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Russian business incubator program  - The functioning of business incubator organizations: legal framework, finances, governance structure and tenant relations by Michael Lazarowich & M. John Wojciechowski, 2002
 

Russian business incubator program - The functioning of business incubator organizations: legal framework, finances, governance structure and tenant relations by Michael Lazarowich & M. John Wojciechowski, 2002

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The purpose of this document is: ...

The purpose of this document is:

TO ASSESS THE STRUCTURE AND PROCESS AND IDENTIFY THE PARAMETERS
THAT WOULD ENSURE THE SUCCESSFUL IMPLEMENTABILITY OF A NATION WIDE
BUSINESS INCUBATOR (BI)PROJECT IN RUSSIA
• INVESTIGATE THE PROSPECT DEVELOPMENT INCLUDING:
1) COMPETITIVE ANALYSIS OF BIMODELS AND PROCESSES - (SWOT);
2) SITUATION ANALYSIS OF BIIN CANADA,AND EU (CASE STUDIES);
3) EVALUATION OF ‘BI GRADUATES’ –PROCESSES AND FINDINGS AND;
4)ASSESSMENT OF SETTING UP AND OPERATING BI
• SUGGEST OBJECTIVES,DATES,CONSULTATION AND COLABORATION BETWEEN
RUSSIAN AND CANADIAN TEAM S IN AN EIGHT MONTHS STRATEGIC PLANNING
PROCESS

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    Russian business incubator program  - The functioning of business incubator organizations: legal framework, finances, governance structure and tenant relations by Michael Lazarowich & M. John Wojciechowski, 2002 Russian business incubator program - The functioning of business incubator organizations: legal framework, finances, governance structure and tenant relations by Michael Lazarowich & M. John Wojciechowski, 2002 Document Transcript

    • 1 RUSSIAN BUSINESS INCUBATOR PROGRAM PHASE ONE PROSPECT DEVELOPMENT & STRATEGIC PLAN By: Michael Lazarowich M. John Wojciechowski Prepared For: Institute for the Economy in Transition Moscow, Russia School of Planning University of Waterloo Waterloo, Ontario Canada April 18, 2002
    • 2 MISSION STATEMENT • TO ASSESS THE STRUCTURE AND PROCESS AND IDENTIFY THE PARAMETERS THAT WOULD ENSURE THE SUCCESSFUL IMPLEMENTABILITY OF A NATION WIDE BUSINESS INCUBATOR (BI) PROJECT IN RUSSIA • INVESTIGATE THE PROSPECT DEVELOPMENT INCLUDING: 1) COMPETITIVE ANALYSIS OF BI MODELS AND PROCESSES - (SWOT); 2) SITUATION ANALYSIS OF BI IN CANADA, AND EU (CASE STUDIES); 3) EVALUATION OF ‘BI GRADUATES’ – PROCESSES AND FINDINGS AND; 4) ASSESSMENT OF SETTING UP AND OPERATING BI • SUGGEST OBJECTIVES, DATES, CONSULTATION AND COLABORATION BETWEEN RUSSIAN AND CANADIAN TEAM S IN AN EIGHT MONTHS STRATEGIC PLANNING PROCESS
    • 3 EXECUTIVE SUMMARY While incubators have grown in numbers, the uneven performance and poor sustainability in many situations have become serious issues with the governments and sponsors who continue to subsidize many of them. There has been much recent interest in identifying ‘best practices’ that could then be used elsewhere. But these practices are location-, culture- and time-specific, and can only be adapted to the conditions prevailing in local situations. The successful development of business incubation programs, often measured in terms of impacts, effectiveness and sustainability, depend essentially on five inter-linked rings: public policy, private partnerships, knowledge affiliations, professional networking and community involvement. The successful mix of these ingredients however, is dependant on the presence and identification of local assets, human skills and potentials. Understanding the local assets-base is the most important factor in the successful development of business incubation and yet it is often the least explored in the initial stages of the project. It is the purpose of this report to examine ‘best practices’ of setting up and operating business incubators. Hence the strategic plan is a form of blueprint for the proposed pilot project, identifying the parameters, goals, and processes of business incubator development. The investigation of these components is referred to as PHASE ONE. The purpose of PHASE ONE is to investigate the prospect development, thus setting the direction for initiating PHASE TWO – the establishment of a Business Incubator Pilot Project in Russia. Finally, long-term and short-term objectives as well as potential stakeholders and funding sources are identified within the proposed three-phased 8-month strategic action plan.
    • 4 OUTLINE OF THE PROSPECT DEVELOPMENT This prospect development component of the report examines business incubators (BI) as a component in the local strategy contributing to job growth and economic development. The findings are subdivided into four sections: 1) Competitive analysis of BI models and processes; 2) Situation analysis of BI in Canada and EU; 3) Evaluation of ‘BI Graduates’ – processes and findings and; 4) assessment of setting up and operating BI. Each section will proceed with an outline of the objectives and will conclude with a set of recommendations. The first section defines the term business incubator and examines the competitiveness of the four legal forms of business incubators identifying the physical structure (formal vs. virtual), their adequateness to a market niche, the type of tenants that the business incubator will attract/retain, the predominant success factors and the benefits of the incubator type to the local economy, the ‘graduates’ and the business incubators themselves. The section concludes with a summary of identified benefits from a successful implementation of a business incubator for each of the stakeholders. The second section will assess the magnitude, structure and effectiveness of different incubators in US, Canada, EU. This section is based on a number of case studies from secondary research conducted by the EU Commission, the National Business Incubator Association (NBIA), as well as academic research. Special emphasis is placed on strategies directed towards the business incubator’s ‘graduates’. Numerous cases studies are used to report on the findings complimented by primary research of 2 incubators in Canada. Furthermore this subsection assesses the monitoring techniques, and identifies the data type that should be collected. The third and final section assesses the process of setting up and operating a business incubator. Size of the incubator, types and numbers of tenants, start-up and annual operations costs, and funding sources are examined based on the EU Commission Report (2002).
