INCUBATORS

Incubators are firms that provide a mix of resources and funding that startups need to grow into self-sufficient companies. Traditionally, they provide space, shared administrative staff, office equipment, possibly seed financing and interim management, and business expertise, all in exchange for fees, equity, or both. Incubators may manage multiple startups at any one time.

There were only a handful of incubators in the 1980's, many of them government-affiliated non-profits dedicated to promoting small business growth in a particular region or state. With the economic boom of the mid-late 90's, the number of (mostly for-profit) incubators exploded. Most focused on internet companies, claiming that they could turn an idea into a public company. On average, these incubators took a 35% stake in the company in exchange for space, shared equipment and staff, and advice. After the 1999 stock market crash, many of these incubators had to close or change their business models.

Biotechnology incubators also have a sordid past. The Massachusetts Biomedical Initiative (MBI-www.massbiomed.org) started off as an organization that incubated companies in its Worcester facility and provided seed funding. MBI burned through its cash reserves before its investments could generate revenue; the resulting financial crisis was typical of what spurred many incubators to change the way they operated. These days, MBI is considerably more cautious and rents out its space to paying companies.

Present-day incubators have a reputation for picking only the best startups and then taking equity at low valuations with aggressive anti-dilution provisions that make it difficult for the startup to raise a next round. There is a belief that most companies that are accepted into an incubator are probably good enough to get VC or angel financing and operate independently right from the start. On the flip side, incubators that lack the experience and credibility to attract high-quality companies may stigmatize those companies they do manage to recruit.

The term 'incubator' is no longer popular. Instead, Venture Creation Firms and Startup Accelerators have taken their place. In some cases, the euphemistic name masks the same old incubator concept. In other cases, these firms take a more sophisticated approach to starting and growing companies. Whether the newer incubator models will succeed where so many others have failed remains to be seen.