Toward a grounded theory of effective business incubation 2008

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Business incubators are found all over the world. Yet, to date, no viable integrative
theory of effective business incubation exists. This essay outlines a grounded theory
of incubation, driven by case studies, empirical results, and field work, based on
three main principles that generalize across countries and cultures. They are:
• The paradox of market emulation:Successful incubators both emulate market con-ditions and shield their ‘infants’ from them. Managing this paradox is fraught
with difficulty, not the least because it is often not explicitly recognized.
• Resolving the key make-or-break constraint:In every country, there are many con-straints that hinder ultimate business success of incubator projects, but there is
one key constraint that always ‘resonates’, i.e., that dominates the attention and
concern of project managers. In India, this constraint is funding. In Israel, where
the VC industry is mature and liquid, funding is not a major constraint (though
as always and everywhere, raising money is a major challenge), but experienced
managerial capacity is the resonating factor. Hence, a theory of incubation should
include principles that guide identification of the key ‘resonating’ constraint and
provide direction toward reducing or eliminating it.
• Alignment with local and national cultures:Culture is a shared, learned, symbolic
system of values, beliefs, and attitudes that shapes and influences perception
and behaviour. Culture is how values drive behaviour. In national studies of
incubation, it is strongly evident how powerfully national culture acts as a medi-ating variable between, for instance, incubator operations and processes and the
national and global business environment. Hence, a theory of incubation should
include answers to the following question:
How can incubator processes align well with elements of national and local culture, in order
to:
• reinforce those aspects of the culture that act positively to help incubator projects
attain success
• mitigate or eliminate those aspects of culture that act negatively, and lead to
failure?

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Toward a grounded theory of effective business incubation 2008

  1. 1. PERSPECTIVES presents emerging issues and Toward a Grounded Theory of Effective Business Incubation ideas that call for action or rethinking by managers, administrators, and policy makers in organizations Shlomo Maital, Shmuel Ravid, D V R Seshadri and Alon Dumanis Executive Business incubators are found all over the world. Yet, to date, no viable integrative Summary theory of effective business incubation exists. This essay outlines a grounded theory of incubation, driven by case studies, empirical results, and field work, based on three main principles that generalize across countries and cultures. They are: • The paradox of market emulation: Successful incubators both emulate market con- ditions and shield their ‘infants’ from them. Managing this paradox is fraught with difficulty, not the least because it is often not explicitly recognized. • Resolving the key make-or-break constraint: In every country, there are many con- straints that hinder ultimate business success of incubator projects, but there is one key constraint that always ‘resonates’, i.e., that dominates the attention and concern of project managers. In India, this constraint is funding. In Israel, where the VC industry is mature and liquid, funding is not a major constraint (though as always and everywhere, raising money is a major challenge), but experienced managerial capacity is the resonating factor. Hence, a theory of incubation should include principles that guide identification of the key ‘resonating’ constraint and provide direction toward reducing or eliminating it. • Alignment with local and national cultures: Culture is a shared, learned, symbolic system of values, beliefs, and attitudes that shapes and influences perception and behaviour. Culture is how values drive behaviour. In national studies of incubation, it is strongly evident how powerfully national culture acts as a medi- ating variable between, for instance, incubator operations and processes and the national and global business environment. Hence, a theory of incubation should KEY WORDS include answers to the following question: Business Incubator How can incubator processes align well with elements of national and local culture, in order to: Market Emulation National Culture • reinforce those aspects of the culture that act positively to help incubator projects attain success Start-ups • mitigate or eliminate those aspects of culture that act negatively, and lead to Grounded Theory failure? Israel It is hoped that this work will stimulate other scholars to seek even more important India general principles, leading to a powerful general theory of business incubation.VIKALPA • VOLUME 33 • NO 4 • OCTOBER – DECEMBER 2008 1
  2. 2. A n incubator is a device in which prematurely- “…we must turn our attention from ‘what’ are the most im- born babies are kept warm and safe. A busi- portant factors to ‘how’ and ‘why’ and ‘in what ness incubator is a programme aimed at keep- context’…these factors are interrelated.”ing ‘infant’ entrepreneurial companies warm and safe, In this paper, we accept Hackett and Dilts’ (2004) chal-through a variety of support resources and services, until lenge and take some initial, preliminary steps in con-they are strong and mature enough to leave the incuba- structing a grounded theory of successful incubation,tor and thrive on their own. based on an in-depth study of incubators in Israel andThe first business incubator was established in the India. A grounded case-based study of incubators inUnited States, in 1959, in Batavia, NY (Hackett and Dilts, these two countries is vital because contextual factors2004). The European versions, known as Business Inno- and culture will prima facie play key roles in any theoryvation Centres, were set up on the initiative of the Euro- of incubation. We take a grounded theory approach – inpean Commission; the first one dates to 1984 (Grimaldi which the theory emerges from the phenomenon underand Grandi, 2005). According to Wikipedia: study, rather than begin with a priori hypotheses – be- cause, we believe, this is the most effective approach for The US-based National Business Incubation achieving powerful insights into management issues Association estimates that there are about 5,000 (Maital, Prakhya and Seshadri, 2008), and because the incubators worldwide. As of October 2006, existing vast literature on incubator CSFs lends itself to there were more than 1,400 incubators in North such an approach. America, up from only 12 in 1980. Her Majes- ty’s Treasury identified around 25 incubation We begin with a brief review of relevant literature. We environments in the UK in 1997; by 2005, UKBI then provide three field-based general principles that, identified around 270 incubation environments we hope, can provide the beginnings of a useful and across the country. A study funded by the Eu- insightful theory of incubation and that can guide policy ropean Commission in 2002 identified around interventions. We conclude with some observations on 900 incubation environments in Western Eu- future research. rope. LITERATURE ON INCUBATOR SUCCESSAs incubators proliferated, a vast literature on incuba-tors emerged. Hackett and Dilts (2004) review 38 stud- As Hackett and Dilts (2004) note, the paucity