Venture Acceleration Networks Report Oct11


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Venture Acceleration Networks Report Oct11

  1. 1. Nurturing Innovation: Venture Acceleration Networks Table of ContentsAcknowledgements _____________________________ 3Overview _____________________________________ 4Objective and Approach of the Study _______________ 9Part I: Drawing Lessons from Existing Models _______ 11 1. The Role of Venture Acceleration Networks ___________________ 12 2. Using Networks to Support Entrepreneurs ____________________ 18 3. Creating Strong Networks _________________________________ 23 4. Selecting Ventures _______________________________________ 32 5. Financing the Program____________________________________ 37 6. Choosing an Organizational Structure ________________________ 42 7. Adapting to the Innovation Ecosystem _______________________ 46 8. A Role for the Public Sector in Russia ________________________ 52Part II: Individual Program Descriptions ____________ 56 Virginia Biosciences Development Center ________________________ 57 TiE Bangalore ______________________________________________ 67 TechStars _________________________________________________ 75 SMART Innovation Center ____________________________________ 93 OCTANTIS ________________________________________________ 105 MIT Venture Mentoring Service _______________________________ 116 MaRS____________________________________________________ 130 Larta Institute _____________________________________________ 142 InnovateVMS _____________________________________________ 160 Innovation Network Corporation Japan _________________________ 166 IMP3rove _________________________________________________ 174 The IC2 Global Commercialization Group ________________________ 197 Endeavor_________________________________________________ 209 U-M Tech Transfer, the Catalyst Resource Network _______________ 221 Carbon Trust ______________________________________________ 234Appendix ___________________________________ 247 2
  2. 2. Nurturing Innovation: Venture Acceleration NetworksAcknowledgementsThis report was prepared for the Russian VentureCompany by a World Bank team led by Jean-LouisRacine in collaboration with Alistair Brett, DoinaCebotari, Juan Julio Gutierrez, Naoto Kanehira,Lawrence Kay, Anthony Lambkin, Sebastián Melin,Florian Theus, Christina Tippmann, Alina Tourkova,and Yanina Yermakova.The team would like to thank Leonid Levkovitch-Masluk of Russian Venture Company who providedimportant guidance and shared his invaluableknowledge. The team is also grateful to SophieSirtaine (World Bank Sector Manager), Pedro Alba(World Bank Country Director), Alfred Watkins (WorldBank) and Bob Hodgson (Zernike UK) for commentsreceived on the draft. The team would like to thankYevgeny Kuznetsov (World Bank) for comments on thecase studies. Finally, the team is grateful to ZenaidaKalinger (World Bank) for her support in putting thereport together and Rodrigo de Castro (World Bank)for the cover design.The team would also like to thank all of the staffmembers, mentors, consultants, clients andbeneficiary entrepreneurs of the venture accelerationnetworks who generously gave offered their time forinterviews. In particular, the team would like to thankSidney Burback (IC2), Pete Peters (Innovate VMS),Dave Raval (Carbon Trust), Sayaka Iwase (INC Japan),Howard Califano (SMART Innovation Center), DonDuval (MaRS), Ravindranath. P (TiE Bangalore), DaveGeary (Endeavor), Carlos Gutierrez and Rohit Shukla(Larta Institute), Jerome Smith (MIT VMS), EvaDiedrichs and Sabine Brunswicker (IMP3rove), WesHufstetter (University of Michigan Catalyst ResourceNetwork), Jenny Boyd and Nicole Glaros (TechStars),and Richard Caro (Acceleration Coop). 3
  3. 3. Nurturing Innovation: Venture Acceleration Networks management and technical talent from theOverview labor force with the appropriate businesses. They match service providers with potential new clients. And finally, they help create a culture of entrepreneurship by exposingRoles entrepreneurs to role models and by fostering the social capital that accelerates the exchangeVenture acceleration networks consist of of knowledge, ideas and deals in theexperienced, skilled and well-connected community.individuals who provide hands-on support toentrepreneurs. They help propel viable Common Threadsbusiness ideas to the market place byaccelerating the regeneration of ideas and Venture acceleration network programs haveconnecting entrepreneurs to the market. They several basic features in common. In theirachieve this by: current form they are all very recent, having Educating entrepreneurs through on-the- appeared only in the past decade, initially in job training on a broad range of practical the United States, although less structured skills related to the business growth. variations existed before. They are organized Connecting entrepreneurs to markets, around a professionally-staffed nucleus, capital, customers, partners, experts, typically supported by a core network of information and role models through mentors or brokers, and an extended network introductions, brokering and by creating of service providers and technical experts. bonds of trust and credibility. Often, they offer learning and networking events for the entrepreneurs and their Validating business ideas through strategic communities of mentors, brokers, service advice and direction, and by creating a providers and experts. They typically include supportive environment for business some level of screening, tied to the development experiments. Validation entrepreneur’s affiliation, the venture’s profile provides the critical value-added of or its potential for success. None of the venture acceleration networks. It builds on programs are financed to any significant extent the two other pillars, educating and through upfront user fees. connecting, to help ideas fail early, often and inexpensively. ApproachThe impact of venture acceleration networkprograms extends beyond the entrepreneurs Around this set of common features, venturethey serve directly to the wider community of acceleration networks experiment with a wideentrepreneurs, investors, and business service range of approaches to financing,providers. They provide investment-ready or management, network creation, selectivity,screened opportunities for potential investors. service delivery and structure. Three mainThey reduce public and private resources approaches emerge from this variety,invested in nonviable business ideas by although most of the programs do not fallaccelerating their path to failure through neatly into any single category. A firstmarket validation. They help match approach aims to commercialize technology 4
