Business Incubator, as economic tolls, has become increasingly common in the last decade or so for stimulating local development. Incubators provide facilities and services to catalyze small business growth. Actually incubated companies have a dramatically higher rate of survival than an average company does.
For incubators to live up to their full economic potential, they need to overcome two pitfalls: they need to provide real value, not just office space, and they need to measure success in more than just outside funding.
CBI Adds Real
Value Effective incubators provide business counseling and management assistance to their client firms. The good value-added business services differentiate themselves from an office suite. And what’s even more of a differentiation is that we (CBI) target the youth and the under-served or disadvantaged communities.
Indeed, as I and others have investigated why incubators fail, I was astounded to find that many incubators assume that cheap real estate, co-working spaces, used furniture, plus a phone and Internet connection equate with business incubation. Stephen Walters, president of the Community Business Incubator, Inc. of San Diego, says, “They are fakes, just because they offer cheap floor space and no meaningful support our valuable program content doesn’t make them an good business incubator.”
Two things determine whether a business can get off the ground successfully and sustainable: a validated market opportunity with customers willing to pay for a product or a service; and a product or service that addresses such an opportunity. I consider CBI as one of the “real” ones that help entrepreneurs achieve these two goals.
Getting to the next level is well within our client’s capacity, and the role of an incubator ought to play to guide them in that process.
The only “next level” worth getting to for a start-up is a validated business idea that has the endorsement of reference customers, and a product that caters to their needs. The office by itself nor, legal documents, QuickBook files they — don’t build valuation or business value. The benchmark for the incubator should be measuring themselves against is simply their success in helping clients validate businesses, gain reference customers, and complete at least a minimum viable product.
Success is More Than Funding
We don’t use funding as a success metric, which is a somewhat flawed criterion. Over 99% of companies should operate as organically grown, self-sustaining businesses — bootstrapped, without external financing. For them the goal is to achieve customer validation, not financing. Yet if the incubator uses financing as its success metric, it will try to force inexperienced entrepreneurs into an unnecessary financing round. And more often than not, they will fail.
Community Business Incubator has and will continue to mitigate this by partnering with venture capital firms, such that every single company in their portfolio gets some seed financing as they graduate from the incubation program. But most incubated companies do not have that luxury. Nor do they have the deals deserving of such guaranteed financing.
Of course, where funding is appropriate and relevant, helping entrepreneurs connect with angel investors and venture capitalists is an important service. Equally important is to provide education on what is and isn’t fund-able.
Our primary conclusion is that CBI’s project based incubator model is the only way for potential startup businesses in under-served communities to have a real chance of success. As we continue to act as a mentor and a bridge to capital, predicating their success on getting businesses funded will keep them focused on trying to be sustainable start-ups that are fund-able.