of theoryies, out of the many hundreds available. There are at in the voluminous incubator literature is striking. At theleast three reasons for the proliferation of incubator stud- same time, the large number of empirical studies pro-ies. First, after job creation became a top policy priority vides fertile ground for grounded theorizing.in America and Europe, it was seen that most new jobs Grimaldi and Grandi (2005) discern two unique incuba-came from small and medium-sized enterprises (SMEs), tor models: In Model I, incubators focus on reducingand it was believed that incubators could foster SMEs. start-up costs for incubatees, by providing tangible as-Second, increasingly fierce global competition made in- sets, and in Model II, incubators that offer intangible as-novation a top priority for many countries, and incuba- sets, such as finance, aim at accelerating speed to market.tors, it was felt, could stimulate innovation. Third, They stress on the crucial importance of alignment – de-incubators lent themselves to case-based research fa- gree of process integration between the incubator’svoured by management scholars. incentives, nature, and objectives and the tenants’ re-Much of the literature on business incubators is of the quirements. We will, in our theory section, stress other‘critical success factors’ (CSF) variety, answering the types of alignment, related to national culture.question, ‘What determines the success or failure of in- In general, a theory of efficacious incubation must offercubators and the entrepreneurial projects within them?’ insights on the “fit” between incubator offering, tenantBut as Hackett and Dilts (2004) note, the research is needs, the business environment, and the national andmainly a-theoretical, while “theory is the lifeblood of local culture. Because all these dimensions vary widelyany research area.” They add: across industries, regions, and countries, no “one size2 TOWARD A GROUNDED THEORY OF EFFECTIVE BUSINESS INCUBATION
  3. 3. fits all” theory of incubators can possibly prevail. Theo- The picture that emerges from the incubator literatureries that address “fit” meet Hackett and Dilts’ (2004) is reminiscent of the poem, “the Blind Men and the El-requirement that “incubator-incubation research… dem- ephant,” by John Godfrey Saxe, fittingly set in India, inonstrate why incubators are intrinsically, theoretically which sightless people try to picture an elephant bycompelling.” touching its different parts. “Each was partly in the right,” the poem ends, “…and all were in the wrong,”The “critical success factor” approach raises two prickly in the sense that none had a clear vision that embracedquestions: How is success defined and measured, and all parts of the elephant (incubation process). We seekhow can the trap of intrinsic selection bias (focusing only to envision and understand the whole incubator ‘el-on successful incubators, rather than on unsuccessful ephant’ while examining in detail its component parts.ones) be avoided? Tamasy (2007) argues that incubatorsare far less successful than they are portrayed, and hence TOWARD A THEORY OF INCUBATORS: THREEpublic money should not be allocated to them. She con- PRINCIPLES IN SEARCH OF A GENERAL THEORYcludes, in her international survey, that “the interna- Italian playwright, Luigi Pirandello, wrote a play in 1921tional evidence clearly shows that recognizing contextual in which six characters wander on stage and declare thatissues is paramount.” Context should be interpreted as they are searching for an author. We have three princi-business, legal, technological, and cultural environment ples, gleaned from our case-based field research, thatwithin which incubators operate. This too should be- are in search of a general theory of successful businesscome a key part of a general incubator-incubation theory. incubation. Here are the three main principles we haveFor example, the study by Hsu et al. (2003) of Taiwan’s so far discovered, together with each principle’s foun-ITRI incubator finds that “the clustering effect in the dations in case study and field research.Hsinchu industrial cluster is the main factor in the ITRIincubator’s development” – an example of a key con- Principle One: The Paradox of Market Emulationtextual factor. Voisey et al. (2006) study incubation in We find that there is an interesting paradox that lies atWales, and argue that success metrics should be broad- the heart of most business incubators. Incubators have,ened; a model to support this view is provided. Voisey as one of their common ingredients, the opportunity foret al. (2005) examines six business incubation case stud- new ventures to take shelter for, say, two years, fromies and based on this builds a theory for a “ladder” of fierce competitive market forces that might otherwiseincubation, in which the “keen desire for key partner- destroy the infant enterprise before it gained size andships with public-sector and private-sector stakeholders” strength sufficient to compete. This is inherent in theis stressed. term ‘incubator’ itself, which is vividly metaphorical.Comparative studies of critical success factors in vari- The fundamental assumption here is one of market fail-ous countries can be illuminating, for theory construc- ure. Open competitive markets fail to provide conditionstion, when treated as pieces of a very large jigsaw puzzle that allow many new start-ups to reach a viable size;that need to be assembled. Lee and Osteryoung (2004) hence there is need for intervention, in the form of ancompare American and Korean university business in- incubator. The very metaphor, “incubator” implies pro-cubators (UBI’s), and find that their CSFs are broadly tecting prematurely born ‘infants’ from the harsh world,similar – except for “clarity and concreteness,” which during the initial period.are perceived as more important to UBI directors inAmerica than in Korea. Clarity and concreteness rank At the same time, case-study research (Meseri andhigh in CSFs for non-incubated projects as well. Maital, 2001) shows that when university incubators choose projects, success rates are the highest when theMeseri and Maital (2001) study the Israeli technology choice is made according to the same criteria that, fortransfer organizations (TTOs), all with informal or for- instance, venture capitalists use when making their in-mal incubation processes, and find that “Israeli TTOs vestment choices. In other words, successful incubatorsevaluate projects in a manner that is broadly similar to both emulate market conditions and shield their ‘infants’ fromventure capitalists and investment banks,” i.e., they them. Managing this paradox is fraught with difficulty,emulate market criteria. not the least because it is often not explicitly recognized.VIKALPA • VOLUME 33 • NO 4 • OCTOBER – DECEMBER 2008 3
