How to Set Up a Business Incubator

by Victoria Duff; Updated September 26, 2017
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Business incubators function as an advisory board for start-up companies, assist in obtaining venture funding and provide office space, office furnishings and administrative services. In 1980, there were 12 business incubators in all of North America, according to the National Business Incubation Association (NBIA). By 2006, that number had grown to over 1,400, with 1,115 located in the United States and the rest evenly divided between Canada and Mexico. Only about five percent of U.S. business incubators are for-profit enterprises, engaged in venture investment and incubation for the benefit of investment partnerships. Local economic development councils or grants from universities, state governments or the federal government fund the rest, which are nonprofits.

Step 1

Create your business model. A successful incubator business model reflects the needs of the local entrepreneurial community; so, if you will be serving entrepreneurs coming out of a school like California Institute of Technology, specializing in technology start-ups is a good approach, though over half of existing incubators provide what's called mixed-use incubation -- no particular specialty. About 40 percent specialize in technology and the rest on general business and professional services.

Step 2

Research the benefits of creating a virtual versus a physical facility. With online meeting and collaboration capabilities, it is easy to operate a virtual incubator, with only occasional face-to-face meetings and required reporting. It eliminates the cost of maintaining a building to house your incubator clients. However, a physical presence allows the entrepreneurs to assist each other and allows you to monitor their activities, problems and successes.

Step 3

Plan your business model and set up your legal identity. Your legal entity will most likely be a corporation, and if you are going to be not-for-profit, you can apply for that status from the Internal Revenue Service (IRS) after you have operated as a corporation. For-profit business incubators are sometimes organized as limited partnerships. If a group of investors owns your incubator, it is best to employ the services of an attorney who specializes in Securities and Exchange Commission (SEC) compliance to set up the legal framework. Innocent violation of complex SEC rules and regulations can result in crippling fines and, in some cases, jail time.

Step 4

Create your legal documents. Most incubators take a percentage ownership in the companies and also charge a monthly fee that includes office rent, furniture, Internet access, use of office equipment, phone service, administrative help and professional business advisory services. If you do not have a strong contract covering all these aspects, then incubator clients who become successful may resist paying you or giving you the stock to which you are entitled.

Step 5

Write your business plan. You will need this to get funding either in the form of grants or sponsorships from local governments or corporations. Economic development organizations sponsor 31 percent of business incubators, government entities fund 21 percent and academic institutions sponsor 20 percent, according to the NBIA.

Step 6

Market your incubator at networking events, angel group meetings, civic group and chamber of commerce meetings, colleges and universities. Directly approach venture capital firms, which often farm out portfolio companies to incubators. These groups are good sources of referrals to entrepreneurs seeking to start businesses, who need the assistance an incubator can provide.

Tips

  • Develop good relationships with local business law firms, accounting and auditing firms, employment agencies and investment bankers. These services will come in handy in working with your clients and will also be good sources of referrals.

Warnings

  • Entrepreneurs rarely have much money to spend, so resist leasing large, expensive office space. It is better to create a virtual incubator and find meeting facilities at local law offices and accounting firms that will offer use in exchange for introductions to potential clients. Always conserve your money because you will never know when your incubator clients will run out of cash or decide to close their businesses.

About the Author

Victoria Duff specializes in entrepreneurial subjects, drawing on her experience as an acclaimed start-up facilitator, venture catalyst and investor relations manager. Since 1995 she has written many articles for e-zines and was a regular columnist for "Digital Coast Reporter" and "Developments Magazine." She holds a Bachelor of Arts in public administration from the University of California at Berkeley.

Photo Credits

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