Description
During this outline around business incubation and venture capital an international survey on synergies and challenge.
IPI
Istituto per la
Promozione
Industriale
IKED
BUSINESS INCUBATION AND
VENTURE CAPITAL
AN INTERNATIONAL SURVEY
ON SYNERGIES AND CHALLENGES
Joint IPI/IKED Working Paper
January 2005
ENRICO CALLEGATI
SILVIA GRANDI
GLENDA NAPIER
Joint IPI/IKED Working Paper
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
2
ISBN: 91-85281-05-0
Title: Business Incubation and Venture Capital – An International Survey on Synergies and Challenges
Authors: Enrico Callegati, Silvia Grandi, Glenda Napier
Publisher: IPI
© IKED International Organisation for Knowledge Economy and Enterprise Development
Reproduction is not authorised without permission in written form from the publisher. Only minor part of the paper could
be utilised and cited provided that the source is acknowledged.
ACKNOWLEDGEMENTS
This working paper is a result of a collaborative work jointly carried out by the Institute for Industrial Promotion (IPI) within
the Department for Centres and Networks in Partner Countries - Direction for Transfer of Knowledge and Innovation -
and the International Organisation for Knowledge Economy and Enterprise development (IKED).
Although all authors have been thoroughly involved in the working paper, Part I has mainly been prepared by Mr. E.
Callegati ([email protected], Part II by Mrs. G. Napier ([email protected]) and Part III by Mrs. S. Grandi
([email protected]). In addition, the authors wish to thank the International Network for SMEs (INSME) Association, which
made the creation of the working group possible, and all the incubators and organisations that kindly answered to
questionnaires and accepted to be interviewed.
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
Joint IPI/IKED Working Paper
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About the Institute for Industrial Promotion (IPI)
IPI is a government agency specialised in the promotion of growth and competitiveness of production systems in an
international globalized context, which imposes the adoption of innovative systems of governance intended to seize the
opportunities offered by increasingly larger and more competitive markets as well as valorising special territorial
characteristics with particular regard to the SME system.
The Institute's operations are oriented towards responding to the needs of the Italian Public Administration and the
governments of its partner countries relative to the definition and management of sectoral, factorial and territorial policies.
In addition, IPI intervenes in the planning, realization and management of programs, system actions and tools aimed at
supporting the development of entrepreneurs as well as manages systems at national and international levels favouring
the access of industrial businesses to innovation. IPI operates in the context of international, multilateral processes of
industrial cooperation with the objective of creating environments favourable to the development of relations between
different productive systems.
IPI
Viale Maresciallo Pilsudski, 124
I - 00197 Rome - Italy
Telephone: (+39) 06809721
Fax (+39) 06.80972.443
E-mail: [email protected]
Website: www.ipi.it
About the International Organisation for Knowledge Economy and Enterprise Development (IKED)
IKED is an independent, international non-profit organization focusing on the emerging issues of the knowledge-based
economy.
IKED strives to link the primary actors forming the knowledge-based economy: government, industry, academia and civil
society – facilitating international networks and policymaking forums; leading projects and forming recommendations to
turn policies into action.
In addition to mobilizing and enhancing Nordic expertise, IKED engages in activities that support the successful
integration of an expanded European Union, and is an active partner supporting structural policy reforms in various
countries worldwide. IKED addresses the driving forces and consequences of new technologies, including information
and communications technology (ICT), the rapidly changing innovation processes, and the conditions required for
dynamic enterprise development. Focusing on the crosscutting horizontal policy dimension of these issues, IKED is a
venue for addressing the broader economic and social implications relevant to the ascent of the knowledge economy.
IKED further develops programs that involve prime policy makers, government agencies, private sector associations,
NGOs, research institutes and other relevant stakeholders.
IKED
Stortorget 29, 5 floor
S - 211 34 Malmö - Sweden
Telephone: (+46) (0) 40176500
Fax: (+46) (0) 40176501
E-mail: [email protected]
Website: www.iked.org
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
Joint IPI/IKED Working Paper
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TABLE OF CONTENTS
TABLE OF CONTENTS ........................................................................................................................................................5
INTRODUCTION...................................................................................................................................................................7
I. FOSTERING FIRMS THROUGH BUSINESS INCUBATORS...........................................................................................9
Business Incubation – a Global Concept ...........................................................................................................................9
Incubation Activity............................................................................................................................................................10
Classifying Business Incubators ......................................................................................................................................11
Some Incubator Experiences...........................................................................................................................................11
II. NEW FIRMS AND VENTURE CAPITAL.........................................................................................................................15
The Growing Impact of Venture Capital...........................................................................................................................15
Venture Capital Activity....................................................................................................................................................15
Classifying Venture Capital Investors..............................................................................................................................17
III. METHODOLOGY...........................................................................................................................................................21
Questionnaire Survey and Interviews..............................................................................................................................21
Characterisation of the answering sample.......................................................................................................................22
The “Yes” and “No” Incubators ........................................................................................................................................23
IV. SURVEY RESULTS.......................................................................................................................................................25
Public/private and Profit/non-for profit .............................................................................................................................25
Regional, National or International Focus........................................................................................................................25
Entry Criteria....................................................................................................................................................................26
Incubator Staff’s Professional background ......................................................................................................................27
Tenants’ profile and background .....................................................................................................................................28
Activities for tenant companies ........................................................................................................................................28
Incubators’ Investments...................................................................................................................................................29
External and Internal Provision of Services.....................................................................................................................30
Service - Help with raising seed and venture capital .......................................................................................................30
Service - Market Research and Sales .............................................................................................................................30
Service - Help with Exporting and Partner Search Abroad..............................................................................................31
Exit criteria for tenant companies.....................................................................................................................................32
Firms’ Development Stages when Leaving Incubator .....................................................................................................32
Follow-up activities...........................................................................................................................................................33
Networking and collaborative structures..........................................................................................................................33
Joint IPI/IKED Working Paper
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
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Venture Capital as complementary partners ...................................................................................................................33
Overall Remarks – Bringing in the Venture Capitalist View.............................................................................................34
V. RECOMMENDATIONS...................................................................................................................................................37
VI. CONCLUSIONS.............................................................................................................................................................39
REFERENCES....................................................................................................................................................................40
APPENDIX A: THE SURVEY QUESTIONAIRE FOR INCUBATORS ................................................................................41
APPENDIX B : LIST OF RESPONDENTS..........................................................................................................................46
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An International Survey on Synergies and Challenges
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INTRODUCTION
Regional and national competitiveness and economic growth are increasingly dependent on the underlying conditions
supporting risk-taking and innovative ideas. As a result, innovation is increasingly becoming a priority for firms,
organisations and governments in most countries throughout the world. At the same time, economic growth has been
coupled with access to information and communication technology (ICT), the ability among firms to introduce
organisational changes and the level of human capital together with research and development in small and large firms.
However, despite many efforts to identify the key factors determining economic growth, a number of countries are still
faced with challenges forcing them to rethink their current position. Wealth and social well-being for thousands of people
around the globe are dependent on societies’ willingness and ability to adapt themselves to the new opportunities
evolving in the Knowledge Economy (KE).
In this new era, innovation is becoming an important national asset, and governments are struggling to find the ‘golden
key’, which will allow them to reap the benefits from the development. But as acknowledged, there are no miracle cures,
and while some countries are reforming market structures or reviewing systems of intellectual property rights, others are
reshaping financial markets or designing technology-push strategies to increase innovation. In parallel with these efforts,
new entrepreneurial firms and small and medium sized enterprises (SMEs) are gradually recognized as generators for
innovation and economic wealth. Today, the study of - and policy focus on - entrepreneurship is rapidly gaining
importance and initiatives supporting the development of entrepreneurial activity have become a priority issue.
Business incubators are essential for strengthening the development of start-ups. These structures have developed
across the world, and are widely accepted as places where professionals offer an organised and resourceful
environment for young, entrepreneurial firms. Especially in societies with little entrepreneurial dynamism, the role of
business incubators has turned out valuable for local development. Similarly, venture capital (VC) contributes to
economic growth in entrepreneurial firms (Kjærgaard and Borup, 2004). Recently, the National Venture Capital
Association (NVCA) underlined the importance of venture capital availability by showing how venture capital has been a
successful tool in supporting high-risk innovative and growth oriented firms across sectors and regions in the United
States (NVCA, 2004).