  4. 4. For example, one of the pitfalls of incubators is that by In national studies of incubation, it is strongly evidentproviding a warm, safe environment, it eliminates the how powerfully national culture acts as a mediatingvital sense of urgency, the go-to-market pressure that variable between, incubator operations and processesnon-incubator start-ups experience from day one. We and the national and global business environment. Forhave seen numerous incubator projects fail for just this instance, Israel has a powerful risk-favouring entrepre-reason. neurial culture that stems in part from the country’s his- tory, as a small embattled nation with few resources,A general theory of incubation will include principles forced to improvise in order to survive. But this verythat guide incubation processes toward optimal resolu- culture of improvisation becomes a hindrance, as incu-tion of the market failure-market emulation conflict. bator projects transition to organized businesses with disciplined operational processes. Also, Israel is a na-Principle Two: Resolve the Key Make-or-BreakMission-Critical Constraint tion with a culture of low ‘power distance’ (that is, ‘ser- geants’ feel comfortable in challenging ‘generals’ andIn every country, there are many constraints that hinder often do). In contrast, India is a country where risk-tak-ultimate business success of incubator projects, but there ing is often discouraged, and where power distance isis one key constraint that always ‘resonates,’ i.e., that relatively high (reflected in the widespread hierarchicaldominates the attention and concern of project manag- structure in organizations). There could be other ele-ers. In India, this constraint is funding. Since India lacks ments of Indian culture and history, that result in pecu-a large and liquid venture capital industry, incubator liarities such as angel investors and venture capitalistsprojects find it exceedingly difficult to find outside fund- taking disproportionate share of control of the start-uping so that they can leave the incubator and launch their during the negotiation process with the entrepreneur,businesses. This tends to make such projects linger and often leaving the entrepreneur in a vulnerable positionloiter in the safe and protected incubator world, and with regard to extent of control, that need to be furthergreatly reduces the incentive to leave. In Israel, where researched. Hence, a theory of incubation should includethe VC industry is mature and liquid, funding is less a answers to the following question:constraint (though as always and everywhere, raisingmoney is a major challenge), but experienced manage- How can incubator processes align well with ele-rial capacity is the resonating factor. Building the team ments of national and local culture, in order to (a)that will build the business requires senior management reinforce those aspects of the culture that act posi-with global experience. Start-ups particularly need to tively to help incubator projects attain success, andbe global from day one. But, since Israel’s domestic (b) mitigate or eliminate those aspects of culturemarket is small, availability of senior management tal- that act negatively, and lead to failure?ent with global experience for start-ups poses consider-able challenge in Israel. Incubators that successfully help All too often, incubator processes seem to imitate, con-their resident projects find such experienced manage- sciously or unconsciously, those prevalent in America,ment, or in some cases, act as surrogates and at least in where the incubation idea was born. Yet, American cul-part supply it, tend to be most successful. ture is in many ways an ‘outlier,’ or a special case, with, for instance, individualism far more pronounced thanHence, a theory of incubation should include principles in nearly all other countries, in Europe and especially inthat guide identification of the key ‘resonating’ con- Asia. A theory of incubator processes that fails to placestraint and provide direction toward reducing or elimi- cultural alignment at its core will, we fear, continue tonating it. reinforce imitation of incubator processes that are un- aligned with and unsuitable for many national cultures.Principle Three: Align with Local andNational Cultures CASE-BASED EVIDENCE IN ISRAELCulture is defined as a shared, learned, symbolic sys-tem of values, beliefs, and attitudes that shapes and in- Jerusalem Incubatorfluences perception and behaviour. In other words, A technological incubator located on the campus of theculture is how values drive behaviour. Hebrew University of Jerusalem, Givat Ram, known as4 TOWARD A GROUNDED THEORY OF EFFECTIVE BUSINESS INCUBATION
  5. 5. Van Leer Technology Ventures, was studied in detail. Figure 1: Partial Order of Structural Analysis:Some 38 projects that existed within the incubator were Successful Projectsstudied and characterized as successes or failures. An 444 12approach based on some of the principles of Guttman’s A 443 434 11“facet theory,” (Guttman, 1959), by using a variation of C,D B“Partial Order of Structural Analysis” was applied, to 433 424 334 10 F Eidentify the critical success factors. Then, detailed indi- H 343vidual case studies were conducted for a failed project Gand for a successful one, to validate the statistical con- 432 342 333 9 N K,L,M I,Jclusions. 431 332 8 Q,R O,PMethod 322 222 7 SThirty-eight projects were analysed. Of these, 20 were T 6defined as “successful” because they continued to oper- 5ate for some time after leaving the incubator and 18 were Technology Market Peopledefined as “unsuccessful” because they ceased opera-tion. Each project was rated along three dimensions: (1)technology: quality, innovativeness, and viability of the Figure 2: Partial Order of Structural Analysis:technology underlying the project; (2) market potential: Unsuccessful Projectssize and quality of the market in which the product or 12service would be sold; and (3) people: management 11skills, leadership capabilities, entrepreneurial teamwork, 10and entrepreneur personality. A scale of 1 to 4 was used,with 1 indicating “poor” and 4 indicating “excellent.” 342 a 9 341 332 8Each project was first classified as “successful” or “un- 431 e,f d b,csuccessful,” and then, a graph was constructed for the 421 331 322 7 g,h20 successful projects and 18 unsuccessful ones. Each l i,j,kproject was positioned in the graph, where the ‘Y’ axis, 321 o,p 231 6 m,nthe joint direction, was the total sum of three scores (tech- 221 5nology, market, people), and the ‘X’ axis, the lateral di- q,rrection, represented the three separate dimensions. The Technology Market Peoplehigher the total score, the higher the project was placedon the ‘Y’ axis. For projects with equal total scores, those unsuccessful projects are located far to the left of thescoring lower on the “people” dimension were moved successful ones, indicating poorer human resources,to the left (e.g., projects C, D are at the same height as, but not much below them, indicating that their over-but to the left of, project B). (See Figures 1 and 2). all average scores are not that different. For most ofThis method allowed us to compare profiles of entre- the unsuccessful projects, the management capabil-preneurship and to see, at a glance, the critical success ity was very low. The average score of successfulfactors for projects, and compare successful to the un- projects was 9.15 out of 12; for the unsuccessful ones,successful ones. it was 7.0. For successful projects, the average score of “people” was 2.8 out of 4; for unsuccessful projects,Lessons learned from this case study are as follows: it was only 1.3, or less than half.(1) The human capital factors were the key success fac- (2) For projects in which the entrepreneur was defined tors. Unsuccessful projects failed largely because of as having an “unsuitable personality,” he or she was the personality and lack of skills of the management characterized in general as being stubborn, not open, team and entrepreneur and their teamwork. As can individualist, unable to communicate, a scientist who be seen from the two graphs (Figures 1 and 2), the does not delegate responsibility to the CEO, havingVIKALPA • VOLUME 33 • NO 4 • OCTOBER – DECEMBER 2008 5
