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Science-Based Economic Development edited by Susan Raymond
Rustam Lalaka
Senior Advisor
United Nations Development Programme
The performance of a business incubator should be measured essentially by the survival and growth of the businesses it incubates. The sponsors may have additional criteria such as the sustainability of operations and positive cash flow, the number of enterprises graduated and the good jobs created, and the income contributed to the community and taxes to the nation. These outcomes depend on the careful planning and implementation of the incubation process. Technology incubators share a characteristic with other forms of human endeavor. Success is multifaceted and complex. Success comes from accomplishing a number of tasks quite well. Success is often related to serendipity. And success, like beauty, is often in the eye of the beholder.
This paper reviews the role, problems, and prospects of the technology business incubator (TBI) in the context of an industrializing country, and the recent approaches at selected incubators that have developed good practices. Attention has to be focused on enhancing the value-adding services that the incubator provides to help resident businesses move from the innovation-concept, though the prototype stage, and on toward probing the market, attracting the needed capital, and commercializing operations. The ten critical success factors for planning and operating a technology incubation system are identified.
The Context
The incubator helps overcome bureaucratic obstacles and provides affordable space and shared facilities, thus reducing gestation time and startup costs. Importantly, it provides advisory, training, and information services, management and marketing support, linkages to research faculty and facilities, and access to capital, thereby greatly enhancing the chances of success of the early-stage "technopreneur." Two-thirds of business incubators in industrializing countries focus on technology based activities, compared to one-third in the U.S. This is because technology seems to have a cachet for politicians and planners, and also because earlier schemes for commercializing research and creating knowledge-based enterprises have not been very successful.
Technological change is taking place today against a background of growing intranational and international disequilibria. While the transformation from state-centered to market-oriented development is opening up enormous opportunities and options, it has also caused severe short-term hardships. In order to survive and prosper in these changing times, developing nations and their enterprises need enlightened government policies, good technical infrastructure, and strong cultural roots. Starting a new business in an industrializing country is usually a hazardous task. Problems are compounded when the venture is technology-based
The technology incubator can help tackle many of these problems. But first, the incubator itself has to be incubated. Once operations are established, the entrepreneur can be helped to become an enterprise, which in turn creates employment and economic growth. A variety of factors determine the success of the incubator from its conception to its commercial operation (FIGURE 1). Most of the sucessful technology incubators have some or all of the ten attributes discussed below. These relate to the whole cycle of planning, operating, and monitoring the incubation system.
Figure 1. Incubator Sucess Factors
Planning Issues
The genetic code marking success—or failure—starts at the planning and conceptualizing of the new technology business incubator (TBI).
Success Factor 1: Establishing the Goals and Selecting Sponsors
The short stay of the early-stage or startup business in the incubator—typically two years but often longer for many technology-based products—serves as the bridge between the nascent plans of the technopreneur and the rigors of the global marketplace. The first step is to make a realistic assessment of the profile of the local entrepreneur and the gaps in knowledge, facilities, and functions that the incubator must be designed to fill. This forms the base of a good business plan, which then serves to mobilize broad sponsor support, raise finance, market, and monitor performance of the TBI. Incubator Focus: An essential planning issue is the subsectoral niche on which design must focus. That is: Should the incubator cater mainly to one discipline, such as biotechnology, informatics, advanced materials, or should it cover a wider range? The single subsector focus has the potential for better cooperation and competition among tenants, perhaps some expensive research facilities provided for shared use, and more concentrated technical assistance from the incubator management. It makes sense and provides synergy, for instance, to focus incubators on ceramics in upper New York State, around the centers of excellence at Corning and Alfred University, or on biotechnology around the extensive biohealth capabilities at the University of Chicago and in the vicinity of Fundaçao Biominas, Belo Horizonte, and Fundaçao BioRio, Brazil. In the U.S. only a small proportion of incubators can be said to concentrate on specific technologies, about 10 percent of the total of five hundred or more. A whole region may offer some advantage to attract and generally incubate a particular industry, whether it be Hong Kong in multimedia and microelectronics or Bangalore, south India, for software development.
But in most situations, even in industrial countries, the reservoir of potential local businesses in a single technology is limited and the capital investment needed to equip a special-purpose incubator is too high to justify this. The Long Island High Technology Incubator at Stony Brook, New York, started with a biotech focus due to the excellence of the sponsoring university in life sciences, but then had to widen its scope to meet demands from aerospace and microelectronics. The diversity of disciplines can itself add value to interactions among tenants.
Public-Private Partnership: Incubators the world over should be considered as part social investment. This usually requires a public-private partnership, with the public sponsor—federal, state, city, or university contributing in cash and in kind, toward the investment and initial operating costs for three to five years, until revenues match expenses. Two-thirds of U.S. incubators continue to receive some form of subsidy, and only a small proportion (under 15 percent) are truly private for-profit entities.