But despite increased political and economic recognition of both business incubation and venture capital, severe
limitations in the research area still exist. While a number of studies on incubators have concentrated on showing best
practices, guidelines for fostering new start-ups, business incubation management, evaluation of incubator programmes
and effectiveness of business incubators on start-ups, only little research has been devoted to investigate the linkages
and interactions between business incubators and venture capital investors and to decide whether they are successful in
their attempts to cooperate (Bearse, 1998; Etzkowitz et al., 2000; Mian, 1996).
As a result, crucial questions such as how do business incubators and venture capitalists collaborate and to what extent
are firms fostered in business incubators prepared to meet external investor’s investment criteria, are hitherto left
unanswered.
Figure 1: Collaboration between Business Incubators and Venture Capitalists
Source: IKED and IPI
At the same time, empirical indications leave the impression that business incubators’ collaboration with venture
capitalists is not always working optimally (Gullander & Napier, 2003). Generally, business incubators’ roles range from
providing affordable space to ensuring core business support such as business development, financing and venture
capital availability. However, as illustrated in Figure 1, very often only few entrepreneurial companies developed in
business incubators (tenants) are prepared to match VC investors’ investment criteria in terms of business maturity,
business activity or even in communication and negotiation abilities. Consequently, instead of being targeted by risk
capital funds, tenant companies are - when leaving the incubators - forced to look for other financing opportunities in
order to expand their businesses. But accessing financial means is not an easy task for entrepreneurial firms. Therefore,
Joint IPI/IKED Working Paper
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
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the risk is that low levels of investment readiness among companies fostered in incubators reduce their chance for
getting funded, which as a result could prevent them from performing well.
Given the described mismatch between young incubated firms and venture capital investors, business incubators should
strengthen their role as facilitator as to ensure that tenant firms can meet the expectations from external investors. In this
way, the economic resources and efforts allocated to operate and manage business incubators worldwide could better
contribute to the sustainability of tenant companies.
Based on the assumption that business incubators and venture capitalists are complementary sources of support for new
start-up companies, this working paper sets out to examine to what extent the described situation is accurate. In addition,
it points to possible avenues for improving collaborative complications between business incubators and venture
investors. By exploring the interaction and the collaboration between business incubation and venture capitalists from 16
countries worldwide, this paper contributes to the discussions related to innovation, entrepreneurship and financing in
different parts of the world.
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
Joint IPI/IKED Working Paper
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I. FOSTERING FIRMS THROUGH BUSINESS INCUBATORS
Business incubation is increasingly playing an important role for new start-ups around the globe. In a growing number of
countries, incubators that support the development of young, innovative firms are introduced as a way to strengthen the
entrepreneurial activity (number of start-ups) and the ability for new companies to survive.
In this chapter, the business incubation concept is discussed and the following sections will serve as background for the
analysis in Part IV.
Business Incubation – a Global Concept
The idea that innovation fosters economic growth is broadly shared and accepted among economists worldwide.
Therefore, one of the most important challenges for economic systems is to encourage technological innovation among
research institutes, universities, agencies, and, above all, firms. With this respect, empirical evidence is increasingly
showing that young, innovative enterprises should be supported (AIFI, 2001).
This need stems from market failures and other shortcomings, such as the difficult relation between academic research
and business, the lack of innovation services, the absence of a real “market” for technology transfer, and the difficulties
connected to the passage from the seed capital to the venture capital stage. The spread of business incubators
represents one of the main answers to the needs of emerging, innovative firms.
The first business incubators were established in the early 1970s in most western countries. They originated from the
necessity to fight the social costs of economic slowdown through job creation. According to Lalkaka (2001), three
«generations» of business incubators can be identified. In the 1970s and early 1980s, incubators were basically
providing selected firms with low-priced room and collective services. Then, in the 1990s incubators started benefiting
from additional facilities, such as counselling, training and networking services, and access to professional support and
seed capital. Finally, starting in 1998, a new incubation model appeared in parallel, aimed at mobilising ICT, focusing
exclusively on hi tech-based ventures and relying more and more on intangible assets and services.
According to the American National Business Incubators Association (NBIA),
“Business incubation is a dynamic process of business enterprise development. Incubators nurture young firms,
helping them to survive and grow during the start-up period when they are most vulnerable. Incubators provide
hands-on management assistance, access to financing and orchestrated exposure to critical business or technical
support services. Most also offer entrepreneurial firms shared office services, access to equipment, flexible leases
and expandable space — all under one roof. An incubation program's main goal is to produce successful
graduates — businesses that are financially viable and freestanding when they leave the incubator, usually in two
to three years. […] Incubator clients are at the forefront of developing new and innovative technologies —
creating products and services that improve the quality of our lives — on a small scale today, and on a much
grander scale tomorrow” (NBIA, 2004).
In this definition all the main elements which characterize the activity of business incubators are outlined and possible
variations among different structure are taken into account. Nevertheless, some argue that the emphasis is too much
focused on physical features, and this is less applicable to “third generation” incubators - which sometimes are called
virtual incubators - because of the intangible nature of their facilities. Accordingly, a possible alternative definition may be
the following one:
“A business incubator is an organisation that accelerates and systematises the process of creating successful
enterprises by providing them with a comprehensive and integrated range of support, including: Incubator space,
business support services, and clustering and networking opportunities. By providing their clients with services on
a 'one-stop-shop’ basis and enabling overheads to be reduced by sharing costs, business incubators significantly
improve the survival and growth prospects of new start-ups” (European Commission, 2002).
This definition can be considered broader and perhaps more able to capture the whole variety of business incubator
activities. Nevertheless, simplicity is perhaps sacrificed in the attempt to grasp new, not yet well established evolutions.
Therefore, the future path of the development in business incubation activity will probably determine more exactly the
scope and the basic features of incubators. Hence, a better understanding of the business incubation activity requires a
classification of the various categories of incubators.
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An International Survey on Synergies and Challenges
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Incubation Activity
According to recent estimates carried out by the European Commission, there are around 3,000 business incubators
worldwide (European Commission, 2002).
Figure 2: Geographical Distribution of Incubators, numbers per region
150
900
1000
200
600
150
0
200
400
600
800
1000
1200
Eastern Europe Western Europe North America Souh America Far East Africa, Middle East
and Others
Source: (European Commission, 2002)
A rough breakdown of incubators by country is shown in Figure 2. Evidently, North America has the highest
concentration of business incubators worldwide, which, not surprisingly, is explained by the strong tradition of incubators
in the country as the first ones appeared in the United States.
Today American business incubators are pioneering new models and practices in the area, such as virtual structures and
“dotcoms”. The American NBIA network involves more than 500 business incubators, mainly located in the US, and it
can be regarded as one of the most important, influential and largest incubator networks worldwide.
Turning to South America, Brazil now has about 160 business incubators, starting with ten a decade ago. Incubators are
also operating or being planned in other South American countries although the programmes elsewhere are less
advanced than in Brazil. In the Far East, from its beginnings in 1987 with a catalytic UNDP input, the China incubation
program has developed into the largest of its type in the developing world. In Japan and Korea, starting from more
autonomous resources, incubators steadily increased in number and importance throughout the 1990s, and similar
developments are taking place in Thailand, Malaysia and Indonesia. Africa and Middle East are among the least
economically developed regions in the world, and this is reflected in the poor presence of business incubators, too.
Nevertheless, several UN agencies and governmental programmes established significant incubation initiatives, for
instance, in Egypt, Tunisia, South Africa and Turkey, and numbers are expected to increase in the future.
Box 1: The Impact of Business Incubation in Europe
• 90% of all start-ups set up inside a business incubator are still active three years later.
• The public cost of creating jobs inside incubators is €4,000, which is very low compared with other public means and
programmes.
• The 900 European business incubators assist in creating 29,000 new sustainable jobs every year in enterprises,
which are much more viable than enterprises set up outside incubators.
Source: (European Commission, 2002)
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An International Survey on Synergies and Challenges
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With regards to Eastern Europe, UNDP technical assistance in 1990 helped pioneer the concept in Poland, starting with
the first incubator in Poznan. The creation in 1992 of the Association of Polish Business Incubators and Innovation
Centres became the catalyst for growth. Nowadays, mainly through the European Business and Innovation Network
(EBN), incubators are being established throughout the region, benefiting from best practices, resources and networking
in Western Europe
1
.
