Guidance supporting Europe’s aspiring entrepreneurs – Policy and practice to harness future potential
CASE STUDY 20
Business incubators
Guidance supporting Europe’s aspiring entrepreneurs /1 INTRODUCTION TO BUSINESS INCUBATORS
1.1 Definitions and the concept
According to the study carried out by the Centre for Strategy & Evaluation Services (CSES) for the European Commission (‘Benchmarking of Business Incubators’), there is plethora of definitions and models of business incubators in Europe (EC, CSES, 2002).[1] Main differences stem from e.g., emphasis on physical aspects (equipment, office services etc.) or on non-physical aspects of incubator operations such as entrepreneur training and mentoring, funding, stakeholder objectives and partnership, target markets, incubator facilities and services. For example, the National Business Incubation Association (NBIA), one of the world’s leading organisations advancing business incubation and entrepreneurship, makes use of the following definition:
“Business incubation is a business support process that accelerates the successful development of start-up and fledgling companies by providing entrepreneurs with an array of targeted resources and services. These services are usually developed or orchestrated by incubator management and offered both in the business incubator and through its network of contacts. A business incubator’s main goal is to produce successful firms that will leave the program financially viable and freestanding.” (NBIA, 2009)
Elsewhere, UKBI - the UK’s professional body for the business incubation industry – understands business incubation as providing SMEs and start-ups “with the ideal location to develop and grow their businesses, offering everything from virtual support, rent-a-desk through the state of the art laboratories and everything in between. They provide direct access to hands on intensive business support, access to finance and experts and to other entrepreneurs and suppliers to really make businesses and entrepreneurs grow.” (UKBI, 2009). The main objective of business incubators is to increase the chance of success of start-ups and decrease the time and costs required to establish and grow a new business. Simply put, business incubators cover a wide range of organisations that help entrepreneurs to develop their ideas from inception to commercialisation and launching of new enterprises.
The term of business incubator (BI) is therefore an umbrella concept encompassing technology centres and science park incubators, business and innovation centres, organisations which have no single physical location and concentrate instead of managing a network of enterprise support services ('incubators without walls') or so-called ‘new economy’ incubators, and a variety of other models. Over the past years, there has been a shift from physical incubation focused on provision of workspace to incubation as a series of processes which supports virtual, remote and flexible working supports (European Commission, Johnson et al., 2008).
CSES organised the various types of business incubators into a comprehensive typology as presented in the figure below:
Figure 1: Types of business incubators
Technology level
Low Medium High
Source: European Commission, Centre for Strategy and Evaluation Service (2002)“Benchmarking of Business Incubators." (Final report). Brussels, European Commission Enterprise Directorate General.
In relation to the typology included above, the typical business incubators usually, but not always, provide a high degree of management support and cater for technology-oriented enterprises.
1.2 Target audience
Incubators in principle support innovative businesses and entrepreneurs in all sectors, including ICT, science, technology, creative industries or social enterprises (UKBI, 2009). Business incubators primarily support SMEs. For example, in the UK, 75% of the incubators’ client companies have a turnover up to £500,000 but very few (1.5%) with a turnover of more than £5 million (UKBI, 2009).
In the USA, the more specialist incubators, particularly Technology Business Incubators (roughly equivalent to the Technology Centres or Innovation Centres in Europe) account for over a third of the total number of BIs. A similar trend has been noticed in Europe too. Specialist though non-technological BIs are also reported. One prominent example includes the cross-border incubator which was established at the border between Germany and the Netherlands for companies seeking to trade in these two countries.
In terms of entrepreneurs, a research project in Wales found that amongst those benefitting from incubator services were also so-called disadvantaged groups e.g., lone parents, young people and the over-fifties (Welsh Development Agency, 2009).
1.3 Practicalities
Business incubators (BIs) can be stand alone business incubators or part of a science or business park, whether based in a university campus, laboratory, research institute or private sector company.
The services provided by the business incubators are diverse. The European study into business incubators (Erenet et al., 2002) organise them as follows:
· Basic services: rent of space, physical and industrial infrastructure, IT services.