With state support inevitably comes state intervention, blatant or subtle. ("As the university will provide the vacant building space, our lecturer should be considered for incubator manager. He will also teach a course part-time," etc.) While treating the incubator as a "center" or department of the university or government agency may be expedient, the two cultures are different, the negative perceptions are significant, and the bureaucratic constraints are many. The preferred legal persona could be a nonprofit corporation, transformed later to an autonomous company. Or, as in the case of Technology Park Malaysia, an initial government investment can later be "corporatized" and the substantial state investment turned to equity.
An emerging trend is the international incubator, such as the German-U.S. facility at Atlanta, Georgia, or the Ben Craig Center in Charlotte, North Carolina. China presently plans to "internationalize" a couple of its technology incubators in order to facilitate the entry of foreign small high-tech companies into the Chinese market. The technology incubator at An-Najah University in Nablus, Palestine, is planned as a hub with a satellite to help revitalize a rural community.
Success Factor 2: Creating Linkages to Professional/Business Communities
Another planning issue is whether the incubator should be embedded in the structure of the technical university/research complex, be loosely linked, or stand alone. The efficiency of technology transfer is often inversely proportional to distance between transferor and transferee, and therefore, physical and organizational proximity could help facilitate access to expertise. Moreover, an incubator is not hardware-intensive but software-intensive, and can utilize the research equipment, information services, and other resources at the university. The stand-alone incubator would have greater autonomy and flexibility. Each option has its advantages and the arrangement adopted may depend largely on the predilections of the primary promoter.
University-Industry-Incubator: The 120 research universities in the U.S. have enviable records of licenses and patents. The top ten universities which actively market their technologies earned over $170 million in 1993, led by University of California ($45 million) and Stanford ($32 million). Professors and graduate students at Chicago, Carnegie-Mellon, Cornell, Michigan, and Wisconsin have been instrumental in starting significant technology enterprises in biotechnology, computers, and communications. MIT, Berkeley, and Stanford have each spawned some 250 successful companies.
There is also potential of synergy between a technology incubator and a technology park, as envisaged by the Evanston Enterprise Center/Evanston Research Park at Northwestern University and Chicago Technology Park/Research Center. But realiq is different, and the potential benefits are often only partly realized. As the technopark is a major long-term investment—perhaps $50 million or more over a decade and longer—it is often desirable to start quickly and at low cost with an incubator, making provision for expansion to a full-fledged park in future (FIGURE 2). Whether the incubator is embedded in the university or stands alone, the essential task of the incubator managing board and manager is to rapidly establish a purposeful network of friends and mentors in business, professional, and academic communities. The incubation activity has to become an integral part of a conglomeration of related technology-supporting systems.
An excellent example of mutually supportive mechanisms is at the University of Texas at Austin. Under the aegis of the Center for Commercialization and Enterprise are the Austin Technology Incubator, UT Austin Entrepreneurs Council, Austin Software Council, NASA Technology Commercialization Center, and Texas Capital Network. A similar synergy is provided for the enterprise center at Northwestern University, under a strong state-city-university-private partnership.
Working relationships are needed not only to learning and research institutions but also to other entrepreneur support activities in the vicinity. In Uzbekistan, for instance, the three pilot incubators (and the future facilities being developed in each oblast) are being purposefully linked to ongoing national as well as bilateral programs for privatization, foreign investment, and SME development.
Figure 2. Technology Park-Business Incubator Nexus
An interesting development is taking place in Jamaica. The College of Arts, Science and Technology has been raised to the status of the University of Technology-Jamaica, while its dynamic Entrepreneurial Extension Center is now being extended to become an incubator-innovation center. The expectation is that this new center will help inculcate a technology research portfolio at the university, in turn nurturing faculty-student businesses and attracting external technologies.
Asian Experience: The era of the entrepreneurial university and learning enterprise has not fully dawned in most Asian industrializing countries. These have practically no research budgets, obsolete laboratory equipment, faculty overloaded with teaching responsibilities, and unsatisfactory liaison mechanisms to link the university supply capabilities with societal needs. But as their economies are liberalizing and markets opening up, local business is at last being forced to undertake research, inhouse and cooperatively. Soon, perhaps, it could be induced to work collaboratively with technology incubators through spinoffs and equity investments.
In Southeast Asia, a good example is the incubator center at the Singapore Institute of Standards and Industrial Research, a tenant within the Singapore Science Park; further, a new innovation center, with forty units covering 2,000 square meters, is being established as the park expands. The constellation of agencies, under the strong leadership of the National Science and Technology Board, includes the Technopreneur Assistance Center and support activities such as the Innovator's Assistance Scheme, a data bank of licensable technologies managed by the National University, a patent application fund, and EDB Ventures for risk capital.