Applying a broad definition of incubators, there are currently thought to be around 900 business incubators in the
Western Europe (EU15). The European Commission (2002) calculated for each EU country the Incubators/SMEs ratio,
which can provide a rough estimate of the development of business incubation activity. Incubators were mostly present in
Scandinavia, France, and the UK and they were least present in Greece, Italy and the Netherlands.
Classifying Business Incubators
A number of incubator definitions exist and many attempts have been made to classify the business incubators (OECD,
1997; AIFI, 2001; European Commission, 2002). Naturally the definition varies according to the chosen criteria. OECD
(1997) has proposed a typology of incubators based on their overriding objective and characteristics of tenant firms.
Three main types can be classified in this way:
• General/Mixed-Use Incubators are mainly committed to promoting continuous regional industrial and economic
growth through general business development.
• Economic Development Incubators are business incubators whose main aim is to stimulate specific economic
objectives such as job creation and industrial restructuring, often the result of local government initiatives.
• Technology Incubators are incubators whose primary goal is to promote the development of technology-based
firms, as spin-offs from universities and science parks, in order to promote technology transfer while
encouraging entrepreneurship among researchers and academics (OECD, 1997).
In a study commissioned by the European Commission and published in 2002, the authors propose a more clear-cut
classification. They differentiate incubators by identifying those that are for-profit from those that are not. This typology,
although simplistic, addresses the need for a clear and always applicable division, whereas other classifications may
create ambiguities and overlapping. In any case, this approach acknowledges the difficulty of classifying structures
whose evolution does not follow predefined patterns, but on the contrary are constantly innovating and renovating, in
order to adapt to the new developments and needs arising from the economic environment.
Some Incubator Experiences
A number of incubator studies collect best practices and practical advices for business incubator managers. Among
those, NBIA (2004) identifies two core principles characterizing effective business incubation. First, the incubator aspires
to have a positive impact on its community's economic health by maximizing the success of emerging companies.
Second, the incubator itself is a dynamic model of a sustainable, efficient business operation. Coming to more
operational measures, several studies attempted at selecting best practices for business incubators (OECD, 1997;
European Commission, 2002; NBIA, 2004), and they can be summarized as detailed in Box 2.
1
In Europe, EBN (www.ebn.be) is the most relevant incubator network. It fosters the establishment and development of Business and
Innovation Centres (BICs), which carry out incubation and other business support activities, throughout the European Union and
neighbouring states, including candidate and associated countries.
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An International Survey on Synergies and Challenges
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Box 2: Examples of Best Practices for Business Incubators
• Obtain consensus on a mission that defines the incubator’s role as integrated in a broader framework, territorially or
sector oriented (especially when non profit oriented). Therefore, a partnership of public and private stakeholders is
desirable in the setting up of incubators.
• The most successful incubators have a definite target market, and tenants are screened on that basis. In addition,
focusing on “cluster-based” technology can increase efficiency and synergies.
• A realistic business plan has to be developed. It should entail public funding but dependence on subsidies should be
minimised.
• Managers play a key role for the overall performance of incubators. Their competences and motivation must be
carefully assessed.
• Business support services are also a core element for the survival and growth of tenant companies. They should be
charged, but their price should be below that of outside market.
• Experience share and international networking can be useful both for the spread of more precise best practices and
for the potential access to a larger span of resources and opportunities.
• Exit criteria should be adopted so as to ensure an efficient turnover of enterprises. On the other hand, aftercare to
graduate companies is also important.
• Evaluation mechanisms should be put in place. They can provide a tool for assessment of incubator and company
performance, thus suggest changes and improvements in activities.
• Location should be chosen carefully and the principle of location advantages should be considered.
Sources: (NBIA, 2004; OECD, 1997)
Nevertheless, the activity of incubating young enterprises is far from straightforward. When an incubator is not carefully
planned, or managed, it can be of limited value - or even harmful - to the economic system as a whole. Some of business
incubators’ deficiencies are listed in Box 3 (OECD, 2002; NBIA, 2004).
Box 3: Examples of Business Incubator Deficiencies
• Business incubators tend to rely solely on public funding, thus not correlating expenses with overall performance.
• Incubators can have the tendency to overemphasize the activity of providing tailored services to client enterprises, to
the detriment of networking with industry and investors.
• When business incubators have functions, business model and operative modalities, which are not tailored to, the
community they are serving (whether this is real or virtual), their impact on the overall economic performance could
be limited.
• Incubators that are not part of a broader economic development strategy can prove themselves useless, as they
could be facing too hard a task for their potential.
Sources: (NBIA, 2004; OECD, 1997)
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
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As detailed in Box 3, most inadequacies found in business incubators are related to the lack of networking with other
actors of economic development. In fact, the object of our research is a particular case of this relation, that is, the
connection between business incubators and venture capitalists. Therefore, the following chapter will address the second
element of our research, namely the venture capital investors.
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An International Survey on Synergies and Challenges
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Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
Joint IPI/IKED Working Paper
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II. NEW FIRMS AND VENTURE CAPITAL
For many entrepreneurial firms around the world, getting access to external capital is a difficult task, and a shortage of
risk capital is one of the greatest hurdles when starting up a new company, particularly in high-tech and high-growth
business areas. In this chapter, the role of venture capital investor is highlighted and some recent trends from venture
capital markets around the globe are brought forward. As with the Part I, this chapter will serve as background
information for the analysis in Part IV.
The Growing Impact of Venture Capital
Venture capital markets have evolved rapidly around the world since the 1980s and 1990s fuelled by both private and
public efforts. However, today’s size of the global venture capital market is remarkably smaller compared to before the
crash of markets in 2001. Venture capital markets displayed a sharp reversal, and the provision of funding to the
industries experienced heavy consolidation as the numbers of venture funds were reduced worldwide. Equity markets
collapsed and many of the “dotcoms” that had obtained heavy funding rapidly faltered.
Figure 3: Venture Capital Investments in Selected Countries (1999-2002)
Source: (Global Entrepreneurship Monitor, 2004)
As shown in Figure 3, the level of venture capital investments differs between countries, and whereas countries such as
Israel and the United States invested up to 1.2% of GDP in new ventures in 2000, other countries such as Poland,
Belgium, Norway and Portugal invested much less. In 2001, the $100 billion invested globally was less than half of the
$250 billion invested in the previous year (PriceWaterhouseCoopers, 2003). Evidently, the flows of investments have
changed remarkably along with the economic downturn in 2001. Today, most countries are recovering and investment
activities are generally back at the pre-bubble level in 1998.
Venture Capital Activity
A broad assessment of financial sources is important for companies during the various stages of business development.
At the pre-seed stage, firms are generally financed through owner/inventor, family and friends and a variety of creative
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An International Survey on Synergies and Challenges
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methods of acquiring access to resources without raising capital from external sources. The demand for funding is
relatively small, and the period of self financing is limited with an increasing need of funding following the development of
the project.
Figure 4: The Business Finance Chain
VENTURE CAPITAL
PRIVATE EQUITY
Low Firm Evaluation Medium Firm Evaluation High Firm Evaluation
High Informal market Informal/Formal Market Institutional Market Institutional Market High
A
m
o
u
n
t
o
f
I
n
v
e
s
t
m
e
n
t
Business angels
Corporate Venture Capital
Public investors
Venture capital funds
Business angels
Corporate Venture Capital
Public investors
Venture capital funds
Stock Markets
Private Equity
I
n
v
e
s
t
o
r
’
s
R
i
s
k
A
v
e
r
s
i
o
n
Low 1. Stage 2. Stage 3. Stage 4. Stage Low
Pre-seed
Financing provided to
research, assess and
develop an initial
concept before a
business has reached the
start-up phase. Firm has
no track record and little
business development.
Seed
Financing provided to
companies for product
development and initial
marketing. Firm may be in
the process of setting up or
may have been in business
for a short time, but have
not sold their product
commercially. Some sales
might have been
demonstrated on small scale.
Expansion
Financing provided for the
growth and expansion of an
operating company, which
may or may not be breaking
even or trading profitably.
