Generic Business Incubation Model – Part 3

We continue description of Generic Business Incubation Model.

In Part 1 (Generic Business Incubation Model (Part 1))  we described the overall process of incubation, and risk model.

Part 2 (Generic Business Incubation Model (Hump Chart Viiew) – Part 2) was devoted to the description of incubation stages and correlation between incubation stages, venture life cycle and funding stages of a venture. Hump Chart View was used in order to give a sense of when particular business incubation practices are usually used to support entrepreneurs at each stage.

Now we continue by extending the Hump Chart View. The main goal is to understand what services to propose according to the needs of an entrepreneur and life cycle of the venture. Then we will look at main stakeholders of the incubation process. This allow business incubator better fit into the entrepreneurship ecosystem.

Matching entrepreneur’s needs and aims stages of incubation process (supporting practices for each stage and need)

Analysis of the incubation models showed that very few models really take into account the real needs of entrepreneurs especially at early stages. What happens is that business incubators design their programs and the services package. Once the program is designed it is rarely got changed. Inflexibility to change doesn’t allow incubators quickly react to changing demand coming from entrepreneurs. Moreover, entrepreneur’s needs have different intensity in the course of the venture life cycle. Some needs are more important in the beginning, some more important in the validation and scaling stage, etc.

Matching entrepreneur’s needs and aims stages of incubation process (supporting practices for each stage and need)

Matching entrepreneur’s needs and aims stages of incubation process (supporting practices for each stage and need)

In the model above we tried to identify main wants of entrepreneur and match them with venture and incubation stages. This allows to understand better which services should be proposed by incubator in the different stages of venture development. Of course needs can’t be satisfied only once. Some needs will require constant satisfaction along the whole venture development. For instance search for business model is what entrepreneur will be doing all the time.

The model of venture‘s risk calculation shows that there are at least eight variables that influence the chance of the success of a venture. Constant work on each dimension allows to reduce risk of failure and eventually produce successful company for an incubator. According to our understanding of the problem there are several entrepreneurial needs that are not satisfied or partly satisfied by the typical incubator’s services package. They are dedicated personal resources to venture (time, money, will, relatives support), credibility & trust, personal mentoring, pivoting, changing ideas and hypotheses in the process, market validation of an idea, feedback mechanism for self-learning, opportunity (problem) recognition, team building (finding relevant team members, selection high-quality people, formation of optimal size team and retention), motivation of team members and founders. Most of them has direct influence on the degree of venture’s risk. Thus, the earlier they will be addressed the better chances of the venture to be successful. Partly satisfaction means that there is no direct incubator’s service that deals with particular need. For instance, there is no service which provide credibility & trust for entrepreneurs. It is more a result of services synergy.

Moreover, our analysis shows that many entrepreneur’s needs occur much earlier than usual incubation cycle starts. Before that entrepreneur is left to himself and basically solves these issues alone. That shows the importance of providing incubation services as early as possible.

Conclusions are:

  • Understanding main problems and basic needs of entrepreneur is a fundamental issue in the incubation process. The sooner supporting organization can help entrepreneur to satisfy his or her need and overcome obstacles the better will be chances for success of a particular startup.
  • However, business incubators rarely adjust their set of services and incubation programs to the changing environment and, especially now, when entrepreneurial revolution is happening. This leads to incapability of traditional model to satisfy existing needs of entrepreneurs on time.
  • Analysis shows that some basic needs of entrepreneurs are either not satisfied by incubator (opportunity to dedicate personal resources to a venture, feedback mechanism for self-learning, team building, motivation of team members and founders), or satisfied partially/indirectly (credibility & trust, personal mentoring, pivoting, changing ideas and hypotheses in the process, market validation of an idea, opportunity recognition). Some of them can be solved through incubation mechanism and environment. Thus, this is a potential room for improvement for business incubators.

External environment of Business Incubation Program (Business Incubator)

External Environment of the Business Incubation Program (Business Incubator)

Obviously business incubation is a complex process. It involves multiple stakeholders with different interests and objectives. We would like to provide a classification of main external players whereupon we will be able to explain the process which happens in the innovation ecosystem linking external players, business incubation program and entrepreneur. Literature review and real-life observations shows that business incubators usually interact with ten entities: from universities and R&D centers to corporations, from entrepreneurs to investors. All stakeholders are listed in the figure above. Below you will find short characteristics and main interests of 4 main players of innovation industry: VCs, entrepreneurs, government and corporations.

Venture investor

An individual or organization who commits money to a venture with the expectation of financial return. Generally, the primary concern of an investor is to minimize risk while maximizing return.

