Incubation in Entrepreneurial Ecosystems

2. What is business incubation?

Abstract

This chapter proposes a working definition for business incubation and describes the main types of supports and services that incubators are typically involved in delivering to startups and scaleups. It also sets out the different types of incubation programmes that are commonly found in OECD countries.

This chapter examines the meaning of business incubation and the activities that are undertaken by incubators and how they are evolving. Internationally, incubator systems are strongly supported by public policy, which often funds certain groups of incubators or particular incubator activities that it is in the public interest to offer. It is important for policymakers to be aware of the key services and trends and update public support where appropriate, working in partnership with other ecosystem players.

Defining business incubation

Business incubators are very diverse. While they generally share the objective of aiding the development of young companies (Bergek and Norrman, 2008[1]) – often, but not always, with a strong innovative component – incubators differ considerably in terms of their business model, support offer, target companies, and delivery methods. Furthermore, business incubators can be dedicated organisations whose sole activity is the delivery of incubation programmes, or they can be subsidiaries or offshoots of parent organisations, such as universities, large corporates or investment entities. It is also common for public entities to deliver incubation programmes.

This heterogeneity in the population of business incubators creates a challenge in defining business incubation, and there is not a consensus definition of either a business incubator or business incubation that is applied internationally. As a result, incubation and related concepts are sometimes taken to mean different things in different contexts. An example of this is the blurred distinction between business incubation and acceleration. Some use the two terms almost interchangeably, while others treat incubation and acceleration as distinctly separate concepts. This means that one organisation might identify as an incubator while another with very similar programmes could self-identify as an accelerator.

Despite these complexities, the process of incubation is widely agreed to involve the following broad elements:

• The provision of a range of different supports and services to client enterprises.

• The targeting of early-stage or developing companies.

• The delivery of support through multiple actions over an extended time period.

These characteristics are distilled in the following proposed working definition for business incubation:

“Business incubation entails the provision of a package of supports and services to early-stage or developing companies over an extended time period by a distinct organisational entity (a business incubator).”

This definition classifies the many different types of organisations that are involved in delivering holistic and extended support offers to young or developing companies as business incubation providers. This includes both entities that identify as incubators, as well as entities that might sometimes be referred to as “accelerators”, “pre-accelerators”, or, in some cases, “co-working spaces”. This approach recognises the core similarities that such business incubation entities share despite important and significant differences in their support programmes or approaches.

Table 2.1 summaries the key features and characteristics of different types of business incubation entities, which are collectively referred to as “incubators” in this publication.

Table 2.1. Taxonomy of business incubation entities

	Description
Incubator	Incubators tend to focus on earlier stage ventures and offer physical space, advice, technical support, networking and other services for entrepreneurs. They do not tend to have a cohort structure and specific time horizon.
Accelerator	Accelerators tend to focus on more developed startups and assist them in reaching an investment stage through cohort-based and time-bound programmes that typically last from one to 12 months (Cohen, Bingham and Hallen, 2019[2]; Centre for Entrepreneurs, 2022[3]). It is also common for accelerators to invest equity into their clients. The earliest example is the Y-Combinator formed in the United States in 2005.
Pre-accelerator	Pre-accelerators will generally target very early-stage entrepreneurial ventures that often do not have a complete team or a developed product or business model. Pre-acceleration programmes are often delivered as preparation for subsequent accelerator programmes.
Science park	Science parks (or equivalently research parks, technology parks, or innovation centres) are physical centres that aim to foster research commercialisation and the growth of technology-intensive businesses. Science parks are often affiliated with universities and commonly provide incubation programmes and other business support services.
Co-working space	Co-working spaces provide shared office space and facilities. Co-working spaces can be considered as business incubation entities where they target early-stage or developing companies and supplement the provision of physical space with other business supports and services.

Note: Venture studios are not considered to fall under the definition of a business incubation entity since these studios do not generally admit external entrepreneurs or startup companies.

