Business incubators support the development of start-ups by providing them with advisory and administrative support services. According to the National Business Incubation Association, an incubator's primary objective is to produce successful and financially viable firms that can survive on their own. Early incubators focused on technology companies or on a combination of industrial and service companies, but newer incubators work with companies from diverse industries.
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Incubators help start-ups save on operating costs. The companies that are part of an incubator can share the same facilities and share on overhead expenses, such as utilities, office equipment rentals, and receptionist services. Start-ups can also take advantage of lower lease rates if the incubator is located in low-rent industrial parks. Incubators may also help start-ups with their financing needs by referring them to angel investors and venture capitalists, and helping them with presentations. Start-ups may have better luck securing financing if they have the stamp of approval of incubator programs.
In addition to financial help, start-ups also need guidance on how to compete successfully with established industry players. Incubators can tap into their networks of experienced entrepreneurs and retired executives, who can provide management guidance and operational assistance. For example, a biotechnology start-up would benefit from the counsel of retired pharmaceutical executives who have first-hand experience of the drug development and clinical approval process. Similarly, a restaurant entrepreneur could learn about the difficulties of overseas expansion from retired hospitality-industry executives. Start-ups usually benefit from having respected individuals on their boards of directors and scientific advisory panels, because these individuals bring invaluable connections and experience to the table.
The close working relationships between an incubator's start-ups create synergies. Even after the start-ups leave an incubator, the connections and networks established through these relationships can endure for a long time. Start-up entrepreneurs can provide encouragement to one another, and employees may share ideas on new approaches to old problems. Start-ups may plan joint marketing campaigns and cooperate on product development initiatives. These synergies do not necessarily exist among start-ups funded by venture capitalists, because, as Kenneth Liss points out in a March 2000 Harvard Business School Working Knowledge article, the companies that receive the funds do not necessarily know one another and they may be located in different geographic locations.
By helping new businesses prosper, incubators assist in creating long-lasting jobs for their host communities. In a March 2003 Association for Small Business and Entrepreneurship conference paper hosted by the University of Central Arkansas Small Business Advancement National Center, Northwestern Oklahoma State University professor Patti L. Wilber and her colleague cited research to write that start-ups in incubation programs have greater viability and show superior financial performance over the long term. They create long-lasting jobs for new graduates, experienced mid-career personnel, and veteran executives. This benefits communities and drives economic growth.