Business Incubators: The Next Innovation Engine?

Business incubators, once a trendy place for entrepreneurs to start companies, fell out of favor in recent years. But some indicators suggest incubators are making a comeback as a breeding ground for startups, innovative ideas and new job creation.

Incubators are locations where startups share low-cost office space, access to business services and advice, as well as the unofficial support group that’s created by working next to other people who are in the same startup boat. Today, reports BusinessWeek, the National Business Incubation Association (NBIA) says incubators have reached a record high, with 1,200 locations nationwide, home to some 41,000 startup businesses.

While incubators used to be more general facilities, BusinessWeek says many of those that launched in the past few years are highly specialized. Often, their focus is on reviving a declining industry in the region where they are located, or on building off the expertise of those in that industry to innovate new products, services and concepts.

Joining in these efforts, the federal government is taking more interest in incubators as a way to boost job growth. In one study, the Commerce Department’s Economic Development Administration found that investing in incubators has a greater ROI than investing in public works programs in terms of creating jobs. The EDA put $80.7 million into incubators last year and says the spending created 8,746 jobs.

The interest in incubators has spawned new legislation. Representative Tim Ryan (D-OH) proposed a bill in April that would expand the types of incubators EDA is allowed to fund. Representative Suzanne Kosmas (D-FL) in May introduced the Early Stage Business Investment & Incubation Act of 2010, which would set up a $250 million funding program for incubators targeting high-growth industries.

But not everyone is sold on how effective incubators can be. The NBIA cites statistics that 87 percent of companies hatched in incubators are still around after five years, compared to just 47 percent of companies started outside of incubators. But Alejandro Amezcua, a Syracuse University Ph.D. candidate, says preliminary results from a study he is working on that examined 19,000 incubated companies found their failure rate was similar to that of companies outside incubators.