Business incubation and high growth firms

NESTA and the Institute for Manufacturing at Cambridge University Engineering Department have just published a review of current knowledge on the role of business incubation in supporting high-growth ventures. A summary of the key findings are given below (as this topic has strong resonance with open innovation) and the full report can be downloaded from the NESTA publication website.

Incubation for Growth: A review of the impact of business incubation on new ventures with high growth potential

Nicola J. Dee, Finbarr Livesey, David Gill and Tim Minshall

Business incubators have proliferated since their emergence over 50 years ago. Over this time business incubation has evolved to include a range of incubation practices. Nonetheless business incubation can deliver critical value to tenants. Contrasting early definitions of incubation where survival of tenants was emphasised, we define incubation as “...a shared office-space facility that seeks to provide its incubatees with a strategic, valueadding intervention system of monitoring and business assistance.” (Hackett, S. M. and Dilts, D.M. (2004b) A Systematic Review of Business Incubation Research. ‘Journal of Technology Transfer.’ 29: 55-82). Our key findings follow the structure of the report.

The proliferation of business incubation over the last 50 years has resulted in diversification of terminology used and types of incubation offered. To help overcome this problem we compared business incubation with two activities sometimes confused with incubation – equity financing and professional services firms. For example, though not as intensive for venture capitalists, incubators implement an entry selection process for tenants. Perhaps more importantly incubators often have a very mixed revenue stream and incentives as a result, strongly encourage peer-to-peer networking, address multiple needs of new ventures without prioritising just one, and offer continual exposure to the incubation environment and services.

Absolute measures of incubation are impractical, but performance indicators are useful. Given the relatively small number of studies and the lack of comparability between them, any conclusions should be treated as indicative at best.

The UK has approximately 300 business incubators supporting around 12,000 businesses (UKBI). Estimates of the direct impact of business incubation by industry associations 2 include between 25-40 supported businesses and between 44-91 jobs per incubator. Many incubators (~60 per cent) also have outreach programmes to support businesses not resident in the incubator.

Indirect incubator effects, e.g. additional jobs and wealth generation from providing products/services to incubator and incubatees, globally range between 0.48-1.5 times the direct impacts of incubation.

Few studies capture the full impact of business incubation, for example taking a measure of incubation impact over the incubation period rather than longer term, and ignoring entrepreneurial learning and subsequent venturesome activity as a result of business failure. Job creation, while a popular metric used to evaluate incubation, is not generally considered a useful measure of incubator value. An emphasis on job creation also contradicts the advice of many investors who are acutely aware of the need to control spending by investee firms, which often means delaying recruitment. Further work is needed to develop appropriate performance indicators for incubation.

In practice, incubation can lead to several outcomes for new ventures. Incubation can impact new ventures through modifying or accelerating the entrepreneurial process of business development. But while incubators have been associated with business acceleration of incubatees, this same process can lead to ‘life support’ which extends the time to business failure. A period of high risk can confront incubatees when leaving the support of an incubator.

Selecting firms with potential for high growth is an uncertain process. A portfolio approach mitigates the risk associated with relying on the performance of a single firm. Across a portfolio of incubator tenants around 23 per cent identify the incubator as important to business performance. ( CSES (2002) ‘Benchmarking of Business Incubators.’ Sevenoaks: Centre for Strategy and Evaluation Services) Over 60 per cent identify the incubator as critical, while just under 17 per cent regard the incubator as unimportant to performance.

Incubators influence new firms by:

• Lending credibility through association, and through shared (and therefore affordable) access to professional facilities and an identifiable and flexible incubation space.

• Offering business support and coaching which are often subsidised e.g. strategic insights, market research etc.

• Providing access to additional resources and talent e.g. finance, legal help.

The incubator draws on its own staff, external consultants, and its existing entrepreneurial support network to provide business support. Peer-to-peer networking is also encouraged.

Matching incubator services to the needs of firms is important. New venture activity and business support needs vary between regions, industries, prior entrepreneurial experience and so on.

Incubators with links to universities are associated with technology firms with higher growth potential, but not all universities have an entrepreneurial culture or are surrounded by a supportive business environment. In addition to technology and facilities, people are a main contribution of universities to entrepreneurial activity.

Rather than cater to all firms, most business incubators have a selection/screening process to target a particular group of firms. This screening process is imperfect, but can be improved through the use of multiple screening dimensions. ( Aerts, K., Matthyssens, P. et al. (2007) Critical role and screening practices of European business incubators. ‘Technovation.’ 27: 254- 267) Nonetheless a selection process can only be imposed if the incubator can afford to turn away potential tenants.

Tenants seem to become dissatisfied with incubator support when the incubation programme is predetermined rather than re-evaluated depending on the changing needs of tenants. The entrepreneurial support mechanisms also fluctuate, with incubators able to offer some continuity.