  4. 4. Nurturing Innovation: Venture Acceleration Networksprojects for short-term payoffs (e.g. creating financials, and relatively open in structure andspin-offs). A second approach aims to build a timeline.local self-sustainable innovation ecosystemwith broad medium to long-term payoffs (e.g. Programs aiming to build innovation-relatedcreating linkages in the entrepreneurship consultancy markets do not aspire to pickcommunity). A third approach aims to foster a winners but to help businesses grow bymarket for innovation-related services by connecting them to qualified and vettedbuilding capacity, transparency and efficiency commercial sources of support. They follow ain the service provider market, and raising “hands-off” approach to supportingawareness among SMEs. entrepreneurs, creating analytical tools, and training qualification tools to supportPrograms aiming to foster short-term R&D innovation-related consultancy, and bycommercialization select technology projects marketing the network. Hence, they generallyon the basis of their (assumed) technical and operate with small teams. Their light-touchmarket potential. They often include funding approach means that their models are easilyfor feasibility testing. Some rely on full-time scalable, although they are also less rich inprofessional mentors and brokers to provide content.bare-bones project teams with rapid anddedicated support. Because they target Success Factorstechnologies that are not yet fully out of thelab, they also focus on team-building, bringing Experiments with venture accelerationin management talent from the outside to networks highlight many success factors.complement the technical talent of the project Critical factors include:team. These many roles make these programs The programs are managed by highly-relatively staff and resource-intensive. To networked “magnetic” individual who areminimize costs these programs are structured able to attract mentors, business servicesaround clear milestones and timelines. providers, experts and ventures by virtue of their position in the businessPrograms aiming to build innovation community. They are well-knownecosystems select projects on the basis of their overachiever entrepreneurs and businessventure teams, and their perceived capacity to leaders with significant convening power.benefit from the program and create high-impact ventures. Many have elements of self- The programs start with small “high-selection whereby unfit entrepreneurs are value” networks with very limitedmade to opt out of the programs. The numbers of high-quality entrepreneurialprograms focus on building the skills of the teams and mentors. High-quality networksventure team, recognizing this as a long-term can be self-perpetuating.investment for society. The programs also The programs select mentors who valuefocus on nurturing and leveraging external their participation in the networks beyondmentor and advisory networks to support the immediate financial reward. They areventures, rather than rely on in-house capacity. motivated by giving-back to theirThey are light-weight in terms of staffing and communities, networking with ventures and other mentors, potential investment 5
  5. 5. Nurturing Innovation: Venture Acceleration Networkspositions in the ventures and potential Challengesmanagement positions. Mentors whoderive personal satisfaction from their Venture acceleration network experimentsinvolvements are “sticky” and stay highlight a multitude of challenges. Some faceconnected with the program and with the challenges linked to the environments whereventures. Giving flexibility to mentors and they operate. Where there is no local pipelineentrepreneurs to select each other creates of coachable ventures or of mentors with thelong-lasting relationships and thus expands right mix of skills, experience and connections,the size and sustainability of an programs do not succeed. Programs also faceentrepreneurship network. an uphill challenge where there is no local access to complementary forms of public andThe programs offer consulting services private support, financial and other.and match-making as a package withmentoring, not as standalone services. This Some venture acceleration networks alsoensures that the ventures seek relevant suffer from design issues. Common problemsconsulting services and are well-prepared are linked to top-down match-making ofbefore prospective meetings. Mentors act mentors and entrepreneurs, which typicallyas gateways or network hubs to other leads to a mismatch, poor screening offorms of support and as connectors. mentors and advisors, and building programsThe programs ensure that non-performing based on pure financial incentives for advisors.entrepreneurs are filtered out. This iseither done through extensive screening The Role of the Public Sectorprocesses or by admitting a wide pool ofventures and putting indirect pressure on Venture acceleration networks can address anon-performers to self-select out during number of market and system failures thatthe course of the program. hamper innovation and entrepreneurship. These market failures are linked to theThe programs actively manage trust. They transaction costs, search costs and informationachieve this by setting and enforcing clear asymmetries that lead to a less-than-optimalguidelines and expectations for amount of innovation-related services suppliedentrepreneurs and advisors. In addition, and sold on the market. They are also linked tothey leverage personal networks in tight- the positive externalities of investing in theknit entrepreneurial communities with skills of an investee, since part of those skillsabundant social capital, where ethical will be captured by future investors. Theviolations would cause reputational risk. system failures are linked to capabilitiesWhere there is no such community, they failures -i.e. inadequacies in entrepreneurs’use self-policing through mentor groups. abilities to act in their own best interest - andPrograms supporting ventures far from framework failures related to cultural andrelevant markets, sources of financing and social norms.specialized knowledge build bridges torelevant global networks. The public sector can help address these gaps by supporting venture acceleration network experiments. Venture acceleration network 6
  6. 6. Nurturing Innovation: Venture Acceleration Networksprograms grow in different ways, requiredifferent institutional structures and servedifferent functions depending on the localcontext. Hence there is no single approach tobuilding these programs and only throughexperimentation can effective models beidentified.The public sector can ensure that it quicklyconverges to appropriate models bysupporting existing network initiatives andpartnering with regional stakeholders tocreate new ones. Support can come in theform of facilitating partnerships betweenrelevant stakeholders, providing financing on acompetitive basis, and creating mechanismsfor programs to adopt good practices and learnfrom one another. 7
  7. 7. Nurturing Innovation: Venture Acceleration NetworksTable 1: Success factors of venture acceleration networks Beneficiaries Human Network Innovation Ecosystem Management Quality of the Network quality Some Mentors as Prerequisites team before size entrepreneurship gateways to Commitment to Connectedness culture and other support the venture to relevant community Screening Quality of the markets Critical mass of mentors idea/technology Connectedness deal flow Mentorship code Connectedness to the entrepreneurship to the Universities of conduct and community entrepreneurship Business trust community environment management Business Complementary Social capital of experience innovation support staff programs Entrepreneurship Screening and Existing filtering-out experience entrepreneurship beneficiaries Motives networks Staff profile Local market demand Dedication to the Complementary program Business partners services Industry sector expertise Venture funding Public-private- Private donor funding sources academic partnerships Public program funding sources Match-making of Quality of innovation advisors & management entrepreneurs consultants Activities that enhance the value of the network Program length and meeting periodicity Meeting coordination & facilitation Host institution brandEnablers Communication of success 8