Capital may be used to finance
increased production capacity,
market or product
development, and/or to
provide additional working
capital.
Bridge
Financing made available
to companies in a period
of transition such as
turnaround, MBO, MBI
or when the company
develops from being
privately owned to
becoming publicly
quoted.
Source: (Andersson et al., 2005)
As shown in Figure 4, different investors complement each other successively as the development of the firm proceeds.
The entry of new investors does not necessarily imply that the existing investors are diluted, but rather that they remain,
sometimes with a lower profile becoming more or less “silent partners”.
As the entrepreneurial company grows, so does the urgent need for additional risk capital. First, informal private
investors, i.e. the business angels are considered the main source of funding. At a later stage the formal venture
capitalists, managing funds originating from sources such as pension funds and insurance companies, enter the
development scene.
In general, entrepreneurs are faced with two funding gaps. The first funding gap arises when the investment-seeking firm
has to identify external investors (after having supported the firm himself with founder’s capital). At this stage, the
entrepreneur typically needs capital for prototyping and investigating different marketing strategies. In this period
business angels play a crucial role as investors. The second funding gap arises once the business angel’s financial
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
Joint IPI/IKED Working Paper
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sources are not sufficient and large investments are needed for the growth stage of the firm, often focusing on heavy
marketing investments. At this stage the formal venture capitalist often enters the financing scene for the start-up firm.
Classifying Venture Capital Investors
According to the Global Entrepreneurship Monitor 2004, only less than 0.01% of entrepreneurs launched their new
business with the support from classic venture capital or business angel investments (Global Entrepreneurship Monitor,
2004). In other words, most entrepreneurs are forced to look for alternative financing opportunities such as banks, or to
develop their business without any financial support. However, for those lucky few, business angels or classic venture
capital funds are typically the main option.
Business angels are high net-worth individuals who provide early-stage companies with financial and non-financial
assets such as skills, professional networking, coaching and expertise. Angel investors often have a background as
successful entrepreneurs/businessmen and accumulated sustainable amounts of capital. Generally, business angels
hold unique insights within certain business areas and they tend to operate with a very committed, strong hands-on
approach. Normally business angels invest smaller amounts compared to the institutionalized venture capital firms
ranging between € 25,000 - € 250,000 (Harrison & Mason, 2002; Vækstfonden, 2002).
Figure 5: Informal and Classic Venture Capital Investment (by country)
Source: (Global Entrepreneurship Monitor, 2004)
As shown in Figure 5, informal types of investors invest up to 10 times more capital in start-up companies compared with
classic venture capital. Especially in countries such as China, New Zealand and Chile, informal investors play a crucial
role as grassroots financing for new firms. Other countries like the Nordic countries have experiences with building
business angel networks in order to increase the flow of business angel investments to entrepreneurial firms. Business
angel networks are new types of public or private organisations that increase business angel investments by providing
screening of entrepreneurial projects and matchmaking events (Gullander & Napier, 2003).
Classic venture capital also plays a significant role for fuelling entrepreneurship, although most venture capitalists invest
in slightly later stages compared with business angels. Venture capitalists are often key actors in the division of labor
between universities or other institutions breeding new technologies and commercial activities.
Joint IPI/IKED Working Paper
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
18
Generally, the funds are administrated by investment managers and have an average investment horizon between 2-5
years in each portfolio company. In this working paper, venture capitalists are understood as investments by business
angels or classic venture capital funds in early stages of business development. Their objective is to help build a
company from conception, add value and, when the company reaches maturity, realize profits from their investments.
Obviously, venture capital fund invests either before there is a tangible product, or before the company has developed an
organisation, or they provide capital to a company in its primary or secondary stages of development. They can also
provide the finance required for helping the company to reach critical mass on its way to success e.g. in the expansion
stage.
The funds take ownership stakes in portfolio companies and engage actively in the management and development of a
firm.
Table 1: Examples of Investors’ Investment Criteria
Suppliers of capital Criteria for accessing funding sources
Family, Friends and Fools Personal relationship based on trust
Business angels
Meeting or matching of individual entrepreneurs with business an-gels
Atmosphere of trust between individuals
Credible business plan in the eyes of the Business Angel
Good management team
Fiscal incentives
Market knowledge of the entrepreneur
Availability of exit route
Return on investment (capital gain)
Banks
Availability of guarantees or collateral
Perceived ability to repay the loan
Company track record
Rating
Good management
Repayable short-term loans
Innovative nature of business projects
Business plan quality
Management team
Venture capital
Business plan credibility
Business plan with patent technology
Track record (over previous years)
Ability to grow fast and deliver quick ROI
Management team quality
Public funding
New jobs
Investment in productive tools
Source: (Adapted from EURADA, 2004)
As found in Table 1, different investors have varying criteria for investments. Whereas business angels weight a factor
such as the atmosphere of trust between entrepreneurs and business angels and the personal meeting with the
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
Joint IPI/IKED Working Paper
19
entrepreneurs high, classic venture capital investors tend to weight growth potential, technology and track record higher.
In contrast, banks are more focused on guarantee and collateral and the firms’ ability to repay the loan. For public
investors, employment and productive tools are important reflecting the public sector’s social and economic
responsibility. Consequently, policies designed to foster more investments should acknowledge these differences and
investment seeking entrepreneurs should be aware of the varying motives and criteria when they look for capital in the
market.
Joint IPI/IKED Working Paper
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
20
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
Joint IPI/IKED Working Paper
21
III. METHODOLOGY
The need of further investigation in the relationship between risk capital and incubators emerged as one of the not fully
developed and unsolved questions; therefore it was decided to attempt shed light on and draw attention to this topic
through a survey, which would cover a large span of countries, i.e. following the INSME
2
rationale.
Based on direct visits to incubators and some preliminary interviews as well as reviews of literature and secondary data
analysis, the research idea and objectives have been identified. It has to be specified that the intention was to collect a
significant number of inputs and multiplicity of points of view that could be of support to analyse the complex reality,
rather than conducting a comprehensive study with a full statistical significance.
In this chapter, the methodology in the study is briefly outlined and some consequences of the applied method are
discussed as well as some characteristics of the interviewed incubators are highlighted.
Questionnaire Survey and Interviews
In order to investigate the research field, a questionnaire survey has been designed in order to collect quail-quantitative
primary data. The task has been carried out through the work of a joint group consisting of IPI and IKED officers, whose
expertise are in risk capital or intermediary organisations, among which incubators are classified.
The questionnaire (see full text in Appendix A) includes 38 questions organised in seven sections, starting from general
data regarding the incubators and useful to characterise the sample, i.e. their tenant companies, their provided services
and their partnerships. While in this part some questions related to financing and innovative finance were included, the
last three sections were designed to investigate the core issue of this research.
The questionnaire was sent by email, with a phone pre-contact or post-contact to enhance response motivation, to 40
incubators worldwide. In particular, the incubators were selected through the international networks of IPI, IKED, NBIA
and INSME databases and the sample was constructed to reflect the proportionality in the geographical distribution of
business incubators in the world regions as reported by the European Commission (2002) and represented in Figure 2.
Out of the 40 incubators that received the questionnaire, a total of 28 returned the questionnaire (see list of respondents
in Appendix B), which results in a response rate of 66%. As shown in Figure 6, the respondents represent 16 different
countries worldwide including Cyprus, Denmark, Finland, Germany, India, Ireland, Italy, Japan, Palestine, Romania,
Singapore, South Africa, Sweden, Tunisia, Turkey and the United States.
Figure 6: Surveyed Business Incubators, by geographical region
2
10
6
3
7
0
2
4
6
8
10
12
Eastern Europe Western Europe North America Far East Africa, Middle East,
other
Source: IPI and IKED
2
INSME, The International Network for Small and Medium Sized Enterprises, is a non-profit Association open to international
membership. Its mission is to stimulate transnational cooperation and public and private partnership in the field of innovation and
technology transfer to SMEs and in this framework particular attention is devoted to the promotion of North-South multilateral dialogue
and co-operation (www.insme.org).
Joint IPI/IKED Working Paper
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
22
As shown, the majority of the respondents are from Western Europe, followed by North America and Africa, Middle East
and others. This distribution is to some extent similar to the estimates of incubators worldwide carried out by the
European Commission in 2002 (Figure 2).