    • 5 1.0 THE COMPETITIVENESS OF BUSINESS INCUBATOR MODELS Outline of Objectives 1. Define the generic business incubator model and its role in the entrepreneurial activity and local economic development 2. Examine the four legal structures of business incubators determining their structure, purpose, industry niche, tenant characteristics and success variables 3. Clearly state the benefits of each model to the business venture, the various stakeholders, the business incubator and the local community/economy 1.1 Definition and Function of Business Incubators Besides start-up capital, many new and growing businesses also need a place to do business and to receive timely advice, as they face the challenges of starting a business. Business incubators furnish both the physical location and the expertise that new businesses need to get started. Business incubators assist emerging businesses by providing various support services such as assistance in developing business and marketing plans, building management teams, obtaining capital, and access to a range of other more specialized professional services. In addition, incubators provide flexible space, shared equipment, and administrative services. Firms generally remain in the incubator for about two-and-one-half years, after which it is intended that they graduate to become independent, self-sustaining businesses (NBIA, 1996). Incubator facilities help new companies survive the critical early stages of development, thus lowering the failure rate. They encourage entrepreneurship and minimize obstacles to new-business formation and growth. Most incubator facilities and programs are sponsored by one of four kinds of groups: public (non-profit), private (for-profit), private (non-profit), or educational. Funding sources are drawn from any combination of foundations, banks, venture capitalists, and all levels of government and government- sponsored commissions. The following subsections will define the generic business incubator model, examine the four types of incubator facilities identifying their unique
    • 6 organizational structure, the type of businesses they attract and the incubators’ benefits to various stakeholders. 1.2 Components of a Generic Incubator Although business incubators can take a variety of shapes, there is a basic form that the typical generic incubator takes. Nijkamp (1988) identified some of the rudimentary elements that makes the existence of a business incubator possible. Supported by a number of studies in the literature, Nijkamp concludes that any type of business incubator should include at least these elements to be present in the community. Figure 1 illustrates Nijkamp’s (1988) interpretation of a generic business incubator. At the bottom is the location of potential entrepreneurs with universities, corporations, the general community, the public sector, research laboratories and inventors being the most likely sources. The presence of a local entrepreneurial base or culture is perhaps the most important the yet the most underestimated variable in the success of the business incubator. The next phase of the process is the identification of market opportunities by the entrepreneurs. Demand will then be created for an incubator and there are two main types of incubators that may be established. They can be either formal or informal facilities. A formal business incubator consists of a physical building that houses and assists the small business clients through services and counseling. The informal type is limited more to a consulting role, and businesses are not housed in a central facility. The informal type of business incubators are today also known as virtual incubators or ‘without walls’. Smilor (1986) then identifies the building blocks necessary for an incubator. These range from presence of venture capital in the community, to pre-existing business networks and an entrepreneurial base. The presence of both debt and equity financing is highly desirable and should be complimented with a pool of ‘patient investors’ – that is, investors who understand that the start-up phase of any entrepreneurial venture involves high risk and hence must be supportive in this very crucial phase. The findings in the literature indicate that the most significant contributing factor to attract ‘patient investors’ is a sound legal and regulatory framework and high levels of trust, which are interestingly
    • 7 brought about by the other building block – the business network. The network should include a variety of formal ties with local institutions, the educational system and business associations as well as informal ties with local clubs, organizations and individuals thus extending the channels of information flow. The public and private infrastructures, as the names imply, refer to the supportive network of physical facilities (eg., vacant buildings and lots with adequate access) and technological capabilities (eg., high-speed internet connection), which would both reduce the costs of starting the business incubator and facilitate the growth of the tenants. All of the listed items are necessary for the successful implementation of an incubator program. The very top of the figure indicates the possible sources of funding and/or legal status: universities, local government, state/provincial or the private sector (Smilor 1986).
    • 8 Regardless of the sponsoring organization, however, the goals of business incubators are to nurture young firms and to help them survive and grow during the start-up period, when they are most susceptible to failure. Generally, incubators provide hands-on management assistance, access to financing and support, such services as office equipment, meeting areas, support staff, accounting, roundtable discussions, research and libraries, and computer facilities, all at lower costs than usual. According to the National Business Incubator Association, "An incubation program's main goal is to produce successful graduates-businesses that are financially viable and freestanding when they leave the incubator, usually in two or three years. Thirty percent of incubator clients typically graduate each year." (http://www.nbia.org/, 2002) 1.3 The Four Types of Business Incubators & Benefits Identified There are predominantly four types of incubators even though variations de exists are often representative of the specific location, culture, availability of resources and time of development/implementation. These are classified on the basis of sponsorship and objectives. There public (non-profit), private (for-profit), private (non-profit), or educational. Public non-profit incubators are sponsored by local government, industrial or enterprise development corporations and community based development associations. These type of incubators attract manufacturing enterprises and new businesses with light production processes. These are usually formal incubators – or physical structures with larger square footage than average. Their benefits are job creation, economic diversification, linkages with existing firms and tax base expansion (Allen 1986, 177). Revolving-loan fund programs are set up to provide capital to start-up businesses that cannot get funding from other sources. According to the U.S. Chamber of Commerce, there are more than 7,500 revolving loan funds in the United States today. Most are managed by local or state economic development commissions, which provide partial funding in partnership with banks or other financial institutions. The loans are usually within the range of $15,000- $80,000. Frequently, these programs are set up to stimulate business growth or to fill
    • 9 gaps and encourage financial participation by banks or other institutions. Some loans are earmarked for revitalizing an urban slum or an enterprise zone. Aid from other programs is granted to help develop otherwise undesirable rural places that are trying to attract businesses. For most gap loans, public financing programs take a position on assets behind the primary lender(s). As a rule, revolving-loan fund programs are careful not to use public funds to compete with private sources. Each local economic development commission has its own policy on profitability. Some programs strive to make a return on investment similar to that of banks, while others have a break-even policy. Still other programs contend that, because they are using public money for high-risk investment, they should make higher-than-normal returns. All programs agree, however, that, when public monies are to be used for the public good, it is in the best interest of the community to create jobs and improve the local economy. Both private for profit and private non-profit incubators are sponsored by one or a few private corporations. Hence it is possible to conclude that the creation of these types of incubators can be facilitated by the entrepreneurial climate in the region – that is depending on the network interactions between larger firms and local providers and/or suppliers. The private non-profit incubators usually attract enterprises that demonstrate the potential for the creation of local employment. The objective of these incubators is the fostering of local entrepreneurial ventures and local economic development. The private for-profit incubators attract new firms that show the ability to grow. Basically, these incubators can be described as venture capitalist establishments were the tenants exchange equity for the services and/or locale provided. The benefits of these private incubators is to make profit on surplus commercial and industrial space and collect on the equity shares once the firm goes public. In light of the above, the most successful graduates from business incubators, originate from this type of incubators. In educational (university affiliated) incubators, the focus is on technology and science based industries. They are likely to be located close to a university and the university is the primary source of funding. The benefits of these incubators is the product
    • 10 development and commercialization derived from research and the cooperation between universities and industries. Table 1: Four Types of Business Incubators, Industry Niches, Tenant Characteristics and Success Criteria Incubator Model Formal vs. Virtual Niche Characteristics of Tenants/Graduates Success Variables Public (non- profit) Formal • Manufacturing • Light Manufacturing • Transportation • Retail/Services • Administrative • Tourism • Agro-business • Rural incubators • Mixed used • Empowerment Incubators • Selection criteria focuses on potential of job creation • Mainly tenants from the local community • Graduates are usually micro- businesses (with less than 5 employees) • Not always growth oriented • Tenants remain in the local area after graduating • Prioritize short stays (not more than 2 years) • The higher the turnover the better (more jobs created locally) • Management should focus on public relations, partnerships with local high schools and trade schools • Financial Responsibility is a must • Provide basic business assistance, counseling, training, • Workshops and presentations from business consultants • Willingness of the community to contribute Private (non- profit) Formal • Depending on the interest/orientation of the corporation behind the project • Often correlates to the regional industrial cluster • Selection criteria considers job creation potential and creation of linkages with larger firms • New and established businesses • A mix of firms belonging to one industry sector • Take advantage of tax incentives to redevelop old buildings (revitalization strategy) • Dependant on rents and other services for financial balance • Manager(s) familiar with industry • Presence of entrepreneurial climate