  6. 6. a large ego and low commitment, and lacking sensi- additional funds, a crisis arose. There were management tivity. For such projects, the turnover rate of CEOs failures related to defining strategy and conflicts among was very high. the Directors. The investors acted quickly to save the(3) When selected for inclusion in the incubator, the main situation, and formed a new Advisory Board. A new criteria were innovativeness and feasibility. Human strategy was defined, and the CEO was strongly resources played only a minor role – probably, a major mentored. Disciplined operational processes were defined, error in the selection process. Having a great idea, aimed all of which led to ultimate success. at a large market, with high innovativeness – these As Jim Collins noted in Good to Great, innovativeness were all necessary conditions, but not sufficient. They must be joined with the culture of discipline in order to must be joined by an entrepreneur whose personal- achieve success. We found this to be evident in our 38- ity is suited for building a business, a strong man- project sample. For projects whose product is market- agement team with high cohesion and managerial ready, the dimension of managing marketing and sales skills and capability. is critical. Companies that left the incubator had to haveThe capabilities of senior management teams and their the leadership and management experience to transi-leaders are key success factors in Israeli incubator pro- tion from ‘development mode’ to ‘business mode.’ Manyjects. Incubators that successfully overcome this chal- projects failed this transition miserably, and many were sim-lenge achieve greater success, by any measure. This, we ply not aware of this challenge.believe, is the key constraint to start-up success in Is-rael. It may not be so in other countries. CASE STUDIES: ACADEMIC INCUBATORS IN INDIAIndividual Incubator Projects We studied several Indian business incubators, hosted“K K Rigid” (name disguised): This project was led by a by academic institutions.scientist from the former Soviet Union, a true genius,with an outstanding viable idea. There was a proven Society for Innovation and Entrepreneurship (SINE)need for it in industry, with many applications and large The Indian Institute of Technology – Bombay (IIT-Bom-market potential. A large company ‘wooed’ the start- bay) is known to have pioneered the concept of busi-up repeatedly. During its two years in the Jerusalem ness incubator in India by establishing the Kanwal Rekhiincubator, four CEOs were hired and turned over, be- School of Information and Technology (KReSIT) withincause they could not work with the entrepreneur. In the campus in 1999 with the support of its distinguishedtimes of stress, and there were many, the entrepreneur alumnus, Mr. Nandan Nilekani, Co-founder, Infosyssimply disappeared. Each one blamed the other. In “con- Technologies. KReSIT was subsequently modernizedciliation meetings” aimed at starting afresh, new direc- into a full-fledged technology business incubator calledtions were defined – and the day after, utterly ignored Society for Innovation and Entrepreneurship (SINE) inby the entrepreneur. A beta site was found, comprising 2004 to cover other areas of science and technology. IIT-an enormous opportunity – but the entrepreneur failed Bombay is one of India’s premier technology institutions,to meet the deadline. The project was closed. Its IP, poten- widely acknowledged as a rich source of technologytially of great value, was lost. innovation, research excellence, and technology expertise.“Barracuda” (name disguised): The entrepreneurshowed great enthusiasm, and strong leadership, with SINE was registered as a society under the Societiesexcellent communication skills in both Hebrew and Eng- Registration Act, 1860. It received financial support fromlish. The product was well-defined, differentiated, and IIT-Bombay and the Department of Science and Tech-aimed at a clear market niche. The market potential was nology towards the creation of its infrastructure that isreasonable, though not large. The development team spread over 10,000 sq ft and can host 17 companies. En-worked well together and made good progress. An couraged by the phenomenal business ideas and over-Advisory Board was formed, which strongly supported whelming interest by entrepreneurial start-upthe CEO. Significant sales were made, at an early stage, companies to be incubated at SINE, the society is expa-to Israel-based clients. After initial success in raising nding its incubator to accommodate 50 companies. Since6 TOWARD A GROUNDED THEORY OF EFFECTIVE BUSINESS INCUBATION
  7. 7. its inception, SINE has been very successful in convert- showcase its products and solutions. When the incubateeing and developing technological ideas into products, company becomes mature, it moves out of the campusprocesses, and services for business by providing high and SINE ensures that the changeover is smooth.quality physical, technical, and networking support and SINE has incubated companies in varied domains in-services, and a nurturing environment. cluding companies providing software in financial serv-The incubation programme at SINE primarily supports ices, software for the internet, hardware and softwareknowledge-based and technology-based enterprises. for the retail industry, simulator to analyse fatigue andHowever, over the last couple of years, there has been a fracture in machines and their lifespan, robotics that aidschange in SINE’s entrepreneurial focus from IT technolo- education, communication and networking, hardwaregies to other hardcore engineering technologies. The simulation, data security, power generation, quantita-society incubates only product-based ventures. Service- tive financial models, and geographical information sys-based ventures do not get incubated. Business ideas of tems. As of January 2007, SINE had successfullyonly the IIT-Bombay alumni and all those linked to the incubated 28 projects of which 13 have graduated intoinstitution are considered for development and commer- companies. Currently, about 20 companies are givingcialization. shape to their ideas at SINE.Business proposals that survive a thorough evaluation N S Raghavan Centre for Entrepreneurial Learningprocess conducted by a panel of external reviewers get (NSRCEL)the nod for incubation. Entrepreneurs are asked for a Committed to the cause of entrepreneurship in India,business plan and market feasibility of their ideas. A NSRCEL was set up at the Indian Institute of Manage-thorough analysis of the business plan, especially tak- ment – Bangalore (IIM-Bangalore) in October 1999. Al-ing into consideration the industry’s and customer’s though IIM-Bangalore’s focus on entrepreneurshippoint of view is done by a technical-commercial com- started in 1994 with the setting up of the Canara Bankmittee. Entrepreneurs are required to make a presenta- Centre for Entrepreneurial Services, a project undertakention to the evaluation committee. If the committee by the IIM-Bangalore in collaboration with Canara Bankapproves the business idea, entrepreneurs then need to (one if India’s large public sector banks, which fundedsign a memorandum of understanding (MoU). The in- most of the centre’s initial activities), it was Mr. N Scubating venture needs to be a company (preferably in- Raghavan’s substantial grant that scaled the activitiescorporated before its admission) and gets a residency of the centre to new heights. The centre was subse-for up to three years in the incubator. The start-up com- quently re-christened as NSRCEL after its primarypany housed in