Furthermore, to collect the point of view of representatives of the innovative finance system four direct interviews were
organised with Danish and Italian Venture Capital Organisations as well as with the European Venture Capital
Association and the European Investment Bank (Appendix B). The interviews were carried out either by telephone or
personal meetings.
Characterisation of the answering sample
Thanks to some introductory questions, the set of organisations that answered to the questionnaire can be described
according to some variables. In the survey, the majority of incubators operate as public entities, while only 25% of the
incubators are organised as private companies. Compared to other incubator surveys carried out in Europe (see for
instance European Commission, 2002, in which the largest part of the incubators consisted of private entities), the
percentage of privately held incubators in this survey is lower. Yet, there are no clear patterns in terms of countries or
regions, as both public and private incubators are roughly equally distributed throughout the regions.
Figure 7: Legal Status of Business Incubators
10
7
5
6
0
2
4
6
8
10
12
Public Entity Private Company Private Public
Partnership (PPP)
Other
Source: IPI and IKED
Furthermore, 20 out of 28 incubators are operating as non-for-profit organisations, whereas only five describe
themselves as for-profit incubators. However, when comparing the profit orientation with the legal status, it is seen that
the profit-oriented incubators are both found among the private companies as well as public entities. In other words, we
confirm that the sample was chosen in line with the observation that profit orientation is not necessarily limited to private-
sector incubators.
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
Joint IPI/IKED Working Paper
23
Figure 8: Non-for-profit or profit oriented incubators, numbers
22
5
1
0
5
10
15
20
25
Non for profit For profit n.a
Source: IPI and IKED
The “Yes” and “No” Incubators
In order to examine the collaboration between the incubators and venture capitalists, the incubators were asked to
consider if they had been collaborating with venture capital investors or not (see Appendix A question 5.2)
3
. In the
following analysis, the results were clustered based on whether the respondents have or have not experienced some
kind of collaboration with venture capitalists. In practice, those incubators who have collaborated with VCs have either
presented some of their tenant companies to investors and/or venture capitalists have invested in the firms.
In the following analysis, we will refer to those incubators, which have collaborated with venture capitalists as ‘Yes’
incubators, while those that have not collaborated with VC are referred to as ‘No’ incubators. Then, for the questions with
a major difference between the answers from the two groups of incubators, the results are presented and compared for
the ‘Yes’ incubators and the ‘No’ incubators, respectively. This is done in order to identify the key factors determining a
positive collaboration between incubators and VCs.
Figure 9: “YES” and “NO” Incubators
0
2
4
6
8
10
12
14
16
18
Yes, we have collaborated with venture
capitalists
No, we have not collaborated with venture
capitalists
Eastern Europe Western Europe North America Far East Africa, Middle East, other
N
u
m
b
e
r
o
f
i
n
c
u
b
a
t
o
r
s
Source: IPI and IKED
As shown in Figure 9, among the 28 interviewed incubators, 16 respondents have experienced some kind of
collaboration with venture capitalists in connection with their work as incubator managers and will be referred to as the
‘Yes’ incubators. On the other hand, the ‘No’ group consists of 12 incubators.
3
Question 5.2 “Did you ever collaborate with Venture Capital? If yes, please fill out box 6, if no, please fill out box 7”.
Joint IPI/IKED Working Paper
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
24
In the “Yes” and “No” perspective, the sample seems quite balanced and, therefore, potentially useful to the objective of
the study to collect inputs and insights on the relationships among incubators and the innovation finance system.
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
Joint IPI/IKED Working Paper
25
IV. SURVEY RESULTS
As discussed, business incubation has increased its impact on firm formation along with venture capitalists increasingly
being recognized as fuel for entrepreneurship and economic growth. Despite the somewhat significant role played by
both incubators and venture capitalists so far, their mutual relationship and impact are somehow uncertain. Based on the
quantitative survey of business incubators in 16 different countries worldwide, some aspects in the collaboration between
incubators and venture capital investors are reviewed in this chapter. It should be underlined that the following results are
not viewed as fully applicable for all other incubators in the world, but rather they reflect the current situation in the
interviewed incubators. Based on this analysis, some synergies between incubators and venture capitalists are
discussed and some future challenges in the collaboration are brought forward in order to provide policymakers and
business incubators with recommendations in this field.
Public/private and Profit/non-for profit
Comparing the origin of the incubators, public or private, no differences are found between the business incubators that
have collaborated with venture capital (the “Yes incubators”) and those incubators that have not collaborated with VC
(the “No incubators”). However, the difference between non-for-profit and for-profit incubators is significant between the
two groups.
Figure 10: Profit Orientation and VC Collaboration
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Yes No
Non for profit incubators Profit oriented incubators n.a.
%
o
f
i
n
c
u
b
a
t
o
r
s
Source: IPI and IKED
While 100% of the ‘No incubators’ are characterising their incubator activity as non-for-profit, as shown in Figure 10, one
third of the ‘Yes incubators’ are working for-profit.
These results indicate that profit oriented incubators –compared with non profit incubators - tend to have more contact
with VCs. This could be explained by the assumed stronger emphasis on revenues among profit oriented incubators, as
venture capital usually is an opportunity for the incubators to increase investments and thereby achieve higher revenues.
Regional, National or International Focus
Generally, incubators can operate with regional, national or international scopes. However, when examining the
interviewed incubators, we find that the majority (80%) of the incubators that have not collaborated with VC is primarily
operating regionally in their business activities and none of them are international oriented in their work.
Joint IPI/IKED Working Paper
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
26
Figure 11: Internationalisation and VC collaboration
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Yes No
Regional National International
%
o
f
i
n
c
u
b
a
t
o
r
s
Source: IPI and IKED
Meanwhile, as shown in Figure 11, the “Yes incubators” tend to span their activities more widely. About one third of
incubators that have experienced VC collaboration have a regional focus, 38% operate nationally and 30% of the
incubators extent their business internationally. Hence, apparently the broader the incubators are focusing
geographically, the more the incubators are likely to collaborate with VCs.
One explanation could be that venture capitalists are not always located within the specific region of a single incubator.
Therefore, incubators with a broad geographical focus tend to increase the chance for accessing venture capital funds.
Similarly, it is assumed that venture capitalists - due to the potential wider market vision in these companies - prefer to
invest in tenant companies located in incubators with international links and networks.
Entry Criteria
Most of the interviewed incubators apply some kind of entry criteria defining the profiles of the tenant companies entering
the business incubators. Among the interviewed incubators factors such as established businesses, certain geographical
location, high growth potential or innovation, are used as entry criteria. However, while “No incubators” in average apply
two entry criteria for new firms entering the incubator, the “Yes incubators” apply a higher number of entry criteria – in
many cases up to 3-4 entry criteria per new tenant. In other words, it seems that the more selective the incubator
managers are when selecting new firms, the more positive experiences they have when trying to access venture capital
funds.
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
Joint IPI/IKED Working Paper
27
Figure12: Entry Criteria and VC Collaboration
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Yes No
1 Entry Criteria 2 Entry Criteria 3 Entry Criteria 4 Entry Criteria
%
o
f
i
n
c
u
b
a
t
o
r
s
Source: IPI and IKED
Moreover, a single entry criterion such as innovation seems to be more important for the “Yes incubators” compared with
the “No incubators”. Whereas half of the business incubators without VC experiences require that new tenant companies’
business models are based on innovation, 75% of the “Yes incubators” prefer innovative tenants. These findings
suggest, that the incubators that have succeeded in collaborating with venture capitalists tend to be more selective and
prefer innovative firms more often compared to the “No incubators”, and are therefore more likely to present innovative
firms to the investors compared to the “No incubators”.
Incubator Staff’s Professional background
Generally, business incubators are often accused for not establishing or maintaining sufficient contacts with the private
sector. As a result, the final outputs and products from incubators are not always adapted to the needs of the market.
Exploring the ability among incubators to respond to the need of venture capitalists, we examined whether the
professional background of the incubators’ staff would influence their ability to communicate with VC.
Figure 13: Private sector background and VC Collaboration
0
10
20
30
40
50
60
70
80
Yes No
Staf f with public/private sector background Staf f with only private sector background
%
o
f
i
n
c
u
b
a
t
o
r
s
Source: IPI and IKED
According to the survey, differences between the staff members’ background in the ‘No’ and ‘Yes’ incubators occur.