  8. 8. Nurturing Innovation: Venture Acceleration Networks Objective andApproach of the StudyThe objective of this report is to understand the role,operational models and identify good practices ofprograms that seek to accelerate innovativeentrepreneurship by managing, nurturing andleveraging social and business networks. This report isbased on 15 case studies of venture accelerationnetwork programs spanning 43 countries (Table 2).The general findings are presented in Part I while theindividual case studies can be found in Part II. Theconclusion suggests next steps for operationalizing aventure acceleration network in Russia.The basic selection criteria for the case studies werethat the programs rely on networks to helpentrepreneurs innovate. The 15 case studies wereselected so that as a whole, they representedprograms with: Sufficient track record to observe their output, understand their impact and draw lessons from the challenges they faced. A wide variety of business models. Distinct innovation ecosystems, in terms of their geography, enabling environment and supportive institutions. Serve ventures in a variety of sectors and growth stages. 9
  9. 9. Nurturing Innovation: Venture Acceleration NetworksTable 2: Case study organizations, program and geographic coverage Shorthand name Metro Program Organizations Case study programs used in this Location population launch report (million) date Metropolitan Coverage MaRS Discovery Toronto, Advisory Services MaRS 5.1 2005 District Canada Singapore-MIT Alliance for Research and Technology Catalyst Program SMART Singapore 5.1 2009 (SMART) Innovation Center Santiago, Octantis Mentoring Program Octantis 7.2 2004 ChileUniversity of Michigan Catalyst Resource Ann Arbor, Catalyst RN 0.3 2007 Tech Transfer Networks USA Boulder*, TechStars TechStars TechStars 0.3 2007 USA MIT Venture MIT Venture MIT VMS Boston, USA 4.6 2000 Mentoring Service Mentoring Service Kitchen Cabinet Virginia Biosciences Richmond, Business Advisory VBDC 1.2 2003 Development Center USA Board St. Louis, Innovate VMS Innovate VMS Innovate VMS 2.8 2007 USA The Indus Entrepreneurship Bangalore, Entrepreneurs (TiE), Acceleration Program TiE EAP 6.6 2006 India Bangalore (EAP) National Coverage Entrepreneurship Fast United Carbon Trust Carbon Trust - 2001 Track Kingdom Innovation Network Open Innovation INC Japan Japan - 2010 Corporation Japan Platform DST-Lockheed Martin 2 2 IC India Innovation IC India India - 2007 Growth Multinational Coverage 3 3 European IMP rove All IMP rove - 2006 Union 11 emerging Endeavor All Endeavor - 1998 countries Commercialization USA + Larta Institute Larta - 2004 Assistance Program others*other locations include New York, Seattle and Boston.Source: US Census; Statistics Canada; Department of Statistics Singapore; 10
  10. 10. Nurturing Innovation: Venture Acceleration Networks network members (MaRS). These internal network members can be mobilized quickly and intensively when a need arises, and are usually pro-active, acting as “project scouts” 1. The Role of Venture within a research institution. At the other extreme, one program, IMP3rove, adopts a Acceleration hands-off approach to network facilitation by Networks creating incentives to join a network in the form of standardization of service offerings, professional certifications and market visibility. In between those two extremes lie programsKey findings that draw individuals from existing networks – either from social networks (TechStars) or Venture acceleration networks address alumni networks (MIT VMS) – and formalize market gaps associated with skills, them into networks that serve their specific transaction costs, resource efficiency objectives. Where there are no such pre- and network externalities. existing networks to draw from, other programs assemble and manage new external networks. New networks are necessary inObjectives communities where the entrepreneurship community is not dense (Octantis), and whereThe venture acceleration networks in the case the networks need to span vast geographicstudies can be classified according to their areas (INC Japan nationally, and Endeavorobjectives (Figure 1). A first category of globally).programs helps accelerate thecommercialization of technology issued from Addressing Market and System FailuresR&D, often still at the pre-venture stage(Catalyst RN). A second category focuses on The programs in the case studies play theaccelerating the growth of early stage following four roles in promoting innovationventures, hence on “commercializing” and entrepreneurship:entrepreneurs rather than commercializing Improve entrepreneurial capacity throughR&D (TechStars). Yet, a third focuses on experiential learning.accelerating growth in revenue-generatingsmall and medium enterprises (SMEs) Reduce transaction costs and improve(IMP3rove). Many serve more than one of search efficiency between entrepreneursthese objectives. and the resources they need to succeed. Increase public and private resourcePrograms vary in their level of engagement efficiency by helping business ideas failwith network creation, coordination and early, often and At one extreme some programsfocus on building strong internal pools of Leverage network externalities byprofessionalized mentors, brokers and expanding and strengthening networks.advisors, who they complement with external 12
  11. 11. Nurturing Innovation: Venture Acceleration NetworksFigure 1: Program objectives and business concrete entrepreneurial skills such as businessmodels planning, business plan development, business management, accounting and legal, marketing, Program objective financing, and hiring staff, but also more tacit skills such as negotiating with investors and commercialization acceleration SME growth approaching potential customers (Box 1). In Venture R&D the case of IMP3rove, capacity for innovative entrepreneurship is not built through learning as much as it is through building more effective internal business processes (Box 2). Several of Internalize the network the programs in the case studies have Catalyst RN & education as their primary objectives (MIT consolidate MaRS VMS). The educational role of all mentor informal 2 IC India networks has high externalities. It is not networks possible for any single investor to fully capture SMART the returns of mentoring an entrepreneur. Carbon Trust Most entrepreneurs fail several times before Larta building a successful business. Future investors OctantisIntensity of program engagement with network Create & will thus free-ride on any investment in skills manage new Innovate VMS acquired through mentoring during previous networks INC Japan ventures. This relates to the public good aspect VBDC of building entrepreneurial capacity. Endeavor MIT VMS Consolidate VV existing TiE EAP networks TechStars Facilitate new networks 3 IMP rove through standards & certificationBuilding capacity for innovativeentrepreneurship mostly translates toproviding business skills through experientiallearning and improving internal businessprocesses. Although some programs such asMaRS have classroom learning events andtraining workshops, most learning takes placethrough mentorship. Learning involves both 13