As incubators become more embedded in a region they tend to become more specialised. A word of caution – while many try and emulate incubation strategies from Boston, Southern California (US) or Cambridge (UK), these regions are also considered atypical and likened to ‘regional incubators’ owing to the amount and maturity of entrepreneurial activity and infrastructure.

Even incubators with similar objectives can have different business models. Business models have changed over time. Since 2005 there has been a reported increase in the cost per job created each year in business incubation in Europe. Some incubators now offer equity finance, and some equity investors offer incubation, with an unclear distinction between both. The challenge for incubators and their funding bodies is to capture some of the value created for incubatees. Generating revenue from services when clients are resource constrained is often not possible without subsidies from public bodies. Corporate funded incubators typically require a strong strategic fit of incubatees with the corporation, which is not appropriate for all ventures. Incubators with mixed funding may encounter principal-agent problems as they attempt to meet multiple objectives.

Capturing value through taking equity in clients introduces delays in revenue and can cause the incubator to behave more like an equity investor by prioritising short-term financial returns rather than longer-term performance. The literature offers little insight on whether incubators could generate better returns for early-stage investments than pure equity investors. Already early-stage investments are associated with poor returns in Europe, especially compared to the US. Further research is needed to understand the strengths and weaknesses of business models for different contexts.

In summary, the evidence we have reviewed indicates business incubation is a valuable tool as part of an entrepreneurial support infrastructure. Incubators deliver the most value when able to respond and adapt to the needs of new ventures. We realise some of our conclusions regarding how business incubation should be monitored challenge some existing norms in this domain. However, the lack of comparability between studies demonstrates how important it is to improve the quality of metrics. Even so any measure of incubation is likely to be incomplete. The impact of incubation on incubatees should extend beyond the incubation period and incubator environment, though measuring this impact could become onerous and time consuming.

While we recognise the variety of business models used and the continuing evolution of the industry, we nevertheless conclude that further research is required for the fundamentals of incubation models – a topic largely neglected in the extant literature – to be properly understood.

The full report can be downloaded by clicking here.

Open innovation, manufacturing, and things you can drop on your foot

The following post was published on another blog I write on the topic of the Cambridge (UK) high tech business cluster. Feedback on this post have highlighted an interesting open innovation angle to this topic, i.e. does the provision of publicly accessible prototyping and production tools ('industrial commons') support open innovation? If so, what type of resources need to be provided, by whom, and using what business model? Comments on this topic most welcome:

On a recent business trip to California, I met with some of my former students who are now entrepreneurs and investors in Silicon Valley, predominantly working in consumer internet and mobile apps. These sectors are typified by low capital costs, rapid prototyping and customer engagement, flexible business models, scalability, and potentially (and frequently actual) significant returns to investors. But this success prompted thoughts of whether we could be doing more to support entrepreneurship based around creating value from tangible "things you can drop on your toes" as opposed to the more intangible worlds of software and services.

This opens a whole debate that is way above my pay grade. On the one hand there is the rational but complex debate on what manufacturing actually is, its role in an economy and its impact in growth. There is also the less rational debate about it being somehow 'better' to create value from 'real things'. This is an issue of great interest in Japan at the moment, where the culture of monozukuri(making things) underpinned the phenomenal post-war recovery, but which some believe now hinders Japan's ability to renew itself ("A Samurai would never write software" as one Japanese manager put it in a recent article on Japan in The Economist).

But if we put that debate to one side and take the view that there is a role for creating value from addressing customer needs through the provision of physical devices, then we should make sure that 'manufacturing' entrepreneurs have access to the resources they need to get their ideas to market. One of the most common needs is access to prototyping equipment, the cost of which is typically way beyond any individual inventor or start-up company. The provision of publicly accessible tools (a part of what academics sometimes grandly call 'industrial commons') can therefore be a key enabler for manufacturing entrepreneurs.

There are many examples of organisations providing access to such tools (e.g. for life sciences, the Babraham Technology Development Lab, and for advanced engineering, the Hethel Engineering Centre). These organisations typically combine public and private investment and leverage existing infrastructure to provide support to entrepreneurs. But there is still a need to provide advice, a place for experimentation, and a supportive community for those at the very earliest stages of the development of ideas. It was therefore very pleasing - during the same trip to California where almost everything seemed to be web and mobile focused - to meet with the CEO of Tech Shop in San Francisco. Tech Shop provides a great example of how tools can be provided to support manufacturing entrepreneurs at the very early stages of the development of business ideas. As the CEO put it: "We provide access to tools to help people accelerate their projects". This is not a contract R&D service; it is about providing access to tools and support to help people experiment, explore and develop their ideas. Examples of businesses that have been developed through Tech Shop included Square, Solumtech, DripTech, Clustered Systems and Embrace.