the incubator typically has 10-17 mem- funder, Mr. Raghavan, one of the co-founders of Infosysbers working on the project. Technologies Ltd., retired from the company in the yearThe incubating company is provided access, at highly 2000. Apart from being on the Boards of many compa-subsidized rates (at about 75% of the market rate), to nies, Mr. Raghavan is also the chairman of NSRCELquality infrastructure, office facilities (computers, Advisory Council.internet, telecom, fully furnished office, etc.), business NSRCEL’s focus is to seed, nurture, and promote entre-support services (mentoring support, interactions with preneurship. Its activities span a variety of areas includ-legal/financial/ accounting/industrial experts, interac- ing teaching, research, short-term programmes,tion with investors and industries), workshops and seminars/panel discussions, entrepreneurship facilita-training programmes, and access to data resources. tion initiatives and most importantly, the incubation fa-Depending on the project, a company could get seed cility for entrepreneurs. A state-of-the-art 18,000 sq. ft.funds in the range of Rs. 1 million to Rs. 1.2 million (about incubation centre has been created at the IIM-BangaloreUS$ 30,000) from SINE. However, this fund is not avail- campus with the help of Sun Microsystems, that pro-able to every company by default. All of SINE’s projects vided the infrastructure, and Global Internet Ventures,receive capital support from the Government of India. that offered a grant of about Rs. 10 million.Periodic review and monitoring of the company is done.Events are organized to help the incubatee company A majority of the business proposals received byVIKALPA • VOLUME 33 • NO 4 • OCTOBER – DECEMBER 2008 7
  8. 8. NSRCEL are IT-based because of the centre being lo- ners within and outside the country are closely associ-cated in Bangalore, the IT hub of India. However, ated with the activities of CIIE. Major stakeholders ofNSRCEL incubates any start-up—manufacturing, serv- CIIE include the State Government of Gujarat, the De-ices, technical, etc.,—a business idea that is scalable. partment of Science & Technology (DST) and WadhwaniFurther, the centre supports business ideas that come Foundation (a not-for-profit organization founded byfrom any aspiring entrepreneur, and the aspiring entre- Dr. Wadhwani, a successful Silicon Valley, USA entre-preneur need not necessarily be from the IIM commu- preneur and now angel investor/venture capitalist.)nity. Admission to the business incubator is based on To open its doors to more innovators and entrepreneurs,thorough scrutiny of the business proposal of the appli- IIM, Ahmedabad has established the Indian Incubatorcant. The applicant needs to first submit an executive for Innovation-based Enterprises (I3E) within its cam-summary of his/her business plan, followed by a dis- pus, which is managed by CIIE. I3E helps to methodi-cussion with the Chief Operating Officer of NSRCEL. cally nurture and develop entrepreneurial ideas intoStep two involves making a presentation to the NSRCEL successful business models and chooses its innovatorsscreening committee and holding a detailed discussion from the public, private, and informal sectors. Selectionwith the committee members regarding the business of an innovator is based on the approval of the proto-plan, value proposition, and future plans. Business pro- type, which is to be developed by him/her. A panel ofposals that meet all standards and selection criteria (such technical experts evaluates the prototype. Only hi-techas growth potential, commercial viability, potential to and high impact innovations make it to the incubator.generate employment, etc.) are incubated. IIM-Ahmedabad enters into a Non-Disclosure Agree-On its idea being approved, the incubating company is ment (NDA), service and shareholder agreement (which-required to enter into a MoU (Memorandum of Under- ever is applicable) with the incubatees. Incubatees arestanding) with IIM-Bangalore. The institute retains five provided with necessary infrastructure in the form ofper cent equity in the start-up and the incubating com- office space and workstations, receive technology sup-pany pays a very nominal amount as licence fee. Incu- port, testing facilities, materials, prototyping facilities,bation services include a faculty guide, an industry and gain access to databases, legal experts, patent filingmentor, office space and facilities (desktops, work- experts, IPR consultants, venture capitalists, advertise-stations, internet connection, telephone, etc.), access to ment agencies, and finance firms. The tenure of incuba-the IIM-Bangalore library, admission to technology tion is normally 20 months. Mentors, who are a groupforums, and interfaces with angel investors, venture of two-three faculty members/experts, assist eachcapitalists, legal and financial experts. The period of in- project. Projects also receive support in areas of marketcubation is generally 12 months and can be extended to analysis, development of a business plan, prototyping,18 months in the case of an exceptional project. manufacturing planning, etc.Ten companies have successfully graduated out of the Foundation for Innovation andcentre, of which five companies have well-established Technology Transfer (FITT)operations in India today, while some of the incubatedcompanies have failed. Established at the Indian Institute of Technology - Delhi (IIT-Delhi) as a Registered Society in 1992, the missionCentre for Innovation, Incubation and of FITT has been ‘to be an effective interface with theEntrepreneurship (CIIE) industry to foster, promote, and sustain commercializa- tion of science and technology in the institute for mu-Set up in the year 2001 at the Indian Institute of Man- tual benefits.’ The Technology Business Incubator (TBI)agement – Ahmedabad (IIM-Ahmedabad), CIIE has was conceived by FITT in year 2000 to serve as a plat-been actively promoting innovation and entrepreneur- form for the promotion of entrepreneurship, primarilyship through a plethora of initiatives and activities such among professors, students, and alumni of the institute.as incubation, entrepreneurship development, researchand training, workshops and seminars, consultancy and FITT runs incubator nursery programmes, whereinorganizing clinics for innovators. A host of organiza- projects are led by one or more members of academictions, professionals, academicians, and networking part- staff, students or alumni of the Institute or is a faculty-8 TOWARD A GROUNDED THEORY OF EFFECTIVE BUSINESS INCUBATION
