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How Tech Incubators Work

The Tech Incubator Process
President Barack Obama makes a statement on the improving economy at the start-up tech incubator 1776 in Washington, D.C. in 2014.
President Barack Obama makes a statement on the improving economy at the start-up tech incubator 1776 in Washington, D.C. in 2014.
© Martin Simon/CP/AdMedia/AdMedia/Corbis

Let's use the example of Innovation Depot in Birmingham, Alabama, to help us better understand the tech incubator process and why a company would want to use one.

The first step to joining a tech incubator like Innovation Depot is to apply online. In 2014, the incubator housed 99 different companies. Twenty-three of those companies were new in 2014, and those lucky companies were chosen from 122 applicants [source: Innovation Depot]. Competition is fierce at the most successful incubators — admission to Innovation Depot is based on the strength of the applicant's business plan and an in-person interview.

Admitted companies move into offices inside Innovation Depot, which are leased by the month. In 2014, the building held nearly 700 employees [source: Innovation Depot]. In addition to offering the conventional office amenities like conference rooms, WiFi, copiers, kitchens and (of course) ping-pong tables, Innovation Depot devotes a portion of its second-floor real estate to cutting-edge "wet labs," where biotech companies can research and develop new products and services. Members pay rent for their office space, which provides most of Innovation Depot's revenue.

Once inside the incubator, Innovation Depot offers a suite of customized services for growing companies, many of them provided by other companies in the incubator. Let's say you have a great product idea, but you need help developing a marketing plan. Lucky for you, there are a half-dozen strategic marketing and branding firms right inside Innovation Depot.

The same is true for other business-critical services like accounting, public relations, intellectual property protection, payroll management, distribution logistics and custom software development. Not only are all of these companies physically close, but they are co-members of the tight-knit Innovation Depot community. This is one of the biggest advantages of working within an incubator, instant access to like-minded entrepreneurs offering helpful services. There are also on-site business coaches to help with strategy and planning.

To foster this sense of community and enhance the incubator experience, Innovation Depot hosts regular community-wide events. There are the traditional mixers and happy hours, but also "hackathons" and twice-monthly seminars on strategic topics in startup development and management [source: Innovation Depot]. Innovation Depot also hosts regular, weekly "Depot Connect" mixers just for member startup companies as a way to foster culture and collaboration among the entrepreneurs.

And let's not forget about funding. Tech companies need capital to fuel growth and innovation. The board of directors at an incubator like the Innovation Depot includes regional business leaders representing banks, investment funds, economic development agencies and more sources of potential venture capital. In 2014, Innovation Depot companies raised $20 million, with 87 percent coming from venture capital firms and angel investors [source: Innovation Depot].