In Malaysia, the splendid new $80 million technology park at Bukit Jalil starts with extensive innovation-incubator-enterprise houses. While it has presently no university on premises, linkages are underway to local institutes of both learning and research, MIMOS for instance. The incubator started by Korea's Advanced Institute of Science and Technology at their new Taejon campus has fifteen high-tech firms, started mostly by professors and researchers. The technology incubator at Indonesia is embedded in the PUSPIPTEK park at Serpong but is not yet a vibrant facility, as the requisite linkages have not developed due to problems of leadership and funding.
Success Factor 3: Planning the Physical Facilities to Stimulate Creativity
Tech-based businesses can be promoted by a variety of mechanisms and do not necessarily need a resident physical facility such as an incubator building. The recent experience, however, is that clustering of entrepreneurs (as in the Emilio Romagno region of northern Italy) or their colocation under one roof (as in an incubator) has many beneficial effects.
TBI Design: For a business incubator it is generally fast and economical to utilize a renovated vacant building rather than construct a new one. But for the technology business incubator, it is advisable to custom-build the facility. A good size is at least 2,500 square meters gross, in order to derive rental incomes for covering fixed costs. A start could be made with half this floor space and assured provision for expansion as warranted. The lab modules could be about 75 and 100 square meters each, light manufacturing spaces of about 250 square meters, and some office modules of 25 square meters.
The layout and design must be highly flexible, with good floor-load capability, loading docks, and wet labs as needed, together with good security and after-hours access for tenants. Utility systems may call for individual air conditioning, good ventilation for fume hoods, fire protection, compressed air and steam connections, and systems for disposal of hazardous waste. For biotech-related activities, the incubator could provide basic shared equipment, such as autoclaves, high-speed centrifuge, spectrophotometer, deep-freezer, and water purification system. At the new Minas Gerais Biotechnology incubator of Fundaçao Biominas, Brazil, state-funded research laboratories—CETEC and FUNED—are to move in as anchor tenants. A state-of-the-art building can become expensive, raising rental rates and making it difficult to break even at under 85 percent occupancy.
Importantly, all tech-based companies, not just software developers, expect to be connected to the information highway. The need for a direct phone line and high speed data transfer can become expensive. Selected production reference books and business/marketing journals are required. The compilation of essential documents— and the skills to use them—is a continuous activity. In many situations, the availability of multitenant space for graduated tenants and other firms is an advantage. At the Hong Kong Industrial Technology Center, of the gross 235,000 square feet space, the incubator occupies 30,000 square feet and the multitenant facility is 180,000 square feet.
Table 1: Physical Infrastructure Practices (valid percent responses)
| no, rarely/never |
yes, by referal |
yes, direct |
both | ||
| Access to Internet/network/telecom services | 5.8 | 15.4 | 76.9 | 1.9 | |
| Special technical facilities | 5.9 | 23.5 | 60.8 | 9.8 | |
| Software libraries/directories | 20.8 | 15.1 | 52.8 | 11.3 | |
| Computer technical support | 26.4 | 35.8 | 32.1 | 5.7 | |
| Access to machine shop facilities | 28.3 | 47.2 | 22.6 | 1.9 | |
| Lease/purchase of specialized equipment | 30.8 | 40.4 | 25.0 | 3.8 | |
| Computer equipment leasing | 31.4 | 39.2 | 29.4 | 0.0 | |
| Develop/adapt production processes/systems | 40.4 | 44.7 | 12.8 | 2.1 | |
Preferred Services: A recent analysis of fifty-four TBIs in the U.S., undertaken by the Southern Technology Council, confirms that the most frequently provided service is access to network and telecom services, followed by special technical facilities such as clean rooms and wet labs (TABLE 1). Equipment leasing and process development assistance are generally through referral.
The entrepreneur doing creative work needs a pleasant but businesslike setting, with spaces to meet, communicate, and relax. This can be functional and modern, without the Taj Mahal syndrome of extravagances. An exhibition area the size of a tennis court, large auditoriums, and karoake bars, as seen in some incubators, are not justified!
Success Factor 4: Leveraging Policy and Legislative Support
The technological innovation process is not R&D alone but a larger constellation of interrelated issues, including state policies for investment, education, and trade and involving a variety of players, both in the country and abroad. The miracle of East Asian growth calls, as a prerequisite, for major investments in the social infrastructure of education and training, health and environment preservation, transport, and telecommunications.
Supportive Environment: As the success of the incubator is in the strength of the technopreneur, state policies that stimulate innovation also contribute to the incubator's performance. The legislative and regulatory system should:
Many industrializing countries aspire to have their own Silicon Valley without this prerequisite infrastructure. Examples of integrated and stable programs are the U.S. SBIRs, Pennsylvania's Ben Franklin and Ohio's Edison.