· Additional services: office services (e.g., postal services) and usage of equipments.
· Advanced level-services: consulting and advisory services (legal advice; mentoring and coaching); business training and information; cooperation (e.g., assistance with professional networking internally with other entrepreneurs and externally with business community).
· Financial support (e.g., fundraising, micro-loans etc.).
Under EQUAL, the Cyfenter project in Wales conducted a baseline study on incubators and business premises in the UK in 2004 and found that the main types of support services provided by the incubators were training (67%) and mentoring (78%). This was in contrast with that client companies identified as key services i.e., reception service, secretarial and IT services, meeting room facilities, low cost premises and advice.
Key areas that are critical to the success of a business incubator are considered to be entrepreneur training (usually component of ‘pre-incubation’), business advice, financial support (usually through links with external providers), and technology support.
The research on UK business incubators shows that BIs provide support to an average of 30 client businesses although many of them operate “outreach” services supporting and advising companies outside the incubator (UKBI, 2009). The business incubators usually provide these services to clients for up to three years although there are incubators that specialise in fast-track businesses which usually operate on a six-monthly basis.
1.4 Funding
Business incubators function on the basis of different funding models; however, public money is still critical for the establishment of incubators in the EU. The data provided in the benchmarking study for EC published in 2002 suggests that on average incubators cost EUR 4 million to set up, which is usually paid from public sources. Public funding also covers a high proportion of the running costs of most incubators (approx. 37%). Therefore, there is a common understanding that due to the high set up and operating costs, many of the EU’s business incubators are publically subsidised. Furthermore, the benchmarking study carried out for the European Commission in 2002 estimated that at that time 77% of European incubators operated on a not-for-profit basis (EC, CSES, 2002).
1.5 Partners
Lessons from previous studies such as CSES (2002) and Sipos and Szabo (2006) emphasise that business incubators should be designed as part of broader strategic framework, whether they are local strategies or focus on specific policies or target groups (or a combination of these aspects). Furthermore, public-private partnerships are better placed to promote and support the growth of business incubators. The case studies included in the benchmarking study (EC, CSES, 2002) show that incubators are typically promoted by a wide range of stakeholders including local authorities and government agencies, universities and research institutes, companies and business associations, trade unions, and financial institutions as well as NGOs.
It is worth mentioning that in contrast with business incubators in the Anglo-American and Western European realm, in Central-Eastern Europe, business incubators are significantly less often founded by or attached to universities. One reason is that historically the legislation in this part of Europe has not encouraged (in some cases, it even prohibited) universities to participate in enterprising activities.
1.6 Statistics
In terms of statistics, the CSES study reported that in 2002 there were approximately 900 business incubators in the EU. According to UKBI, there are currently 300 business incubators in the UK only (UKBI, 2009). On balance, the empirical evidence gathered in the CSES study suggests that US incubators show a particular strength in relation to funding and some management functions whilst EU incubators are particularly strong in entrepreneur training (which are usually considered part of the business support services), virtual networking and integrating incubator functions into wider development strategies.
2 EXAMPLES FROM THE HE SECTOR
Many individual Higher Education Institutes (HEIs), or networks of HEIs, have set up incubators to nurture enterprises that can be spun off, sometimes with the support of venture capital provided by the HEI or with the help of HEI connections (WEF, 2009). Incubation is a business guidance process that accelerates the successful development of start-up companies by providing entrepreneurs with targeted resources and services. The main goal of the incubation process is to produce successful enterprises that are financially viable and freestanding. While much of the support offered by HE related incubators is technical, practical or financial by nature, advice from experts and investors is fundamental for the service.