    • 11 Private (for- profit) Formal & Virtual • Telecommunication • Biotechnology • Nuclear • Engineering consulting • Human resource consulting • Food processing • Financial services • ‘Urban incubators’ • Technology based firms • The tenants exemplify a mix of knowledge intensive enterprises • Highly educated in specific field • Often more established businesses get through the selection criteria • Presence of venture capital and other alternative financing options (business angels) • Proximity to high-tech clusters • Availability of highly- skilled labour • Manager/President is expert in one of the technological fields • Manager pursues the success of the tenant firms with a venture capitalist attitude (performs due diligence) • Financial gain from IPO of the graduates • Provide advice on global exporting, finances, industry- specific marketing • Industry funded Educational Formal & Virtual • Telecommunicat ion • Biotechnology • Medicine • Pharmaceutics • New materials • Avionics • Defense/military • ‘technology incubators’ • Researchers and highly educated professionals • Science based and knowledge intensive firms • Large portion of firm’s costs go to R&D • Access to R&D grants • Presence of local entrepreneurial base • Presence of venture capital and business angels • Collaboration among University and industry • Support from other business dev offices • Larger firms in vicinity pertaining to the industry sector • Financial success dependent on university funding
    • 12 1.4 Selecting the Type of Business Incubator Evidently not all regions are adequate locations for the development of a specific type of business incubator. In fact in some regions it may not be feasible to develop a business incubator in the first place. According to the Global Entrepreneurship Monitor (GEM) studies by the Kauffman Center for Entrepreneurial Leadership, Babson College and London Business School, the factors which affect different levels of entrepreneurship are: 1) the perception of opportunity, 2) the culture which respects entrepreneurs and accepts wide disparities in wealth creation, 3) the policy and business infrastructures, investments in tertiary education, and the demographics, as men aged 25 to 34 are most likely to start a business. If those preconditions are not adequately developed - that is, they are not at carrying capacity - other initiatives such as government funded and managed business development offices and service providers may be required to pursue concomitant economic development objectives with the special purpose to build these preconditions. Recommendations I. To assure the adaptability of the business incubator to the local community and economy, the business incubator must be integrated into the local strategic economic development plan. The support of the local leadership and identification of acknowledged local ‘champions’ is a must. Personalities, business and political, can play seminal roles. By pulling the right strings and pushing open the right doors, the ‘champions’ are able to help overcome barriers and leverage support. II. The type of incubator chosen for the region must coincide with the local potential of individual skills and assets as well as the synergetic effect of the local educational environment, the quality of the regional financial sector, experienced management consulting and most importantly the competitive regional economic base
    • 13 III. A cluster analysis of the local industries is recommended in order to clearly identify the backward and forward linkages between major local employers and the servicing small-and-medium enterprises. The cluster analysis will also identify the interest of firms in innovative solutions, research and development. IV. The systematic identification of the competitive advantage of the region and individual firms will compliment other eligibility criteria (to be a tenant in the business incubator) and thus will set the specialization of the business incubator Identification of Benefits to Stakeholders The benefits of a well-managed incubator can be many-fold for different stakeholders (Molnar 1997): • For tenants, it enhances the chances of success, raises credibility, helps improve skills, creates synergy among client-firms, facilitates access to mentors, information and seed capital. • For governments, the incubator helps overcome market failures, promotes regional development, generates jobs, incomes and taxes, and becomes a demonstration of the political commitment to small businesses • For research institutes and universities the business incubator helps strengthen interactions between university-research-industry, promotes research commercialization, and gives opportunities for faculty/graduate students to better utilize their capabilities, • For business: the business incubator can develop opportunities for acquiring innovations, supply chain management and spin-offs, and helps them meet their social responsibilities. • For the local community: creates self-esteem and an entrepreneurial culture, together with local incomes as a majority of graduating businesses stay within the area. • For the international community: it generates opportunities of trade and technology transfer between client companies and their host incubators, a better understanding of business culture, and facilitated exchanges of experience through associations and alliances.
    • 14 2.0 BUSINESS INCUBATION AND ECONOMIC DEVELOPMENT Outline of Objectives: 1. Define business incubators according to their functional type 2. Illustrate the fostering elements of business incubator program 3. Identify arguments for and against state funding 4. List and explain the limitations of business incubator programs 5. Examine strategies targeted at different types of Graduates (Case Studies) The National Business Incubation Association (NBIA) reports that throughout the United States small businesses generate approximately two out of every three new jobs. At almost any time, roughly 7 million people are starting new businesses. All across the country, business incubators are providing entrepreneurs with tools that encourage technology transfer, enhance the local economy, and create new jobs. NBIA has estimated recently that roughly 1000 business incubators are operating in the United States alone (http://www.nbia.org/, 2002). According to a recent study conducted by the European Commission, 3000 business incubators are operating worldwide. Unprecedented growth of business incubators has been reported in transitional economies such as China, India, Malaysia, Brazil as well as is Eastern European countries. Business incubation programs generally work with new businesses from before they have brought products to market until they have graduated, that is, obtained sufficient size and earnings stability to be able to survive without on-going assistance. The previous section of this report examined the four legal basis of a business incubator program (public [non-profit] private, [for profit, non-profit], and educational). With regard to identifying, measuring and monitoring the impact and benefits of a business incubator program to local economic development it is recommended that the type of business incubator be also well defined. Incubation programs can be generally categorized into three major types: 1) empowerment, 2) mixed-use and 3) technology. Empowerment incubators foster the growth of businesses located in areas characterized by high unemployment or deteriorating neighborhoods. These incubators usually support companies whose founders had to overcome a significant lack of personal economic resources, business literacy and/or education. Mixed-use incubators
    • 15 encourage growth of all kinds of businesses such as light manufacturing, heavy manufacturing and construction firms, and wholesale, distribution, mail order, and professional services. Technology incubators foster the growth of firms involved in emerging technology. 2.1 A new Breed of Incubators: The ‘New Economy’ Technology Incubators The Harvard Business School in its recent survey identified 356 such incubators around the world (Hansen, 2000). Of these 222 are in the US (that is, about 25 % of the total U.S. incubators). The others include Canada (14), UK (28), China-Hong Kong (11), and Brazil (10). The growth of ‘new economy’ incubators is reflected in the fact that whereas in 1994, only 1 out of every 25 technology incubator companies was IT related, by 1999, this figure had risen to 20. Many of these incubators are associated with major universities and have as a primary objective commercializing technology (Refer to Exceler@tor Case Study under Section 4.4). ‘New economy’ type business incubators are often virtual. New economy incubators are usually funded by venture capital companies or set up by large multidisciplinary consultancies that are able to offer a complete range of technological, advisory and other business support services to their clients. Large multinationals have also been keen to capitalise on their expertise in the e-economy, namely the rapid development of the B2B and B2C sectors, e- commerce, m-commerce (mobile phone commerce driven by WAP technology) and v- commerce (voice activated commerce) by offering advisory expertise to new high-tech start- ups within a virtual incubator model. Amongst technology incubators, a key factor is the extent to which an incubator plays an active role in the broader regional (technology) development strategy of the area where it is based. For new-economy incubators the primary objective being is the generation of returns to investment to their own shareholders. Due to the high risk involved and often low return rates (due to the fierce global competitions) some incubators resorted to selling consulting services to established companies, or to partnering with local universities and research institutes. An analysis of best practice suggests that incubators should not be treated as stand-alone operations but rather integrated into a network of key stakeholders, agencies and schemes that work together to promote innovation, competitiveness, technology transfer and other key public policy objectives. In light of the above the strategic objectives and modus operandi of ‘new economy’ incubators differ fundamentally from their ‘traditional’ equivalents:
    • 16 • ‘New economy’ incubators are private-sector, profit-driven with the pay-back coming from investment in companies rather than from rental income; • Secondly, they tend to focus mainly on high-tech and internet-related activities and unlike ‘traditional’ incubators, do not have job creation as their principal aim; • Thirdly, ‘new economy’ incubators often have an essentially virtual presence with financial and business services at the core of the offering unlike their ‘traditional’ counterparts that usually centre on the provision of physical workspace. CONCEPTUAL MODEL AND COMPONENTS FOR SUCCESSFUL DEVELOPMENT OF TECHNOLOGY BUSINESS INCUBATOR Depending on the type of business incubator program, numerous support sources will have to be coordinated and various stakeholders will have to be brought on board. Lalkaka (2001) identifies five inter-related rings, which have the potential to foster venture creation:
    • 17 2.2 Getting Support (Human, Knowledge, Social, Financial) for Business Incubator Program Lalkaka (2001), based on a review of a number of incubators from both developed and transitional economies, lists a number of problems and risks of business incubator programs – often used as arguments against state funding: • Elitist: as it caters to a selected group of potential “winners”, • Dependent on government support: in policy, infrastructure, initial funding, • Limited in out-reach and makes only a marginal contribution to job-creation in the short term, • Not yet demonstrated to provide additionality, as most businesses start outside an incubator, • Expensive: as it provides focused assistance and work-spaces to only a selected few, • Duplicative: as it may undermine existing markets for business development services, • Skills-intensive: as it requires experienced management teams, • Creates dependency by sheltering entrepreneurs from the harsh realities of the market, • Calls for good business infrastructure in a good location, and • Requires external subsidy for some years before it can become self-sustainable. Lalkaka (2001) suggests that although these obstacles are legitimate, the conflicts can be avoided through “realistic briefings to policy-makers, by careful planning of the incubator, consensus building, patient support and strong leadership” (pg. 9). Furthermore he outlines the scenarios and arguments, which should be used to gather state support for the business incubation program: • When it helps overcome market constraints, improves the access to information, finance and divisible work space not freely available,
    • 18 • Extends the state’s role in providing public goods--knowledge, research, infrastructure, • Becomes a visible symbol of the state’s commitment to the creation of good jobs (direct, indirect and through multiplier effects), • Stimulates innovation and entrepreneurship as prime forces in the new economy, • Promotes the cultures of technology commercialization, risk-taking, teamwork, sharing, • Reduces the costs and consequences of business failures, and facilitates the transition from a command to a market economy, • When it empowers backward areas (urban and rural), youth and women entrepreneurs, and promotes employment in the longer term, • Helps develop synergy between university, research, state and civil society, • When support is limited to initiate the establishment, not a continual operating subsidy • Generates taxes paid by corporations and workers, typically in excess of net subsidy, and raises incomes, sales and exports for the community and country, 2.3 Limitations of Small Business Incubators One major problem among public and private incubators is their apparent differences in philosophy. An example of this difference is seen in public incubators stipulating rent below market rate. “This policy increases the benefit to the tenants but hampers the profitability of the incubator and its ability to cover operational and maintenance costs – which are both a priority of most private incubators” (Nyrop 1986, 7). This brings us to a larger problem faced by all incubator managers – incubator finances. In fact financial difficulties are often manifestation of deeper problems. An incubator may be suffering from low occupancy rates, poor pricing structures, lack of capital investment or other such issues that appear to be monetary problems. Certainly, the vital aspect for all incubator types is the management team. Larger and usually for-profit incubators have a wide variety of mangers experts in their respective fields including, marketing, finances, strategic planning, product development, public relations etc… However, managers of smaller business incubators usually have to perform all of the above functions. A lot of cases studies report that the reason why business incubators have failed can be partially attributed to the fact that the management has been overwhelmed with the task to improve fiscal matters rather than concentrating on the success of the incubating firms.
    • 19 2.4 Strategies directed at Graduates’ Success: Two Case Studies The retention of the graduates is the most important benefit with regard to economic development. Not only will the investment of public money be recycled in the community (through income and corporate taxes) but more importantly the entire business incubator process contributes to capitalizing on local entrepreneurial talent and nurturing small businesses. This section examined the strategies undertaken by the TBDC – a non-profit mixed business incubator in Toronto. The business incubator began operating in 1988 and was originally subsidized by both provincial and municipal agencies. For the past 5 years it has been self-sustainable relying predominantly on income from rental fees and business counseling services provided to both the tenants and other entrepreneurs/small businesses in the community. At its conception the City gave approximately $65,000 in funds to select the location and prepare a business plan. The entire start-up costs were approximately $4 million. 2.4.1 The Toronto Business Development Incubator (TBDC) For more than a decade, the Toronto Business Development Center (TBDC) has successfully accomplished its mission "to nurture the growth and development of new and existing businesses." Since its inception, the Center has been an active participant in the growth and success of hundreds of new and existing business ventures. TBDC is a mixed incubator and approximately 80% of all graduates is still in business and all but two (over a period of five years) are still currently residing in the Greater Toronto Area (GTA). TBDC’s success can be directly linked to its four-stage development cycle, designed to target the possibilities and reveal the full potential of each business. Following a change in management and general philosophy, today the business incubator graduates its tenants after 3 years. It is important to note that the four-step development cycle is costumed to the business depending on whether it is in an early start-up phase or a mature venture. Stage 1: Exploration This stage is perhaps the most crucial stage for the management of TBDC. In this stage the potential client of the business incubator participates in a number of business oriented workshops which inform the client on business processes, need for funding and the personal effort required in running a personal business. Often at this stage the management can differentiate between firms that are in the early start-up phase of the business cycle and those
    • 20 that have enough experience to progress into the second stage. Before a participant of the workshop can become a tenant he/she is mandated to write a business plan. Stage 2: Planning TBDC helps its clients to develop a top-rate plan with clearly defined priorities, attainable goals and a well-charted direction. It is important to note here that an adequate business plan is not necessarily directed at investment (both debt or equity), but one that identifies a viable opportunity and provides a ‘road map’ to capitalize on it. More mature firms are often well- equipped with a business plan. In this case TBDC’s management identifies finance sources. Stage 3: Implementation At this stage TBDC provides its clients with a thorough understanding of a wide range of business disciplines including management, finances, administration, marketing, In addition to providing training and consultation in all aspects of business development, TBDC also provides access to a vast network of business specialists, professionals and funding sources. This is perhaps the most important stage for both the business incubator and its tenants. The networking component is particularly valuable with regard to increasing exposure, recognition and building a stable clientele list. Stage 4: Graduation & Monitoring The management team at the business incubator makes it very clear to all new tenants that graduation is expected within three years. A number of strategies are implemented to pursue this objective: • Constant adherence to the four-stage model of business development • Increasing rents for more mature tenants • Increase in service fees for consultation services Since the new management has been operating at the TBDC (2000), two monitoring reports have been published with regard to the graduates. The reports indicated that100% of all graduates are still operational ad that they have generated 126 new jobs in the community. 2.4.2 The Axceler@tor The Exceler@tor is an information technology and telecommunications focused incubator, providing infrastructure and services, to accelerate high potential disruptive and platform technology businesses globally. The Exceler@tor is a centre for innovation, providing a unique, collaborative environment with direct access to the University of Toronto and the
    • 21 wider resources of Toronto’s technology and financial communities. The Exceler@tor’s vision is to be the foundation of a successful technology hub in Toronto, to become recognized as a leading International institution, fostering a culture of entrepreneurial opportunity, facilitating wealth creation locally. The Exceler@tor is a joint initiative between Universities, Industry (Technology and Financial) and Government. The Incubator was initialized by the Innovations Foundation (IF) - a technology commercialization office at the University of Toronto. The twenty year old foundation in 2001 investigated the opportunity of establishing a non-profit technology incubator based on close interaction between six universities (in Southern Ontario allowing maximum use of resources and opportunities) lead by the University of Toronto, the local high-tech industry and Research Council of Canada – the national agency for coordinating funding and programs for research and development in both industry and educational institutions. Once a board of senior industry advisors had been appointed, the creation of The Exceler@tor became a reality, with technology and other support from industrial partners, and a line of credit from the Innovations Foundation. Today the business incubator is 12,500 sq. feet and has a staff of 20 highly skilled technical consultants and managers. However, The Exceler@tor is somewhat different from other incubators. Whereas a traditional incubator provides space with very limited technology, infrastructure and business support. The Exceler@tor’s goal is to help companies outgrow it and provide opportunities to add further value to their enterprise. The key success factors for The Exceler@tor are the following: • Strong link with the University of Toronto • Robust operating principles (not for profit) • Low overhead facility (sharing resources with IF) keeps fixed costs to minimum • Technology focused (ITC) with special interest areas (i.e. wireless and e-Health) Tenants of The Exceler@tor The Exceler@tor focuses on information technology and telecommunications. In general, as a technology incubator, the Exceler@tor admits companies that have unique technology applications. These technologies are usually disruptive or a platform technology as they have the greatest potential to turn into major opportunities. It is encouraging to see technologies with patents either issued or applied for, but this is not a requirement, especially as in some cases, the patent process is not that effective for software businesses.