Problems are more severe in the post-communist nations, which once had strong research and education capacities but are now affected by budget constraints, and inadequate property rights, contract law, and banking systems. The Uzbekistan incubator program is already influencing national policies towards better support for private, self-owned businesses. The incubators planned for the Krasnodar region in southern Russia expect a local legislative initiative to help reduce the existing punitive taxes (up to 80 percent of turnover) at small businesses. The state's role is to promote venture creation, not unduly control it; to prime the pump and then let the business specialists operate and maintain it. Organizing a system with a variety of human resource, policy and market conditions as well as of technology acquisition modes and change agents is a complex task, to be initiated by the state.
Operational Issues
Once the groundwork for the incubation system is put in place, the real problems of implementing, operating, and achieving results begin.
Success Factor 5: Building a Dynamic Management Team
According to Chinese lore, "A mountain is known by the god that lives on it and a lake by the dragon that lives in it." Then surely a technology incubator is known by the manager who runs it. She or he is critical to its success. Yet, sponsors in industrializing countries are often unwilling to recognize this and make a wide search for the best person, to provide a good compensation package to attract and keep the team, or to incur the expense of continuing training. Salaries in many developing countries are still low, but then so is the ability of the entrepreneur to pay the incubator for rents and services.
As with other professional activity in technology-related business today, the incubator must secure competent personnel familiar with the changing trade and technical environment. This requires an attractive compensation package, including participation in any equity/royalty arrangements with tenants. Without a promising future career path, will the manager really deliver and stay? One could not successfully run, say, a hospital or a steel mill without experienced managers with related core skills, any more than one can run technology incubators without competent, entrepreneurial managers. The TBI manager's attributes are:
Within the management team, the deputy may have complementary experience in real estate management, accounting systems, and equipment procurement. A competent administrative assistant and a bilingual receptionist-secretary would complete the initial staff. Then, as the operations expand—and as revenue grows— additional staff may be added, but always keeping the target of positive cash flow in full view.
Ideally, the bulk of the manager's time should be devoted to first, providing support to help the companies grow, and second, running operations in a self-sustainable, businesslike manner. Typically however, the main tasks of the manager are raising funds for the incubator and tenants and maintaining good relations with the managing board and professional community.
The proper training of incubator management in developing countries usually comprises:
Managers and sponsors of the Egyptian, Indian, Indonesian and Malaysian incubators have had training, often under United Nations-sponsored programs, at U.S. and European incubators such as those in Renssalear, New York and Austin, Texas. Incubator personnel from Latin America have benefited from the Columbus Program in Europe.
Success Factor 6: Selecting the Firms Most Likely to Survive and Grow
Is the incubator elitist, as alleged? Yes, to the extent that it carefully selects the best one-out-of-ten applicants with potential for rapid growth. This, of course, is a reason for tripling the chances of success of companies in the incubator, compared to those outside. This selection also saves the community the resources that would otherwise be wasted. The focus is not on small businesses per se, but large businesses that happen at this moment to be small.
The steps to secure the best mix of tenants are: First, market the incubator to target audiences—particularly banks, technical universities, research and manufacturing organizations, and chambers of commerce—through professionally designed promotion campaigns. Second, develop clear admission and exit criteria, based on the incubator's mission and the regional conditions. Third, implement the selection in a transparent and fair manner.
The selection process usually comprises:
entrepreneurial qualities;
The technology-related product or service should conform generally to the country's priorities, the incubator's mandate, and should normally be less than twelve to eighteen months from market entry. Even with a thorough selection process, there will be only a few high-flyers, some "walking-dead," a majority of steady-growth companies, and a few failures.
Success Factor 7: Adding Value through Quality Services
Support to the technopreneur is provided through general management services, technology-specific counseling, capacity building, and access to finance and professional help. The portfolio of assistance has to be customized to the real needs of each firm or group, and should complement that already available in the area.
The general services provided have a pyramid structure, with the higher-cost, less frequently used at the upper layers.
Finance service
Marketing, legal support
Counseling and training services
Business, admin, information services
Shared office facilities & equipment services
Affordable modular rented space on flexible terms
To enable the incubator to become self-supporting, the choice of services and fees charged need to be balanced and based on analyses of market needs. Some are included in rental rates, a few utilities on cost-recovery basis and others on modest surcharges, some strategic loss-leaders to build volume, and other higher-level professional support at prevailing commercial rates. In U.S. incubators, services most in demand are tenant networking and mentoring through university faculty and business executives, facilitating strategic partnerships, and securing temporary staff (TABLE 2). The high percentage of activities (such as formal technical reviews and mentoring) on a direct, rather than referral, basis is surprising.