Incubation activities

The Batavia Industrial Centre – formed in New York in 1959 – is seen as the first example of a business incubator, with the owners of the disused industrial site opting to rent office space and provide shared services to multiple separate businesses having failed to find a company who could rent the whole space individually. The business incubation model gradually spread across the world in subsequent decades. While the first generation of incubators focused their activities on the provision of physical space to companies, incubators began to add coaching, training, networking, and commercialisation support to their service offering. More recently, incubators are moving towards providing greater access to external technological, professional, and financial resources.

The remainder of this section briefly discusses the main types of supports and services offered by business incubators today, which together provide practical solutions to some of the major frictions that startups and scaleups encounter during their development and growth.

Physical spaces and facilities

The physical workspace provided by incubators is often a central component of the support they offer to startups. These spaces often come equipped with essential office infrastructure, such as hot-desking areas, private offices, meeting and conference rooms, high-speed internet, and printing services, which can significantly reduce operational costs for fledgling companies and provide them with a high-quality professional environment in which to work, network and collaborate without the distraction of managing logistics. Many incubators also offer 24/7 access to these spaces, allowing founders to work on projects at their own pace – a particularly helpful feature for startups in intensive growth phases or with international teams or partners.

Incubators that cater to specific industries, such as biotech or healthcare, may also provide access to specialised equipment, such as wet labs, prototyping facilities, or other technical resources. Wet lab incubators, for instance, provide life sciences startups with access to advanced scientific equipment that would otherwise be prohibitively expensive, sometimes in exchange for a fee. This significantly lowers the barrier for startups needing occasional access to high-end technologies in order to develop or test their products and services.

Incubators have increasingly been introducing virtual programmes with a reduced emphasis on the provision of physical spaces and facilities – a trend accelerated by the COVID-19 pandemic. However, some incubators that went remote during the pandemic are now reinstating in-person components of their programmes in order to encourage collaboration and networking in a shared space.

Coaching

Coaching (often also referred to as “mentoring”) is one of the most impactful aspects of incubation programmes, providing startup founders with expert guidance and advice to help them to navigate complex business challenges. These insights at the early stages of a company’s development can make the difference between a startup's success or failure.

Incubators connect founders with coaches, who are generally seasoned entrepreneurs, investors, industry leaders, or specialists in areas like product development, marketing, or legal matters. These coaches take a hands-on approach, acting like business "doctors" who diagnose specific problems and recommend solutions. The relationship tends to be dynamic, with coaches adapting their advice as the startup progresses. Topics covered include finding product-market fit, team building, and scaling and investment strategies.

A key aspect of coaching is the tailoring of advice to the unique needs of specific entrepreneurs and startups. Incubators often have large networks of coaches and mentors with expertise covering a broad spectrum of areas, which helps to ensure that their clients can be matched with a coach with knowledge and experience that is relevant to their particular needs. Entrepreneurs can often be assigned multiple coaches, as is the case, for example, in Techstars’ programmes.

Some incubators provide coaching through their internal staff, others leverage external experts and some deploy a combination of the two. Many incubators also facilitate less formal or structured coaching by enabling startups to connect with alumni, advisors, or external professionals at events and through online platforms.

Training and classes

Incubators offer training programmes to help founders to develop the skills they need to grow their companies. This training can be delivered in individual or classroom settings. Some incubators also provide online learning platforms with recorded modules, allowing participants to revisit important concepts at their own pace. Incubators’ training programmes often focus on building practical business skills, such as in fundraising, sales and marketing, human resources management, and business strategy and product development. One of the most common types of training is pitch training, where participants refine their ability to present their startups to investors and other potential partners in a compelling way. Incubators that are affiliated with universities will also often offer specialised training in areas such as intellectual property management or scientific research methods, particularly for science-based startups.

Networking

Facilitating networking among startup and scaleup entrepreneurs and other ecosystem actors is a core activity for business incubators. Peer networking within incubators is often facilitated through a campus structure, where entrepreneurs work alongside each other on a daily basis. This proximity encourages spontaneous interaction, the sharing of ideas, and the provision of mutual support. Similar effects can also be achieved through cohort-based programmes, where admitted firms start a programme at the same time, resulting in a built-in peer group that progresses through the programme stages together. This setting naturally encourages regular interaction and group-based problem-solving, as founders are exposed to similar challenges and milestones.

