idea and active involvement in start-up management, but it offers more social capital and less financial support.
The target group of the management-centric model is similar to the investment-centric model, entrepreneurial minded people. This model possesses reputable founders in the incubating company and experience in recruiting and managing top talent portfolio start-ups. This includes a unique management approach and established collaboration with investors (VC or Angel funds). In this case the typical program length is 3-4 years.
The management-centric model opportunity is in minimization of the risks in product development and in start-up organizational improvements that it offers. Through this model, required capabilities for exploration of new markets and verticals can be developed. The high risk of this model is the dependency on business intelligence of start-up mentors.
For Betafabrik, the founder’s experience and lean management approach are key differentiators to other models. It builds on agile software development, strong customer integration in the development process and use of open source software platforms. They incubated recently e.g: Club Family, Ligatus, Next Level, among others.
The National Business Incubation Association (NBIA) estimated in 2011 that North American incubators supported about 49,000 start-up companies that provided full-time employment for almost 200,000 workers and generated annual revenue of nearly $15 billion.** Additionally, business incubators reduce the risk of start-up failures. NBIA member incubators reported 87 % of all start-up companies that have graduated from their incubators are still in business.***
Incubation is a competitive market. It is essential to have the right approach to attract the best start-ups. In the US, highly selective 6 month “boot camps” enjoy the greatest popularity. In Germany, incubators are more investment-focused, bring in their own ideas, and recruit co-founders as interim managers. But incubation has long been established in markets outside the US as well.
Incubation is a great way to generate ideas. However, it is essential to carefully consider the key risks and challenges, and assign appropriate measures and sufficient funding to mitigate these.
Some questions though, have not been answered. For example; when to start their own incubator and when to rather partner with established ones? Other interesting are is future development of incubation, will there only be those four models existing in parallel in future? Are we going to see fragmentation and specialized incubators for micro businesses, maybe with social impact demand? Or are we going to soon see consolidation in a new “incubation” industry?
*Dunaj.M, Narielvala, Y., Arunov, E.et al., “Reviewing corporate incubation success factors- Exploratory study” in proceedings of the XXIII ISPIM Conference – Action for Innovation: Innovating from Experience – in Barcelona, Spain on 17-20 June 2012
**NBIA, 2012 State of the Business Incubation Industry
Michal Dunaj is R&D Director in Deutsche Telekom Laboratories in Berlin, Germany. Dunaj is responsible for Strategy, Foresight, and Networks integration in the innovation project portfolio of Telekom Innovation Laboratories, a central go-to-point for innovation in the Deutsche Telekom Group.
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