  12. 12. Nurturing Innovation: Venture Acceleration NetworksBox 1: Building entrepreneurial capacity Box 2: Building innovative capacity throughthrough experiential learning. management consulting.Brendan McNaughton is the founder and chief Perficable is a metal-cutter and manufacturer oftechnical officer of Lifemagnetics, a biotechnology metal parts for cars, furniture and generalfirm spun out of his research at the University of appliances based in Spain. It was founded in 1999. 3Michigan with the help of Catalyst RN. The Before it approached IMP rove its objective was tocompany has five employees. It is currently become more innovative so that it could expandcommercializing technology for bacteria into new industries.identification and measurement of patientresponses to antibiotics, which will help doctors Perficable had several industry niches that it 3target treatments at patients more quickly. wanted to target and joined IMP rove for the help it could provide in improving its internal processesIn establishing Lifemagnetics Brendan required for encouraging and managing innovation. 3substantial help with starting and managing the IMP rove highlighted two areas for improvement:business, and then getting connected to people the creation of an innovation plan and the needwith the expertise and experience he needed to for collection and analysis of customer feedback ingrow the company. Catalyst RN helped with order to improve customer satisfaction. The first 3Brendan’s and Lifemagnetics’ development in both issue that IMP rove thus helped with was theof these areas. specification of problems that needed solving.While he was at the university Brendan was To try and improve Perficable’s processes in these 3guided by a mentor (who eventually became two areas, IMP rove helped the firm to develop anLifemagnetics’ CEO), and then a business start-up innovation plan that involved all the staff andspecialist who helped him to write a business plan explored the generation, development andand assess the potential market for his research. evaluation of innovative ideas. In order to improve 3He was then connected to consultants and other the flow of customer feedback, IMP rove helpedexperts who were central to the formation of the Perficable to both manage and analyze the clientbusiness and management of the technology. responses that they were receiving but previously not managing adequately.Catalyst RN also helped Brendan to find vitalsources of funding at each stage of the The innovation and feedback management planscommercialization process. At the start he are still being implemented but it is hoped thatreceived USD 150,000 through two funds at the they will have several important effects,University of Michigan that enabled the particularly in Perficable’s ability to encourage thetechnology to be prototyped. The network then creation, selection and marketization of innovativeconnected him to the Walter Coulter Foundation, ideas. It is also hoped that Perficable will soonwhich gave him a total grant of USD 350,000 over have customer satisfaction strategies in place thatthree years for support in growing the business. are based on customer feedback.Finally, the network introduced him to a venturecapitalist, which has invested in the firm. Source: Engel, K., Diedrichs, E. and Brunswicker, S. 3 (2010) IMP rove: A European Project with Impact: 50Source: Interview with Brendan McNaughton. Success Stories on Innovation Management, Europe INNOVA Paper No 14. 14
  13. 13. Nurturing Innovation: Venture Acceleration NetworksReducing transaction costs implies connecting improve them or abandon them. They alsoentrepreneurs with relevant and trusted allow for entrepreneurs to quickly recognizeresources (e.g. lawyers, consultants, their own failure if they do not have theinvestors, business partners, potential required willingness or ability to take theiremployees, potential customers). Transaction ventures to the market. Importantly, they helpcosts can be deal-breakers between early- governments minimize the public resourcesstage ventures and the external resources they spent on supporting ventures and businessneed to succeed. Entrepreneurs with limited ideas that do not have a future in the market.experience do not know what types of A comprehensive study of new businessresources they need, how to formulate their development in the United States over a 50needs, and who to trust. The same may hold year period found that 3,000 ideas only lead totrue for SMEs in the area of innovation one market success.1 The role of the programmanagement. From their viewpoints the is hence to reduce the time and resourcesproviders of “resources” see early-stage spent on the 2,999 ideas that never make it toventures and SMEs as a very fragmented the market. They help business ideas fail early,market that requires prohibitive business often and inexpensively.development costs. Moreover, there areinformation asymmetries due to the lack of Market validation plays a particularlyefficient market signals: investors, business important role for young firms and newpartners and customers cannot easily markets. Young firms do not have the start-updistinguish promising opportunities from poor capital or time for careful market research (Boxopportunities. All programs include 3). And for disruptive innovation, classicalmechanisms to reduce transaction costs. Some approaches to market research are often notare passive (IMP3rove’s consultant database) very informative since the markets to bewhile others are active (IC2’s brokers). researched do not yet exist. Rather what isPrograms centering around mentors ensure needed is testing the idea quickly to havethat transaction costs are minimized on both market judgment from individuals with uniquethe supply and demand sides. For example, abilities to “interpret” the market. This maythey will only connect a venture to a trusted include talking to potential customers,investor if and when the venture is investment- investors, peers and experts at an early stage,ready. which can be accelerated by tapping into a mentor’s network to help identify potentialRapid market validation leads to increased customers and markets.public and private resource efficiency. Therole of the programs is to continuously connect Resource efficiency is best exemplified by theentrepreneurs to resources (experienced “sounding boards” in the program casesentrepreneurs, industry leaders, potential studies. These groups of individuals providecustomers, potential investors, technical earnest and rapid feedback to entrepreneurs.experts, consultants, etc.) that can provide These boards are different from the typicalthem with rapid feedback on their business advisory boards that individual companiesideas and on their ventures. The programs have.allow entrepreneurs to limit the time and 1 Stevens G and Burley J. (1997) 3,000 Raw Ideas = 1resources they spend on bad ideas, and commercial Success , Industrial Research Institute. 15
  14. 14. Nurturing Innovation: Venture Acceleration Networks roles stated above on a sustained basis. SocialBox 3: Market validation versus marketresearch networks help entrepreneurs improve their skills, reduce their transaction costs and In a seminal study on the origin and evolution of validate their ideas. Mentors are the key the fastest growing businesses in the United States gateway to entrepreneurial networks. They Amar Bidhé found that they often employ fast- develop the trust relationships with their paced strategies of opportunistic adaptation based mentees that are required for network entry. on rapid market validation: “Entrepreneurs who As network members themselves, mentors start uncertain businesses with limited funds have epitomize the benefits of leveraging networks: little reason to devote much effort to prior planning and research. They cannot afford to they sometimes keep their roles as mentors spend much time or money on the research; the after the program, they sometimes invest in modest likely profits doesn’t merit much; and, the their mentees, they sometimes join their high uncertainty of the business limits its value. ventures as managers, and they sometimes help them broker relationships with investors, Sketchy planning and high uncertainty requires customers, business partners or service entrepreneurs to adapt to many unanticipated providers. In programs with mentors in problems and opportunities. One entrepreneur residence, such as the