  9. 9. student led project. Such faculty-student led start-up Society for Innovation and Development (SID)companies are the most preferred for incubation by TBI. The Indian Institute of Science (IISc), Bangalore is oneOther entrepreneurs eligible for the TBI incubation pro- of India’s leading science and technology research insti-gramme include start-up companies formed by one or tutes that has over the years made significant contribu-more first generation entrepreneurs, and R&D division tions to the scientific and technological growth of theof the existing SMEs. Business ideas addressing devel- country. SID was instituted by IISc in 1991 with a mis-opment of products/services that leverage technologies sion to ‘enable Innovations in science and technologyare the ones that get incubated. by creating a purposeful and effective channel to helpThe business plan and proposal is scrutinized and ap- and assist industries and business establishments to com-praised by a Standing Screening Committee based on pete and prosper in the face of global competition, tur-pre-defined selection criteria. Incubating ventures, other bulent market conditions, and fast moving technologies.’than the start-ups of the incubator nursery programmes, In furthering its activities in areas of innovation andare required to foot incubation expenses from their own entrepreneurship, SID set up an incubation centre insources. However, funding for the bridge-capital for 2004. The activities of the incubator include providingincubatee companies is sourced by TBI. Incubatees need incubating infrastructure, networking opportunities,to enter into a MoU (Memorandum of Understanding) mentoring panels from the institute and industry to helpand license agreement with the institution. Further, TBI entrepreneurs achieve their long- and short-term goals;has established well-defined guidelines for various fi- offering courses related to business planning, globalnancial parameters like equity, loans, space utilization market survey, technology assessment, financial man-charges, etc., that resident companies need to abide by. agement, intellectual property negotiation, and softIncubator services provided include office space and skills; interaction and networking with VCs, other finan-infrastructure, business facilities, networking with ven- cial institutions, industries, experts, mentors/coaches,ture capitalists and all necessary access and facilities entrepreneurship associations and Institute alumni; andessential for commercialization of the business idea. periodic monitoring of incubatee companies. Apart from these incubation centres in the top science,SIDBI Innovation and Incubation Centre (SIIC) technology, and business schools in India, there are aWith a view to providing entrepreneurs a platform to few commercial incubators such as the one promotedbring their innovative ideas to life, the Indian Institute by ICICI, a leading bank in India. Two such organiza-of Technology – Kanpur (IIT-Kanpur) established SIIC tions that provide services to start-ups are now brieflyin collaboration with Small Industries Development described.Bank of India (SIDBI). Life Sciences IncubatorVentures that are initiated by one or more members ofthe academic staff, students, and/or alumni of one of The ICICI Bank, which is India’s second-largest bank,the IITs are most preferred for incubation by SIIC. Be- and a part of ICICI (India’s premier financial institutionsides, technology-based start-up companies promoted providing total financial solutions), in collaboration withby a first generation entrepreneur and Technology/R&D the Government of Andhra Pradesh, set up the ICICIunit of an existing SME are also eligible to apply. The Knowledge Park (IKP) in Genome Valley, HyderabadEvaluation Committee evaluates business proposals for in 1999. The park that is spread over 200-acres has beenresidency in SIIC. Approved incubatees are expected to made a pollution-free zone and is recognized as one ofexecute a licence agreement (for space utilization) and a the best Research Parks in the country. IKP houses theMoU with the institute. Limited seed money is provided Life Sciences Incubator (LSI) to enable scientists, re-to incubatees at a reasonable rate of interest. The incu- searchers, and entrepreneurs incubate pharmaceutical,bator services include mentoring, business plan devel- biotechnology, and life sciences related ideas. LSI wasopment, business promotion, incubation space, office partially funded by Department of Science & Technol-support, access to database and library, access to finance ogy and the Department of Scientific & Industrial Re-companies, venture capitalists, advertising agencies, and search, Government of India.legal experts.VIKALPA • VOLUME 33 • NO 4 • OCTOBER – DECEMBER 2008 9
  10. 10. The incubation facility is a sprawling 3,200 sq. ft. area individuals and venture capitalists. e4e focuses on in-that can accommodate eight incubatees. Each incubatee vesting primarily in services start-ups, and also fundscan develop his/her business idea in a module of 225 companies that build technology of relevance to servicesq. ft. area, which comprises of a well-equipped labora- providers. e4e Labs also does technology development,tory, office facilities (furniture, telephone, computer, and these technologies get transferred to the servicesinternet) and other shared facilities. Other services of- companies.fered by LSI include business-related services such asassistance in company incorporation, vetting/writing LESSONS LEARNED FROM INDIAN INCUBATORSbusiness plans, mentoring and marketing guidance; Our survey of Indian incubators focused on incubatorsfunding-related services such as lease rentals with mini- that are fostered mainly by educational institutions.mal initial cost, fund raising, networking with VCs andother funding agencies; other services like regulatory One of the significant issues of incubators in educationalcompliances and IP management. To facilitate know- institutions is that most of them do not provide fundingledge sharing, IKP has built a network with key aca- for the start-ups, although they arrange networking withdemic and research institutions in the country. angel investors and venture capitalists. However, ob-Incubatees have access to this rich network along with taining funding from these sources in India for a start-access to IKP’s Virutal Information Centre that provides up is an uphill and often a frustrating experience, sincea database of network members, their library catalogues, the angel investment and venture capital industries inand online access to national and international databases. India are nascent and typically very risk-averse. This results in technology entrepreneurs having a very diffi-The eligibility criteria to avail of LSI’s services are that cult time in convincing these sources of funding. So,the applicant must be either a scientist or an entrepre- while quality management is a key constraint in Israel,neur with a life-sciences idea that can be commercial- with venture capital relatively plentiful, in India, financeized or a business idea in this domain which requires is the binding constraint. The scarcity of funding in In-further R&D. A technical expert committee and the ICICI dia for start-ups inhibits various service providers fromKnowledge Park Board screen submitted proposals. providing their expert services to the start-ups, sinceIdeas that are innovative, sustainable, and marketable these start-ups are unable to pay the market rates forget the green signal for incubation. The period of lease services rendered, and the culture of service providersof the incubation module is for three years and is re- accepting shares in the start-up ventures in lieu of pay-newable. ments is still not widely accepted because of the per-Since its inception, LSI has incubated 26 companies of ceived high mortality rates of the start-ups, and resultingwhich 8 have set up their own facilities. Currently, there perceived worthlessness of the shares.are 18 companies doing R&D in areas of pharmaceuti- The cultural aspect is crucial. Israel’s culture is one ofcals and biotechnology. risk-taking and acceptance of uncertainty. Israeli moth-e4e (entrepreneurs for entrepreneurs) ers encourage their sons and daughters to start busi- nesses, in part because of the many legendary successesCo-founded by Subhash Chandra, Sridhar Mitta, of Israeli entrepreneurs who have gained indescribableSomshankar Das, and five others, e4e is a technology wealth through ‘exits.’ For instance, two young Israeliholding company that invests in infrastructure services entrepreneurs, Arik Vardi and Yair Goldfinger, startedcompanies. e4e’s wholly-owned subsidiary in Bangalore, a company, Mirabilus (‘miracle’ in Latin), even beforecalled e4e Labs Pvt. Ltd. is a technology incubator that they completed their Computer Science degrees. Theirinvests in Indian technology start-ups. Started out in website enabled free download of ICQ (instant messaging)2000, e4e Labs provides the start-ups some initial fund- software. Some 12 million people did this. AoL boughting and mentors them till they are mature enough to be the company (which never had any revenue or profit)on their own. The start-ups could be of an entrepreneur for some $400 million. This has become part of Israel’sbased in the US or in India, and e4e stays with the com- modern entrepreneurial mythology. Its cultural influ-panies that they have invested in, even after the com- ence is hard to overestimate. In contrast, it is known thatpany has gone public. e4e’s investors include both Indian mothers urge their sons and daughters to find10 TOWARD A GROUNDED THEORY OF EFFECTIVE BUSINESS INCUBATION