Whereas only around 50% of the staff in incubators without VC collaboration has a professional background in the
private sector (they have previously worked either as entrepreneurs, firm managers or firm consultants), about 75% of
Joint IPI/IKED Working Paper
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
28
the staff in incubators with VC experiences has professional backgrounds from the private sector. Moreover, while 20%
of “No incubators” has staff members that have only been working in the private sector, this number is more than double
in the “Yes incubators”. Therefore, these figures indicate that business incubators with primarily private sector staff are
more likely to have good relations with VC.
Tenants’ profile and background
In order to increase the number of tenant companies leaving business incubators and instantly becoming targets for
venture capital investors, it is necessary to understand (in order to improve) the business profile and background of the
companies fostered in incubators.
Figure 14: Spin-offs from Universities and VC Collaboration
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Yes No
New start-ups Spin-off from universities Spin-off from existing firm Spin-off from R&D centre
%
o
f
i
n
c
u
b
a
t
o
r
s
Source: IPI and IKED
As shown in Figure 14, spin-offs from universities and existing firms are more often found within the incubators having
experienced some kind of collaboration with venture capitalists. On the opposite, incubators without VC experience tend
more often to foster either new firms or spin-offs from R&D centres.
Activities for tenant companies
Another indicator for the company profiles is the type of business activities, which the tenants are carrying out.
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
Joint IPI/IKED Working Paper
29
Figure 15: Tenant Companies’ Activities and VC Collaboration
0
10
20
30
40
50
60
70
80
90
Yes No
ICT R&D Advanced/high tech manufacturing Sales, marketing, distribution
%
o
f
i
n
c
u
b
a
t
o
r
s
Source: IPI and IKED
As shown in Figure 15, firms working with research and development and information and communication technologies
are more often found in the incubators, which have collaborated with venture capitalists compared to those incubators
that have not collaborated with VC. Whereas up to 80% of the firms in the “Yes incubators” have ICT as their main
business activity, only half of the firms in the “No incubators” are occupied with ICT. The results in Figure 14 and 15
indicate that incubators, fostering technology and research-based firms, tend to be more attractive for venture investors.
Incubators’ Investments
As discussed, for most investors factors such as the “personal feeling”, trust and strong confidence in the entrepreneurial
firm are paramount when making a new investment. Normally, VCs realise new investments because they believe in both
the new business idea and in the entrepreneurial team behind the idea. However, investors can be encouraged to invest.
Sometimes one investor manages to convince other investors that an idea is worth “believing” in, simply by investing in
the idea himself. Similarly, this mechanism could describe incubators’ seed investments in tenants. If a business
incubator invests in one of its own tenant companies, it signals to other investors such as venture capitalists, that this
company is worth investing in.
Figure 16: Incubators’ own Investments and VC Collaboration
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Yes No
Incubators are not investing in companies Incubators are investing in companies
%
o
f
i
n
c
u
b
a
t
o
r
s
Source: IPI and IKED
According to the survey, as shown in Figure 16, the business incubators that have financed some of their companies with
either loans or equity tend to have better collaboration with VC compared with the incubators that have not invested in
the tenants. Whereas more than 30% of the “Yes incubators” have invested capital in their firms, none of the “No
incubators” has invested in their tenants before presenting them to the VC.
Joint IPI/IKED Working Paper
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
30
As discussed, it is very often viewed positively - when presenting tenants to VCs - if the incubators can show that they
have been willing to risk and invest in the companies themselves.
Another explanation could be that many of the firms, which have been invested in by incubators, are presumably more
developed and matured (due to the extra capital) compared to those firms which have not received any additional capital
from incubators, and they therefore appear more attractive for investors. This point will be turned to later.
External and Internal Provision of Services
Generally, business incubators provide a number of services to the tenant companies during the period in the incubator.
Analysing these services, it is found that the “Yes incubators” tend to provide more services externally (services provided
from sources outside the incubators), whereas the “No incubators” more often provide services internally (services
provided from sources inside the incubators). In other words, outsourcing of incubator services tend to co-exist with
increased venture capital in incubators.
The openness to external sources - both in services and in networking - facilitates a better collaboration with VC.
Presumably, the benefits of being more open are that the tenants can benefit from a larger span of views and services,
thus reaching potentially the best service in the market. In that way, incubators provide more competitive services, which
in turn are expected to make the enterprises better equipped and prepared for external investments. In the following,
some examples of incubator services are highlighted.
Service - Help with raising seed and venture capital
The “Yes incubators” tend to provide assistance with raising venture capital more often compared to the ‘No’ group of
incubators. In addition, when the ‘Yes’ group provides the service, it is likely to be provided by person working inside the
incubator.
Figure 17: Help with Raising VC and VC Collaboration
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Yes No
No help with raising VC provided
Help with raising VC provided
externally
Help with raising VC provided
internally %
o
f
i
n
c
u
b
a
t
o
r
s
Source: IPI and IKED
This survey result could indicate that those incubators, which have been collaborating with venture capitalists, have in-
house human resources capable of advising and communicate with external investors.
Service - Market Research and Sales
The ‘No’ group of incubators tends to provide help with market research and sales more internally. As shown in Figure
17, 57% of the incubators provide the service internally, while 36.4% use external consultancy.
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
Joint IPI/IKED Working Paper
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Figure 17: Market Research and Sales and VC Collaboration
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Yes No
No help with market research and
sales provided
Help with market research and
sales provided externally
Help with market research and
sales provided internally %
o
f
i
n
c
u
b
a
t
o
r
s
Source: IPI and IKED
On the other hand, the ‘Yes’ group of incubators tends to provide the service externally, which might indicate that they
have a better contact with professionals outside the incubators regarding market research and sales. Therefore, external
consulting in market research and sales seems more likely to be associated with a successful performance in relation to
Venture Capital.
Service - Help with Exporting and Partner Search Abroad
When the ‘No’ group of incubators provides help with exporting and partnering, it is more often based on internal
resources, and around 40% of incubators do not offer this service at all.
Figure 18: Export Help and Partner Search and VC Collaboration
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Yes No
No help with export and partner
search provided
Help with export and partner
search provided externally
Help with export and partner
search provided internally %
o
f
i
n
c
u
b
a
t
o
r
s
Source: IPI and IKED
On the contrary, the ‘Yes’ group has a higher percentage of incubators that provide the service through external
professionals. Hence, the export and partner search service seems more likely to be associated with a successful
performance in relation to venture capital, and even more if the service is provided externally.
Joint IPI/IKED Working Paper
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An International Survey on Synergies and Challenges
32
Exit criteria for tenant companies
Incubating is by definition supposed to be limited in time, as its core function is to support start-up firms in certain stages
of business development. Therefore, once the tenants companies have spent certain a period of time, reached a certain
turnover or implemented certain activities inside the incubator, the firms are requested to leave and forced to continue
the business development outside the incubators.
Figure 19: Time restriction as Exit Criteria and VC Collaboration
0
10
20
30
40
50
60
70
80
90
Yes No
Time restriction as exit criteria for tenants
%
o
f
i
n
c
u
b
a
t
o
r
s
Source: IPI and IKED
As shown in Figure 19, for the majority of the ‘No’ incubators companies must leave the incubator after a certain period
of time, normally after 2-3 years. On the other hand, the ‘Yes’ group of incubators tends to use time as a criterion for the
firms less often, but they rather refer to a certain development stage or employment status as a reason to change
location.
Firms’ Development Stages when Leaving Incubator
As discussed previously, entrepreneurial firms go through certain stages of business development (pre-seed, start-up,
seed, expansion) before reaching maturity and a number of activities characterise each development stage (see also
Part II).
Figure 20: Expansion and VC Collaboration
Source: IPI and IKED
Following the findings in Figure 20, ‘Yes’ incubators claim that the development stage is usually the expansion one for
firms leaving the incubators. On the other hand, more start-up firms in ‘No’ incubators leave the incubators as shown in
Figure 20. These results could indicate that the ‘No’ incubators - due to decisions on more rigorous time restrictions are
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Yes No
Pre-seed Start-up Seed Expansion Maturity Withdrawal f rom market
%
o
f
i
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c
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b
a
t
o
r
s
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An International Survey on Synergies and Challenges
Joint IPI/IKED Working Paper
33
asking the tenant firms to leave too early. As a result, investors might not willing to invest in them because of the higher
risk connected to these firms.
