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Guide On Business Incubator Models

By gswardman May 2, 2022

Business incubators are programs specifically designed to help early-stage companies to innovate and grow. Incubators provide mentorship, training, education, workspace, and access to venture capitalists. These resources assist new ventures in taking shape at the early stages of incubation while maintaining low operational costs. Most incubators have an application process and require a time commitment.

Business incubator models play a critical role in creating successful startups in the ecosystem. A business incubation program will provide a new venture or small business with mentorship at its very early stages.

Business incubator models

What are the Four Different Models of Business Incubation?

Before choosing the best incubation or accelerator program for your startup, you need to understand the underlying business incubator models. Although many business incubation programs offer similar business assistance, different models define their priorities.

The four fundamental incubation models are:

The Teachers

This incubation model operates a program similar to an MBA program. However, as the name suggests, this model is a startup school. After application and admission, the model puts startups through classes, training, and consultancy.

The model also organizes networking events and parties, which allow startups to network with successful entrepreneurs. The startups also get an opportunity to pitch their business ideas to angel investors and venture capitalists on the demo day.

An inherently good quality application is the key to getting admitted in a teacher’s incubation model. This business incubation model attracts the best candidates.

The Agents

The agent business incubation model typically helps startup companies reach out to investors and customers from different regions. In addition, an agent incubation model may also assist an existing business look for new technologies.

The Agents is a successful incubator business model because it offers business development solutions to corporates and startups. In addition, agents also provide additional services such as consultancy on generating new income and market research.

Paying customers are the core of an agent incubation model. Therefore, these incubators must have a strong link with customers. In addition, they must also create startups and bring information that interests customers.

The Merchants

The critical priority of Merchant incubators is to sell their own products and services to customers. As a result, merchant incubators prefer to assist startup companies who succeed in marketing their products and services. They are corporate incubators belonging to large companies.

Merchant models spend a lot of resources on marketing. It is typical for this type of incubator to have sales and marketing budgets. They love to participate or organize high-profile events and promote business startups’ success stories.

The Builders

Builders are usually the creators of new businesses. Typically, they are small corporate incubators that create businesses using their own resources and ideas. Unlike venture capitalists, builders use different approaches in starting a new venture. First, they form an internal management team to develop business ideas within their own network.

Instead of focusing on raising funds, the management team spends most of its energy pushing the product out into the market. This model is similar to the natural process of how entrepreneurs start businesses and is a rising trend in an innovation ecosystem. The core of this model is centered around internal management teams led by successful entrepreneurs.

The builder incubation model has a higher success rate of creating new startup companies. This is because resourceful and experienced entrepreneurs actively looking for new business ideas initiate the startup project. More importantly, an internal management team experienced through precious startup projects drives the project. The team also benefits from economies of scale because it can re-apply the best practices and reuse infrastructure from previous projects.

What is an Incubation Model?

An incubation model is typically the way an incubation program supports new businesses to improve their chances of survival and accelerate their growth. Business incubators use various techniques, processes, and procedures to provide incubation services to startups. As a result, incubation models differ in their objectives, goals, processes, and outcomes.

For example, the traditional incubation models had physical buildings where the incubation process would occur. However, modern incubators, also called virtual incubators, don’t require physical facilities.

What is Campbell, Kendrick, and Samuelson Model?

This incubation model stresses process functions as the primary business development tools that can transform business ideas into real businesses.  Campbell, Kendrick, and Samuelson introduced this model in 1985 to illustrate four critical practices involved in a value-added incubator model.

The four practices are:

  • Diagnosis of business needs
  • Access to investment capital
  • Selecting and monitoring the services provided by corporate incubators
  • Access to networking

Campbell, Kendrick, and Samuelson's Incubation model

The authors of this model also failed to address:

  • Entrepreneurs’ competencies and the viability of their ideas. This incubation model fails to recognize that not all early-stage startups and entrepreneurship ideas are viable. It also fails to address the lack of capabilities in some entrepreneurs.
  • The Campbell model also fails to state how the incubation process will happen and what resources it needs.
  • Environmental barriers may occur during the incubation process and turn a new venture into a failure. This incubation model fails to link the external environment, the incubation process, and the entrepreneur’s life cycle.
  • Though the model states the four key activities of a business incubator, it does not explicitly explain them. For example, the model does not expressly explain potential candidates’ selection and application process. As a result, it fails to understand that an incorrect or lousy selection process could adversely affect the viability and growth of a startup.