And this is why it is so exciting to see that the MakeSpace project is really gaining momentum in Cambridge, and is about to set up in its new home in - very appropriately - an old factory in the city centre.

Open Innovation Research Forum: Fast-tracking open innovation research

The newly-formed Open Innovation Research Forum (OIRF) held its inaugural meeting in the form of a two-day ‘fast start’ research proposal development workshop. The OIRF workshop – sponsored by the UK Innovation Research Centre and Japan’s Institute for Technology, Enterprise and Competitiveness – brought together 40 representatives of multinationals, open innovation intermediaries, and academics from around the world to discuss the links between geographic location and the successful implementation of open innovation. The workshop ran over two days and took an open approach to identifying the challenges and developing collaborative research proposals for addressing these challenges.
The first day was devoted to capturing the issues that companies feel are most important when trying to implement open innovation in different locations. The workshop kicked-off with four presentations to stimulate discussion. First, attendees were able to hear a summary of a recent UK-IRC survey that as captured the current open innovation practices of 1,200 UK firms. Next, the contrasting experiences of Kodak and Philips were presented, highlighting the role of location in their open innovation strategies. Finally, the role of open innovation in attracting investment to the UK was presented, with particular emphasis being given to the ‘Tech City’ development in London. Attendees then worked in groups to filter the wide range of issues raised by these discussions and select five key questions that, if addressed, would be of direct benefit to companies implementing open innovation and those that support them.
A dinner at King’s College then provided attendees with a chance to network and reflect on the day’s discussions.
The second day was structured around identifying ways in which the key questions identified by the companies on the first day could be addressed. This was done through a process of academics presenting a short, PowerPoint-free summary of their work and preferred research methods, and then matching these with the questions identified by the companies. Groups then spent the afternoon working on developing outline proposals for projects to address these questions. By the end of day, six outline proposals, each involving a minimum of two academic institutions, were developed and presented back to all attendees. The six proposals were:
1. Comparing open innovation best practices in developed countries versus emerging markets
2. Identifying factors influencing successful open innovation implementation
3. Open innovation for corporate growth and renewal
4. Effective intra- and inter-organisation collaborations
5. Developing leadership capabilities for open innovation
6. The role of open innovation in stimulating cluster development
Each of these proposals will now be taken forward and resources sought to run these collaborative projects. In addition, an edited book summarising current knowledge in the area of location and open innovation is being explored, and planning for the next OIRF meeting is already underway.
For further information on this workshop, the projects listed above, or any other matter relating to OIRF, please contact tim.minshall@eng.cam.ac.uk. The OIRF is coordinated by Cambridge University Engineering Department’s Institute for Manufacturing. Further information on the activities of OIRF will soon be published via www.oirf.net.

Getting help with open innovation: The role of intermediaries

A year-long research project lead by Dr Letizia Mortara of the University of Cambridge Institute for Manufacturing has examined the role of intermediares in supporting open innovation. The project was undertaken in collaboration with a consortium of industrial and other partners, including: BP, CIRA, Crown Cork, Doosan Babcock, EPSRC, GSK, IXC-UK, NESTA, Oakland, PepsiCo, Quotec and Shell.

Firms increasingly need to collaborate with other businesses in order to introduce new products or services. Such partnerships – known as ‘open innovation' (Chesbrough 2003) – help them gain access to new technologies, ideas or skills they require to keep pace with today's evolving markets and changing customer demands. However, this more collaborative approach is an innovation in itself, and demands a new set of capabilities which many businesses do not possess.

Companies looking for help with open innovation will find numerous organisations offering assistance – from commercial and technical consultancies, to government departments, national and local development agencies, academic networks and university technology transfer offices. These organisations have come to be known as ‘innovation intermediaries'.

This project focused on the ways in which intermediary organisations can help to increase the effectiveness of open innovation and intelligence gathering activities. In particular, it aimed to:

understand the ways in which companies can improve their innovation and technology intelligence activities by engaging with intermediary organisations

provide criteria for companies to support the selection of intermediaries to work with

give guidance to intermediaries on how to improve their services and to organise their business models

The findings of the research have been captured in a report published this month. The report aims to help companies select the most effective source of help with open innovation. It describes the capabilities companies need in order to implement open innovation successfully and the range of assistance offered by different types of innovation intermediaries. It suggests a structured approach to selecting the most appropriate intermediary for a particular company's needs and illustrates this with case studies and examples. The report also aims to help intermediary organisations to present their services more clearly to their clients.

You can download an electronic copy for free by clicking here.

The geography of open innovation: Do what where?

Simple question: Does anyone know of research that links the implementation of open innovation with the decision on where to locate business operations?

