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The 4 fundamental business models of incubators

When choosing an incubation programme or an innovation partner, entrepreneurs and  organisations need to be aware of their underlying business models

Singapore’s start-up ecosystem has been growing fast. The number of startups here has increased by more than three times in the past decade[1]. One only needs to visit the startup enclave LaunchPad at One north to find out how vibrant the startup scene is. The JTC hub is home to more than 800 startups and close to 50 incubators[2]. Incubators in the ecosystem play an important role behind successful startups by providing targeted business assistance at very early stages of the company.

In recent years, I have had the chance of interacting and collaborating with different incubators in Singapore and overseas. Although many of them offer similar business assistance, they have vastly different business models which define their priorities. I would classify incubators into four different categories:

  • Teacher
  • Agent
  • Merchant
  • Builder

1. The Teachers

The “Teacher” operates the incubation program similar to a MBA program. They are a school for startups. After the application and admission process, the startups will be put through classes, trainings, and consultancy to get themselves ready to pitch their ideas to the selected investors. There will also be networking events and parties where startups get connected to the who’s who.

The secret sauce lies in the inherent good quality of their applicants. To succeed, they need to develop an outstanding brand name to attract the best candidates. Y Combinator is one of the most successful “Teacher” type incubator, and other notables include 500 Startups, AngelPad, Chinaccelerator. There are many more trying to follow this model. However, their successes are extremely difficult to duplicate. It is akin to creating another Harvard MBA program in Singapore.

2. The Agents

The “Agent” type of incubator typically help start-ups to reach out for customers or investors in a different region. In some variations, the Agents also help large corporates to search for disruptive innovation.

The “agent” is a viable business model because there are real needs for both startups and corporates. Besides the plain vanilla servicing fee, Agents often provide additional services such as market research and consultancy to generate more income. The paying customers are the core of their business. Agents have a strong imperative to maintain good linkages with customers and ensure efficient operation to bring the information/start-ups that customers are interested. Some of the “agent” types incubators are LabCentral, Plug&Play, and MBC Biolabs.

3. The Merchants

The top priority for a merchant is to sell its own product or service to its customers. Similarly, Merchant-type incubators are most willing to help start-ups whose successes better market their products or services. They are usually incubators belonging to large corporates.

Necessarily, Merchants spend a lot of effort on marketing. Sometimes, its whole incubation programme is supported by the marketing and sales budget.  They would love to organise or participate in high profile events and promote incubatees’ success stories to sell their own products. Some of the “Merchant” types incubators are Huawei i5Lab, HP Enterprise Incubator, and Microsoft Accelerator.

Also read: Accelerators versus incubators: Which one should your startup go to?

4. The Builders

The Builders are creators of new ventures. Typically. they are small outfits that build companies using their own ideas and resources. Unlike venture capitals, the Builders take a different approach in starting a new business. They pull business ideas within their own network and form internal teams to develop them. These teams spend most of their time pushing the product into the market and focus little on raising funds. It is natural process of how a business owners start their new ventures and has been a rising trend in the startup ecosystem.

The Builders has a much higher success rate of starting a new company. The startup projects are initiated by experienced and resourceful entrepreneurs who are actively looking for new business opportunities. More importantly, the projects are driven by an internal team who are tightly knitted through previous start-up projects. There are also economics of scale since the teams are able to re-use infrastructure and best practices across different projects.

At the core, the venture builder model is centered around internal teams led by experienced entrepreneurs. Although it is a resource-intensive model, there are some notable examples including Rocket Internet, Obvious Corp, Incube Labs, JCS Venture Lab, and Betaworks.

Not all business incubators are created equal

When choosing an incubation programme or an innovation partner, entrepreneurs and  organisations need to be aware of their underlying business models. Not all business incubators are created equal, so is their value to your business. Understanding them and selecting the right one could be the first step of your challenging journey as an entrepreneur.

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References:

  1. Singapore Department of Statistics
  2. SPRING, More support for startups to growth locally and globally

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