Business incubators, financial recycling and incentives

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I work as a lobbyist at the European Parliament where I follow the ITRE committee here I contribute with draft proposals.
Abstract:
It is not lack of good ideas for starting businesses that stops business incubators from helping them to succeed. It is rather that there are not enough qualified people that can support these companies. In this suggestion, I have developed and present how a financial recycling model makes it possible for Business Incubators run by municipalities, boroughs, counties and cities to offer highly qualified professionals that can help their portfolio companies. A pilot project monitored by the EBN should run for a few years. After its evaluation and adjustments are made EBN could offer this service and knowhow to the municipalities, boroughs, counties and cities of Europe.

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Business incubators, financial recycling and incentives

  1. 1. Jan Softa CEO of Somerco Research – Date: 2013-06-17. Enhance EC member states competitiveness in R & D Part 5: Business Incubators, financial recycling and incentives into reward. Abstract: It is not lack of good ideas for starting businesses that stops business incubators from helping them to succeed. It is rather that there are not enough qualified people that can support these companies. In this suggestion, I have developed and present how a financial recycling model makes it possible for Business Incubators run by municipalities, boroughs, counties and cities to offer highly qualified professionals that can help their portfolio companies. A pilot project monitored by the EBN should run for a few years. After its evaluation and adjustments are made EBN could offer this service and knowhow to the municipalities, boroughs, counties and cities of Europe. Background Helping geniuses! Our slogan sums up who Somerco aims to help. Somerco are a company that target to help researchers and innovators so that these geniuses can create prosperity and jobs in society. In order to achieve this aim, I discuss how a financial recycling model makes it possible for Business Incubators run by municipalities, boroughs, counties and cities can offer more highly qualified professionals that can help their portfolio companies. Introduction Municipalities, boroughs, counties and cities in the EU-zone have an interest in creating new jobs to people. A measure is to set-up new and increase the support of current business incubators. Business incubators are financed in different ways. It could be taking a share in companies or by being subsided by governmental programs and so on. To have a sound economy at these business incubators creates stability which is beneficial for the development of the incubated companies. I believe this is a key factor if we would like to see even more business incubators who have a high success rate for their companies. This could happen if the right economic conditions are in place at municipalities, boroughs, counties and cities so that they can run highly competitive business incubators. How to It is not lack of good ideas for starting businesses that stops business incubators from helping them to succeed. It is rather that there are not enough qualified people that have the dedication to support these companies. An action to increase the number of qualified professionals at business incubators is to be able to offer a great employment package. To hire qualified professionals who have the knowledge to offer great business advice you need to create incentives that make it interesting for them to work at business incubators run by municipalities, boroughs, counties and cities. This discussion draft focuses on how the public sector can increase the presence of business incubators by creating incentives for this professional group. And also how to create a sound economic model that includes how the incubated companies can pay back to the business incubators run by municipalities, boroughs, counties and cities. Two key phrases are used in my model: financial recycling and the re-use tax system. The re-use tax system The economical instruments I propose are not too costly for the public sector to adopt since it return money back into the public sector by “the reuse tax system”. A kind of financial recycling that make it easier for municipalities, boroughs, counties and cities to hold business incubators that can
  2. 2. Jan Softa CEO of Somerco Research – Date: 2013-06-17. maintain or hire new highly qualified staff who are important to get a high success rate of the incubated companies. Financial recycling In the first step, my financial recycling model focus on letting the incubated companies get help to subside their rent for office or industrial spaces with 80 % the first three years and 50 % year four and five.1 With such instruments in place they have had a possibility to grow and become steady companies for their five year graduation. The middle-step of the recycling model is when the companies after graduation needs to pay back 3- 5 % to the municipalities, boroughs, counties and cities on their turnover for two - three months during two years within a four year period. They can ask to postpone this re-payment twice. It gives money back into “the reuse tax system” and will be used to hire skilful business developers and educate more junior business developers that will be employed by the municipalities, boroughs, counties and cities. The last step in the recycling model is to have incentives that keep the talented staff. In my opinion, it is important to attract talent that are willing to go the extra mile for companies they work with in the incubation programme. In order to attract these people it is important to create incentives for them to be a part of the programme by offering a competitive employment package. When the programme has been running for five years and the first pay-ins on the company’s turnover start to come back to the public sector some of this money should be allocated to bonuses on how well the business developers companies are performing. It means their salary will be somewhat performance based. It is advisable that there are caps for the number of companies the business developers can advise and also a cap on the bonus they can get on each company. The reason is of course that they should be able to do an excellent job for all their incubated companies. Too many companies on their portfolio do not make them efficient and if they get uncapped bonuses per company it could lead to that they only focus on 1-3 that are growing rapidly at the moment. Some business sectors naturally grow slower in the beginning such as pharmacy companies due to that they have to put in much research, clinical testing, and wait for governmental approval and secure patent rights before they can become profitable. However, often this means they make a greater ROI after a few years. In principle, all companies that have to rely on IP rights to protect future income have a longer start-up phase before they become profitable. In these cases the re-use tax system can be extended in time. Other sectors such as financial services and building software apps have a more immediate ROI for the company. Ideally it should be a long-term relationship between the business developer in the incubation programme and the companies they manage. The companies who participated in this programme have to pay “the reuse tax” for two years after graduation. It should mean the business developer and his/her managed companies have had a business relationship for 7-9 years when they depart from each other. Ideally, hereafter they continue their relationship and pay a consultant fee as you do when you use a lawyer or your accountant. 