Table 2. Management Practices (valid percent responses)
| no, rarely/never |
yes, by referral |
yes, direct |
both | ||
| Organize tenant networking/peer technical assistance | 4.0 | 6.0 | 80.0 | 10.0 | |
| Mentoring services using business executives/faculty | 11.1 | 11.1 | 61.1 | 6.7 | |
| Management training for technology business | 13.5 | 40.4 | 30.8 | 15.4 | |
| Monitor enterprise financials | 14.3 | 8.2 | 71.4 | 6.1 | |
| Provide temporary staff | 15.1 | 26.4 | 52.8 | 5.7 | |
| Conduct exit interviews and exit assistance | 16.0 | 2.0 | 80.0 | 2.0 | |
| Locate/identify key management staff | 18.5 | 31.5 | 33.3 | 16.7 | |
| Facilitate strategic partnerships | 18.5 | 37.8 | 40.7 | 13.0 | |
| Conduct strategic planning sessions | 22.2 | 22.2 | 44.4 | 11.1 | |
| Build management team | 25.0 | 40.4 | 26.9 | 7.7 | |
| Conduct formal technical reviews | 32.7 | 16.3 | 44.9 | 6.1 | |
| Introduce advanced management practices | 41.5 | 47.2 | 11.3 | 0.0 | |
| Select and assess employees | 44.2 | 23.1 | 23.1 | 9.6 | |
| Use formal project selection tools/instruments | 44.9 | 16.3 | 36.7 | 2.0 | |
| Organizational design and structuring | 46.2 | 26.9 | 23.1 | 3.8 | |
| Provide temporary management services | 51.9 | 25.0 | 19.2 | 3.8 | |
| Use project management tools | 55.3 | 19.1 | 23.4 | 2.1 | |
Given the diversity and exponential growth in the technology arena, the incubator cannot have much resident technical experience. It needs to access such expertise through relationships with technical universities and outside professionals or through publicly funded research institutes, such as the cooperative research and development agreements with NASA and other federal labs in the U.S. The incubator can also help scout for new technologies with commercial potential from among university research portfolios, as done by ATDC at Georgia Tech.
The main technology support provided at U.S. technology incubators is access to technical expertise and facilities (TABLE 3). Again, TBIs in industrializing countries would need to secure more such support through referral rather than directly. Services most needed in the developing world are trade and technology information and access to the internet.
Acquiring and adapting commercially proven technologies is generally easier and offers more immediate payoff; the emerging, precompetitive technologies are less accessible for transnational and proprietary reasons but are needed for longer-term national aspirations. The incubator can play a useful role in technology sourcing activities for its technopreneurs by utilizing new tools that facilitate these tasks, such as Technology Exchange Database, Techno-L Database and Knowledge Express Database. In addition to the traditional high-technology sources of Japan, North America, and western Europe, new sources are becoming available in central-eastern Europe and the Russian Federation, and now from the NICs of Southeast Asia. The incubator is a physical entity, an "achievement" that politicians and planners can point out as a tangible result of their programs to spread economic development. Accordingly, based on the limited operating experience of their first few incubators, they invariably plan many more. This can be a mistake. The pilots should first be strengthened, to provide quality services for the startup, survival, and success of their tenants, and to serve as the seed for future incubators.
Table 3. Research and Technology Practices (valid percent responses)
| no, rarely/never |
yes, by referal |
yes, direct |
both | ||
| Loaned/consulting university faculty/students | 3.8 | 30.8 | 51.9 | 13.5 | |
| Organize acess to external technical facilities | 3.9 | 15.7 | 62.7 | 17.6 | |
| Locate/identify key technical staff | 5.9 | 45.1 | 27.5 | 21.6 | |
| Use database of researchers and technologies | 8.0 | 34.0 | 46.0 | 12.0 | |
| Finance research and development | 23.5 | 45.1 | 27.5 | 3.9 | |
| Technical review board | 33.3 | 21.6 | 39.2 | 5.9 | |
| Help design/initiate research/technical project | 23.7 | 34.6 | 26.9 | 5.8 | |
| Develop CRADAs or their equivalent | 41.3 | 34.8 | 17.4 | 6.5 | |
| Alpha and beta testing | 56.9 | 29.4 | 11.8 | 2.0 | |
Success Factor 8: Mobilizing Finance for the Incubator and Enterprises
Even where the entrepreneurial culture, research capabilities, and other conditions for establishing an incubator exist, a serious obstacle is the lack of finance. Governments in industrializing countries are reluctant to make such investments due to scarce resources in the face of emergent priorities, the need for quick returns and demonstrable results in job creation, or simply because there is incomplete understanding of the longer-term benefits of investing in technological enterprises.
Incubator Finance
Incubators require finance for investment (business planning, building construction or renovation, office equipment, training, and other preoperational costs) and working capital for the initial two to three years of operation (until the revenue stream covers salaries, utilities, maintenance, promotion, interest and mortgage payments, and other expenses). Recent feasibility studies in a number of developing countries indicate that when a vacant building in fair shape is made available at low or no cost, typically these capital and initial operating expenses amount to under half a million dollars. When a custom-built structure for technology enterprises is called for, this investment could become three or four times higher. As noted, the bulk of this often comes from public sources, as in Malaysia and Singapore. The China Science and Technology Commission under its TORCH Program has generously supported some seventy-two technology incubators. KOSGEB—the Turkish Small Enterprise Promotion Agency—has financed incubators at Istanbul Technical University and at Middle East Technical University, Ankara. CONYCT in Mexico has been strongly supporting technology incubators, but resources are now slashed due to economic problems. Here then is a lesson for both industrial and industrializing nations: While the summer sun shines, position your incubator to withstand the rainy season.
