Over the past year, the tech startup world has seen a significant increase in the number of incubators throughout the country. Incubators – sometimes called startup accelerators – are organizations that work with entrepreneurs to develop their startups. Often, in exchange for a small stake in the startup, an incubator’s staff of advisors and mentors assists the startup in areas such as product development, concept evaluation, capital acquisition, strategic business planning, and technology support. Many also provide their clients a small amount of funding to develop their products. The best incubators may be most valuable for the access they can provide to potential investors and a huge pool of talent.
Entrepreneurs and startups have taken notice of the resources incubators can offer as both supply and demand of the incubator market has increased drastically over the past year. As of August 2011, we’ve counted at least 64 known U.S. incubators. This number has grown from 34 in 2010, and new incubators are springing up from California to Texas to Massachusetts and to most major cities in between. Existing incubators are also expanding their operations and increasing their number of startup clients.
Although the incubator market has undeniably taken off, the recent expansion of the number of incubators has led to questions over whether the incubator market is sustainable. Some critics argue that the increase of incubators has created (or perhaps just indicative of) a bubble that is bound to pop. Under the typical model, an incubator earns money when one of its clients hits it big, and the incubator is able to sell the stake it holds in the company for a profit. Obviously not every startup an incubator works with is going to be the next Facebook, so there is no guarantee that an incubator will profit from working with and investing in a given startup. Since the number of incubators looking to work with startups keeps growing, critics worry that there will not be enough successful startups to keep incubators profitable. Plus, the more startups that incubators produce, the harder existing startups will have to compete to attract investor attention.
In contrast, proponents argue that the current incubator boom is sustainable and has even become a necessity in some areas of the country. With the Obama administration, other government agencies, and private investors pledging billions to spurring startup development lately, supporters of incubators point to the increase of startups looking for professional help. The rise of incubators is simply a response to the rise of startups and the increased focus on small business development. In communities like Detroit that are in desperate need of an economic boost, incubators are needed to rapidly develop and refine startups so that they can start having an impact on the local economy as soon as they are financially viable.
Whether the current incubator boom is sustainable or not, these companies can serve as a valuable resource and guide for tech startups. Leading incubators like Y Combinator and TechStars have paved the way for successful startups like Dropbox and Justin.tv. Incubators have the potential to rapidly accelerate an entrepreneur’s business over a relativity short period of time and can sometimes provide much needed sources of funding and expertise. Not all programs are created equal, however, and as always it’s important to do your homework before entering into any equity sharing arrangement.
The good news for local startups looking for an incubator is that they do not have to travel to the west coast as Ohio is home to a number of established incubators. Three of the most established are highlighted below:
The Brandery, a Cincinnati incubator, was recently rated the 10th best startup accelerator in the U.S. (click here for the Top 15 list). In exchange for a 6% diluting warrant in a startup, The Brandery offers $20,000 in seed funding, free office space, product development, consumer research, legal support, brand identity, and a number of other services. The incubator also maintains a staff of over 50 mentors comprised of chief marketing officers, company executives, attorneys, and marketing experts.
TechColumbus, based in Columbus, OH, focuses on working with information technology, bioscience, and advanced material startups. TechColumbus offers office and lab space, a team of experts, executives, and Ph.Ds, and access to capital from a variety of sources. An incubator with a proven record, TechColumbus has had almost 90 companies gradate from its program, and 75% of those companies have realized sales or commercialization success.
JumpStart, Inc. focuses on startups in Northeast Ohio. A private, nonprofit organization, JumpStart seeks to assist startups who have the potential to generate $30-50 in revenue within five to seven years after working with the incubator and who will be located in the 21-country-area of Northeast Ohio. JumpStart invests in a startup using convertible debt, i.e. providing a loan that eventually converts to equity, and in exchange, the company provides 18 to 24 months of intensive development and $250,000 or more in early-stage investment.
For more information on incubators, see this list of Ohio startup accelerators maintained by The Gillespie Law Group.
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