University of Michigan likens the process of starting a new business to Catalyst Resource Network, a mentor will jumping from rock to rock up a stream rather than frequently serve as the start-up company’s constructing the Golden Gate Bridge from a detailed blueprint. Often, to borrow from Elster’s “acting CEO”. discussion of biological evolution, entrepreneurs adapt to unexpected circumstances in an Impact “opportunistic fashion: their response derives from a spur of the moment calculation made with The rationale for venture acceleration the intention of maximizing immediate cash-flow. networks is grounded on market failures, and Capital-constrained entrepreneurs cannot afford studies on angel investing suggest that to sacrifice short term cash for long term profits. mentoring has a positive effect on investment They have to play rapid-fire pinball rather than a returns (Box 4), but there has yet to be a strategic game of chess.” rigorous evaluation of their economic impact. Source: Amar Bidhé (2000) The Origin and Evolution of Only a few of the programs in the case studies New Businesses. make any attempt to measure impact. Larta is the only program to publish its impactLeveraging networking externalities implies assessments. They suggest that the programsabsorbing entrepreneurs into high-value do make contributions to the progress of thenetworks. Social networks can be difficult to venture in several areas. These include formingpenetrate for newcomer entrepreneurs, even new partnerships and deals, raising investmentin dense and highly-connected clusters such as and raising revenue. Anecdotal evidence fromSilicon Valley.2 Connections to entrepreneurial the case studies suggests that many of thenetworks help to achieve the three program entrepreneurs benefited in similar ways from other programs.2 There are now numerous “bridging organizations” inSilicon Valley whose role is to connect outsiderentrepreneurs or inexperienced entrepreneurs torelevant networks. 16
  15. 15. Nurturing Innovation: Venture Acceleration NetworksBox 4: The effect of mentoring on angel investment returnsAttracting investment is a key part of the growth of any startup, but so is the expertise that it can draw on.Entrepreneurs negotiating the stages of founding and developing a business can benefit substantially from theadvice of experienced investors, hence the potential effects of mentoring during angel funding and other early-stage investments. A recent study examined some of the effects of this mentoring on the performance of startupsthat had attracted angel investment in the United Kingdom.The study examined the activities of angels in 31 investment groups. It specifically looked at the exits they hadmade from their investments, mostly from the year 2000 onwards. There was substantial knowledge in the group,as the median level of experience of investing was five years while the median number of years spent with a largecompany was 13. In the sample there were just over 1,000 separate investments with 406 exits. The averageinvestment size per investor was £42,000 and the average number of investments was six. The median pre-investment valuation of the firms that received money was £875,000 while the mean was £1.7 million.Among the investors in the sample more entrepreneurial experience was significantly correlated with betterinvestment outcomes. In particular, those who had been involved in three or more ventures were less likely tolose money and were better able to make several-fold returns on their investments. Furthermore, angels whomade investments in areas in which they had already had prior involvement were also much less likely to seetheir investments fail. This suggests that acuity for spotting and then guiding the growth of a venture is importantto its success. In places where there are few entrepreneurs with much depth of expertise it thus makes sense forthe ones who do to provide much-needed mentoring.The study examined both the amount of due-diligence performed by the investors and the level of involvementthey took in their investments. The study found that investments where the investor had spent at least 20 hoursof due diligence were much less likely to fail (another study in the US found that investments that were subject tomore than 20 hours of due diligence showed an overall return of 5.9 times while those subject to less than 20hours showed an overall return of 1.1 times). Therefore, mentors, if given the time to properly work with aventure, can use their expertise to investigate its fundamentals and provide commensurately detailed and usefuladvice.The study also found some interesting results for investor involvement. It found that board membership, whereappropriate, had strong positive effects on outcomes, as did regular involvement with the venture. The 40% ofpassive investors in the sample experienced more failures than the active investors, and the more active aninvestor was in terms of frequency of interaction the more likely the investment was to have a positive outcome(in the US study, investors who interacted with the managers of a venture a few times a month recorded anoverall investment return multiple of 3.7 times; those who only interacted a few times a year produced an overallmultiple of 1.3 times).All of this evidence would suggest that more involvement is always better than less, if it were not for the resultswhere angels had taken management roles. However, in the UK study, the 13% of investments where this hadhappened enjoyed significantly poorer returns. Clearly, this would suggest that the involvement of anexperienced mentor can contribute substantially to the growth of a venture, but that the degree of involvementneeds to be managed appropriately.Source: Wiltbank RE, Siding with the Angels: Business Angel Investing – Promising Outcomes and Effective Strategies, NESTA,2009. Wiltbank R and Boeker W, Returns to Angel Investors in Groups, 2007. 17
  16. 16. Nurturing Innovation: Venture Acceleration Networks roles but emphasize one over the others (Table 2. Using Networks to 4). Support Figure 2: Overlapping roles in venture Entrepreneurs acceleration networks Sounding boardsKey findings Service providers To manage trust and expectations, programs clearly differentiate mentors from service providers. Mentors Brokers are of limited efficacy unless complemented with mentoring roles. Mentors act as gateways to other forms of Brokers / Connectors support and as connectors. Mentors from the wider business Table 3: Relationships between advisor roles, community are more likely to sustain and profiles and incentives evolve their relationships with their mentees than full-time professional Role Typical profile Main incentives mentors. Sounding A variety of Giving-back, board industry entrepreneurial expertise excitement, keeping up with tech. trends,Individual Roles within the Networks investments, business opportunitiesThe case studies reveal the existence of the Service Specialized Business opportunities,four roles displayed in Figure 2: mentors, provider expert salary, feesbrokers, service providers and sounding Broker / Business Salary, fees,boards. As shown in the figure, although Connector development entrepreneurialnetwork members can serve several of these professional, excitement managementroles simultaneously or consecutively, this is consultant withnot the case of mentors and service providers. strong networksMentors do not serve as either current or Mentor Serial Giving-back,prospective service providers (i.e. receiving entrepreneur entrepreneurial with strong excitement, keeping upupfront payment for a service) for the networks with technology, angelcompanies. Table 3 summarizes the typical investing, managementprofile and incentives of the different roles in rolesthe networks. Most networks combine a mix of 18