Incubators also offer structured networking events, such as workshops or seminars on critical topics like business development, fundraising, and marketing. These events not only feature successful alumni as speakers but also provide a space for founders to connect with potential partners in informal settings. In addition, many incubators provide matchmaking services, setting up curated meetings between startups and potential partners in their network. There are also structured problem-solving sessions, where startup founders present challenges faced and receive feedback and suggestions from peers. Regular social events, such as happy hours, informal dinners and off-site retreats, further facilitate relationship-building in a relaxed environment between the participants of incubation programmes, as well as with mentors and incubator staff.

In addition to facilitating in-person interactions, incubators often provide online platforms where participants can share documents, pose questions, and collaborate with peers and experts. These digital spaces can be accessible to founders, alumni, and experts, and can also include matching services to identify and connect with potential co-founders or partners. Such platforms enhance connectivity and provide a continuous support system that can be accessed long after the programme ends.

Investor connections

Related to networking, one of the main advantages of joining an incubator from the perspective of a startup is the access to investors that it provides. Building relationships with venture capitalists, angel investors, and institutional investors is crucial for startups looking to secure funding. Many incubators excel at connecting founders with potential investors. Acceleration programmes often have extensive networks of venture capital firms and business angels who regularly attend events such as demo days, which are high-profile events where startups pitch their business to a room (or virtual audience) of investors. In addition to demo days, incubators organise smaller networking events or one-to-one meetings between their clients and potential investors. Some programmes also offer digital platforms where investors can browse startups’ profiles and connect directly with the founders.

Incubators also help startups to gain exposure in the media, which can facilitate investor connections. Often, these activities leverage online tools. As an example, Y combinator uses internal websites such as Product Hunt and Hacker News to provide media exposure to emerging ventures, while at the same time, preparing founders to interact with journalists.

Direct funding

In addition to the various services offered to their clients, some incubators also provide their startups with direct funding. One model is to provide non-dilutive funding such as grants, which allow the startups to retain full ownership of their business. Non-dilutive funding amounts are generally relatively small. For example, the Bravo Innovation Hub in Italy offers EUR 20 000 grants to startups admitted to its programme, while Enterprise Ireland’s New Frontiers programme provides EUR 15 000 allowances to selected founders.

For larger investment sums, incubators often offer equity-based funding. For example, StartUp Bootcamp invests USD 15 000 in each startup in exchange for a 6% equity stake. Y Combinator offers a more complex funding structure, investing a total of USD 500 000 in each startup, comprising a USD 125 000 investment in return for 7% equity and an additional USD 375 000 investment in the form of a SAFE (Simple Agreement for Future Equity), which converts into equity when the startup raises more capital. Some incubators deduct participation fees from their investment, requiring startups to use part of the cash received to pay for the programme. Others do not require equity participation upfront but may invest in startups later through in-house venture capital funds. With all of these approaches, the incubator’s investment serves to both alleviate financing gaps for their clients and provide a source of revenue for the incubator itself.

Legal, technical and administrative advice

Legal and administrative challenges can be daunting for early-stage startups. To help them to navigate these complex areas, incubators provide resources and services such as advice on intellectual property protection, incorporation assistance, accountancy support, support in contract drafting, and guidance on tax compliance and hiring practices, among other things. Many incubators also provide assistance to help their clients establish their operations overseas. Startups within incubators will often have access to a network of external lawyers, accountants, and other experts that are affiliated with the incubator. These professionals can be available for one-to-one consultations, ensuring that startups have access to the right expertise when they need it.

References

[1] Bergek, A. and C. Norrman (2008), “Incubator best practice: A framework”, Technovation, Vol. 28/1-2, https://doi.org/10.1016/j.technovation.2007.07.008.

[3] Centre for Entrepreneurs (2022), Incubation Nation: The acceleration of UK startup support.

[2] Cohen, S., C. Bingham and B. Hallen (2019), “The Role of Accelerator Designs in Mitigating Bounded Rationality in New Ventures”, Administrative Science Quarterly, Vol. 64/4, https://doi.org/10.1177/0001839218782131.