To give this question some context, three research domains are related to this question (though there are of course many more).

1. Cluster theory: Regional clusters are believed to provide a fertile environment to support innovation. A huge amount has been written by economic geographers on categorising clusters, analysing how they form and evolve, identifying different policy measures that can be used to stimulate cluster development (addressing perceived market 'failures'), the role of inter-firm networks within clusters, etc. A good summary of work in these areas can be found in the 'Handbook of Research on Innovation and Clusters' edited by Charlie Karlsson.
2. Globalisation of innovation: There's plenty of research looking at the way in which innovation activities - especially those of multinational corporations - are increasingly distributed globally. However, some of this work uses R&D as a proxy for innovation. With the recognition that innovation is much more than just the commercialisation of the outputs of R&D operations, the use of R&D as a proxy for innovation seems to be potentially missing a big part of the picture. There is also plenty of research on the topic of innovation systems at the regional level.
3. Implementation of open innovation: With the frenzy of interest around open innovation (in all its guises), there is no shortage of how-to guides and useful examples from a wide range of industries and sectors.

However, we haven't yet come across much work that looks at the practicalities of implementing open innovation in a particular location. Specifically, we are looking for research which links the decision to locate some part of a firm within a particular region with the stated aim of implementing open innovation and the activities a firm needs to undertake at that location to ensure successful implementation of open innovation. So, if anyone knows of research which does make this link, we'd really like to hear from you either via the comment box below or via email to tim.minshall@eng.cam.ac.uk.

Three books, open innovation, and Maslow's hammer

On a recent hot, quiet and remote vacation, I read three books and when I had finished them I found myself pondering the implicit (or explicit) connections between the core theme of each book to open innovation. The three books were:

• Matt Ridley: "The Rational Optimist: How Prosperity Evolves"
• Carlota Perez: "Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages"
• Brian Arthur: "The Nature of Technology: What It Is and How It Evolves"

I'm not going to attempt to summarise these very interesting books other than to highlight what I think might be some of the open innovation angle that can be taken from each one (but I am still working on this ..).

Matt Ridley's core message is about the power of the exchange and reproduction of ideas, the trade in goods and services, and innovation as a 'collective phenomenon'. As such the book (to me) seems to push the role of collaboration innovation to the fore and, in fact, raise it to high prominence as an essential component in underpinning our ability to maintain growth across the globe in the face of major social, economic and environmental challenges.

Carlota Perez presents an excellent, structured summary of the patterns that can be observed in technological revolutions. She splits analysis of past revolutions into two broad phases of installation and deployment, and each of these is in turn split into irruption and frenzy, and synergy and maturity. She stresses the difference between financial and production capital in supporting the widespread adoption of the technology. A key message of this book, from an open innovation perspective, is the recognition that technologies are extremely unlikely to be brought to market by firms acting in isolation and that the development of the whole ecosystem - or 'techno-economic paradigm' - is required to support successful diffusion of novel technologies. And this is not a feature only of modern technologies, but something that can be observed in the analysis past technological revolutions such as canals, steel making, railways, automobiles, and many others.

Finally, Brian Arthur's delivers 'an -ology of technology'. He discusses technology in terms of links to natural phenomena, the combining of and building upon existing technologies, and how technologies deepen and develop over time. He also presents an interesting discussion of the links between the evolution of the economy and technologies, and the way in which an economy can be considered as an expression of its technologies. From an open innovation perspective, this book provokes numerous interesting areas for further discussion. Among these, the links between modern technologies, management change and collaboration are interesting. E.g. "[..] the nature of modern technology is bringing a new set of shifts: In the management of businesses, from optimizing production processes to creating new combinations - new products, new functionalities. From rationality to sense-making; from commodity-based companies to skill-based companies; from the purchase of components to the formation of alliances; [..]. Order, closedness, and equilibrium as ways of organizing explanations are giving way to open-endedness, indeterminancy, and the emergence of perpetual novelty" (p210-211).

However, in reading all three of these books and looking for the open innovation links as I have attempted above, I'm not sure whether I have fallen into the trap identified by Abraham Maslow when he stated: "It is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail". So, if anyone else has read these books and has an interest in open innovation, your comments would be welcome.

Key points from IfM's open innovation workshops

The open innovation workshops organised by the Institute for Manufacturing on 20/21 April attracted delegates representing a range of industry sectors and company sizes, with diverse experiences at implementing (or plans for implementing) open innovation. Ruth Thomson from Cambridge Consultants has kindly written two blogs summarising the key themes discussed at this event, and these can be accessed via the links below:

• Blog summarising 20th April workshop on "Open innovation for small firms: how to set up and manage collaborations with large firms"
• Blog summarising 21st April workshop on "Implementing open innovation in large firms"