In 1987, Merrifield addressed some of the challenges of the Campell, Kendrick, and Samuelson model. Merrifield built selection criteria for potential candidates. The criteria address the resources and competencies an incubated firm needs to compete successfully. Finally, Merrifield discussed the issue of which startups should use to enter and grow in the business world.

Business Incubator Models Example

There are many business incubator models with different applications, performance, and efficiency for business development purposes. In addition, the incubation process involves multiple stakeholders, resources, and business service categories. This section will define, analyze, and evaluate the different incubation models to understand the incubation process better.

Smilor’s Incubation Model

Smilor developed this model in 1987 by improving Campbell’s model. He created a structure model by describing the critical support systems, incubator affiliates, and the primary outcomes of a business incubator process. Smilor also views an incubator program as a transformation methodology that helps entrepreneurs build successful ventures.

Smilor’s incubation method fails to provide extensive information on business incubators’ services to startup companies.  However, the model categorizes the benefits that startups derive from an incubation process into four dimensions, namely:

  1. Access to a network of successful entrepreneurs
  2. Shortening the learning curve
  3. Credibility development
  4. Faster troubleshooting

Smilor was among the pioneers who shifted the focus of business incubators from the provision of physical resources to the provision of business services and expertise. He emphasized that a business incubator is built from different support systems. He also sought to identify the components of a business incubation process.

Smilor developed the model having in mind innovation-based entrepreneurs. The model conceptualizes an incubator as a system that offers startups the structure and credibility of creating new businesses. It also ensures a set of critical resources for setting up new ventures.

Smilor's incubation model

However, Smilor’s systematic approach fails to link the internal and external environment. It also fails to describe the transformation process. Despite the drawbacks, the model’s stated outcomes include:

  • Business profits for startups
  • Profits for business incubators
  • Economic development
  • Successful products
  • Job creation
  • Technology diversification

Nijkam and Smilor Generic Incubator Model

This model is an extension of Smilor’s model. It also combines Smilor’s 1987 model with Nijkam’s 1988 model. The model is an interpretation of the generic business incubator. Nijkamp argues that business incubators act as mediators between the community and entrepreneurs.

Nijkamp also states that an incubation process requires the combination of the following elements to be successful:

  • Sources of entrepreneurs: Entrepreneurs can come from universities, the general community, the public sector, corporations, or research laboratories.
  • Entrepreneurs recognizing opportunities
  • Demand for business incubators

The demand for incubation services appears after entrepreneurs recognize business opportunities. There are two main ways of solving the need for business incubation services:

  1. Formal Incubation: These are physical buildings established to assist small businesses with mentorship and business development services.
  2. Informal Incubation: This incubation process is limited to a consultancy role. The startups are not housed in a physical building. Informal incubators are today known as virtual incubators.

Smilor added two components to the model. These are:

  1. Possible funding sources: They include the private sector, universities, and the local government.
  2. Incubator’s building blocks: The building blocks include an entrepreneurial base, pre-existing business networks, and the availability of venture capital.

Carter and Jones-Evans Process Incubation Model

Carter’s model is a process model, unlike Campbell, Smilor, and Nijkamp, which were structure models. Structure models discuss the elements of a business incubator, while process models explain how an incubation process is organized. In addition, the model gives the steps and possible consequences of the incubation process.

Carter and Jone-Evans proposed this five-step incubation process in 2000. The model focuses on the needs of startup companies, which are catered for by business incubators. According to Carter and Jones-Evans, the incubation process has the following stages:

  1. Formulation of the business idea – This stage focuses on experiences, such as education, training, creativity, or work.
  2. Post-entry development – This stage focuses on building credibility and developing networks.
  3. Recognition of an opportunity – Opportunity recognition focuses on cultural attitudes to risk and the economic environment.
  4. Entry and launch
  5. Planning and preparation focus on market research, finding partners, and financing access.

