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SMART ANSWERS
By Karen E. Klein
MAY 23, 2000


How Do I Pick the Right Incubator?

Nonprofits offer more hand-holding, while for-profits like fast growth and take a chunk of your business

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Q:  A business incubator has expressed great interest in helping my startup. How does the process work, and what should I watch out for?

--R.S., Ellicott City, Maryland

A:  Incubators provide physical headquarters for startups, shared infrastructure, networking, access to capital, and hands-on business coaching. Incubators can be either for-profit or nonprofit and are usually industry-specific, so take your time choosing one and make sure you've got the right fit. Incubators are booming, and securing a space shouldn't be difficult, says Bert Weinstein, a senior consultant at the Venture Point Tech Coast Small Business Development Center in Irvine, Calif. The average business startup stays in an incubator about two and a half years.

The National Business Incubation Assn. (www.nbia.org), based in Athens, Ohio, provides incubator lists by e-mail request. The group offers links to regional incubation associations and recommendations on how to choose an incubator as well.

Nonprofit incubators, often associated with universities, can be particularly well suited for technology companies still in the research and development stage, says Sally Linder, the NBIA's director of publications. "They are interested in helping commercialize technologies and have the facilities and faculty to help with prototypes and business plans," she adds. If your company still needs a lot of hand-holding and early development, this may be the choice for you. Nonprofit incubators are funded through various combinations of public money, client fees and rent, and sometimes equity and/or royalties from the companies that they incubate. They typically accept a wider variety of clients than for-profit incubators, and many have long-term community economic development goals.

For-profit incubators, which have cropped up over the past year following Bill Gross's idealab!, are more likely to ask for an equity stake or a royalty stream from your company's future sales. In addition, they are more likely to be interested exclusively in extremely fast-growth, high-tech, short-term-valuation companies. While a few might take on your company even if you're just at the idea stage, other for-profits will not consider startups that haven't already written business plans.

Getting business guidance and nurturing from an incubator in return for equity can be a great deal for both parties, but make sure you have a knowledgeable professional representing your interests during negotiations, Weinstein says. Startups typically give up 22% to 44% in equity during each funding round, so if the incubator that is courting you wants more than that, its nest may be feathered too richly.


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