Follow-up activities
According to the research, incubators experienced with collaborating with VC tend to offer more follow up activities to
companies that have left the incubators compared to incubators that have not collaborated with VC.
Figure 21: Networking and VC Collaboration
0%
20%
40%
60%
80%
100%
Yes No
No follow up activity Consultancy Networking Training
%
o
f
i
n
c
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b
a
t
o
r
s
Source: IPI and IKED
Evidently, external networking activities seem to be more often among the follow-up activities provided by the ‘Yes’
incubators.
Networking and collaborative structures
Not surprisingly, the group of “Yes incubators” tends to view venture capital investors and business angels as integrated
external structures with which they can collaborate. On the contrary, the “No incubators” tend to view Banks more as a
part of their external networks compared to “Yes incubators”.
Figure 22: Collaborating Structures and VC Collaboration
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Yes No
Banks
VCs and Business Angels
Other Innovation Centres
Other Incubators
Research Centres
Universities
%
o
f
i
n
c
u
b
a
t
o
r
s
Source: IPI and IKED
Venture Capital as Complementary Partners
As shown in the survey, the ‘Yes’ incubators are generally more positive towards the value of venture capital, and tend to
see venture capital investors more as complementary to incubators compared to the ‘No’ group of incubators.
Joint IPI/IKED Working Paper
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An International Survey on Synergies and Challenges
34
Figure 23: VC as Complementary to Incubators and VC Collaboration
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Yes No
VC is to a high extent
complementary to incubators
VC is to a significant extent
complementary to incubators
VC is to some extent
complementary to incubators
VC is not at all complementary to
incubators
%
o
f
i
n
c
u
b
a
t
o
r
s
Source: IPI and IKED
As shown in Figure 23, 10% of the ‘No’ incubators view venture capital as not relevant for incubators, and whereas all
incubators in the ‘Yes’ group see venture capital as a complementary partner to incubator, 90% of the ‘No’ incubator
answer this. These finding reflect that although, the ‘No’ incubators have not collaborated with venture capital investors,
the majority of the incubators still view incubators as valuable and complementary to their work.
Overall Remarks – Bringing in the Venture Capitalist View
In theory, incubator and venture capital investor are complementary actors playing a crucial role in the innovation system
by equally supporting the breeding ground of new firms.
In practice, the situation is somewhat different, however. Whereas incubators have difficulties in accessing venture
capital sources either because they are prevented from doing so or simply have no interest in interacting with VC, the VC
investors tend to view their role as slightly more later-stage compared to the incubators. In the following the various
qualitative inputs collected from both incubators and venture capitalists are discussed.
It seems for those incubators that have collaborated with venture capitalists, that initiating contact with the venture capital
investors is not the most challenging part. The main challenges are rather related to follow up activities with investors,
which is difficult because investment decisions apparently take long time to realize for investors. Among the incubators
that have tried to collaborate with venture capitalist, more frequent contacts and closer dialogues between incubator and
VC are brought forward as tools to improve the collaboration.
On the other hand, there is the group of incubators that has never succeeded in cooperating with venture capitalists
(referred to as the “No” group). According to this group, the lack of collaboration is explained by the difficulties in locating
or contacting VCs or because VCs are not interested in their tenant companies. Other incubators refer to venture
capital’s risk aversion against young start-up companies or that tenant companies are not interested in venture capital.
According to the interviews carried out with venture capitalists (see Appendix B), the collaboration with incubators can be
viewed as an excellent constellation (alias public-private partnership) since venture capitalists contribute with the hands-
on, business-oriented experiences and external networking activity that some incubators lack. In fact, the combination of
networking and active involvement provided by the investors can be the single leading factor determining whether an
investment (in a tenant company) turns out successfully or not. However, regardless of these positive elements, the
collaboration is also viewed as somewhat troublesome.
In many cases, venture capital investors point to the lacking ability among incubators to plug into market oriented and
relevant activities and research, hence listing this issue as one of the main reasons for not collaborating more with
business incubators. Moreover, generally seed investors are limited in numbers and represent a scarce source of capital
particularly since the global economic downturn as previously highlighted. Following, the shortage of risk capital makes
the competition between incubators harder, and not surprisingly venture capital firms choose to invest their capital in the
most promising and secure firms. The increased risk aversion among investors is accumulated the capital around a few
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
Joint IPI/IKED Working Paper
35
firms, and – if given the possibility – only the most investment-ready firms are invested in. The venture capital funds
underline the necessity of increasing the investment readiness among the tenants firms, which likely requires a
strengthened dialogue with VC in order to understand what their investment criteria are.
Joint IPI/IKED Working Paper
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An International Survey on Synergies and Challenges
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Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
Joint IPI/IKED Working Paper
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V. RECOMMENDATIONS
Based on the survey and analysis of the incubators from 16 countries, it is found that venture capital availability is a
major challenge for business incubators across the world. Generally, risk aversion and lack of interest among VC, poor
communication channels and little follow-up activities are listed as the main obstacles in the collaboration between
business incubators and venture investors. However, despite the difficulties, some business incubators have been more
successful in collaborating with VC than others.
Challenges vary between the two groups of business incubators in the survey. For those incubators that have never
been successful in cooperating with VC (the so-called “No incubators”), creating the preliminary contact, developing a
sufficient deal flow of tenant companies, widening the geographical focus and strengthening their own financial
engagement in the firms are issues that should be addressed in order to improve access to VC. Among this group of
incubators, one could foresee to plan and to implement an action directed to raise the awareness of the importance of
VC funds for the development of enterprises. This is because several managers from “no” incubators did not seem to
give importance to the availability of VC funds for their enterprises. In addition, in many countries, namely the developing
ones, a proper VC activity does not exist. Therefore, here incubators activity will always be prevented from seizing the
fruitful opportunity of establishing a good relation with VC, and also their role with respect to their community will be
negatively influenced by these conditions.
On the other hand, the incubators which already are in some dialogue or collaboration with VC (the “Yes incubators”)
face different challenges such as developing sufficient follow-up activities and meeting with venture capital, strengthening
their position in the venture capital investment processes and ensuring mutual awareness about VC and companies.
Figure 24: Strengthening the Collaboration between Business Incubators and Venture Capitalists
Source: IPI and IKED
According to the result of the studies certain sectors are more interesting for VC than others (i.e. ICT and high knowledge
content ones). Accordingly, those incubators that are focusing on factors that are not considered attractive by VC will
have to take into account the fact that their tenant companies will need to make a stronger effort get funded by VC.
Positive factors that seem to influence VC’s investment decision are longer incubation retention time of tenants, in line
with the fact that companies reaching later stages gradually become more interesting for institutional investors. In
Joint IPI/IKED Working Paper
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
38
general, seed capital is more appropriate in the early stage and the fact that it is generally connected with high risk is
coherent to the often impossibility to be rentable.
Similarly, the provision of services also after leaving the incubators, showing trust between the incubator management
and the company, seems to improve the relationship with VC. In addition, this characteristic can potentially improve the
performance of enterprises, as the period after leaving incubator units is usually a critical one for their survival. Follow-up
activities, if carefully planned, tailored and implemented, can represent a bridge between the incubator-supported stage
and the VC-supported stage of a company.
In addition, selectivity (i.e. tight and/or multiple entry criteria) is helping as well to be more interesting to institutional
investors. This probably indicates that incubators that tend to have a mission more linked to job creation in an under-
development area will have less chance of being interesting for VC, as their mission might not be focused on highly
profitable and innovative businesses. Moreover, the fact that enterprises already passed a selection when they leave the
incubator helps the further selection activity performed by VC.
Furthermore, among the positive factors that influence the correlation between the existences of relationships with VC is
the profit vocation of the incubator as well as the tendency to directly invest capital in the tenants companies.
Also the openness to external sources, both in services or in networking, facilitates the collaboration with VC, indicating
that providing services with internal resources may not be the best choice, as this, indeed, could lead to services that are
not at market quality level, due to internal limited resources or experiences that can be gained by incubators managers.