  11. 11. well-paying jobs with a brand-name of established Indian incubators do—and instead respond to the questions:and foreign companies or government, to ensure their ‘how,’ ‘why,’ and ‘in what context’? We sought to gen-security. As a result, while Israeli incubators do not need eralize the study of critical success factors into the be-to foster the bold risk-taking attitudes for entrepreneurs, ginning of a quest for a grounded theory of effectiveand only need to choose well from a large supply of pro- incubation processes. We identified three elements ofposed entrepreneurial projects, Indian incubators prob- such a theory. There are doubtless many more.ably do need to overcome the cultural constraints thatlimit the supply of entrepreneurial projects, in part by We hope that scholars of incubation will conduct meta-objectively reducing the risk and uncertainty involved. studies of incubators, building on the large empirical literature, to construct powerful general theories of ef-CONCLUSION fective incubation that will add to, extend, and challenge, our principles.In the study of business incubator efficacy, it is time toreach beyond the ‘what’ question – what do successfulAppendix: Background of Incubation Programmes of India and IsraelIsrael’s Incubator Project 1991-2006 projects. The last two governing institutions, the heart and soulIn late 1989, following a change in American immigration laws of each incubator, are composed of professionals of the highestthat redefined émigrés from Russia as ‘economic’ rather than calibre from industry, business, and science—corporate and in-‘political’ (and hence subject to a 50,000-person yearly quota), dustrial executives, R&D managers in high-tech enterprises, pro-many Russian Jews chose to migrate to Israel. In a decade, a fessors, heads of faculty in research institutes, and public figures.million immigrants from the former Soviet Union migrated to All of them work on a voluntary basis, with dedication and en-Israel. Many had advanced degrees in science and engineering. thusiasm, devoting their precious time as well as their valuableIn addition to infrastructure needs for housing, health care, and experience, contacts, and infrastructures of their enterprises andeducation, these immigrants needed suitable employment. institutions. The incubator is structured to permit ten to fifteen R&D projects to run simultaneously, and is organized andAn innovative response was to create technological incubators, equipped to support the projects in all respects during their stay.under the auspices of the Office of Chief Scientist, Ministry ofIndustry. In these incubators, ex-Soviet émigrés would partner The typical incubator has six functions: (1) Assistance in deter-with Israelis to launch technology-based innovation and build mining the technological and marketing applicability of the ideastart-up companies. According to the Ministry of Industry (2008): and drawing up an R&D plan; (2) Assistance in obtaining the“Through the technological incubators, the government provides financial resources needed to carry out the project; (3) Assist-entrepreneurs with physical premises, financial resources, tools, ance in forming and organizing an R&D team; (4) Professionalprofessional guidance, and administrative assistance—so that, and administrative counseling, guidance, and supervision; (5)during their stay in the incubator, they may turn their abstract Secretarial and administrative services, maintenance, procure-ideas into products of proven feasibility, novelty, advantages, ment, accounting, and legal advice; (6) Assistance in raisingand necessity in the international marketplace. The entrepre- capital and preparing for marketing.neurs’ term of activity in the technological incubator consider- Typically, projects stay for two years in the incubator, and com-ably enhances their prospects of raising the financial investment prise teams of 3-6 people. The budget for each approved projectthey need, finding strategic partners, and emerging from the in- is between $300,000-$500,000 for the two years. This fundingcubator with businesses that can stand on their own two feet.” is provided by the State as a grant, and comprises 85 per cent ofUltimately, about half of all the project ideas implemented within the budget; 15 per cent must be raised by the entrepreneur. It isthe incubators came from new immigrants from the ex-Soviet required that any new products resulting should be made in Is-Union. rael. If the product succeeds, the State expects reimbursementOrganization: There are some 26 incubators, scattered through- through royalties.out Israel as part of the policy to encourage technology-based Equity structure: On entering the incubator, each project is or-entrepreneurship in the peripheral regions. The structure of the ganized as a limited liability company; its principals learn toincubator is as follows: A technological incubator is run and operate the company as a commercial venture. Normally, halfmanaged by a professional salaried director, a policymaking man- the equity resides with the entrepreneurs and developers; 10agement, and a projects committee that selects and monitors per cent, at least, with key staff members; up to 20 per cent,VIKALPA • VOLUME 33 • NO 4 • OCTOBER – DECEMBER 2008 11
  12. 12. with the provider of the 15 per cent supplementary financing; being recognized worldwide for their high levels of entrepre-and up to 20 per cent, with the incubator itself. neurial energy and hunger to succeed. In fact, the Global Entre- preneurship Monitor (GEM) Report ranks India as the secondSuccess measures: As of 2004, some 200 projects were most entrepreneurially active nation among 37 participatingunderway. By the end of 2004, 806 projects had left the incuba- nations.tors (in addition to the 200 that remained). Of these, 45 per centcontinued while 55 per cent were discontinued. Total private The Indian economy today being globally connected and inno-investments in incubator companies totaled US $773 m. In terms vation-driven has opened doors to a new league of entrepre-of industry, 11 per cent were in electronics and communica- neurs who are creating world-class companies (more so in thetions; 11 per cent in software; 18 per cent in medical devices; IT industry) capable of vying with the world’s best and winning.19 per cent in chemistry and materials; 19 per cent in biotech- India has also witnessed an overwhelming progress