Analysis of 20 Business Incubation Models

Introduction

Series about Business Incubation Models Review is almost over. Two more models are still uncovered. One is the Becker & Gassmann model (2006) which was proposed by Ms. Sophia. I am going to include it into the Business Incubators’ Models Map which is shown below. The last one is the model that is proposed by me as a result of analysis reviewed models and synthesis of best practices from all over the world. I would like to remind all readers why this series was initiated and what is the eventual goal.

One of the most fundamental models for entrepreneurs’ is business incubation. It’s not necessary that business incubation model is implemented in business incubator. It could be personal mentor or business coach that drives startup from one milestone to another. Or it could be venture capitalists who with capital brings his expertise and guidance sitting on the Board. I consider Business incubation as a set of practices, tools and elements that form a system which helps entrepreneurs to increase their chances for success and nurture them in mature businesses. However, this system has certain limitations and old logistics which could be improved with new technologies and approaches.

The main purpose of my work is to introduce a completely new framework of virtual business incubation program (VBIP), and assess its potential applicability as an enabling system for early-stage entrepreneurs in comparison with existing models. But virtual incubation model can’t be built without considering previous models and physical models of business incubation. The way I took was to review existing models of business incubators, analyze them according to the developed framework and synthesize new Generic Business Incubation Model which will incorporate best practices from existing ones.

Map of Business Incubation Models - 20 Business Incubation Models since 1985 till 2013

Map of Business Incubation Models – 20 Business Incubation Models since 1985 till 2013

In today’s post I’m going to prepare synthesis basis for the Generic Business Incubation Model. Main purpose of this post is analysis of reviewed models, their historical applicability, performance and efficiency for business innovation purposes. Main outcomes will be problems in existing business incubation models, unsolved issues and generic business incubation model which will be described in the following set of posts.

Context

In the beginning it is essential to present several conceptualizations that have been made by Hackett & Dilts (Hackett & Dilts, 2004) (2004). These conceptualizations will help to understand the overall view on a typical business incubator and its operations.  Authors used different lenses to formulate these conceptualizations:

  • theoretical lens for data analysis, such as, social network theory, dyadic theory, real option-driven theory or the resource based view;
  • conceptual constructs  linked to specific bodies of literature (such as the new venture creation literature) to develop definitions and / or models;
  • philosophical implications of new theoretical conclusions such as the line of argument a game or rational choice theorist would use.

“These conceptualizations are as follows:

  1. Incubation as a mechanism for new venture creation- a step-by-step / staged process that awards legitimacy, opens network access and heightens community support for entrepreneurs.
  2. Incubation as a mechanism for resource  allocation  –  a mechanism of awarding a stock of tangible and in-tangible resources to client firms that results in, in addition to other benefits, client firm growth.
  3. Incubation as a socio-political game- a socio-political mechanism of creating an environment and perception of reduced risk and security within a boundaried physical space.
  4. Incubation as a co-product of incubator-incubatee dyads-a process of co-producing developmental assistance in independent incubator-client dyads.
  5. Incubation as an outcome of network behavior – a system of increasing client firms’ network density.
  6. Incubatee selection as a predictable and controllable process- a process of selecting “weak but promising” firms for incubator induction.”

The summary of the main outcomes, problems and questions that have been brought to light while we have been analyzing business incubation models since 1985 till 2012 will be provided below.

Key outcomes of existing Business Incubation Models

Key outcomes of the business incubation models are:

a)      Business incubation program is a support (or enabling) system for the entrepreneur.

b)     Business incubation program has multiple stakeholders and sponsors. They shape significantly the process, efficiency, effectiveness and main outcomes of the program.

c)      Business incubation program is a risk management system for the business environment, investors, business angels and entrepreneurs. It is an instrument that reduce uncertainty in the high-risky projects via stage-gate model of venture development.

d)     Business incubation program requires a variety of players, playing as a team.

e)      Business incubator should concentrate on the following key value-adding activities for the stakeholders (mainly for entrepreneur):

      1. increase success rate and survival chances of the incubatee companies,
      2. trust and credibility development,
      3. the shortening of the entrepreneur’s learning curve,
      4. faster troubleshooting,
      5. access to business networks and proactive formation of strategic alliances.

f)       Incubation process is of key importance. It should add value to the entrepreneur while moving him along life cycle in the innovation value chain.