1 (A) It is the municipalities, boroughs, counties and cities that subside these costs. (B) Unlike, the corporation tax that is collected by the government, the re-use tax system is paid to the municipalities, boroughs, counties or cities. (C) These can adopt and develop the financial recycling model I propose by adjusting the years and percentage after needs.
  3. 3. Jan Softa CEO of Somerco Research – Date: 2013-06-17. Depending on the size of your municipality, borough, county and city you decide how large companies you want to be a part of this financial recycling model for business incubation. The financial recycling model that subside office and industry space is also a flexible option because it enables you to not have the companies at the same location as you have at business, science and technology parks. Figure out The business world is not static and much can happen during five years. How will this affect the financial recycling model? For instance, what happens when there is a buyout from another company or venture capitalists or a merger with another company? The legal agreements between the company and business incubator could cover these events in the contract between them. I believe, when there is a buyout or merger the companies should have the option to continue for the remaining time of the incubation period. Those companies who chose not too should have an option to do so. When these events occur the re-use tax should be paid to the municipalities, boroughs, counties and cities based on the company’s turnover. It could mean, if the company leaves the incubation programme they pay 3-5% on their turnover for two-three months and also payment for the second year will be based on 3-5% on their turnover for the same months plus 10-20%. If the company already done one re-use tax payback they will only pay 3-5% on their turnover for two-three months. Long-term As you can see the incubation programmes subsiding of rent is longer than the usual three years of incubation programmes. It is a long-term commitment by the municipalities that hopefully will give a long-term effect because most companies have settled-in when the incubation programme ends. I think long-term incubation programmes is appealing for municipalities etc because it is more likely the companies remain in the area and create jobs and the company’s employees pay tax. Since the financial recycle model ease the costs for the municipalities etc to run competitive business incubation programmes I think there should be a pilot project that covers different countries. It is a task that could be supervised by EU-bodies. After the pilot project ends it will be adjusted and set into full scale by the Commission and perhaps run by the EBN. Involved In particular, the EBN – the European Business and Innovation Centre Network are a suitable partner for a first investigation of the costs it takes to implement these measures. Several EU bodies could be involved and give feedback, such as the commissions COMP, ENTR, RTD, the Parliaments ITRE committee. The business incubators supported by the commission can be further developed into an efficient network for trade and creating jobs. It would a bit like the WTCA, but for incubating companies supported by the municipalities, boroughs, counties and cities business incubators. The pilot project In such a pilot project, I would think that you choose to contact municipalities, boroughs, counties and cities from different parts of Europe. It could be the Finnish city Abo, the Camden borough of London – UK, the Polish city Krakow, the Bulgarian city Burgas, the French city of Bourdeux and a sparsely populated area as the Swedish municipality of Kiruna. No matter who would be included in such a pilot project, I believe it is important to have a variety in size, business pulse, countries of the participants in order to find out how this type of business incubator programmes work. During the pilot project, best practices are shared which will also speed up the evaluation of the projects when it
  4. 4. Jan Softa CEO of Somerco Research – Date: 2013-06-17. ends. Adjustments are made. Then EBN could offer this service to the municipalities, boroughs, counties and cities in Europe who are interested in adopting my suggested model for how they can run competitive business incubators with highly qualified staff. Adopt co-financing I believe several co-financers would be interested in financing, participating and developing such a pilot project. Not just EU, but also on a national and regional governmental level there should be an interest in participating and co-financing this type of project. Also the private sector runs business incubators, such as Nokia Mobile Lab. Even if these type of business incubators cannot adopt the re-use tax system it would be beneficial to get their feedback and perhaps co-financing. Make it happen As with most new types of service models they need to be questioned, tested and developed before they are adopted. I hope this suggestion will end up on the political agenda at the Commission and the European Parliament and after being examined also adopted. The involved parties at the Commission and the Parliament I have already mentioned. However, since it includes a pilot project that is monitored by EBN financial means needs to be allocated for them. Therefore, also the Parliament’s Budgets should be involved. I am convinced that many municipalities, boroughs, counties and cities in Europe would be interested in such a service and knowhow being provided by the EBN. The network EU has in Europe makes them the most suitable candidate for testing my proposed suggestion of a financial recycling model for business incubators. Many new companies and jobs can be created this way and it should be an appealing action to adopt in order to boost economy in countries.

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