I would like to summarize one of the nice article from HBR written more than 13 years ago by Mr. Chesbrough (pioneer of OpenInnovation concept) about Networked Incubator and give a continuation of his ideas developing a Virtual Business Incubator concept.
Most business incubators provide physical services (office space, shared facilities) and basic business services such as accounting, recruiting, legal help, mentoring, business model consulting, etc. according to mr. Chesbrough (Networked Business Incubators, HBR, 2000) the better ones offer extensive network of powerful business connections. This feature makes them unique and allow to get synergy from portfolio companies, experts, mentors and investors.
In the new Internet Economy business incubators are considered as valuable tools for nurturing startups. However, my research shows that some achievements of business incubators (creation of new jobs, % of companies that failed) tend to be overstated. Especially, if these organizations provide little more than a “place to set up a shop”. However, one type of organization could deliver superior value to its tenants – networked incubator (NI).
The distinguishing feature of a NI is that it has mechanisms to foster partnerships among startups and other firms facilitating flow of knowledge, talent, ideas; and forging of marketing an technology relations between them. Properly designed NI combines the of two worlds – the scale and scope of large companies and entrepreneurial spirit of small venture capital firm. Because of this combination it represents fundamentally new type of organizational model that is well suited for creating value.
What are characteristics of NI?
1) they have spirit of entrepreneurship.
Thus they allow founders to maintain significant amount of shares (60-70%)
2) they connected to top-tier service providers. Thus they save time and money for tenants finding, negotiating, contracting for such services.
3) preferential access to a network of companies as a differentiating factor.
Organized networking is a key. This means that incubator facilitates attracting necessary resources, organizing meetings with venture capital partners, entrepreneurs, external advisory boards of experts, establishing strategic partnerships. It is done through small stakes on portfolio companies and network of blah, blah. In 2000 survey by Chesbrough of 169 business incubators showed that only 26% offer organized networking.
Networking – how it works
“While there is thousands of business plans and partnership proposals opportunities floating around, people have less time to consider and evaluate them all.”
Network economy showed that there is critical need for access, i.e. connections, access that help quickly solve problems (recruit people, launch businesses, obtain expertise and advice from outside experts, etc). Basically NI offers outsourcing of problem decision for startups. And this is impossible to do using only internal resources of BI. Here comes networking as tool for delivering “outsourcing function” imagine you are a startup and need to get advice. What will you do? Time consuming search for expert, mentor, may be even negotiating a contract or conditions of work up front. Tremendous amount of efforts that could be eliminated.
In that sense NIs are similar to corporate incubators established by large companies such as Ford, Google, Cisco, and many others. They try to leverage on existing assets of these companies (customers base, purchasing power, etc).
How to create organized networking?
Critical characteristics of NI are :
1) institutionalized networking. They have mechanisms in place to foster networking. Through this NI reaches scalability of networking benefits. Networking should not depends on the personal connections of a few people.
2) networking leads to preferential access, not preferential treatment. First means being able to call a meeting and receive the full attention of busy people. While second means being guaranteed results from meeting, I.e. partnership deal.
(Source: HBR, 2000)
Practices that help avoid Pitfalls
1. Portfolio Strategy.
Portfolio should be created in related businesses, because the benefit from being together is greatest when portfolio companies in the same type of industry.
Having stars in portfolio is crucial because they help generate buzz about startup.
2. Create long-lasting relationships with incubatees
Retain significant equity stakes in important portfolio companies and remain active in them by sitting in their boards.
3. Network design
Goal is to establish relationships that are anchored more to the incubator than to particular individuals. How:
- create formal links with external experts
- bring outside experts on site
- schedule occasional but regular meetings
- establish processes for exchanging information and know-how across companies. Databases with leads on business development and funding.
- implement economic incentives
- hire specialized deal brokers
Trick is to prevent counterproductive networking. Thus huge part of a system should be voluntary. This saves entrepreneurial spirit.
Networked Incubator is organizational model that exploits entrepreneurial spirit and network access preserving the benefits of scale and scope. Probably these type of models will be most potent models for long-term success.
Virtual Business Incubator – evolutionary step of the Networked Incubator Model
I believe that there is a lot of good points made by authors in 2000 (especially before social networks boom, internet crowdsourcing, crowdfunding, co-working models). What they haven’t considered before was real internet boom that have changed communication models, ways of people work. These new approaches and innovations allowed to indroduce new dimension for the business incubator model and there is theoretical possibility to overcome main restrictions of the current organization of the system (limited resources to nurture projects). Let’s consider them step by step.
Main constraints of the typical business incibator are:
1) limited resources
2) limited dealflow and projects per incubator
3) funnel organization of the system with 99% would-be entrepreneurs rejected
So, you could probably ask. What is main difference between Networked Incubator described by Chesbrough, Hansen, and others and Virtual Business Incubator.
Firstly, the boom and internet technologies allow to expand significantly networking dimension of the model described above. Following points could be added:
- crowdsourcing of ideas selection, development and crowdinvesting allows to decrease barriers for would-be entrepreneurs to enter the business
- mentoring and tracking methods online
- possibility to provide crowd expertise of ideas and initial market validation
Second point is may be more important than the first one: you could use the same amount of resources (people, time, money) to help much more startup projects and entrepreneurs with the help of new technologies. By providing a structured process of project development (classical stage-gate model) and establishing flexible conditions for moving from one stage to another gives opportunities to many entrepreneurs (not only selected few ones).
Here is a Virtual Business Incubator model we developed that could be considered as a new evolutionary leap of Networked Incubators.
Prezi View (link to a Prezi form – I would suggest to use it instead of Slideshare)
Sources of the post:
1. HBR Article, 2000: link