Generic Business Incubation Model (Hump Chart Viiew) – Part 2

In previous post we described first part of Generic Business Incubation Model. This is the second part in which we will discuss the model itself. This model describes incubation stages and correlation between incubation stages, venture life cycle and funding stages of a venture vs. business incubation practices used to support entrepreneurs at each stage. Incubation stages are based on 19 business incubation models (since 1985 till 2012), typical business incubation phases, services and activities. The model has essentially entrepreneur-centric view, which means that the main focus of the process is to create successful ventures.

Entrepreneurial cycle is based on a Steve Blank’s Customer Development (Blank, 2005) and Marmer’s Venture stages models drawn from self-reported data by thousands of startups worldwide. It is more product-centric. Later we will provide description of goals and activities.

Lastly, explanations of how funding at each stage can meet a startup’s needs.

These stages are matched with practices that are applied by incubator along the stages with different intensity. This is the main contribution of the model – matching entrepreneurial process with the incubation process and understanding the intensity of each practice that should be used by incubator. This could allow incubators to allocate their resources in more smart way and serve more potential entrepreneurs.

Generic Business Incubation Model (Hump Chart View)

Generic Business Incubation Model (Hump Chart View)

Pre-incubation stage

The goal of this phase is to help an individual to develop a viable business proposal, initial business model and business plan, to gain necessary competences, build a team. This is the most riskiest and expensive stage of the process. Very few incubators provide services on the pre-incubation stage. Usually it is carried by other players. Main inputs of the process are pool of would-be entrepreneurs, pool of business ideas or business proposals, number of technologies and environmental factors (entrepreneurial culture in a society, attitude towards risk, cultural issues, socio-economic factors).

Venture cycle stage: discovery (5-7 months). According to the venture stages there is need to validate whether a venture is solving a meaningful problem and whether anybody would hypothetically be interested in proposed solution. Typical activities during that period of time are founding a team, conducting customer interviews, finding value proposition, creation of a minimal viable product, joining an accelerator or incubator, finding first mentors and advisors.

Funding stage: SEED/ANGEL ROUND. First money are given to an entrepreneur and his endeavor. Usually the main aim for entrepreneur is to ensure that venture have enough money to build version one of the product or service and raise the next round of capital. Business angels and early investors secure their investments by asking fulfillment of a business plan addressing the six fundamental questions:

  1. what the venture is about
  2. why users/customers need the product/service
  3. how large the market is
  4. who is in the team
  5. how a venture will make money
  6. who competitors are and why this company is going to beat them

According to our observations business modeling is one of the most common practices that incubators propose to entrepreneurs. Next two popular practices are provision of physical infrastructure to save entrepreneur’s costs and entrepreneurship training. Later we will show that existing model doesn’t solve all entrepreneur’s needs with this particular set of practices.

Incubation stage

The main goal is to find scalable business model of a venture. Interestingly to notice that before the incubation will start there are many prerequisites should be provided. These inputs include:

  • Capable and credible would-be entrepreneurs
  • Viable business ideas and recognized opportunities
  • Strategic/crucial potentially viable technologies
  • Enabling technologies (incubator)
  • Incubator resources (physical facilities, management team, IT resources, service providers),
  • Demand for particular solutions/technologies/teams from corporations, community, government
  • Capital sources
  • Expert’s network linkages & strategic alliances
  • Dead/dying entrepreneurs, ideas, technologies

Incubation stage consists of two main stages: early-stage incubation (< 1 year) and classical incubation stage (2-3 years, even up to 5).

During early stage of incubation a venture passes validation phase of the development which lasts around 3-5 months according to Steve Blank. The goal is to get early validation that people are interested in venture’s product through the exchange of money or attention. Entrepreneurs carry out various activities in this stage such as refinement of core features, they experience initial user growth, implement first metrics and analytics, hire first key people, pivoting (if necessary), acquire first paying customers, test product market fit.

While as classic incubation (1-2 years) more corresponds to efficiency phase of the venture cycle when entrepreneur refines business model of a venture, improve the efficiency of customer acquisition process, and eventually finds the way for scaling up the business. For doing that, entrepreneur needs to refine value proposition, understand and test again users’ experience, optimize conversion funnel, achieve viral growth, and find repeatable sales process and/or scalable customer acquisition channels.

From the financing point of view a venture should attract early stage financing and pass this round in order to show some traction and possibility to generate revenues. Usually investors put several goals (or conditions) before committing the money. They usually ask:

  • Turn prototype into something releaseable to the public
  • Have solid core features ready
  • Gain a small but devoted following
  • Start generating revenue
  • Formulate an exit strategy — go public or exit.
  • Pay investors who will help the company in some way by letting them invest at low valuations.
  • Use other investors as leverage to prevent funding delays. Pursue alternatives.
  • Hire first employee and freelancers/part-timers/interns

Post-incubation stage

There is no exact data how many incubators provide the post-incubation assistance. However, indirect evidence shows that some revenues come from renting the spaces to mature companies. The main goal of the stage is to assist profitable ventures in order to get additional support such as increase sales or improve its production processes. Another example is internationalization services or innovation introduction through scouting and detection activities.

Inputs at this stage are outcomes from incubation stage. These inputs are used by incubator to provide a support:

  • Profitable, credible venture
  • Credible and efficient team
  • Successful product or service
  • Technology commercialization
  • Entrepreneurial culture inside BI
  • Profits for incubator
  • Entrepreneur – business networks (experts, VCs, mentors, partners)
  • Dead / dying entrepreneurs, ideas, technologies
  • Incubator resources (physical facilities, management team, IT resources, service providers),
  • Demand for particular solutions / technologies / teams from corporations, community, government
  • Capital sources
  • Expert’s network linkages & strategic alliances
  • Dead / dying entrepreneurs, ideas, technologies

Venture cycle is SCALE where entrepreneur steps on the gas pedal and try to drive growth very aggressively. Hу or she tries to massively acquire customers, improve back-end scalability, hire first executives, establish processes, and departments.

SERIES A ROUND & BEYOND/GROWTH STAGE is the name of next in turn stage of financing. Again, investors are willing to put significant investments at this point of time because risk is lower, but expectations are higher: to go from revenue to profit and grow aggressively. Investors also help ventures in marketing, building infrastructure, hiring executives.

As a result of this process either mature profitable company could be born or there will a downfall.

The main practices are those services that are used by incubators in order to support entrepreneurs:

Conclusions are:
  • The model describes correlation between incubation stages, venture life cycle and funding stages of a venture.
  • Various practices of incubation are required along the incubation process (from pre-incubation till post-incubation). The set of practices is heavily dependent on type of incubator, target group, sponsors and established objectives.
  • Practices are applied with different intensity (see humps on a diagram) which depends on the degree of entrepreneur’s needs in knowledge, mentoring, resources, and team. Intensity of applied practices heavily depends on the industry, type of incubator, and entrepreneur’s capability.
  • There are peaks in the incubation process which are related to the moving to the next phases, and attracting financing.
  • Systemic approach to incubation with application of particular services / practices at any given stage allows entrepreneur to get more qualified support, and to spend resources more efficiently.
  • However, due to big risk and limited resources incubator can process only limited amount of tenants per period. This restricts scalability of the incubator and makes it real only in linear way, not exponential one.

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