These incubators, like most in U.S. and Europe, define success in terms of enterprises nurtured and other benefits, not in terms of positive cash flow. One model is for the state to cover the initial investment and then let the incubator meet all operating costs. Another is to cover both capital and continuing operations as a social investment. Yet another is to structure the incubator as a private, for-profit, realestate based undertaking. The fourth model, highly recommendable, is for a public-private partnership, whereby the state meets capital and initial three- to five-year operations, on the premise that thereafter the incubator management will find creative ways of financing.
Once performance is demonstrated, the private sector can play a bigger role— through mentoring and vendor development assistance, through annual subscriptions to a corporate (friends-of-incubator) club, possibly equity in the incubator and in tenant companies, and through subcontracting or licensing.
Enterprise Finance: More critical is the access to finance by the incubator tenants, because without the resources to move from research-based concept to prototype and pilot production, the tenant may fail, not pay for rents and services, and give the incubator a bad name. Most countries have a variety of schemes intended to give SMEs grants, loans, or some combination for research, promotion, investment, and working capital. But in many places, this does not work well because banks are generally ill-equipped to deal with the risks and high transaction costs of small loans, particularly for tech-based products; or bureaucratic delays and collateral requirements are excessive; or there is little information available on how to access this money; or credit is available but the currency convertibility regulations do not permit ready use of funds for imports of equipment, supplies, and technology. While the initial funding for a startup business usually comes from the entrepreneurs family and friends, the incubator does help in accessing seed capital from networks of angels and state schemes. It assists in formulating financial strategies that lead to bankable business plans, and provides respectability through its reputation and network of sponsors.
The incubator can also prepare the early-stage business for venture finance. Countries such as India and Indonesia have made a fair start on creating the technology appraisal capability and tax/market regimes for venture capital mechanisms. Until such an environment is developed, alternatives to risk capital are being devised.
Incubators such as Wuhan in China are now taking equity positions in tenant firms, with fair results. The practice at the 28 Israeli technology incubators is unique: The state contributes $120,000 per year to selected incubators for the first two years. Further, $120,000 is paid per year for two years to selected tenant businesses (mostly Russian immigrants); in this period, they are required to develop their prototype to the point of forming a strategic alliance with a U.S. company. This new venture must give 20 percent equity to the incubator, 20 percent to outside investors, 10 percent to the team, and keep 50 percent for the owners. The state is repaid through a 2 percent royalty on sales until the original subsidy is returned.
In royalty financing arrangements, now becoming popular, money is made available up front without collateral or equity, and then repaid starting when product sales begin. For instance, the Emerging Company Fund, linked to University City Science Center Philadelphia, requires 3 percent of sales per quarter, limited to three times the initial investment.
Many incubators now have seed capital funds within their management, often as short-term working capital on commercial terms. The Evanston Business Investment Corporation, linked to the Evanston Enterprise Center, has invested in twenty-two high-growth ventures aimed at bringing employment to the area. The Texas Capital Network, a nonprofit venture capital network, matches investors to entrepreneurs though its data base and "venture fairs." The incubator at Rensselaer has a consulting firm specializing in accessing capital as a tenant.
A recent NBIA FaxBack survey of how U.S. incubators are helping their tenants secure funds indicates that half of respondents have revolving loan funds. Half also have special relations with venture capitalists, while 26 percent have loan guarantee programs, 34 percent have seed capital funds, and 22 percent have networks of angel equity investors. Eligibility requirements for the revolving funds and the other types of financing assistance provided are shown in FIGURE 3.
Monitoring and Globalization
A large incubator should typically graduate five to seven ventures per year, although in practice fewer are ready to move out. Once operations have reached a level of maturity, the tasks are continuous monitoring to upgrade the quality of services and reaching out to incubator associations, other incubators, and their tenants abroad.
Success Factor 9: Monitoring Performance and Assessing Impact Most incubator managements have struggled to survive in the last decade, and have had little time or resources to step back and evaluate their performance. In the past there have been limited assessments of benefits and costs, partly because of the lack of data, and partly because many benefits are of a long-term nature and not readily quantifiable.
As the incubator industry expands rapidly, it invites critical attention. Also, as the virtues of small business are under attack and as development resources decline in real terms, sponsors and donors are now asking questions. A UNDP-UNIDOOAS-sponsored study in 1995 attempted to assess the role of incubators in economic development, based on study of 140 incubators in Brazil, China, the Czech Republic, Mexico, Nigeria, Poland, and Turkey.