Carter and Jone-Evans five-step incubation process

In 2005, Carayannis and Zedtwitz reviewed the model and added five essential services for startup companies. These services are:

  1. Access to physical resources
  2. Business administrative support
  3. Access to capital
  4. Business and organizational support
  5. Networking activities

Though the services provided and the model proposed is valid, there are still some drawbacks to Carter’s incubation model. These drawbacks include:

  • The model is based on a waterfall model rather than being iterative. For example, some needs in the opportunity recognition stage could also occur at the later stages. Therefore, the process cannot simply follow a waterfall model.
  • The model fails to identify the services and stages in a typical incubator.
  • The model does not measure the efficiency and effectiveness of the incubation process.

Nowak and Grantham Virtual Incubation Process

Nowak and Grantham established this virtual incubation model in 2000. The model explains the structure of a virtual incubator. In addition, it is based on findings of the observations in the software industry case study. The concept of innovation networks brings together centers of excellence in business and technology management.

Nowak and Grantham Virtual Incubation Process

In a knowledge-based economy, Nowak and Grantham assert that creating wealth is synonymous with producing products and services with substantial software content. Moreover, with the IT industry’s globalization, the need for small companies to form strategic partnerships will become essential to their ability to create wealth.

The authors of this model considered the software industry and proposed a model for public-private partnerships, which could help startups achieve their growth goals. They concluded that a virtual incubator could be a possible way to facilitate business networks and startup success. The model shifts focus to connecting startups with strategic partners and business expertise.

The model assumes that traditional business development entrepreneurs have common challenges: lack of capital, management challenges, and human resources. Therefore, Nowak’s model provides startups with a platform to access:

  • Business management experience
  • Business development best practices
  • Resources for sales, distribution, and international marketing

The authors saw the need for a virtual incubation model founded on network innovation. The model would bring together centers of business management and technical excellence in a virtual way. A combination of experts and new technologies would help establish strategic alliances between specialized engineers, managers, and strategists. Such a model would achieve better synergies and business opportunities.

Nowak and Grantham’s model combines traditional incubation’s successful elements with new technologies that focus on strategic alliances and virtual channels. They also stress the profitability of a corporate incubator. Though 95 percent of business incubators are non-profit organizations, the critical point of this model is to provide theoretical evidence that new technologies strengthen the increase of incubators.

However, the model fails to explain the whole virtual incubation cycle. The authors discuss the potential benefits of a virtual incubation process and forget the downsides of the model, such as:

  • The time frame for productive collaboration through virtual channels
  • Lack of credibility and trust
  • Its applicability
  • Cultural differences
  • Social isolation

Booz, Allen, and Hamilton Corporate Incubator Model

The main contribution of this model is the conceptualization of the incubation process and applying continuous innovation to a company’s needs. In addition, the model outlines how corporate incubation could support innovation practices. Finally, the authors distinguish two idea paths within the corporate incubator:

  • Spin-off as a product or business into the existing environment. This path entails developing ideas into new products tied to the core business and utilizing company assets.
  • Spin-off as a new venture. This path seeks to develop a new venture that will be distinct from external funding.

Boos, Allen, and Hamilton explain the critical success factors of the model as:

  • Entrepreneurial leadership – The commitment of executives that empowers, enables and follows the incubation process.
  • Incubator Engine – Incubator managers should oversee the standard incubation process.
  • People and entrepreneurial culture – Empower the intrapreneurs and let them understand that failure is part of success.
  • Corporate resources – Use corporate resources like business networks, partnerships, marketing, public relations, and client database.
  • Corporate incubation process – It is essential to work with short lead times.

You should organize the incubation process in stages and gates to reduce uncertainty. First, a strict application process ensures that the model only funds the best business ideas. Then you launch detailed planning activities to identify an opportunity and develop a new venture. Finally, incubator managers decide on initial seed funding after following all the processes.

