Incubating Start-Ups: Where should the egg hatch?

Harini Subramani                      "Very few men are wise by their own counsel, or learned by their own teaching. For he that was only taught by himself, had a fool for his master."

Seventeenth-century poet, playwright and literary critic Ben Johnson clearly didn't have budding entrepreneurs in mind when he penned that thought. All the same, it is wise counsel for start-ups exploring the role of an incubator for their companies' growth. One of the big questions that confront newbie entrepreneurs is whether to approach an incubation centre or not. If so, when is the time right?

"As we see it, incubation is one way of getting recognised to get funded," says Hari Ganapathy, co-founder of Chennai-based Travel Troops Global, a start-up that runs pickyourtrail.com, an e-commerce portal. "Once we have a decent billing and user base, access to funding is much easier," believes 28-year-old Ganapathy.

When is the time right for incubation?

Is this the correct approach for every start-up? Not necessarily. But for those going the incubation route, when is the time right to seriously explore this option?

Although there are no statutes that define an incubator, one may view an incubator as an embryonic cell for a company that is evolving. But since it is critical to choose the correct incubation model, here's a brief overview that might help.

In India, we have three types of incubators. So your options are:

1. Government-backed incubators2. Privately-owned incubators3. Incubators that follow a PPP model (public private partnership)

Government-backed Incubators

The government has been at the forefront of establishing incubation centres to foster entrepreneurship. However, its role has been limited to creating incubation centres that promote technological innovations only.

These are typically the incubators in academic institutions set up under the auspices of the Department of Science and Technology. The Rural Technology and Business Incubator or RTBI, the IIT Madras incubator, is one such.

The model such incubators use is to provide technical expertise/counsel to start-ups and compulsorily pick up a stake. In fact, according to government requirements, these incubators are required to hold a minority stake for the funds they provide. Even so, these incubators do not necessarily provide space to the start-up.

"Having been a part of such an environment, I find the expansion opportunities for a start-up very restricted. There is also scope for some level of bureaucracy in such a set-up," says the founder of a private incubator who wished to remain anonymous. Also, since the funding is by the government, there could be certain compulsions, he adds.

Privately-owned Incubators

As privately-owned incubators receive no funding from the government, the backers of the incubation centre have a free hand to encourage start-ups.

These incubators not only provide space but also take a stake in the company. But they do not necessarily provide funding. The role of an incubation centre here is limited to space, networking assistance and mentorship.

It is important to note that India also breeds accelerators. From the point of view of the funding world, the difference between an incubator and an accelerator is the kind of role they play in growing the company. Incubators are more useful for extremely early stage companies while accelerators are more suited to companies that have a reasonably established presence.

Public Private Partnership

There are not many incubators that have adopted the PPP or Private Public Partnership model, however Startup Village in Kerala is one of those few who have. The centre has three entities that have entered into an arrangement, including Mobme (a privately-held software firm), Thiruvananthapuram's TBI (registered as a society) and the Department of Science and Technology.

"Incubators provide answers to questions that start-up companies are usually faced with," remarks Padmaja Ruparel, president of the Indian Angel Network (IAN), a group of entrepreneurs and senior company executives that assist start-up companies with various requirements in the initial growth phase.

The IAN also has an incubation wing. They offer space to the start-ups and pick up stakes in every company as the incubator is set up under the Department of Science and Technology. However, they do not offer funding to all the start-ups. Says Ruparel, "The role of an incubator is to bring high value and provide the right mentors who offer the right advice to start-up companies."

One of the missteps that start-ups make is to muddle incubators with funding. Although some incubators may offer valuable funding, the primary objective to enrol with an incubation programme should be much larger than sourcing funds. Careful you don't fall prey to this misconception.

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