Figure 3. funding Assistance at U.S. Incubators.
The findings are summarized in the box (Box 1) that follows. The main conclusion of this assessment is that where political and economic stability prevails and state support is consistent, the incubators have shown fair results in enterprise and employment creation together with other indirect effects on, for instance, reviving entrepreneurism societies and improving university-industry relationships. Nevertheless, this must be considered a first step, leading in future to better data collection and improved assessments of benefits and costs.
In this context, the results of many incubators in China are exemplary. They follow fairly traditional incubator practices, but the powerful state support, the firm linkages to technology parks and universities, and the strong motivation of entrepreneurs to work hard and become rich, are determinants of success. The TBI at Tianjin attributes its remarkable performance to both internal and external factors (see Box 2).
It can be argued that self-sufficiency and success cannot be measured in the confines of the incubator itself. A larger view of benefits accruing, say, to the state of Georgia in the form of total jobs and economic activity created and employee, state, and local income generated by the Advanced Technology Development Center, Atlanta, would seem to give significant returns on the investment (TABLE 4). The recent interest in bench-marking the performance indicators of incubators in defined categories, within countries and across countries as well, is a positive move. Industrializing country representatives meeting at Tianjin, China, in September 1995 have expressly called for such a bench-marking scheme to help identify good practices and move towards them.
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Box 1 Assessment of Role of Incubators in Enterprise Creation The seven countries studied have among them some 140 business incubators, constituting a significant proportion of the estimated total of around 250 incubators in the industrializing countries and transitional economies. These countries differ markedly in policy orientation and technical infrastructure, and their incubators cover a wide range in size, characteristics and performance. The incubators should be considered s one additional device in the tool kit of small enterprise support modalities. It has been derived from these modalities, with some distinguishing features. It has a special niche, that of nurturing selected early-stage ventures through focused assistance within a supportive environment. An incubator complements other policy instruments. Characteristics of Incubator Programs The business incubator, like other systems, may produce excellent or inadequate results depending on its adaptation to local needs, the commitment of its sponsors, the skills of its management team, and the policy framework within which is operates. Meaningful analyses of their effectiveness can best be made by in-depth studies of selected groups of incubators with similar purposes. The main features of the incubators studied are summarized below: Main Feature of Incubators Studied
As the average age of incubators in industrializing countries is quite young, they have fewer gradutates. The median in the incubators studies for a government-sponsored incubator which opened in 1992 would be eight graduates after three years. Two to three firms would have discontinued their business in the same period. Impact Even though the median year of opening for the incubators studied was 1992, the study demostrates that incubators in industrializing countries are making a significant impact on economic development. For examples, seventeen incubators in the Czech republic were associated with the creation of 440 enterprises—,an average of about twenty-six companies and one hundred jobs per incubator over about three years. Incubators that responded to the question concerning business creation (142) have claimed to be supporting 3,000 new businesses. Among the eventy-eight incubators reporting employment figures for their client companies, a total of 26,000 jobs have been created. Although onlya small number responded to the question of survival rates, the responses indicate that an enviable 80 percent of businesses are suceeding. Although the incubators studies shared many characteristics, the varying circumstances in each country affect the nature and extent of their incubation system. Consider, for instance, China. Starting modestly in the late 1980's, China developed the largest business incubation systems outside of the U.S., occupying 23 million square meters of space and serving 1,969 enterprises with gross sales of almost $200 million in 1993 and with 159 enterprises having graduated. The system is being expanded from the current 73 to200 incubators by the year 2000: these are expected to serve 1,000 enterprises and graduate 1,200 enterprises per year. |
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Box 2 The Tianjin-China incubator, posting an enviable record of financial sustainability, attributes its success (56 tenants, 12 graduates, no losses, and increasing profitability) to six factors:
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Success Factor 10: Planning Strategically for the Future
Technology Incubators—and the businesses they serve—have to plan for the next millennium, if they are to survive and prosper. The changing pattern of work, the globalization of trade, and exponential technological change mean that standing still is going backward. The incubation industry is a decade old globally, and only half as old in the industrializing countries. It certainly must learn from past mistakes of SME support systems and redefine its role for the difficult times ahead. The discernible trends for incubators of the future are outlined below; however, there is yet no consensus on where the industry is heading.
1. The technology orientation, so evident in industrializing countries, will continue. The galloping developments in informatics, communications, biotechnology, and advanced materials will provide new opportunities for incubation. Techrelated enterprises can be expected to grow rapidly, called for the expanded, more strategic services of an "innovation center," that is, one proactively serving the complete innovation cycle.
2 Concurrently, there are emerging opportunities for bleeding advance techniques with traditional processes, as in agriculture, textiles, environment, and energy. A bottom-up, regional development focus will call for innovative design, production, and packaging of traditional products, and higher value added in light engineering and chemicals for both export and domestic markets.