The stage-gate model has seven stages:

  1. Formation of ideas and concepts
  2. Screening and validation
  3. Prototyping business development
  4. Preparation
  5. Launching
  6. Building up
  7. Transition

The stage-gate incuvation model

Like all other models, corporate incubators also have downsides, which include:

  • Bureaucracy
  • Achieving the right balance between exploitation and exploration, without limiting innovative capacity
  • Producing and incubating strategically aligned projects

Lazarowich and Wojciechowski New-Economy Incubator Model

John Wojciechowski and Michael Lazarowich developed their new economy incubation model in 2002 with two main objectives:

  1. To examine the best practices of starting and running business incubators. The two authors had a strategic plan of forming a blueprint for the pilot project. The pilot project included identifying the metrics, parameters, processes, and goals of business incubation.
  2. To establish a business incubation model that matches the local environment.

Incubator Environment

Lazarowich and Wojciechowski define the new-economy model as set up by multidisciplinary consultancies or funded by venture capitalists. This funding allows the model to offer business development support services and a vast range of technical support to startups. This type of incubator program is usually virtual.

The key aim of a new-economy incubation model is to generate a return on investment for its shareholders. However, some incubators sell consultancy services to established businesses due to low return rates and high risk. In addition, new-economy incubators may partner with research institutes or universities.

Based on their analysis of best practices, the authors recommended incubators be integrated into a network of critical agencies, schemes, and stakeholders rather than being treated as standalone operations. The integration will enable the incubator to promote innovation, technology transfer, competitiveness, and other key policy objectives.

The characteristics of the new-economy incubation model include:

  • Business incubators are private-sector and profit-driven, with payback from investing in companies and rental income.
  • They are technology business incubators that focus on internet-related and high-tech activities. Unlike traditional incubators, new-economy incubators don’t have job creation as their key objective.
  • They have a virtual presence with business and financial services as their core offering. This characteristic distinguishes them from traditional incubators that center on providing physical workspace.

Lazarowich and Wojciechowski also make the following recommendations

  • The micro-economic framework should vitalize the markets for new products and innovation. It should also create a master plan in consultation with entrepreneurs, stakeholders, and local authorities.
  • Scientific research, engineering, technical education, transport, communication, technology, and management consultancy requires commensurate investments.
  • The development of long-term plans for developing business development services anchored in a technology park or business incubator. The location of these support services should be attractive and well connected to research laboratories, universities, and recreational facilities.
  • The selection of organizational structure and proactive sponsors origination from strong government departments, non-governmental agencies, private sector, and knowledge institutions.
  • Programs for mentoring entrepreneurship from school onwards, structures for searching new early-stage companies, their selection, and graduation.
  • Developing networks with experts at national and international levels for mentors, consultancy services, and venture capital.

Lalkaka Incubator Model

Lalkaka developed a model that describes technology business incubators in 2000. The model has five parts, namely:

  1. Incubation concepts: This section places the support services for small and medium enterprises in the overall framework. It outlines the objectives, characteristics, challenges, and types of technology business incubators.
  2. Planning: Covers the preparation, application process, feasibility analysis on the business plan, design of facilities, and selection of a location. It also contains a financial analysis and the expected benefits.
  3. Implementation: Defines the actions to start the technology business incubator, organizational issues and provides a guide for selecting tenant startups.
  4. Operating: Proposes metrics for serving tenant startups through networking, mentoring, and training. It also provides a framework for assessing performance and outlines good management practices towards self-sustainability.
  5. Learning: It brings together the success factors for enhancing operations and the lessons learned.

Lalkaka Incubator Model

The primary concern for business incubation is to nurture early-stage companies. The entrepreneur’s starting point is to overcome challenges and create a successful business. The preparatory stage begins with clearly understanding the incubation process as well as talking to consultants and incubator managers. The next step involves preparing a feasibility study to investigate viability.

The typical time frame is as follows:

  • Preparatory work consisting of feasibility study and incubator planning – six to nine months
  • Implementation – six to nine months

It, therefore, takes 12 to 18 months before a technology business incubation can begin operations. The implementation can take longer when the concept is new. However, assured funding and strong leadership can accelerate the process.