    • 22 A focus on specific types of technology allows the greatest synergies in the provision of services and enhances networking opportunities as a result of many of the companies working in similar areas. It also enhances the opportunities for collaboration between companies within the Exceler@tor and between them and the external partners and sponsors. The main entry criteria are constantly being reviewed, but currently include: • Company formed (not individuals) • Company has significant growth potential and aspirations • Technology based in the area of information technology and telecommunications • Sponsor found (usually Innovations Foundation) who will do the initial investigation • Technology unique, usually disruptive or platform (frequently possible to patent – although patenting is not necessary) • Not a direct competitor with an existing Exceler@tee (can be with virtual clients – that is clients that are not physically in the incubator) • Will gain real value from being in the Exceler@tor, especially from the networking opportunities • References available • Have the ability to pay for the level of services they require for at least 3 months. • Willing to sign service agreement and agree to all terms which includes provision of some simple monthly corporate information with which we can track the impact of the Exceler@tor. Companies are allowed to stay in the Exceler@tor provided that: • They are still growing and moving forward on the implementation of their business plan • They are not disruptive to the Exceler@tor as a whole • They remain solvent • They do not occupy more than 25% of the Exceler@tor’s workstations The incubator is currently examining the opportunities of developing a local science park/discovery area into which graduates/alumni can move. However, it is expect that all Exceler@tees will exit the Exceler@tor within 3 years of entering, although this date is not fixed. In the case when the tenant stays longer than the prescribed three years, service and rental fees increase. Due to the incubator’s early age, there have not been any graduates yet. Networking in the Exceler@tor There are three types of networking opportunities: within the Exceler@tor, within the University/sponsor community and with the external business community. The Exceler@tor is organized to maximize the networking opportunities between each of these communities.
    • 23 Within the Exceler@tor, there are a number of events organized to stimulate interaction between the various companies. In addition to these events, the social hub of the Exceler@tor is the coffee shop on the third floor, which has both an informal lounge and some additional facilities such as a pool table. Interaction with sponsors and the University community will also be catalyzed by a number of events, such as lunch-and-learn opportunities. As well, there are many interactions with staff and students from Rotman Business School who are interested in working with Exceler@tees. In addition, sponsors and other organizations participating are keen to see how companies in the Exceler@tor are progressing. This interaction may range from an informal meeting to a formal mentoring program, depending on the interests of the parties. The Exceler@tor is already establishing itself as a destination for innovation events and networking opportunities with the wider business community. These activities will see a stream of local, national and international visitors in the Exceler@tor weekly. There will be a formal program where Exceler@tees will be notified in advance of these visits and asked if they want to make a short presentation in addition to many other informal opportunities.
    • 24 Recommendations I. The micro-economic framework should stimulate innovation and markets for new goods and services, together with a master plan prepared in consultation with local communities, entrepreneurs and stakeholders. II. Commensurate investments are required in scientific research and technology development, engineering and management consultancy, technical education, environmental preservation, transport and communications infrastructure. III. Long-term plans should be formulated for developing the convergent enterprise support systems encompassing the full range of small business development services, anchored possibly in a business incubator and technology park. Locations for these support complexes should be environmentally attractive and well connected to technical universities and research laboratories, cultural and recreational facilities. While it is easier to start in a developed urban environment, the political wisdom may call for balanced expansion to peripheral regions. IV. The selection of proactive sponsors and organization structure could originate from strong initial government support, with responsibilities moving progressively to knowledge institutions, non-governmental agencies and the private sector. V. Programs are required for kindling nascent entrepreneurship from school onwards, and structured efforts to search for new tenant businesses, their selection and graduation. VI. Networks should be developed with agents at the national and international levels particularly consulting, and service sectors, venture capital, banking, legal and accounting services, business associations and chambers, state and community leaders, together with firm linkages to technical universities and research institutes.
    • 25 Good Practices for Managed Work-spaces & Their Adaptation Good Practice Adaptation 1. Commit to the core principles of venture creation as the first step. In order to avoid misunderstandings and conflicts, the core principles must be early explained to all the stakeholders of the incubator and their commitment obtained as early as possible. 2. Collect and assess salient information to decide on whether the project is feasible or not. In many countries, information is often spurious, incomplete and biased. It may also be over-optimistic, to "sell" the project and obtain funds. 3. Design the services and facility to be self-sustainable in an overall community context and in a medium-term horizon Business development services, including incubators and parks, need initial state support, because benefits usually out-weigh the net state subsidy when all the employment, income, taxes and other benefits are considered. 4. Structure the organization to optimize governance & maximize assistance to tenant companies. In some countries there is a tendency for the bureaucracy to interfere or micro-manage, resulting in loss of initiative and accountability at operational levels and consequently poor performance. 5. Engage stakeholders to help companies and mentor the operations. Most entrepreneurs in restructuring companies are good at networking, but this process should be also managed by enlisting possible academic, government, private and international assistance 6. Recruit staff who will manage the facility as a business and a Director with the capacity to help companies grow Initially, the local manager may be supported by a carefully recruited expert for a short period. Hands-on training of staff would be done at a comparable operational facility, or locally by trainers familiar with international practices. 7. Choose a building that will enable the incubator to generate sufficient revenue and also support business incubation. The buildings should be of high quality, functional and well equipped (telephone exchange, computers, copiers, faxes, satellite communications) in order to attract international and national tenants. 8. Recruit and select firms that have the potential to develop their technology product/service, to grow and create jobs, income, taxes and other benefits. The director must resist political pressure from stakeholders to recruit companies that do not meet criteria. The business plans and reliability of the entrepreneurs should be rigorously evaluated. A marketing effort is needed to recruit anchors and tenants with business and innovation skills. 9. Customize the delivery of assistance and address the developmental needs of each company. The incubator staff must be fully familiar with specific needs of the companies, Foreign advisors may assist the companies and local staff in the start-up period, with rapid transfer of skills. 10. Engage in continuous evaluation & improvement as program progresses and needs of clients change. Careful monitoring of progress and bench-marking of performance should be done monthly by the staff and by the board. Deviations from plan should be promptly identified and corrected. Key Issues in Business Incubator Development
    • 26 • Critical Mass: The size of the community is important. Mobilizing cooperation and demonstrating viability requires a certain scale of operation • Markets: Rather than depend on vagaries marketing and distributing the products of the business incubator communities can be designed to include bulk procurement of materials, warehousing and focused distribution channels. In the community, local business can be supported by making credit facilities and money management training available to local entrepreneurs. • Replicability: Demonstrations of "best practices" and model projects have to be replicated widely if their impact on a national scale is to be significant and sustainable. This requires affordable charges for services, with the prospect of the programs becoming self-supporting in the future. • Improvement Services: Management, quality control, production, commercialization processes and related skills are generally inadequate in many smaller communities and must usually be upgraded if local businesses are to compete in a regional or national market. In specific situations, multi-purpose workshops and shared work spaces for businesses facing similar challenges may be warranted. • Integrated Package: A convergence of support functions in an integrated package including skills enhancement, counseling and financing, is ideal in a business incubator program. Other related national and donor-supported activities should be inter-linked. • Grassroots Involvement: Exhortations regarding "participation" by the local community in design and implementation of development schemes implies that the program is externally imposed on their lives. In most poor communities, working is a part of living itself, not a separate wage-earning activity. The development process also has to become an intrinsic part of living. • Vital Concerns: Growth with equity, gender equality and environmental preservation have to be continuously kept in the forefront of planning.