  17. 17. Nurturing Innovation: Venture Acceleration NetworksSounding boards validate or deny Table 4: Program network rolesassumptions made by the ventures and Network rolesprovide strategic insight. The role of soundingboards is played to at least some extent by providers Sounding Programs Mentors Brokers Service boardsmost advisors in the programs. A key functionof mentors is to act as sounding boards. Butthe relationship of a sounding board with an Carbon Trustentrepreneur need not be as deep and Catalyst RNsustained as with a mentor. Sounding boards Endeavor 2 IC Indiacan provide valuable business or technical 3 IMP rovefeedback while having limited interactions with INC Japanentrepreneurs. Many entrepreneurs in Larta’s Innovate VMSprograms consider the Industry Feedback LartaSession, which occurs only once during the MaRS MIT VMScourse of a program, the highlight of the Octantisprogram. During these sessions individuals SMARTfrom a wide range of backgrounds ranging TechStarsfrom IP lawyers to industry experts provide TiE EAP VBDCgroup feedback on the entrepreneur’s businessstrategy. VBDC’s Business Advisory Boards Network focus: ■ = primary, ■ = with the entrepreneurs for as little as sixtimes per year for 90 minutes. Throughout the Service providers provide a wide range ofTechStars program, ventures have services and have arm’s length relationshipsopportunities to setup meetings and network with companies. Two programs, IMP3rove andwith individuals who provide them with Carbon Trust, are entirely dedicated totargeted feedback on their business ideas. fostering relationships between serviceMost are successful entrepreneurs or providers and companies. Other servicerepresent companies in related sectors. providers span areas ranging from law to banking, technology validation, marketing and graphic design. In the case of MaRS and IC2, some of the business services providers are part of the program staff. The program staff and mentors often play a key role in connecting early stage ventures to trusted resources and helping them articulate their demands. Without proper references, inexperienced entrepreneurs can easily fall prey to disreputable service providers. The role of brokers (or connectors) is to orient and introduce the companies to individuals with relevant value added. In most case studies the program management staff play 19
  18. 18. Nurturing Innovation: Venture Acceleration Networksthe role of brokers, by matching companies as management. Marketing, IPR, etc., throughwith appropriate mentors, service providers learning by doing, rather than form curricula.and investors. In the case of Carbon Trust, And their final closely related role issubcontracted consulting companies connect psychosocial support. This relates to valuethe ventures with trusted service providers systems, self-worth, personal advice and issueswhile the staff connect them to sources of of interpersonal relationships. In the city ofcapital. Brokers seldom appear in a pure form Austin in the United States, the IC2 mentorsin the case studies. Connections to relevant coach Mexican entrepreneurs of the techBA onindividuals often comes tied with coaching on the cultural side of doing business in the US.why and how to approach them. In the case of Many mentors report this as the largestthe IC2 India program, US-based brokers challenge for innovative ventures entering theprepare Indian entrepreneurs for meetings, US market. Finally, mentors act as role mentorattend the meetings with them and offer and help further a local culture offeedback after each meeting. Endeavor’s entrepreneurship.Mentor Capital Program is dedicated toconnecting middle-income country Some part-time mentors continue theirentrepreneurs to sources of capital but as its relationships with their mentees after thename indicates, includes a predominant course of the programs, through continuedmentoring component. The need for brokers mentoring, as angel investors or inalso depends on the accessibility of local management positions. Often, whenresources. InnovateVMS for example operates mentorship is not done as a full-timein a mid-sized town with a very strong tight occupation, such as in IC2 or MaRS, the interestknit networked community where everyone of the mentor in the venture goes beyond theknows everyone. Brokers, as a separate group, life of the program. Many keep an informalare not needed. relationship with the mentee, thus raising the value-for-money of the program. In the case ofMentors have the broadest roles, acting as TechStars, one of the mentors invested in atsounding boards and brokers, and bringing in least two companies over a few years. Someknowledge and psychosocial support. While mentors view the mentorship program as athey act as sounding boards by challenging the “very-long interview” for prospectiveentrepreneur’s assumptions, they do not judge investments. In other cases, the entrepreneurstheir business ideas but rather guide them realize the value-added of the mentors andthrough the idea validation process through invite them to join their companies inrepetitive interactions. As one mentored management positions. However, in none ofentrepreneurs stated “it’s good to bounce the case studies were any of these outcomesideas off experienced people.” As brokers, they explicit objectives of the programs. To thegenerally draw from their social networks to contrary, most programs made efforts not tomake appropriate introductions. This leads to a raise the expectations of the ventures as to thereputational stake in the quality of the future role of the mentors in their companies.entrepreneur. In this way mentors are much Ventures are often discouraged frommore than advisors or coaches. They are proactively seeking investments from theirtrusted collaborators. As educators, they help mentors in order to maintain a relationship ofbuild the mentee’s competencies in areas such trust. 20
  19. 19. Nurturing Innovation: Venture Acceleration NetworksIn their networks, each program relies on a market relationships with the ventures theydifferent mix of sounding boards, service serve in the form of either service fees orproviders, brokers and mentors. Each of these equity stakes. The case studies show that thehas a different expected impact on the most effective mentor-mentee relationshipsentrepreneur (Table 5). are guided by social norms (Box 5), although mentors often have professional (i.e. non-Table 5: Program focus and expected impact social) motives. Members of the extended network are typically service providers or Expected impact relate to beneficiaries on the basis of market norms, i.e. they have or expect clear business Transaction Program Networks efficiency Resource Capacity focus opportunities with the beneficiaries. Sounding costs boards are in a more ambiguous situation, between the core and extended networks. Sounding boards Figure 3: Typical organization venture acceleration network Service providers Brokers Sounding boards Core Extended Program mentor network of Mentors management or service broker providersImpact: ■ = high, ■ = moderate. networkThe typical venture acceleration network isorganized around a professionally-staffed Relations Relations hips hipsnucleus, a core network of mentors or guided by guidedbrokers, and an extended network of service non- by market marketproviders and technical experts (Figure 3). norms normsMembers of the core network have directinstitutional, personal or contractual ties to theprogram management. Members of theextended network either have ties to the Beneficiaries, typically in theprogram management or to its core network. same geographical or virtual business communityIn most programs, the beneficiaries, early-stage ventures or small businesses, are in thesame community as the core and extendednetwork members. These are eithergeographic communities or communities byway of a common institution (e.g. universitygraduates). With exceptions, the mentors orbrokers in the core network do not have direct 21
