ACADEMIC ANGLE. Organisation, financial models are the key to set up an incubator

In this concluding piece, I intend to discuss two considerations that I believe are important while setting up an incubator: The organisation of incubators and their financial models. Many more aspects are important in this regard, such as marketing an incubator’s services to create a pipeline of incubation applicants. But those need to be the topic for a more comprehensive discussion on incubators.

Form & format The first consideration is that the form and format of an incubator must follow its function. Form and format refer to nearly all aspects of the incubator’s organisation. The design of the physical infrastructure, the staff, the networks and the activities of the programme all depend on the kind of the business that it proposes to incubate and the nature of its engagement with the incubatee.

For example, incubators that intend to support enterprises based on deep science need to either have laboratories or workshops of their own. Alternatively, if they do not wish to replicate costly facilities, they will need to have arrangements with existing infrastructure that will allow their tenant enterprises to access them seamlessly.

The network of resources that an incubator assembles will again depend on the stage of evolution of the incubator’s tenants. Ventures that are about to acquire their first customers need mentors who have access to experts in areas like business model development. Ventures engaged in drug discovery and development would benefit from inputs on critical choices for commercialisation such as licensing arrangements.

Incubators coming up in science and technology institutions need to organise themselves to be able to act as vehicles that will promote entrepreneurship among their scientists. A free standing business school by contrast needs to think about how it will develop a pipeline of ideas for incubation.

Location is another key factor. An incubator that is being set up in a town or region where entrepreneurship is yet to take roots among its population needs to evangelise entrepreneurship through talks by inspiring entrepreneurs and academics and events. It needs to create a public space where aspiring entrepreneurs can hang out as and when they feel the need for the same.

Financial model The other important consideration is the financial model for an incubator. The most common source of revenue for incubators is rental income. Given their stressed financial situation, start-ups are often unable to pay market-determined rents.

That means incubators will most likely not even cover their cost of operations from the rental they charge, let alone realise a return on investment. Quite frequently, it is not easy to even collect rents on time.

Some incubators seek to compensate themselves for these risky and un-remunerative rentals by taking an equity stake in the incubated enterprise. Whatever the financial model, the overwhelming evidence from our understanding of incubators over the past few decades is that the business of incubation is not financially attractive in the long run.

From time to time, a few incubators have been successful in the short run. In the past their financial success could not be maintained for long. It remains to be seen how long this recent profitability will sustain.

For now, I look upon incubators to be quite like public infrastructure such as a park or a boulevard or a meditation hall. It has the potential to lead to many positive network effects, which make it a useful building block for an entrepreneurial ecosystem.

By itself though, an incubator does not appear to be a profitable business.

(The writer is Chairperson, NS Raghavan Centre for Entrepreneurial Learning at IIM-Bangalore. Views expressed are his own.)

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