    • 27 3.0 STARTING UP AND OPERATING A TECHNOLOGY ORIENTED BUSINESS INCUBATOR PILOT PROJECT Outline of Objectives 1. Introduce the basic components of a business incubator pilot projects 2. Summarize the findings from the CSES report on Benchmarking Business Incubator Performance: a. Selecting location b. Selecting quantity and quality of business incubator clients c. Assess the financing start-up costs and operating costs, associated breakeven points and sources of funding d. Propose sources of funding specific to this project e. Propose an NGO for leading the pilot project Business incubators evokes an image of a specific building or complex where businesses locate, pay relatively low rents for space, and share common support services. These businesses also can have access to a wide variety of business development and professional consulting services. Incubators offer small business clients financial and professional assistance that typically includes: • Flexible space and leases. • Access to a network of business and technical consultants. • Relationships with financial institutions. • Use of university resources. An incubator's main goal is to be financially stable and produce successful graduates, or businesses that are more financially viable and stable when they leave the incubator, usually in two to three years. Businesses incubated today often are at the forefront in developing new and innovative technologies, creating products and services that can enrich citizens' lives and their communities. Perhaps the most important aspect of business incubation is the fact that it uses local institutions and resources to build a local capacity for business startup. The incubator employs financial resources, professional networks, and intellectual capital to broaden the local economy one enterprise at a time. According to NBIA, an incubator program helps build an
    • 28 entrepreneurial culture within a community by pulling together the support of financial institutions, business owners, community leaders, schools, government, and business assistance professionals. Adding this depth to an economy can provide greater insulation against the effects of the negative business cycles that occur from time to time. This section will summarize the findings from the report by CSES for the European Commission (2002) on business incubation principles, specifically regarding issues relating to the financing of incubator start up and operating costs. The study is based on surveys and interviews conducted with 125 business incubators in the European Union. Location of the Business Incubator The location of a business incubator largely reflects the aims it pursues. Thus, a specialised incubator that focuses on promoting technology-based enterprises may well be located on ‘greenfield’ site, for example on a science park adjacent to a university, whilst a multi- purpose incubator could be in an inner-city area or on an industrial estate. New-economy incubators, in contrast, tend to be concentrated in metropolitan areas, particularly in cities and regions that combine strengths in technology, creative talent, entrepreneurship, professional services and finance. Large urban centers and prestigious capitals are adequate locations because that is where entrepreneurs and investors work, live, play and network. Very few new-economy incubators are housed in newly built facilities, but for reasons largely unrelated to cost. At least in the beginning, when they were managing to raise large amounts of funding, it was more important to launch operations as soon as possible, often in cities where office space is scarce. For young entrepreneurs and information technology workers there is also a sort of "shabby chic" appeal in occupying converted lofts, former warehouses, or antiquated offices. The CSES research suggests that to operate successfully, incubators need to have sufficient capacity to accommodate a minimum of around 20 tenants at any one time and hence to achieve economies of scale. According to the survey, a typical incubator has around 3,000 square meters of incubator space. These findings do not however, apply to ‘new economy’ technology incubators. Their profitability is much more dependant on the equity shares rather than rental fees. Some of them may host only two or three companies while others may operate as virtual incubators that do not provide office space at all.
    • 29 Business Incubator Clients The success of business incubation programs is directly dependant on the quality of its tenants and the ability to provide these tenants with added-value services while fulfilling their networking needs. The strategic selection of incubator clients is hence, pivotal to the success of both the incubator and of its clients. Somewhat related yet perhaps a paradox is the is the necessity to achieve a critical mass in order to maximize the economies of scale with regard to service provision and costs. This is perhaps the most complex aspect of selecting the types of clients, the numbers of clients served (both in the incubator and in the community) and the type of services provided – all of which become benchmarks also for selecting the size, and expertise of the business incubator’s management team. In light of the above, the CSES study concluded that a business incubator should have about 18-22 clients in the incubator and about 10 other clients in the community providing consulting services and networking opportunities. On the other hand, new-economy incubators tend to have considerably fewer tenants because of the significant investment they make in each incubatee (typically ranging from €500,000 to €1 million in the form of seed capital and support services) (CSES 2002). It is also important to mention a shift that was observed in the investment strategies into ‘new-economy’ technology incubators. Although investors were more interested in early-stage startup firms, they have recently shifted towards investment in more mature technology-based firms to start new businesses. Financing Start-up and Operating Costs According to the survey, the average cost of setting up a business incubator is just under € 4 million. In terms of the sources of finance typically used during the set-up phase, the survey data suggests that the overwhelming majority of the financing comes from public sources. Just over a fifth of the set-up costs are subsidized by the EU and other international agencies whereas almost 50% are funded by national, regional and local authorities. 13% of set-up costs come directly from private sector sponsors. With regard to operating costs the survey revealed that on average typical incubator has operating costs of approaching €500,000 per annum.
    • 30 Payroll and related benefits constitute the highest proportion of outlays. A key performance benchmark here is the extent to which overheads such as these can be minimized and resources devoted to incubator services that directly benefit client companies. New-economy technology incubators, which profits come from equity shares in client firms lower payroll costs by giving stocks to the employees of the business incubator. This strategy beside reducing operating costs also has a positive impact because it helps to align the interests of the staff with those of the incubatees they serve. Similarly to the funding sources for starting costs, operating costs are extensively reliant upon revenues from international agencies as well as national and regional authorities (37%). However, and in contrast to start-up costs, operating costs are largely covered by revenues from rentals and service charges (40%). The remaining revenue sources include bank loans, and other private sector organizations. Interestingly, and due to the inability to rely only on equity revenues, technology incubators are now forming hybrid cost-recovery schemes, which include both rental and service fees and reduced equity stakes. Out of the entire sample only 40% indicated that a breakeven point has been set in the business plan (primarily because the majority of incubators in the survey is oriented as a public non-for-profit organization). The following chart illustrates the distribution of estimated breakeven time by the participants in the CSES survey.
