The pros & cons of startup incubators

MT EXPERT: If you're after networking and advice an accelerator can be invaluable, but do you really want to give up equity?

by Rich Preece
Last Updated: 06 Oct 2014

There are plenty of clichés to describe how it feels to run a startup - ‘backs against the wall’, ‘keeping your head above water’, ‘a rollercoaster ride’. And for many, they ring pretty true – no matter how optimistic the entrepreneur, starting a business requires blood, sweat and tears.

There isn’t really any way around that, but the numerous incubators, accelerators and ‘Tech Cities’ popping up across the country have been touted as a somewhat easier route to success for startups than doing it all on your own. There’s Seedcamp, based at Google Campus in London. Ignite100 has a big presence in the north of England. And then there are global organisations like Techstars.

But will these hubs actually support your business? Here are the pros and cons:

Pros

• You can get collaborative

It’s not unusual to hear a founder talk about spending 18 hours a day cooped up in a garage. That’s undoubtedly impressive, but having access to a shared space filled with like-minded, energy-fuelled individuals can be invaluable. It creates a backdrop where ideas, creativity and innovation are readily shared between peers.

Some spaces are huge and have a constant churn of new individuals racing in and out in an attempt to kickstart their business. Others are smaller and have members that bed in for a while to get their business off the ground. Either way, there’s a diverse pool of ingenuity and ideas to tap into.

• They provide advice

Any good incubator will be laden with investors, VCs and mentors who have a record of making businesses and ideas of all sizes work. They also have a vested interest in making your business succeed. When the business is up and running, this collection of individuals can provide connections that will help you take your business to the next level.

• They can expand your network

Birds of a feather flock together in business. An entrepreneur will usually be drawn to an incubator that has form in growing a business in a relevant sector and that, in turn, will throw up plenty of networking opportunities with relevant individuals. This might be through unearthing cheap or unique suppliers, discovering processes that build efficiency or simply the opening of a right door to get those crucial first leads in.

• You can cut costs

The small things count when running a business. Not having the nuts and bolts in place wastes time and money. A small but significant support incubators and accelerators provide is free resources such as IT equipment and Wi-Fi, crucial in your earliest days when time and budgets are tight.

Cons

• There are plenty of other funding sources

Decent amounts of cash can be dangled in front of start-ups by incubators, but, while this is useful, there are many other ways to secure funding. Stats from the Bank of England’s Funding for Lending Scheme show most small business aren’t getting help from the banks.
Instead, you could raise money from regulated crowd funding platforms like Funding Tree or online business networks like Tradeshift, which gives loans on the back of data collected from within its network. The Government is also working on its ‘British Business Bank,’ which aims to learn from the mistakes of previous small business lending schemes.

• You have to give up equity

Many incubators take a percentage of equity for the privilege of their funding, counsel and use of their services. This is a tough call on many levels. In the early days of a business it can feel like everyone who helps asks for a slice.

There are some that only ask for a low percentage or others that don’t require equity at all, but these are usually government-funded grant programs that charge members monthly dues.  Either way, there is usually something required in return, and a judgement call should be made on whether turning your back on funding and support is worth it to protect your share of the business.

• You don’t need to be based in the centre of the action

London is a big tech hub. Cambridge is a centre of innovation. York was in the news recently, labelled the latest start-up scene. But what if there’s no market demand for your product in the area the incubator is in? If a business is localised - a manufacturer or retailer, for example - it’s unnecessary to tie it to somewhere unrelated. Especially as around these hubs the cost of living and labour tend to be high. Also, setting up outside a tech hub gives you the impetus to get out and work on the move, which can be critical in a business’ early months when as much time as possible should be spent on the ground getting in leads.

• Tech is available to everyone

The cloud, internet and mobile are reducing the need for physical hubs and workspaces. A business can be based and run from anywhere, consultancy and inspiration can be taken from numerous online sources and leads can be generated by just popping a laptop down and working from a coffee shop. It makes little sense to run many micro businesses from an office.

Also, a lot of the collaborative tools, systems and processes that are provided by incubators now have cloud-based rivals at a fraction of the cost. There are online tools that will help you manage cash flow, find investors, indeed, manage an entire organisation - freeing up time to run and build the business.

So, while you can get ideas, connections and a helping hand from incubators, they aren’t the be all and end all. With the right technology and support you can run your business – and its crucial business processes - from anywhere. It’s just a matter of figuring out what’s right for you and your business.

Rich Preece is the vice president and UK country manager at QuickBooks, part of small business accounting software company Intuit.

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