Incubation must be operated in a business-like way to achieve its objectives both for startups and sponsors. The concept of control and local autonomy is the basis of a technology business incubator. Local investors are the incubator’s owners. The incubation of businesses fosters interaction between existing structures since it combines many aspects of economic development.

Costa-David, Malan, and Lalkaka Incubation Model

Costa-David, Malan, and Lalkaka Incubation Model

Costa-David, Malan, and Lalkaka presented this model in a European Union (EU) incubation benchmarking study in 2002. The Center for Strategy and Evaluation Services later copied the model, using proposed benchmarks to show the efficiency and performance of business incubators.

The model explains the practices used in transforming initial inputs into outputs. The authors of the model believe that pre-incubation, incubation, and aftercare stages are the components of incubation.

The incubation process offers the following practices for startups:

  • Training
  • Networking
  • Business advice
  • Physical space
  • Financial support
  • Technology support

The main inputs of an incubator are:

  • Projects
  • Incubator management team
  • Objectives of stakeholders
  • Finance

The model does not provide the step-by-step process and the sequence of the practices during the incubation period. However, it links the incubation process with the external environment. In addition, it establishes the feedback loops for measuring the effectiveness and efficiency of the incubator.

The limitations of the Costa-David, Malan, and Lalkaka Incubation Model include:

  • The model fails to factor in the macro-politics of institutional change, regional and national environment, which are the determinants of the objectives of a state-level incubator.
  • The model does not consider the influence and role of startup companies, which are essential components of the incubation process.
  • The model gives a black-box view of the incubation process. However, it concentrates on the inputs and outputs, failing to discuss the process itself.

Gibson and Wiggins Technology Business Incubator Model

This model describes the operational blocks of technology business incubators. The authors consider incubation to add value to inputs and transform them into outputs. However, the process also adds industrial competitiveness, commercialization, experimental laboratory, and global networks to the outputs.

The authors say networking and capital are more valuable building blocks than business expertise and secretarial service.

Sahay Technology Business Incubator Model

Sahay Technology Business Incubator Model

The objective of this model is to transform entrepreneurs with business ideas into entrepreneurs with successful ventures. The model is also similar to the Gibson and Wiggins Technology Business Incubator Model. The model provides the following building blocks to startups.

  • Knowledge and expertise
  • Funding
  • Markets
  • Networks
  • Technology

Hackett and Dilts Business Incubator Model

Hackett and Dilts described the logic of this model in 2004. The authors believe that business incubation is a community strategy that promotes the survival of new ventures. The critical practices of this model include:

  • Venture development
  • Resource generosity
  • Business assistance
  • Selection
  • Product development
  • Monitoring

According to the model, the only way of producing innovative and profitable ventures is to feed the incubator with suitable materials. This increases the startup’s chances for survival. Incubation is a dualistic process between the incubator and the entrepreneur. Providing the incubator with high-quality and knowledgeable entrepreneurs is the most critical task.

Bergek and Norrman Incubation Model

This incubation model rejects the black box principle that most incubators use, which is centered on inputs and outputs. Instead, Bergek and Norrman consider that you can only evaluate an incubator’s performance when you confront the objectives and outcomes of the incubator.

Bergek and Norrman Incubation Model

The following set of components, depending on internal and external variables, form the incubation process:

  • First, the selections of startups to be accepted or rejected.
  • The infrastructure concerning administrative services and physical facilities to be offered.
  • Mediation – This concerns how the incubator mediates the relationship between the external world and the incubated startups.
  • Graduation – concerns the policies that the incubator put in place regarding the circumstances and moment of exit from the incubator.

According to the authors, the selection and application process are critical. Therefore, the selection process must match the goals and characteristics of the business incubator. This model identifies two selection approaches, which are:

  • Selection on the basis of business idea
  • Selection of the basis of the entrepreneur

The model requires that the incubator has fundamental knowledge in the business or domain of technology and the necessary background to evaluate the viability of the business ideas. In addition, the incubator must be competent in assessing the entrepreneur’s capabilities, personal traits, and skills related to the new venture.