    • 31 Potential Funding Sources for Pilot Project: Multilateral Assistance The large regional development banks have, not yet financed incubator-type programs. EBRD is presently supporting a technology park program in Russia. A technical assistance component for incubators was part of a World Bank private sector development loan to Poland. This program was transferred to PHARE. The Bank presently supports micro- enterprise development projects for employment generation with the Polish Ministry of Labor and Social Policy. This includes 37 small business assistance centers and 23 business incubators and enterprise development funds. The International Finance Corporation has had interest in incubator-type arrangements in St. Petersburg, Russia, and Pilzen, Czech Republic. The European Union, through the PHARE program, has been extremely active in central and eastern Europe through TACIS in Russia. For instance, in Poland, it has helped set up 30 business support centers and four business incubators in the 1991-95 period. In the Czech Republic, PHARE helped establish three Business Innovation Centers (BIC’s), as well as various consulting, information, training and business promotion programs. In Hungary, PHARE supports the Hungarian Foundation through the Columbus program of EU. EBN plays a leading role in PHARE-assisted Business Support Centers (BSC) and Innovation Centers. For instance, Lodz (Poland) is twinned with Lyon (France) at the level 23 of BSC/BlC and the chambers of commerce and industry. A potential NGO for the Pilot Project: UNIDO – Strengths and Opportunities Within UNIDO’s (United Nations Industrial Development Organization) prime mandate of promoting industrial development, support to small and medium enterprises is one of its six programmatic themes. Business incubators have now become a component of national small
    • 32 enterprise strategies. Further, the majority of tenants in incubators world-wide produce innovative goods and technical services in agri-based, chemical and engineering sectors and in advanced materials, microelectronics, information and bio-technologies. These are all within UNIDO’s competence. UNIDO has specific experience in establishing incubators as an executing agency. Its work in Turkey, Poland, Czech Republic, Romania, and Uzbekistan, and more recently in Columbia, Dominican Republic and Pakistan has provided the basic capability to build upon. UNIDO has had research experience in preparing publications of guidelines for business incubation and software in financial planning for incubators. Further, a good network of incubator contacts and consultants was established. Importantly, UNIDO has the unique capacity of bringing together a range of specializations, within the organization to address the demand of technical assistance services for incubation systems. Incubator development clearly must take fully into account the current priorities in the international dialogue on safeguarding the environment, rational use of energy, employment generation and full involvement of women entrepreneurs in the development process. No other multilateral or bilateral agency has such integrated in-house capability, UNIDO has proven skills in the development and implementation of industrial development systems. Focused on a Business Incubation System, such a Strategy would take the lead in characterization, expansion and diversification of ‘incubator” operations. Using internal and external analytical skills, UNIDO would contribute towards better understanding of the nurturing of small enterprises with potential for growth. Implementing these lessons through an incubator modality would enable UNIDO to leverage limited personnel and financial resources for maximum impact. Support for the incubation process would be consistent with philosophies to support maximum latitude in individual self-determination. Finally, UNIDO’s considerable world-wide experience with larger enterprises and governments would develop into new paradigms for linking small and large enterprises for mutual benefit while advising on the development of supportive government structures.
    • 33 Recommendations Governments should solicit carefully assistance from the state government both at the federal and regional levels and funding from multi/bilateral organizations such as UNDP, UNIDO, World Bank, European Union funds, to initiate innovative concepts and support local initiatives, within the framework of national priorities and local culture. It is a difficult task to measure the effectiveness of intervention programs that assist start-up businesses. The entrepreneurial start-up stage is complex and often requires different types of interventions ranging from one-on-one mentoring, to contacts for suppliers, customers and sources for financing. Information reviewed to date indicates that most incubators have not been evaluating the effectiveness of their programs, other than by considering the total annual revenues or the total number of jobs created by the incubated firms. A few facilities have stated that they consider tenancy in their buildings as an important measure of potential success. In light of the above it is important to understand and implement benchmarking techniques with regard to the business incubators’ start-up costs, operation costs, and impact and effectiveness in the initial stages of developing the program and/or pilot project. Furthermore, the development of a benchmarking framework needs to be sensitive to the diversity of incubator models and operations. The EU Commissioned Final Report on evaluating business incubator programs (2002) assessed 125 European business incubators and identified a feasible list of benchmarks that would adequately show and evaluate a business incubator program’s performance, management and promotion: • Capital investment and operating costs: It is inappropriate to set benchmarks for incubator capital investment and operating costs because these will vary widely depending on the type of incubator. For example, a biotechnology incubator requires dedicated laboratory space as well as office space, whereas an incubator providing just office to new start-ups will require less capital investment. • Proportion of revenue dependent on public subsidies: Whilst the public funding requirements of incubators will inevitably vary depending on location-specific factors such as the dynamism of the regional economy and the extent of market failure, the CSES recommends that incubators should try and increase the proportion of operating costs derived from their own activities (rent, advisory services, etc) rather than rely continuously on funding from outside agencies. • Incubator space/number of tenants: The average incubator space in the survey was 3,000m². There is a good deal of evidence to suggest that a minimum of 2,000 m²
    • 34 space is needed (enough to accommodate 20- 30 companies) to achieve economies of scale. We suggest a range of between 2,000 m² to 4,000 m² as a benchmark depending on the type of incubator. • Length of tenancy: A benchmark of 3 years is suggested. It should be noted that the benchmark applies to the average incubator and would not be appropriate for some specialist types of incubators, e.g. biotech incubators, high-tech R&D and high-tech manufacturing because of the longer product development lead times associated with those business sectors, amongst others. • Number of Managerial Staff/Ratio of Staff to Tenants: The benchmark of at least two managers assumes an average of 20-30 tenants and allows sufficient flexibility to cover absence (training and professional development, conferences, holidays, sickness etc.) while still ensuring that tenant firms have permanent access to managerial-level advisory support at all times. Given that the real added value of incubation lies not in real estate aspects but in the quality, relevance and utility of business advisory, the ratio of incubator managers to incubator tenants should ideally not exceed 1:20. • Proportion of Management Time Advising Clients: Currently, the proportion of management time spent advising clients, highlighted in the survey, stands at 39%. The CSES report recommends that, ideally, it should be possible to ‘free-up’ management so that more time is spent advising tenants and less on administrative matters. • Survival rate of tenant firms: The survey revealed that the survival rate of firms reared in an incubator environment was significantly higher than the business success rate amongst the wider SME community, estimated at 30-50% (over a 5 year period). In the survey, there was a notable clustering of incubators reporting a survival rate amongst tenant firms of 80-90% and the benchmark is based on this. The survival rate of incubator tenant firms operating in more high-risk sectors such as high-tech industry may well be lower. We would emphasize that survival rates are one indicator of the performance of incubators, of more importance is the extent to which incubators can contribute to the accelerated development of innovative, high-growth firms and their capacity to create new jobs. • Job creation - average jobs per tenant company / new jobs per incubator: Whilst employment creation is one of the key objectives of business incubators, setting a benchmark for the number of jobs created per firm or per incubator would be inappropriate because the number of jobs created will vary greatly depending on the type of companies being incubated, the amount of tenants the incubator can accommodate and the amount of available space. The number of jobs generated by a typical tenant company will vary depending on the type of industry the firm specializes in, the extent to which industry is technology or labor intensive. • Cost per Job: The average gross cost per job according to the incubator survey was €4,400. When set-up costs and the amortization of capital are taken into account, the figure rises to €6,700. Rather than setting a benchmark, we have set a range, which we feel is more appropriate given that incubators receive widely differing levels of support from the public sector depending on location-specific factors.