Money. Venture capitalists and investors are in it just for the money. Their only priority is to sell the company or take it public, so that they can get the 5- to 10-times returns their investors seek. Moreover, they seeks to realize their investments in 2 to 5 years. Most are not out to do good for the world. They manage money on behalf of pension funds, insurance companies, educational endowments, and wealthy individuals. Their concern is not for your employees and customers, or to build a long-term business. They don’t think about sustainability,

Another important issue is diversification. 9 out of 10 startups die. Entrepreneurship is about risk and uncertainty. That is why investors build portfolios and that is why they select and “pick the winners”. At least half of those enthusiastic funding decisions will produce below-average results. First, they select those who are seeking investments, then they pick the winners out of their portfolio and devote almost all their resources and time to the most promising startups. Only 1-2 companies from portfolio of say 10 companies and put all their resources there. This is classical Pareto rule. The rest are supported by the residualprinciple.

Main Goals / Needs:

  • Growth of capital or return on investment, usually 5 – 10x
  • Short term capital gain orientation (seeks to realize investments in 2 to 5 years) vs. long term
  • Risk opportunities
  • Dividend or interest yield
  • Diversification of the capital investment

Entrepreneurs, Ventures, SMEs.

Entrepreneur is the undertaker in the economic realm whoseprimary role is to create, organize and operate a business, taking on risks to do so. A venture (or startup) is a temporary organization designed to search for a repeatable and scalable business model.

Search for business model, growth and uncertainty are main characteristics of a venture. Everything comes out of these three fundamental concepts. The search for the business model is the front end of the startup process. The goal is to find a repeatable/scalable model, and then execute. Right business model allows entrepreneur to create value, earn money, experiment, introduce new features, products or services, get more resources. Very influential thinker and founder of Y Combinator considers that startup is equal growth(Graham, 2012).The faster you create value, the faster you make mistakes and correct them, the faster you earn your first money, the better your position will be in the market. Huge pressure exists today forcing entrepreneur to find possibly best solutions to deliver their proposals to market, emerging and volatile markets puts pressure on investors which require faster profits, ROI. Thus, “growth like a compass to make almost every decision you face.”(Graham, 2012) As it was shown (see Risk model of entrepreneurship) entrepreneurs are usually act in the environment of total uncertainty. Risks are everywhere: from technology, right team to product-market fit and funding. These are the pillars that should be considered when supporting programs for entrepreneurs are developed.

Main Goals / Needs:

  • Funding
  • Experimental Laboratory (faster troubleshooting)
  • Networking, Access to experts, mentors, entrepreneurs
  • Commercialization of an idea
  • Trust
  • Shortening of the learning curve, quick access to relevant knowledge

Government

It is an organization exerting centralized control over a community (i.e., over a state). This is made possible by imposing taxation via such agencies as the revenue service and, if necessary for the actualization of a policy, by use and initiation of force via such agencies as the police and the military (Dictionary, 2013).

Taxes, community wealth, jobs creation and balance are those pillars that connected to an entrepreneurship. For government is important to get a constant flow of revenues into the budget. This happens mainly through taxes levied on the incomes and wealth accumulation of individuals and corporations and on the goods and services produced, exported and imported from the country. The more jobs created and the more product and services produced and bought the more taxes are received by a government. Here is why, when government establishes business incubators and supports entrepreneurship its main concerns are creation of local jobs, diversification of local economies, building/acceleration of local industry growth. Governments provide support in order to get more taxes at the end.

Main Goals / Needs:

  • Economic development
  • Job creation
  • Industrial competitiveness
  • Viable Companies
  • Taxes

Corporations and business organizations

These are established businesses. They mainly think about about entrepreneurship in several ways:

  1. Sell goods/services for entrepreneurs.
  2. Get solutions to their problems through entrepreneurship and/or intrepreneurship.

Main Goals / Needs:

  • Technology diversification
  • Solutions to their R&D problems which can increase SCA
  • Product and Process Commercialization
  • New sources of revenues and profits

Below you will find a simplified scheme of interactions between main innovation industry players. Community, market, corporations and government provide money in exchange for value created by entrepreneurs in the form of goods and services. This happens with the help of intermediate entities and players such as venture funds, incubators, R&D labs, universities, investors. Those who produce value are entrepreneurs and professionals who work in their teams.

Main Interactions between Players in the Innovation Ecosystem

Conclusions are:

  • There are many stakeholders of the incubation process in the innovation ecosystem. These goals and interests are conflicting with each other. This creates inefficiency in the incubation operations. If government is a sponsor, it establishes quite often a set of objectives which could be quite far of the entrepreneur’s goals. The same happens if incubator receives sponsorship from investors who seeks for profits and ROI.
  • Business incubator is one of the mediators in the innovation ecosystem. It links money on the one hand, and people and technologies on the other hand.
  • This leads to the conclusion that incubators should be more private and profit-driven than it is now, eventually this will lead to more projects and deals.
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3 thoughts on “Generic Business Incubation Model – Part 3

  1. Hi Vasily, Great Great Great post! May I ask for the exhibit of “value creation in a typical business incubator” with higher resolution? I am asking because I would love to closely study this chart but some of the notes are hard to discern. Thank you.

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