Ever heard the expression to follow the money trail? Well, it is sage advice but someone forgot to mention where that money trail is located. One trail short-cut is business incubators. Business incubators can provide a solid path to capital from angel investors, state governments, economic-development coalitions and other types of investors. Many states offer listings of various business incubator programs but, what exactly is a business incubator and why should a new business owner consider it?

What is It?

Business incubators are designed to house several businesses under one roof or in a campus-style setting. They offer resident companies reduced rents, shared services and, in many instances, formal or informal access to financing. Business incubators are appropriate for pre-revenue-stage companies to early-stage companies that are selling products or services.

According to the National Business Incubation Association, there are approximately 1,000 business incubators in North America. Most North American business incubators (about 90 percent) are nonprofit organizations focused on economic development. About 10 percent are for-profit entities, usually set up to obtain returns on shareholders investments.

What type of funding is available?

Incubator programs can provide access to funding sources for as little as $500 or as much as $25,000 or greater.

How easy is it to get into one?

Gaining entry to an incubator can be easy or challenging. The simple truth is that even being in an incubator offers value to potential investors. Incubator managers are aware of this, and will carefully screen would-be applicants to see that they match certain criteria. The good news is that once you are in an incubator, the path to angels or other investors may be more direct.

Incubators attract sources of capital because they are simply convenient. Rather than searching for potential deals, investors can easily find a significant number of investment opportunities housed under one roof.

How do I find the right one?

Like with any other aspect of your business, you need to do your homework. Start by checking out the National Business Incubation Association website, for business incubators in your state and/or community. Once you created a viable list, start calling and asking questions such as:

How well is the program performing?

How long has the program been in operation?

Does it have any successful graduate companies and if so, how long have they been in business independent from the incubator?

What is the program's graduation policy, i.e. what are the incubator's exit criteria?

How long, on average, have clients remained in the program? (Incubators typically graduate companies within three years.)

How long has the current staff been with the program?

How much time does staff spend on site?

Be thorough and find the incubator that will best fit your needs. If you do find the right match, the benefits will outweigh the initial leg work. Business incubators are known to reduce the risk of small business failures. Historically, the survival rate for a company that successfully completes an incubator program is approximately 85%. That in itself should offer you some major motivation to check it out.