    • 35 STRATEGIC PLAN: SETTING UP A BUSINESS INCUBATOR PILOT PROJECT This section of the report discusses the 8 Month Strategic Plan presented on page 34. The following discussion is sub-dived into subsections that correspond to the components identified in the diagram PHASE ONE (MARCH 2002 TO JULY 2002) PROSPECT DEVELOPMENT REPORT The prospect development component prepared by the Canadian Team (Michael Lazarowich and M. John Wojciechowski), investigates various aspects and strategies of business incubation. The report was prepared with technology incubators in mind – a direction chosen based on consultation between Mr. Mau and Mr. Lazarowich. The technology incubator theme is emphasized in section 1 when examining the four types of business incubators, their industry niches, tenant characteristics and success criteria. A more detailed discussion of the differences between technology incubators and traditional incubators can be found in section 2.1 while section 2.4.1 provides a case study of the Exceler@tor – a technology business incubator in Toronto, Canada. Finally in the last section of the Prospect Development Report, specific attention is given to the differences in starting and operating costs of setting up a traditional incubator and a ‘new economy’ technology incubator. The findings and recommendations from this report should be used to assess the feasibility, effectiveness and impact of pursuing the development of a technology business incubator with regard to its location and target market. It is imperative to note however, that the type and location of the business incubator selected will ultimately depend on the assets, skill and potentials of the local community and economy. CONTEXT ANALYSIS REPORT The Prospect Development Report and the Context Analysis Report are vital components of PHASE ONE. The Context Analysis Report should include information on the local: Infrastructure (both hard and soft) • Economy (and local political will to generate growth in the SME sector) • Technology • The Political Framework • The Socio-Cultural Framework • The Entrepreneurial Framework
    • 36 Once the local socio-economic structures are identified it is possible to compliment the findings with the recommendations from the Prospect Development Report. It is important to note that the strategy most suitable for the implementation of the Business Incubator Pilot Project is and/or should be determined by the local strengths, weaknesses, opportunities and threats. The Context Analysis should be well complimented by investigating both positive and negative experiences from previous business incubator projects in Russia. Both Components will determine the direction of implementing PHASE TWO – the Business Incubator Pilot Project. PRIORITY SETTING MEETING (MID - JUNE 2002) During the meeting the two teams should share the findings from the two preceding components, identify priority issues and divide responsibilities among the two teams. Certainly, the most important issue, is obtaining funding from regional and national levels of government as well as bilateral and multilateral organizations. TACIS, is particularly well equipped to provide funding for this type of project but other sources should also be explored including UNIDO and the Canadian International Development Agency (CIDA). Considering that the application and selection process is fairly time consuming it is recommended that this issue be investigated already before the meeting. An Interim Report should be prepared at the end of the meeting sessions to compile all the information together gathered from the Prospect Development and the Context Analysis Reports including a more accurate time table with objectives and responsibilities for both the Russian and Canadian teams. PHASE TWO (July – October 2002) PILOT PROJECT PLANNING The Strategic Program Development needs a team of devoted government, industry and local stakeholders that can create a steering committee for the project. The steering committee should be comprised of local leaders that can persuade the procurement of funding and human capital for the project from diverse sources. At this stage the teams of consultants, facilitators and steering committee should be involved in option identification of best suitable location and target market for the business incubator. This strategic process should be based on market testing and/or personal knowledge of the socio-economic potential and skills and entrepreneurial climate in a certain region or locality.
    • 37 In light of the above it is important to include people local to the community on the steering committee and/or perform local entrepreneurial surveys assessing the local assets. This stage should finally conclude with the application for funding the Business Incubator Pilot Project. Proceeding the Business Planning Component incubator sponsorship and incubator financing should be identified and solidified. BUSINESS PLAN COMPONENT Through a series of meetings with local government, interest groups, Russian and Canadian consultants and funding agencies, the planning phase should result in a business plan for the pilot project. The business plan should incorporate the findings from the entrepreneurial surveys, the operating aims and procedures identified by the steering committee, services network, facility specifications, organizations and staffing, costs, revenues and funding. The business plan must include content analysis of the following sub-sections: OUTLINE OF THE BUSINESS PLAN Mission Statement and Strategic Objectives Incubation Design a) Incubator Type b) Location c) Site and Premises d) Facilities and Services Legal Structure a) Legal Status b) Ownership Organizational Structure a) Steering Group b) Executive Board c) Advisory Committee d) Management Team e) Advisory support (foreign, local) Financial Planning Operational and Procedural Framework a) Promotion of the Business Incubator b) Entrepreneur Detection Procedures c) Admission and Exit Criteria d) Service Provision and Pricing Strategy e) Training and workshops for Staff and Management Evaluation of the Incubator Activity Implementation Strategy Risk Profile
    • 38 PHASE THREE (NOVEMBER - ?) Phase three is the implementation stage. This phase should be a continuously evolving process with the ability to adapt to the location-specific scenario. Functional plans should be systematically revised and consulted to measure progress and/or improve on operations and should be accompanied by adequate and responsible budgeting of resources, aiming towards the predetermined breakeven point and self sustainability. The following diagram illustrates the implementation stage over a 2-3 year period. This stage should be complimented by ongoing evaluation, monitoring and optimization.
    • 39 REFERENCES Allen, N. David. “Business Incubator Life Cycles” in Economic Development Quarterly. Vol.2(1), 1988 19-29 Frank, Bruno. “The Fort Collins Virtual Business Incubator” in Public Management. Vol.80 March 1998, 10-13 Campbell Candace, Robert C. Kendrick and Don S. Samuelson. “Stalking the Latent Entrepreneur: Business Incubators and Economic Development” in Economic Development Review. Summer 1985, 43-48 Campbell Candace and Allen N. David. “ The Small Business Incubator: Micro-level Economic Development” in Economic Development Quarterly. Vol.1(2) 1987 178- 191 Carroll, R.R. “The Small Business Incubator as a Regional Economic Development Tool: Concept and Practice” in Northeast Journal of Business and Economics. Vol.12(2) 1986, 26-34 CSES. “Benchmarking of Business Incubators: Final Report” Brussels, Belgium: Services European Commission Enterprise Directorate General, Feb. 2002 Doloreux, David. “La Papiniere D’enterprises dans le Contexte d-un Parc Scientifique: L’exemple du centre Quebecois D’Innovation en Biotechnologie a Laval, Quebec (Canada)” in The Canadian Geographer. Vol.43(4) 1999, 423-432 Finnish Ministry of Trade and Industry. “Seminar on Best Practices in Incubator Infrastructure and Innovation Support” A compilation of Workshop Reports, Papers and Recommendations. Helsinki: Finland, 1998. Reynolds P.D., Hay M., Bygrave D.M., Camp S.M., Autio E. “Global Entrepreneurship Monitor: 2000 Executive Report” Kauffman Center for Entrepreneurial Leadership, 2000 Lalkaka, Rustam. “Lessons from international experience for the promotion of business incubation systems in emerging economies” Paper commissioned by the Small and Medium Industries Branch, New York: UNIDO Program, Issue 3, November 1997 Lalkaka, Rustam. “Critical Factors in Incubator Development” United Nations Development Program, 1997 Lalkaka, Rustam, "Venture Creation and Growth through Business Incubators and Technology Parks," http://waitro.dti.dk/Publications/Seminars/Best_Pra/Lalkaka.htm, 2001 Lalkaka, Rustam. “Best Practices’ in Business Incubation: Lessons (yet to be) Learned”. New York: Business & Technology Development Strategies LLC,2001
    • 40 Lichtenstein A. Gregg and Thomas Lyons. “Incubating New Enterprises – A guide to Successful Practice”. Aspen: Colorado. The Aspen Institute -Rural Economic Policy Program, 1996 Linowes, L. “Lending a Helping Hand to Small Business” PAS Memo, American Planning Association, 1985, 2-4 Nanette,Kalis. “Technology Commercialization through New Company Formation”. Athens, Ohio. NBIA Publications, 2001 Nijkamp, Peter, Ronald Van Der Mark and Theo Alsters. “Evaluation of Regional Incubator Profiles for Small and Medium Sized Enterprises” in Regional Studies. Vol.22(2), 1988 95-105 Nyrop. A. Kirsten. “Business Incubators as Real Estate Ventures” in Urban Land. Vol. 45(12), 1986 6-10 O’Dea M. Kelly. “The Small Business Incubator: The Search for an Evaluation Framework”. A major research paper presented to the Univeristy of Waterloo in fulfillment of the major paper requirement for the degree of MAES in Local Economic Development. Waterloo: Canada, 1995 Parsons, Robert, Gudmundson Karen and Tanner David. “Orem's tech center and revolving loans” in Public Management. Vol. 83(7) August, 2001 21-23 Rice, P. Mark and Matthews B. Janna. “Growing New Ventures, Creating New Jobs: Principles and Practices of Successful Business Incubation”. London: Quorum Books, 1995 Smilor, R. “The new business incubator: linking talent, technology, capital, and know-how” Lexington, Mass. : Lexington Books, c1986. Tornatsky Louis. “The Art and Craft of technology Business Incubation” Athens: Ohio. NBIA Publications, 1996