2.1 European overview
Examples of successful incubators situated in HEIs were provided by HE entrepreneurship experts interviewed from Austria, Cyprus, Denmark, Finland, France, Germany, Greece, Ireland, Iceland, Latvia, Lithuania, Liechtenstein, the Netherlands, Poland, Slovenia, Spain, Sweden and the United Kingdom. In Hungary and Portugal incubators are predominantly run by regional authorities and not universities. Incubation services are run by national public bodies in Malta and Luxembourg (Malta Enterprise and public research centres, respectively). In two countries (Bulgaria and Romania) business incubation opportunities do not exist for HE students or are very rare. In countries where business incubators do exist, the quality of services differs between institutions. For instance, in Iceland technology parks and business incubators are either well established with developed services, or new and in need help to function well.
2.2 New Member States
In some of the new Member States (e.g. Latvia and Lithuania) there is a growing interest in business incubation. In Latvia, several business incubators are currently being developed, which will provide entrepreneurial possibilities to a variety of individuals, including HE students (Zarins, 2009). For example, the Riga Science and Technology Park (RSTP) attached to the Riga Technical University (Latvia’s principal technical university) is set to be one of the largest innovation hubs in the country. A number of incubators exist in Lithuania, but only a few target HE students. One of these is the recently established business incubator at Siauliai University.
2.3 Dutch example[2]
The University of Twente’s ‘Temporary Entrepreneurial Positions’ (TOP) Programme has been running for 25 years. The scheme was set up in order to guide new businesses – in particular knowledge-based firms - through their difficult first year and enable the local region to benefit from the knowledge available from the university. The programme has been a great success and has benefited over 400 entrepreneurs to date. The objective of TOP is to encourage graduates of the university who are starting their own knowledge-based companies by housing them for one year within one of the university’s participating research-groups relevant to their business.
Prerequisites for entering the programme are: ownership of a business idea matching the interest of staff members in one of the university’s research-groups; and a consistent business plan. The programme offers the entrepreneur the following support:
· Office space at the research-group’s premises, paid by the programme.
· Secretarial support (within certain limits) – use of all communication aids: computer, fax, copier and telephone in arrangement with the research-group.
· Laboratory facilities – as some companies require access to expensive equipment, by arrangement with the research-group, entrepreneurs may be provided with access to such equipment.
· Financing – to allow entrepreneurs to concentrate fully on his product/business development, the TOP-entrepreneur is granted an interest-free loan of EUR 14,500 where necessary which is to be repaid within four years.
· The ‘Becoming an Entrepreneur’ course - this course helps participating entrepreneurs develop important skills such as how to write a sound business-plan. The course is part of the university curriculum and is offered for free to students.
· Scientific mentor – the researching staff member who ultimately decides upon the entrepreneur’s participation on the programme also acts as ‘scientific mentor’.
· Business mentor - the entrepreneur is matched with an experienced businessman who started his own business in the past.
Participation to the TOP program is granted on the basis of a business plan. The plan then forms the basis for further business development in the incubation phase and its production is guided by advice of the programme manager.
Participants on the programme receive both a mid-term review and exit interview with the TOP Commission. The Commission monitors whether the entrepreneur is achieving his/her objectives. For example, if the entrepreneur is found to concentrate too much on desk research too little on business the TOP-Commission will intervene.
The Temporary Entrepreneurial Positions (TOP) Programme is a good example of an incubation programme from the Netherlands. It provides multiple forms of support to new entrepreneurs including scientific mentoring, a course on entrepreneurship and administrative support. These forms of support guide new entrepreneurs through the first year of the company’s operation – the year most crucial to the company’s success.
2.4 An example from Iceland
Reykjavik University’s Idea House is a rare example of a bottom-up ‘incubation’ initiative which sprang up as a reaction to the financial breakdown of Iceland. It is run by the University and the Iceland Academy for the Arts and operates as a meeting place/entrepreneurship centre for seed companies. The Idea house is located in an abandoned factory and provides workspace, internet connection and meeting facilities as well as a cafe. Entrepreneurs have to apply to be able to use the office facilities, but the cafe is accessible for all. Advice is provided by people from the university or other hub "residents". According to an Icelandic expert, ‘this is a real grassroots movement; the students organised themselves and have found a way to transmit the positive message in midst of a crisis; to be a doer and take command of your own situation’.