3. The incubator is becoming the focal point of entrepreneurism and economic development activities, linking university, SME support, finance, human resource development, and other activities in expanding networks. The second generation incubator will operate both within walls and outside through outreach, providing preincubation as well as postincubation services.
4. Will structured employment be replaced by home offices, making both the corporate work place and incubator obsolete? What is emerging is a balance between the flexibility of distance working and the need to meet face-to-face occasionally in an office setting.
5. And what will be the role for governments, when new employment and income is expected to come mainly from private initiatives? Again, changed patterns of responsibilities are forming. Governments will continue to address national concerns and to finance human resource development, basic research, and infrastructure. But they will spend progressively less and more selectively.
6. At the incubator, the vagaries of future state support budgets will put pressure on attaining financial sustainability, through enhanced professionalism, performance bench-marking, increased private sector involvement and creative resource mobilization.
7. Stronger linkages will be needed to technology sources and users, to the universities, corporations, and public research. Incubators will have to be sited in physical and structural proximity to technology parks and industrial estates.
8. Creation of incubator hubs with satellite systems will promote scale economies while international incubators will provide wider impacts. Innovative systems such as the franchising of incubator technology itself will emerge.
9. While the incubator will primarily serve to create viable enterprises, which create employment, which generates growth, nevertheless, rising dislocations in work patterns mean that the incubator will have to enlarge its mission to house the young college graduate seeking self-employment, the middle-aged professional who is "down-sized," and the retired person who has to continue to utilize lifelong experience.
10. These trends will impose greater responsibilities on the managing board and manager. The incubator professional for the year 2000 will have to be technologically versatile, totally computer literate, with higher-end financial management, marketing, and interpersonal skills and full immersion in community affairs. He or she will have to be fully accredited and better remunerated.
11. Incubators and their tenant-businesses will have to link up within countries and reach out across borders. Note the emergence of national associations of business incubators and technology parks in Mexico, Brazil, China and now in Malaysia, Egypt, Indonesia, Russia, Hungary, Poland, and the Czech Republic.
12. Further, the multicountry regional groupings such as NBIA, EBN and ADT are now looking eastwards and southwards. The recent incubator assessment workshop in Tianjin, China, has called for accelerating this internationalization of the incubator industry and its linkage to technology parks under the same aegis.
13. Other perceptible trends are incubators for empowerment of disadvantaged communities, for economic revitalization of rural areas, and private for-profit facilities.
14. While growth of incubators in the industrial countries may flatten, expansion in industrializing and restructuring countries could continue at the rate of 20 percent annually, until the present number of 250 incubators doubles by year 2000. Such growth will come from countries with new programs as well as those diversifying and replicating.
15. As the future incubator attempts to be all things for all people and to do more and more with less and less, it will be in danger of losing its distinguishing characteristics. While incubation must certainly adapt to the changing times to survive to end up like the dodo, it must continue to be nimble and uniquely committed to the main task of nurturing enterprises through quality services.
Table 4. ATDC Report Card of Affiliated Companies
| 1990 | 1991 | 1992 | 1993 | 1994 | ||
| Revenues | ||||||
| Graduates* | $142.9 (18) | $157.1 (18) | $186 (18) | $187 (20) | $200 (22) | |
| Member Firms* | 5.2 (25) | 5.9 (34) | 9.8 | 12 (36) | 14 (36) | |
| Total | $148.1 (43) | $163.0 (52) | $195.8 (57) | $199 (56) | $214 (58) | |
| Employment | ||||||
| Graduates | 1,025 | 1,047 | 1,294 | 1,328 | 1,465 | |
| Member Firms | 81 | 135 | 157 | 163 | 180 | |
| Total | 1,106 | 1,182 | 1,451 | 1,491 | 1,646 | |
| Gross Economic Impact | ||||||
| Total Jobs Created | 3,740 | 4,116 | 4,944 | 4,975 | 5,404 | |
| Total Economic Activity* | $218.41 | $240.38 | $288.75 | $209.53 | $315.59 | |
| Employee Income* | 40.58 | 44.66 | 53.64 | 53.98 | 58.63 | |
| State Govt. Income* | 10.88 | 11.97 | 14.39 | 14.47 | 15.72 | |
| Local Govt. Income* | 6.38 | 7.02 | 8.43 | 8.48 | 9.22 | |
| *millions ( )number of companies | ||||||
Conclusion
The emerging trends in business incubation in industrializing countries appear consistent with the concept of the incubator as analogous to a symphony orchestra. Just as good instruments and an acoustically perfect hall are desirable, the role of talented musicians and a world-class conductor can be critical to the success of the performance. The future calls for renewed commitment to the rationale of the incubation process, that is, to mobilize networks of resources to enable the technopreneurs survive and prosper. Their success has positive impacts on the local community and the country—and on the incubator.
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