Generic Business Incubation Model (Systems Engineering view) – Part 4

This is the last part of the Generic Business Incubation Model description.

In previous posts about Generic Business Incubation Model we’ve discussed:

Part 1 – overall process of incubation, and risk model.

Part 2 – 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.

Part 3 – extending the Hump Chart View in order to understand what services should be proposed according to the needs of an entrepreneur and life cycle of the venture. Main stakeholders of the incubation process. This allow business incubator better fit into the entrepreneurship ecosystem.

In overall, systems engineering view on business incubation allowed us to understand that:

  • Success of incubation process in general depends on internal (incubator’s resources and processes of selection, mediation, and exit) and external factors (entrepreneurs and ideas flow into the BI) apart many other success factors which are not relevant to the model.
  • The chances for success of a startup depend on many factors, and are extremely low at early stages.
  • Model shows that the more uncertainty is eliminated the more chances of startup to raise financing. Thus, the earlier entrepreneur will receive support, the better his chances for survival. That is why business incubators should shift their focus towards pre-incubation stages.
  • 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.
  • 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.
  • 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.
  • 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.

Eventually, applying systemic approach to incubation it’s important to see a bigger picture and the place of business incubators within innovation ecosystem. Nobody have described that before in a holistic view. So, I will present my own view on that.

Process model of innovation ecosystem

Why is it important to consider process model of innovation ecosystem and to understand the position of business incubators inside it? The holistic view of structure and process of innovation ecosystem allows to understand the flow of technology, knowledge, money and information among people, enterprises and institutions. It eventually is key to understand an innovative process and the role of business incubation in it. According to Lundvall who first introduced the concept of innovation system IE is a set of “ .. the elements and relationships which interact in the production, diffusion and use of new, and economically useful, knowledge … and are either located within or rooted inside the borders of a nation state.” (Lundvall, 1992). There are different point of view on innovation ecosystem and what are the critical processes and elements. I created an innovation ecosystem ontology from the business incubator’s perspective.

Process model of External Environment, Business Incubation Program and Entrepreneur (Demand and Supply Graph in the Innovation Ecosystem)

Process model of External Environment, Business Incubation Program and Entrepreneur (Demand and Supply Graph in the Innovation Ecosystem)

The model shows what are the stakeholder’s goals within an innovative and incubation process. It cant present the whole set of goals and interactions between the players. It also has the incubation–centric view where business incubation put in the heart of the system. The model consists of elements (innovation ecosystem stakeholders), their interactions (value flows) and types of their relationships (provision or reception).

Elements – these are mainly key stakeholders of the ecosystem. These stakeholders interact between each other via value flows. Demand & supply is what connects the system. For instance, government needs to improve economic development of the region and create local jobs. With this aim it creates business incubator, provides physical facilities, grants and financial support. Universities on the on hand receive the same grants from the governments, but also produce inventions and technologies. They seek incubator’s support in technology commercialization. They are also one of the key players who delivers entrepreneurs (but not necessarily). This is a cycle that should be looped in the well-functioning ecosystem.

Processes (or value flows) – the various inputs and outputs are brought together in the innovation ecosystem through the provision of value-adding services to other stakeholders. I distinguish 6 types of value flow: resources (mainly physical resources), financial capital, knowledge (tangible and intangible), branding & connectivity, innovation. The processes are rather self-explanatory, that is why few comments are provided.

Multiple stakeholders bring a variety of concerns and strengths (and conflicting goals). All hope to benefit and satisfy their demand, deliver value and in turn receive money. Demand & supply is what drives innovations in the particular ecosystem. During 50s and 60s in the Silicon Valley demand for innovations was created by military & defense orders (e.g. by government), later in the era of silicon integrated circuits and personal computers first private venture capital appeared which created the demand for new innovations. However, I would like to point out that demand is what drives innovation process. Therefore, being a start-up business to serve start-ups, the incubator itself must meet the requirements which are coming from multiple stakeholders and the dynamism of entrepreneurial industry. It could be considered no only as a venture transformation mechanism, but as a demand transformation mechanism.

The demand for technology commercialization, jobs creation, multiplication of savings, economic development, creation of value drives and influences the business incubation process. Moreover, the successfulness of incubator highly correlates with the possibility of incubator to meet the requirements and demand coming from government, corporations, investors, and community.

The predilections of the leading stakeholders influence the incubation process and goals. They are:

Table 2 – Innovation Ecosystem Stakeholder’s Goals

Stakeholder Desired goals
Government Economic development, diversification, job creation, poverty alleviation, taxes.
Corporations Innovations, technologies and problem solutions, bright talent, new sources of revenues
Venture capital Winning enterprises, high portfolio returns, investment opportunities, equity
University / Research institute Innovation, faculty/graduate student involvement, research commercialization
Public/private partnership / market Investment, employment, other social goods, profits, revenues, patents, spin-offs, equity in client, goods & services
Entrepreneur Knowledge, connections, finance, credibility, team, safe environment, revenues

Conclusions are:

  • The innovation ecosystem ontology with the business incubator’s perspective is presented in the model.
  • The model presents a holistic view of structure and process of innovation ecosystem and allows to understand the flow of technology, knowledge, money and information among people, enterprises and institutions.
  • The key interaction process is exchange of value between players, where money plays essential role. Demand is the driver of an innovation process. By demand I mean basically the demand coming from government, corporations and lastly from community.
  • Incubators could be considered no only as a venture transformation mechanism, but as a demand transformation mechanism – mediators of the demand in the ecosystem.
  • The successfulness of incubator highly correlates with the possibility of incubator to meet the requirements and demand coming from government, corporations, investors, and community.
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