A business incubator is a programme designed to assist a startup in its development and growth phase. However, with the flood of incubators in South Africa today, it’s becoming increasingly difficult for entrepreneurs to decide if an incubator programme is right for them and how to pick the right one.
“Entrepreneurs should choose an incubator which can add value to their business,” says Lianne Du Toit of Silicon Cape, the Western Cape’s go-to startup hub that nurtures a community of tech entrepreneurs, developers, creatives and angel investors.
Du Toit lays out the abc’s of incubators and gives her advice on how to pick the right one for your startup.
What is an incubator?
An incubator generally has a programme for either seed/early-stage startups or growth startups which support entrepreneurs in setting up their business providing mentoring in terms of strategy, technical expertise, general business skills (accounting, marketing, etc) and physical resources, like office space, wifi, meeting rooms, etc.
Incubators are also used by government and bigger corporations to spark the economy and to motivate young people in creating their own businesses.
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Is there a set criteria for startups who approach incubators?
Incubators are generally aimed at seed and early stage companies which are pre-revenue but have developed a beta version of their product. Each incubator is different, but the general criteria is:
- Pre or post revenue
- Able to work on their business and attend classes from mentors and speakers
- Willing to give away a portion of equity
“The mentorship and expanded networks received and access to market are arguably the greatest value adds”
How does the ownership work?
There are several different models. Most leading incubators take up equity in return for the mentorship and other services. This is on a case-by-case basis. Depending how big and structured the startup is. There are different models from one founder to several investors or visa versa. It is always advisable to ensure a fair and valid business case valuation to avoid issues that may arise later.
Depending on the business model, the incubator usually takes an equity stake in the startup company (10%-25%) with the aim to exit at a later stage and achieve above average returns.
How much time do startups usually spend in an incubation programme?
3-6 months, we usually call these accelerators. With the aim of accelerating a business into growth through a structured programme.
How do startups go about picking an incubator thats right for them?
Startups need to match the application criteria of each individual incubator and do not have too much of a choice. Generally, entrepreneurs should choose an incubator which can add value to their business. Related to this I would recommend to research the industry which the incubators are targeting as the technical expertise to be provided will depend on the mentors/coaches which are on board the incubator.
What are some of the challenges with using an incubator?
As I said above there are various incubator models. Some are more advantageous than others but this largely depends on the entrepreneur’s needs. Also, the incubation time is usually relatively short and startups might require more support in the early stage of their business.
“There are limited success stories as yet and the market needs to mature to see major successful exits through incubation”
Leading incubators may take higher equity stakes in startups, as entrepreneurs may have limited alternative funding options. The mentorship and expanded networks received and access to market are arguably the greatest value adds.
What does the incubator get out of working with the startup?
The incubator usually takes an equity stake in several early stage businesses, hoping to make an profitable exit at a later stage. Some incubators that are funded by government have different KPI’s such as how many jobs were created. It’s all relative.
What type of businesses aren’t suitable for incubation?
Basically any type of business can be incubated. Social (CSI) projects are more difficult to incubate as the return on investment is generally more difficult to identify. Depending on the type of company (tech, IT, services, etc.) the incubator needs to have the right (technical) resources/mentors available to be able to add value for the entrepreneurs.
What’s the incubation space in SA like? Is there more room for improvement? How do we compare globally?
There are limited success stories as yet and the market needs to mature to see major successful exits through incubation. Incubation in SA is continuously improving, especially over the last three years. Many corporates are also showing strong interest in this area and this can only be good for the ecosystem.
More structured programmes offering direct access to market are needed. We also need to highlight our success stories and encourage South Africans to embrace entrepreneurship.
The local market still needs improvement, especially in terms of funding, access to market and mentorship when compared to international startup hubs like in Silicon Valley and Berlin. We are however continuously growing.