      1. The business incubation process should be built as a combination of stage-gate and iterative models with the usage of PDCA cycle approach.
      2. Business incubation performance is positively related to:

                                                               i.      selection performance,

                                                             ii.      intensity of monitoring and business assistance efforts,

                                                           iii.      resource munificence,

                                                           iv.      management and leadership capacity of the business incubator head.

g)      Business incubator itself should be profit-driven and innovative organization able to learn, to be sustainable and focus on providing value to key stakeholders. Business incubator should measure it’s efficiency, effectiveness, impact on the community, relevance of the results according to the stakeholders objectives.

h)     Business incubator should act as a mediator, which provides links between government, industry and university. It is mandatory to consider a business incubator as part of innovation value chain within innovation ecosystem with sources and outputs. Thus, business incubator should provide a mechanism of transformation the demand coming from industry and government for particular solutions/technology to the supply coming from the entrepreneurial community (Pull approach)[1].

      1. Taking the example of corporate incubator, it should produce and incubate strategically aligned projects. If we will develop this idea to a typical business incubator, incubating projects should be aligned with investor’s needs, industry and society needs, country’s demand.

i)       Business incubator should influence and proactively participate in formation of local entrepreneurial culture.

Problems with existing models

Questions and problems, revealed after analysis of the prevailing models are listed below:

  1. Incubation process and services:
    • Most models of business incubators describe a business incubator as a transformation mechanism. The entrepreneur and/or business idea are inputs to the business incubation system. The system transforms the “material”, and provides results. No model describes the importance of influencing the inputs in order to increase the performance of the business incubation system.
    • Few models described the incubation process in detail.
    • Few incubator’s models explain which services to apply in the particular conditions and cases.
    • Many models stress on the selection / admission procedures as one of the most important in the incubation process. However:

i.       few analyze how to provide viability of entrepreneurs, their ideas and their competences, how to provide sufficient flow of entrepreneurs and business ideas of high quality for incubation program,

 ii.      there is no consensus on what selection criteria to use (potential of entrepreneur or idea).

    • Most process models based on waterfall model of the process. However, in real world this rarely happen.
    • How to combine virtual and physical business incubation?

2.      Performance, effectiveness and efficiency of business incubator:

    • Business incubation programs are becoming more and more short-term oriented. Only few propose pre-incubation services where risks and needs are on their peak.
    • There is no clear guidelines of how to measure effectiveness and efficiency of the incubation process, which performance metrics to use (growth and financial performance at the time of incubator exit, etc).
    • Well established and efficient incubation process is not enough for great performance if there is lack of inputs such as capable entrepreneurs and/or critical technologies for commercialization.
    • Criteria of selection:

i.      What criteria should be considered at the time of the selection of possible incubatees?

ii.      Would the existence of predefined criteria contribute to the economic results of incubation?

    • To what extent performance of incubation depends on the incubator’s ability to create options through which the selection of weak-but-promising intermediate potential firms is interesting?

3.      Relationship between entrepreneur, business incubator and innovation ecosystem:

    • There is no model that have linked entrepreneur’s life cycle, incubation process and processes in the innovation ecosystem (external environment). “The model is divorced from the national and regional environment and the macro-politics of institutional change which determine the real aims and objectives of state-level incubation systems” (Aernoudt about Hacket & Dilts model, 2004).
    • “The total absence of the role and influence of the incubatee firm – an important party in the co-production dynamic of the incubation process” (Rice, 2002)

4.      Entrepreneurs’ needs and performance:

    • Almostall models describe “picking the winners” policy as the optimal (successful) approach. Bergek & Norrman’s (2008) suggested, to deploy a selection process by assessing pairs of ideas/entrepreneurs, and winners/survivors in order to get more holistic vision. However, I would argue that “picking the winners” is the approach that applied by 99% of the incubators, venture funds, venture capitalists and other players in the venture industry in order to reduce risk of business incubator not produce unsuccessful venture. In that sense they are doing good job in order to increase success chances of selected. But this is a short-term oriented way to the incubation and they don’t consider development of the region and those 99% would-be entrepreneurs that were rejected during the selection process. As we will see later one of the main problems of almost every business incubator and venture fund is not a deal selection, it is the deal sourcing and  flow. Thus, “picking the winners” and rejecting others policy doesn’t solve this problem.
    • How would startup company performance be outside in the real world?
    • How to incubate those target groups that will not be able to pass selection criteria (e.g. in rural areas)?

5.      Culture

    • No model describes an importance of cultural issues for the incubation performance. Business incubation program should be considered as a cultural transformation mechanisms.
Good luck and see you soon with New Generic Business Incubation Model.

[1] This thesis is arguable because pull approach vs. push approach is an ongoing debate. In majority market conditions pull approach is better for building innovation ecosystems.

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