This article employs real options-theoretic reasoning to develop a theory of business incubation. This theory seeks to predict and explain how business incubators and the process of business incubation increase the likelihood that new ventures will survive the early stages of development. It conceptualizes the incubator as an entrepreneurial firm that sources and macro-manages the innovation process within emerging organizations, infusing these organizations with resources at various developmental stage-gates while containing the cost of their potential failure. The incubator is the unit of analysis while incubation outcomes--measured in terms of incubatee growth and financial performance at the time of incubator exit--provide indicators of success. Our model of the incubation process and specification of the range of possible incubation outcomes offer implications for managerial practice and policy-making vis-ý-vis incubator management and good entrepreneurial failure.
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