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Should Small Business be Cautious of Incubators? Part I

By Linda Plater |

"...The typically unflappable Winblad [one of the most powerful figures in the technology industry] spat out the prediction that within a year, 90% of the incubators spawned in the past 30 months will be out of business...."

10th annual Information Week Fall Conference, September 2000
Tucson, Arizona.
Information Week Magazine, Sept. 2000

companies that provide a combination of financial and non-financial resources to start-ups in exchange for an equity.
Small business start-ups, especially those in technology or Internet fields, have probably followed stories in the media about 'incubators' or even considered getting help from such groups. What is all the buzz about?

Anybody can give money away, but just how venture capitalists or as some refer to them "vulture capitalists" do business should be under scrutiny. Investors with deep pockets try out a lot of ideas in hopes that a few will succeed. Some give very little and expect a great return in exchange for helping a fledgling company. And, once the company makes it, they may even try to take the credit. The role of an incubator is to help build companies, but in fact there seem to be fewer actual successful incubated companies than incubators.

Just what kind of value-added services do incubators provide to their start-ups?

To help new companies get a jump start on developing their ideas, a good incubator would need to take over administrative tasks including: legal, accounting and accommodation. They may also add value to a start-up by providing access to early stage technology, equity revenue and by helping to improve employee retention.

What incubators offer in the way of cash and expertise varies greatly. Entrepreneurs seeking a relationship with an incubator need to do their homework to ensure that they are entering into a relationship that will bring them the benefits they need and expect.

Business incubators come in different packages: consulting firms or agencies also present themselves as incubators. Remember, building a really successful, sustainable business can be tough even with outside help. Success follows the commitment of a strong and talented team with a great plan combined with resources at the right time.

"The first years in business are never easy. Any incubator promising a magic bullet solution probably hasn't gone through the process themselves." says Peter Standeven, President,

A good incubator will bring money and experienced partners with strong, credible track records gained from operating a similar business to the start-up. They should also bring valuable contacts who will help accelerate the start-up's growth. As any business develops, mentors should be there to answer the important question - "is this normal?" - when a new business faces tough times or unyielding prospects.

A good incubator will act as a true partner. More involved in the business than a regular investor, but not as involved as management. And these partners should take the time to work with the start-up to establish, in advance, any ground rules they have for the relationship, including who will run things. All responsibilities should be formally laid out before any commitment to proceed is made.

Next: What to Consider Before You Seek Help from an Incubator or Venture Capitalist (Part II)

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