InfoDev Process Model

The InfoDev model is a well-known and influential World Bank program. This incubation model focuses on five different areas, namely:

  • Women entrepreneurs
  • Climate technology
  • Access to finance
  • Mobile innovation
  • Agribusiness entrepreneurship

InfoDev Process Model

The business incubation services that the model offers are access to early-stage financing, better entrepreneurship financing, and business coaching.

The InfoDev model of 2009 proposes linking the incubation process to the entrepreneurial life cycle. According to the model, an entrepreneur goes through four stages: idea formation, startup, growth, and maturity. On the other hand, an incubator, as a business development tool, follows these stages:

  1. Germination: This is where business ideas come and is the earliest stage of invention. It is also the riskiest stage because of high uncertainty. In addition, due to lack of capabilities, knowledge, and other challenges, it is the most expansive stage for the incubator and entrepreneur.
  2. Pre-incubation: The key objective of this stage is to assist the entrepreneur with an idea. It is the most expensive stage, and only a few incubators can afford this stage, where they access private risk capital and public support.
  3. Incubation: The business idea is graduated into a plan, with a management team, and operations begin. The startup starts to scale up and expand. Investments in this stage are expensive and don’t bring any profit.  Incubators assist in looking for a business model, building the team, providing business assistance, capitals sources, ad networks.
  4. Post-incubation: At this stage, the incubator does not need to intervene, and the company merely seeks a particular facility. However, experience shows that incubators are still helpful at this stage.

What is the Business Model of an Incubator That Provides Office Space for Startups?

Traditional incubation models offer office space for startups. These incubators have physical sites and buildings to allow cohorts to co-share office space and other office equipment.

Traditional incubation models recognize that many startups don’t have enough capital to set up workspaces. Therefore, once a startup is selected for the incubation program, it is provided with a workspace. The startup will share with the management teams of other startups.

Virtual incubators do not offer office space. In addition, these incubation models do not have physical sites and buildings.

How do Incubator and Accelerator Business Models Work?

Startups aim to access world-class mentorship programs and pitch to venture capitalists. However, they don’t know the differences between the central business models that provide funding opportunities: incubators and accelerators.

It is essential that new entrepreneurs understand these models and how they work to pick the right one for their startups. Choosing the right one will enhance the chances of success.

Business incubators assist entrepreneurs in refining their business ideas and building startups from the ground up. However, business accelerators provide resources, education, and mentorship to early-stage companies with an existing minimum viable product. Accelerators promote companies with a few years or months of slow growth.

Although used interchangeably, incubators and accelerators have different purposes and outcomes. They also accept varying types of startups.

While accelerators aim at scaling up a company, incubators focus on mainly stimulating innovation. They incubate new business ideas. In addition, incubators may prepare startups for accelerators.

Accelerators offer a clear limited timeframe, usually a few months. However, incubators are a long time in nature and may take up to a few years. In addition, some incubation models are open-ended.

Mentoring by an established company is a distinctive component of accelerator programs. Often, the established company purchases some equity stake in the startup.  As a result, an accelerator has a high entry threshold. On the other hand, incubators are less selective.

Accelerator programs are more structured and try to create an alignment between startups. On the other hand, incubators are less structured and focus on creating environments for co-creation.

What Business Model for an Accelerator Incubator Generates the Most Profit?

The new-economy incubator model by Lazarowich and Wojciechowski is the most profitable. Venture capital firms or large multi-disciplinary consultancies fund the model with the primary aim of generating returns. New-economy incubators also sell business consultancy services to successful companies to boost their incomes.

Accelerator models that also buy equity in the startups they incubate are also profitable. However, such models have tough application processes because they select only companies with a high probability of success. They also seek early-stage companies with an existing minimum viable product. Since these accelerator models seek to profit from startups, the only select companies with slow growth but with a potential for fast growth.

Conclusion

Before choosing a corporate accelerator or incubator program, organizations and entrepreneurs should know the underlying models. Each incubator model varies, as does the value they offer. Understanding these models and choosing the right one could be your first successful milestone towards a successful entrepreneurship journey. So hire a business incubator today and take your new business to the next level.