Business incubators—programs designed to help launch entrepreneurial ventures—are expanding nationwide amid increased demand for the resources, services and counseling the programs typically provide for little or no cost.
New incubator programs have been forming in the U.S. at an annual rate of 8% to 10% for the past five years, and today there are approximately 1,200, estimates Tracy Kitts, vice president of the National Business Incubation Association, a nonprofit in Athens, Ohio. The programs are commonly funded by economic-development groups, government entities and academic institutions, and more than half support start-ups in a mix of industries.
More Incubators Hatch Start-Ups
Programs designed to help launch entrepreneurial ventures are expanding nationwide amid increased demand for the resources, services and counseling the programs typically provide for little or no cost.
Most incubators offer start-ups commercial space to grow their ventures for below-market lease rates, plus free counseling, administrative support and services in areas such as human resources, information technology and marketing.
Purdue Research Foundation in West Lafayette, Ind., the Center for Emerging Technologies in St. Louis, TechTown in Detroit and the University of Toledo in Ohio are among those that have added new incubator programs or facilities in recent years to accommodate more early stage companies.
Driving the trend is largely high unemployment and a dearth of adequate financing in the current economy, says Mr. Kitts. But at the same time, some incubator programs have suffered budget cuts, he adds.
About 1,500 early stage companies are participating in 10-week business-training programs at TechTown, an incubator established in 2000 by Wayne State University, General Motors Co. and the Henry Ford Health System. Of those, about 80% are run by individuals who have been unemployed for six months or longer, says Randal Charlton, executive director. Located in Southeast Michigan, where unemployment is about 15%, the incubator is also home to 200 start-ups in industries ranging from energy and education to homeland security and logistics.
There are also a growing number of incubators funded by early stage investors and other parties looking to capitalize on new prospects. Since 2008, Polaris Venture Partners, a Waltham, Mass., venture-capital company, has opened incubators, called Dogpatch Labs, in Waltham, New York and San Francisco. And Pool LLC, an incubator-marketplace hybrid, is currently being built by real-estate developer Brad Weinstock in a vacant 100,000 square-foot commercial space in Mesa, Ariz.
Start-ups that live in incubators stay for an average of three years and most—close to 90%— survive for at least seven years after they leave, according to the NBIA. One reason for their high success rate is that the programs tend to have strong ties to investors seeking promising young ventures to support.
Paul Angott, founder of Angott Medical Products LLC, a medical-device company at TechTown, says he was introduced to one of his start-up's largest investors as a result of connections he nurtured at the incubator. "I've met a number of people that have helped me with my business," he says.
About 70% of the start-ups admitted to the Austin Technology Incubator in Austin, Texas, obtain investor funding during their residency, says Isaac Barchas, director. Over the past two years, its entrepreneurial occupants have raised more than $50 million, and about $750 million since its inception in 1989, Mr. Barchas says. The incubator is a division of the University of Texas at Austin and is made up of four programs—two of which were added in the past four years. The programs support young companies in information technology, wireless communications, clean energy and health-care focused life sciences.
Incubators are also attractive homes for start-ups because they typically charge affordable rent. The Business Incubator Center in Grand Junction, Colo., founded in 1987 by community leaders, offers a five-year program with a lease that starts at 25% off fair-market value and increases annually by 5%. The 60,000 square-feet facility, which will undergo an expansion next year, currently houses around 50 start-ups, including a website developer, credit-card processor and soap manufacturer, says Chris Reddin, executive director.
Another benefit of incubators is that their tenants can exchange ideas and advice with other budding entrepreneurs. "If you need help with something, like understanding how to advertise on Facebook, you can go to others in your space," says David Ambrose, whose start-up, Scoop St., an online collective-buying service, moved into Dogpatch Labs' New York incubator in January.
Mr. Ambrose's company must move out by June, as residency there is limited to six months. The incubator currently provides 15 start-ups with as many as five desks per company, Wi-Fi access, conference space and snacks.
Incubator programs tend to be selective when considering applicants for occupancy. University of Toledo's four programs want start-ups planning to establish themselves in the area after they move out. Purdue Research Foundation's four incubator programs favor ventures that promise to tap resources at Purdue University, such as the school's labs for research and its students for jobs.
It is also common for incubator programs to assess applicants' chances of survival and commitment to success. Some deny admission to competitors of existing occupants.
Aspen Renee Flower Boutique LLC will be the lone florist and one of roughly 300 tenants to occupy Pool, the incubator-marketplace hybrid in Mesa slated to open on June 1. Owner Aspen Renee says she is paying $1,500 a month for roughly 400 square feet of retail space, plus she is getting benefits such as free marketing, utilities, storage, a mailroom and security.
Ms. Renee had been working out of her home since launching in 2005, and until now the only properties she could afford to lease were warehouses in industrial areas.
"It was something I wanted to expand into one day," she says. "Pool just gave me the opportunity to do it sooner."