  20. 20. Nurturing Innovation: Venture Acceleration Networks and accelerate the failure of “bad” ideas andBox 5: Social norms versus market norms the regeneration of new ones.We live simultaneously in two different worlds –one where social norms prevail, and the other Some programs do not incorporatewhere market norms dictate behavior. Social standardized milestones but agree to them onnorms are those based on intangible costs or an individual basis with the venture. Thesebenefits such as a feeling, reputation and how we milestones typically relate to specific aspect ofthink of ourselves, while market norms revolve the ventures, such as fundraising, marketing,around more concrete costs and benefits such as strategic planning, etc. A few of the programswages, prices or rents. In communities based onsocial norms, people often contribute because of are completely open-ended and have no timetheir passion for the topic or devotion to a limits, such as MIT VMS, IMP3rove, MaRS andproduct, group or individual. They provide Endeavor. Regardless of program timeframesfeedback and ideas because they want to see the and milestones, in all cases where there is agroup or individual succeed. mentorship relationship, the mentor requests the venture to do some incrementalSource: Ariely, Dan. Predictably Irrational: The Hidden “homework” before the next meeting. TheForces that Shape our Decisions. Harper Collins. New mentor always expects something back fromYork NY. 2008. the company. Pressure to deliver this “homework” ensures that ventures that areProgram Processes not committed to the program opt out.Clear program milestones and timelines Minimum guidelines for meeting frequenciesinfuse performance pressure on the ventures. can ensure that programs not loseMost programs support entrepreneurs over momentum. These can vary from every weekpredetermined timeframes, from as little as (TechStars) to every six to eight weeks (VBDC).three months (TechStars) to 24 months Weekly meetings require more commitment(Catalyst RN). Some, of these programs have from the mentor, and therefore a stronginformal or formal pre-defined milestones that network. In the case of the Larta programs,entrepreneurs are expected to meet. The mentors are expected to meet for 22 hoursTechStars program is divided into a mentor over a 9 month program but they typicallymatch-making phase, a product development exceed this amount. In a few cases (MIT VMS)phase and a pitch phase, which ends with an the entrepreneurs and their mentors agree oninvestor pitching event. In Larta’s programs, the meeting frequency on their own.entrepreneurs are expected to work on semi-tailored strategic documents during the course Programs based on service providers tend toof the program and present their strategies in be open-ended in their objectives. In thosepre-scheduled industry feedback sessions. That programs, there is no engagement timeline orsaid, in both of those programs there is milestones for the venture. Rather, the ventureconsiderable leeway to tailor the mentorship is entitled to a certain number of hours ofor advice to entrepreneurs’ needs. Milestones service provider “credit” which they can use asare used to put pressure on the entrepreneur they see fit. This entitlement is either formally specified by the (Carbon Trust) or provided on 22
  21. 21. Nurturing Innovation: Venture Acceleration Networksan ad-hoc basis by the program (TechStars,Larta).Matching entrepreneurs with several mentorscan offer a broader variety of perspectives 3. Creating Strongand connections than a single mentor, andcreates checks and balances on conflicts of Networksinterest. SMART Singapore assigns twomentors per venture, MIT VMS assigns three tofour while VBDC finds that eight to ten is an Key findingsoptimal number. In the case of TechStars thereis typically a lead mentor, who spends more Networks built around highly-networkedtime with the venture, and non-lead mentors, individuals and prestigious institutionswho only meet occasionally. MIT VMS and result in network member commitmentVBDC offer group mentoring sessions, whereby and in longer-lasting bonds.entrepreneurs meet with several mentors Networks built on financial compensationsimultaneously. This ensures that can be rapidly mobilized but their internalentrepreneurs benefit from discussions from bonds are ephemeral and trust can bementors who do not agree on certain points. lower.Some entrepreneurs expressed theirconfusions when faced with differing opinions Successful networks start small and high-among mentors, but also acknowledged the quality and progressively build attractingbenefits of different viewpoints. Importantly, power.meeting in groups can help protectentrepreneurs from conflicts of interest. Ingroups, mentors are subject to peer pressure Features of Attractive Networksand less likely to try to exploit their position forunethical gains, such as selling a service to the To be effective, programs need to creatementor or investing in a competing company. strong networks that are attractive to bothAssigning multiple mentors also increases the their members and the entrepreneurs theychances that ventures will be left with some serve. Networks need to have a high enoughmentorship if mentors are too busy to attend value proposition to attract high-qualitymany meetings. VBDC assigns eight to ten members and keep them engaged. The casementors per venture knowing that only 70 studies reveal a variety of strategies (Table 6):percent will likely attend any particularmeeting. But large groups can also introduce Remunerating network members: Mostrigidities in the program due to coordination examined programs do not remunerateproblems. For this reason VBDC schedules a their external network members, andminimum of only six mentor sessions per year. when they do it is for a fee that falls short of the actual value of their time. Larta and Octantis compensate their mentors. In the case of Larta, a possible reason is the tight time constraints under which programs 23
  22. 22. Nurturing Innovation: Venture Acceleration Networksoperate under government contracts. As the ground up, programs that benefit fromsoon as they win a contract Larta must one can generally create a more attractiverapidly mobilize mentors to serve and hence selective network. For example,hundreds of firms and are accountable for being associated with the MIT brand offerstheir mentors vis-à-vis their government an attractive value proposition to mentors.clients. This is not the case for programs Over several decades TiE has built up ansuch as MIT VMS where mentors do not exclusive “by-invitation-only” brand. Incommit to specific hours spent with the new EU member states, consultants wereventures. Remuneration is also required also attracted to the “EU” branding thatfor service providers who are expected to they could leverage by participating in theconduct research or analytical work for the IMP3rove (Carbon Trust, Catalyst RN). It is Leveraging local social capital: Some of thealso used to quickly build up a network and networks that have the greatest attractiveits beneficiaries up to a critical mass. power have at their core highly-connectedDuring its startup phase, IMP3rove paid