in the scien-nology; and 22 per cent in other areas. tific and technological infrastructure in the country and boasts of having 1,200 technical institutions including 300 universi-An updated study (2008) by Israel’s Technology Incubator Pro- ties, 400 national laboratories, and over 1,300 in-house R&Dgramme, in the Ministry of Industry, reveals the complexity of units in various sectors. Highly qualified and experienced pro-measuring incubator success (See Table 1). Of 352 companies fessionals and young management/technology graduates arein incubator programmes included in the study, 68 per cent raised evincing keen interest in wanting to start and grow their ownat least some investment funds. Is this a success measure? Some ventures. This apart, many non-resident Indians are returning to44.4 per cent of all companies ceased operating or operated India to participate in the country’s growing opportunities throughwithout investment funds. Israel is a country where start-ups of- entrepreneurship and to breathe life to their own innovative busi-ten make spectacular ‘exits,’ bought by multinationals. From 1995 ness ideas. The changing face of entrepreneurship in the coun-through 2007, $45.6 billion was spent in Israel on acquiring try, the rise in the number of people wanting to pursue thestart-ups; of that, $13.2 billion in 2006-07 alone. Very few such entrepreneurial journey, and the rise in Knowledge-based‘exits’ occurred for incubator companies. Is this a failure? Many Industries/Information and Communication Technology Indus-start-ups locate in incubators in peripheral areas; yet often en- tries/Bio-Technology Industries in the country have given antrepreneurs return to the main cities after their two-year incuba- impetus to the concept of ‘business incubation.’tion period. Is this too a failure? India recognizes that business incubators are an effective wayTable 1: History of 352 Incubator Projects That of fostering the spirit of entrepreneurship and innovation in the ‘Graduated” SME sectors in the country. While the concept of technology business incubation is still in its nascent state in India, the De- Graduated: 352 companies partment of Science and Technology (DST) of the Government of India, various R&D organizations, and technical/managementOf which: 112 (32%) 240 (68%) institutes have taken the lead in promoting incubators in the Failed to raise Succeeded in raising investment funds investment funds country. Some of the premier science, technology, and manage- ment institutes and universities in collaboration with DST haveOf which: 31 81 41 199 set up incubators at their campuses. Although these incubators, (8.8%) (23%) (11.6%) (56.6%) to a large extent, have been successful in providing necessary Continued Ceased Ceased Continued physical infrastructure, business amenities, a favourable envi- operations operations operations operations ronment/ecosystem, etc., the networking system to help fund start-ups needs to be developed and strengthened. Venture capi-India’s Business Incubation Journey talists in India are not enthusiastic about providing seed capitalOver the last decade, India has been making a transition to- for start-up companies and angel funding is not yet popular inwards a market economy. Several initiatives have been under- the country. The power balance in many entrepreneurial start-taken to revolutionize and steer the country’s political, economic, ups tends to be weighed towards the funders of equity capitaland social systems towards a market economy. Creating an en- such as angel investors and venture capitalists, resulting in thevironment that facilitates the growth of small and medium en- entrepreneur not having a fair deal vis-à-vis his counterparts interprises (SMEs) in the private sector has been an important focus the developed world. This may also impact the extent of entre-of the country in its efforts of transforming the society towards a preneurial energy that is infused in the start-ups. In short, themarket economy. India has also been emerging as a country ecosystem for funding new ventures is still in its infancy.with phenomenal entrepreneurial capabilities, and Indians are12 TOWARD A GROUNDED THEORY OF EFFECTIVE BUSINESS INCUBATION
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The authors wish to acknowledge the support of the S Neaman Institute for Advanced Institute for Ad-vanced Studies in Science and Technology, Israel, in the form of a partial grant provided for this Research, as part of a project onIsrael-India cooperation.Shlomo Maital is a Senior Researcher at the Samuel Neaman D V R Seshadri is a Visiting Faculty in the Marketing Area atInstitute for Advanced Studies in Science & Technology, the Indian Institute of Management, Bangalore. He holds aTechnion-Israel Institute of Technology. He is also the Aca- B.Tech. (Mechanical Engineering) from the Indian Institute ofdemic Director of TIM-Technion Institute of Management, Technology, Madras (1978), an M.S. (Engineering Sciences)Israel’s leading executive leadership development institute and from the University of California, San Diego, and a Fellow titlea pioneer in action-learning methods. He is the author, co-au- (Doctorate) from the Indian Institute of Management,thor, or editor of 10 books, including Fogs of War and Peace Ahmedabad. He had over 15 years of industrial experience(Praeger Security, 2008), Innovation Management (Sage, 2007); prior to joining academics in 2000. His areas of interest areRecent Advances in Behavioral Economics (Elgar, 2007), Executive strategy, business-to-business marketing, and corporate entre-Economics (The Free Press, 1994), translated into seven lan- preneurship. He is the co-author (with S Maital) of Innovationguages, and Managing New Product Development & Innovation Management (SAGE, 2007).(Elgar, 2000). e-mail: dvrs@iimb.ernet.ine-mail: smaital@mit.edu Alon Dumanis is the CEO of Docor International Manage-Shmulik Ravid is an organizational consultant, his expertise ment, a Dutch investment company, subsidiary of The Van-including coaching and consulting to large, complex organi- Leer Group Foundation. A Ph.D. in Aerospace Engineeringzations and start-up companies. An MA in Sociology, major- from Purdue University in the United States, he serves eithering in Counseling and Organizational Development, Shmulik as the Chairman or as a member of the Board of Directors ofguides management teams in establishing sound strategic plan- various companies. He is a member of the Board of Directorsning processes, implementing smooth management changes, of Tadiran Communications (TASE-TDCM), a member of theassessing employees, developing leadership, and group train- board of directors of Inventech Investments Co. Ltd. (TASE-ing. He has more than 20 years of experience working with IVTC), and formerly, a member of the Board of Directors at Elleading companies in Israel, and serving for six years as Chief Al Israel Airlines (TASE-LY). Earlier, Dr Dumanis has beenOrganizational Consultant to the Israeli Air Force where he the Head of the Material Command in the Israel Air Force withmanaged a large group of consultants and carried out major the rank of Brigadier General. Currently, he serves as the chair-organizational changes. person and member of several national steering committees and is the author of many papers published in a number ofe-mail: sravid@inter.net.il subject areas, including technology and management. e-mail: Dumanis@docor.co.ilVIKALPA • VOLUME 33 • NO 4 • OCTOBER – DECEMBER 2008 13

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