super-achiever “champions”, typically theconsultants to conduct assessments and founder or manager of the program. Theyshort consultations with enterprises. As for have social and business roles in theirfull-time mentors and brokers, they are communities that bestow upon themalways paid at market rates (MaRS, IC2). significant social capital and hence theSounding boards are never paid as their capacity to mobilize a network. They playstrength lies in being completely the roles of mentors, connectors, brokers,independent and representing potential sounding boards, business partners,business partners, customers and investors and sometimes even politiciansinvestors. in their local communities. TechStars andOffering networking opportunities: Many its four founders is a case in point.of the programs, specifically those that are Accumulating this type of social capital canrooted in local communities, attract their be easier in tight-knit entrepreneurialmembers by offering them networking communities such as Boulder, the home ofopportunities with other mentors and TechStars. To a lesser extent, most otherservice providers. MIT VMS hosts periodic mentor programs in the case studiesmeetings for all of the mentors. TiE hosts leverage an internal champion’s socialnetworking events for its members. Many capital. As social capital often diminishesof Endeavor’s local mentors are attracted with geographic distances, it is moreby the prospect of networking with its difficult to leverage beyond localglobal mentors who are global business community networks.leaders. The value of networking is highest Providing access to unique ventures:when the network is exclusive and Mentors tend to be more willing to workassociated with a prestigious brand name with promising ventures that have aor a network “champion”, which connects chance to succeed, i.e. ventures withto the next point. unique market or technological valueLeveraging a prestigious brand: Although a propositions. One reason is that mentorshigh-value brand is difficult to build from put their own reputation at stake by 24
  23. 23. Nurturing Innovation: Venture Acceleration Networksconnecting their mentees within own Table 6: Strategies to build a mentor/advisorsocial networks. A second is that unique networkventures offer opportunities for learning Strategiesabout new markets and technologies. A Remunerationthird is that mentors derive more Social capital Networking Customers Programexcitement from the prospect of success. Ventures Learning BrandAnd a fourth is that some mentors areinterested in investing or taking upmanagement positions in high-potential Carbon Trust Catalyst RNventures. All of the programs hence have Endeavorsome amount of selectivity with their 2 IC Indiaventures. Sounding boards typically have 3 IMP rovesome of the same interests as mentors, for INC Japanexample finding new ventures to invest in. Innovate VMS LartaService providers may also have incentives MaRSto lock-in relationships with promising MIT VMSventures that will grow to become their Octantiscustomers in the future, which relates to SMART TechStarsthe next point. TiE EAPProviding access to customers: When VBDCservice providers are included in thenetwork, it is always the case that they are Market Relationships in Human Networksdrawn by potential customers. This is notthe case for mentors. Sounding board The case studies reveal that upfront financialmembers may also be in search of compensation is not sufficient to build strongcustomers, but this does not appear to mentor or sounding board networks. Mentorstypically be their primary intentions. who see value from networking within their entrepreneurial community do not needOffering learning opportunities: some of additional financial incentives. Moreover, thethe programs enhance the attractiveness introduction of financial compensations limitsof their networks by offering the sustainability of the mentor-menteeentrepreneurship or innovation-related relationship. When the mentor-menteelearning opportunities to their participants relationship is predominantly based on market-through short training courses and norms the relationship can weaken when thepresentations. This is the case of TiE and program comes to an end and financialIMP3rove. rewards are terminated. At the far end of the financial compensation spectrum are mentors and brokers who are employed by a program on a full-time basis. In such cases, the relationship with the firm seldom outlasts the program. In the case of MaRS, professional mentors occasionally left for other careers, 25
  24. 24. Nurturing Innovation: Venture Acceleration Networksleaving the ventures “orphaned” during some reputational risk in the mentor’s or brokerstime. business networks. However, this bottom-up approach is not easily scalable in the short run.Sounding boards do not expect to commitmuch time –their marginal costs of Network Development Typologiesparticipation in the program are low - and donot expect fees. In fact, the most effective The case studies bring out three approaches tosounding boards have genuine interests in the developing venture acceleration they are advising as networking, “Personality-driven” networks: regional,learning and investment opportunities. bottom up, pro-bono program guided by social norms, often coupled withIn contrast, service providers expect to have professional motives.or to develop commercial relationships withthe companies. Developing a mentor network “Institution-driven” networks: regional,and a service provider network require very institution-based program guided by socialdifferent approaches. To services providers, norms, often coupled with professionalsmall businesses –and to an even greater motives.extent early stage ventures- represent a “Market-driven” networks: national andfragmented market that imposes high business transnational, top-down program guideddevelopment costs. For innovation by market consultants, the costs of Most programs use elements of each“educating” SME clients to stimulate demand approach.are prohibitive. Thus, service providers havehigh incentives to reduce their search costsand transaction costs by joining a network that Personality-driven networks have at theiroffers them ready access to clients. core highly-networked individuals who are champions for the programs. TheseBuilding an effective network of service champions have high-standing as businessproviders is easier to achieve although less leaders or successful entrepreneurs in their regional communities, inspire trust, and havescalable through trusted referrals than significant social capital (Box 6) to draw from.through standardization and certification.Demand for innovation management The exemplary “personality-driven” network isconsultant training and certification can be TechStars. The co-founders are prominent entrepreneurs and investors in the tight-knitweak without first building a critical mass of Boulder, USA business community. They drawdemand from enterprises. Conversely, openinga network to un-vetted service providers members of their mentor and service providerdecreases the overall attractiveness of the network from their close primary social network and trusted referrals from thatnetwork. The case studies suggest thatreferrals from trusted mentors and brokers are network (Figure 4). The network is sufficientlyeffective at connecting entrepreneurs to interconnected to be self-policing. Any violation of trust or unethical behavior via thetrusted service providers. They are more likelyto guide entrepreneurs towards service mentees will be socially sanctioned. Theproviders that match their needs and face a quantity and quality of the members and inter- 26