These factors can lead us to elaborate some further recommendations, which could be directed to incubator managers,
to public authorities, and to other stakeholders involved in the process of setting up and running business incubators
(Figure 24).
Incubators should ensure that they are providing sufficient training to the companies preparing them to meet venture
capital investors and they should engage in follow-up activities allowing them to join and influence the investment
decisions among VC.
Communication and links between VC and business incubators should be improved, both by offering more training to
incubators management, providing them with higher visibility of procedures, practises and names of VC as well as by
creating more opportunities to foster relationship between them. This would improve mutual awareness and knowledge
and, therefore, improve convergence of incubation management strategies to those of VC and vice-versa, thus improving
numbers of deals and shorten lead-time
Awareness and training should also be done at enterprise level, in order to facilitate their professionalism when meeting
institutional investors, fostering their chances to be attractive. Indeed, lack of “marketing” and capacity of promoting
themselves could represent a major source of loss of investment opportunities, both for VC and enterprises. Marketing
strategies towards VC should be also carefully and periodically addressed in order to make an incubator, and especially
its tenants, more attractive and visible compared to others. Finally, public financing to incubators seems to be needed
even more when incubators have non-profit and job development missions, as companies retained might not be fully on
the market, thus less interesting for VC, although important for local development.
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
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VI. CONCLUSIONS
Venture capital funds can provide a vital help to enterprise development, which by definition is complementary to that of
business incubators. Therefore, a good and fruitful relation between business incubators and venture capital can possibly
guarantee a vital and fertile economic environment, in which entrepreneurial ideas can grow easily and with a trouble-
free availability of financial, material and immaterial help at each and every development stage, hence ensuring a
maximization of job and well being creation.
Nevertheless, in reality, relations between business incubators and venture capitalists are not always as efficient as one
could expect. Not surprisingly, this is due to several factors such as the general intrinsic mistrust of stakeholders when it
comes to risky investments or the lack of essential reciprocal information between business incubators and venture
capital investors.
To conclude, several interesting findings emerged in this survey, whose objective was to improve the understanding of
the factors influencing the relation between business incubators and VCs. The multiplicity of elements resulting from this
study partly confirms the thesis of the relevance of the chosen subject, and hopefully will start paving the way for a
broader and deeper research activity, which could in turn help investigating, developing and strengthening the best
instruments to ensure a profitable and successful relation between business incubators and VC, thus improving the
efficacy of local economic development strategies worldwide.
A possible field of investigation could be the relation between business incubators and single sources of innovative and
traditional finance, such as business angels, traditional banking and public source of capital, seed capital and so on; this
could help to better understand the connection between the development stage of enterprises when they leave the
incubator, and the availability of finance for them, eventually estimating the optimal critical mass of financing flow
requested.
Furthermore, possible future research trends could regard the connection between access criteria of incubators and the
performance of VC financing.
Finally, region or country-focused researches could also be carried out, so as to take into account specific country factors
affecting the treated variables and analyse the influence of “territorial” factors into venture capital and SMEs growth.
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An International Survey on Synergies and Challenges
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REFERENCES
AIFI (2001), “Incubatori privati: realtà internazionale e modello italiano”, internal publication, Milan.
AIFI (2001), “Il mercato italiano del Venture Capital e Private Equity”, internal publication, Milan.
AIFI (2002), “L’incubazione non profit in Italia”, internal publication, Milan.
Andersson, T., Napier, G. and Schwaag Serger, S. (2005), “The Venture Capital Market – Trends and Issues in the
Nordic Countries”, IKED, Malmo. Forthcoming.
Bearse, P. (1998), “A question of Evaluation: NBIA’s Assessment of Business Incubators”, Economic Development
Quarterly, 12(4): 322-333.
Etzkowitz H., Webster A., Gebhardt C., Cantisano Terra B.R. (2000), “The future of the university of the fu-ture: evolution
of ivory tower to entrepreneurial paradigm”, Research Policy, 29, 313-330.
EURADA (2004), “All Money is not the same – SME Access to Finance”, Brussels.
European Commission, DG Enterprise (2002), “Benchmarking of Business Incubators”, Brussels.
France Technopoles Entreprises Innovation (2003), “Annuaire 2003”, FTEI, Nantes.
Global Entrepreneurship Monitor (2004), “Global Entrepreneurship Monitor – 2003 Executive Report” Bab-son College.
Gullander, S. and Napier, G., (2003), ”Business Angel Network Handbook”. Handbook prepared for the Nordic Innovation
Centre, Stockholm School of Entrepreneurship.
Harrison, R. and Mason, C. (2002) “Barriers to Investment in the Informal Venture Capital Sector”, Entrepreneurship and
Regional Development, pp. 1-17, Routledge, London
Kjærgaard, R. and Borup, J. (2004), “The Significance of Venture Capital for Firm Growth”, Vækstfonden, Copenhagen.
Lalkala, R. (2001), “Best Practices in Business Incubation”, paper presented at the International Conference on Business
Centres: Actors for Economic and Social Development, Brussels, November 2001.
Mian, S.L. (1996), "Evidence on Corporate Hedging Policy," Journal of Financial and Quantitative Analysis (September),
419-439.
NBIA (2004), website: www.nbia.org
NVCA (2004), “Venture Impact 2004”, Arlington.
OECD (1995), “Government Venture Capital for Technology Based Firms”, Paris.
OECD (1996), “Venture Capital and Innovation”, Paris.
OECD (1997), “Technology Incubators: nurturing small firms”, Paris.
PriceWaterhouseCoopers (2002), “Global Private Equity 2002”.
Vækstfonden (2002), “Business Angels i Danmark”, Copenhagen.
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
Joint IPI/IKED Working Paper
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APPENDIX A: THE SURVEY QUESTIONAIRE FOR INCUBATORS
IPI – INSTITUTE FOR INDUSTRIAL PROMOTION
Direction for Transfer of Knowledge and Innovation
Centres and Networks for Partner Countries
IKED – INTERNATIONAL ORGANIZATION FOR
KNOWLEDGE ECONOMY AND ENTERPRISE
DEVELOPMENT
Joint working paper on incubators and
venture capital
1. GENERAL DATA ON INCUBATOR
1.1 Name and Country:
Contact person: Mr./Ms. Incubator Year of Establishment:
1.4 Is the incubator designed to be:
For profit
Non for profit
1.2 How would you best describe the incubator?
Business & Innovation Centre (BIC)
Science/Technology Park Incubator
Sector-oriented incubator – please specify sector
'Virtual' business incubator, i.e. no in-house space let to
clients.
Other type - please specify:
1.3 What legal status does the incubator have?
Public entity Private company
Public-private partnership Other
1.5 Who were/are the main partners involved in setting
up and operating the incubator?
EU and/or other international development agencies
National authorities
Local authorities
Firms
Banks and other private sector organisations
Universities and other R&D organisations
Community and voluntary organisations
Other partner organisations
1.6 On what geographical basis does the incubator
operate?
International National Regional
1.7 How many people are currently working in the
incubator?
1.8 Please indicate the background of key personnel in incubator (thick more than one box if necessary):
Entrepreneurs Firm managers
Previously worked for public authorities/agencies Previously worked in universities
Firm consulting
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An International Survey on Synergies and Challenges
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2. GENERAL DATA ON TENANT COMPANIES
2.1 How many businesses has the incubator assisted since
it started operating?
2.2 How many tenant companies are currently located in
the incubator?
2.3 How many people on average work in your tenant
companies?
2.4 What are the main business activity/ies of tenant
companies?
Sales, marketing and distribution
Business and financial services
Advanced/high tech manufacturing
Information and communication technologies
Research and development
Other manufacturing activities
Other service activities– please specify
A combination of some/all these activities
2.5 How would you best describe tenant companies when
they entered the incubator? Please indicate the main
category/ies:
New start up
Spin off from university
Spin off from R&D centre
Spin off of existing firm
Other - please specify
2.6 How do you finance tenant companies?
No financing Equity Non refundable grants
2.7 What sort of criteria are used to screen tenants for
admission to the incubator?
A business plan must have been prepared
Financing must be in place
Business must have an innovative project
Business must demonstrate high growth potential
Other criteria - please specify:
No criteria
2.8 Do you have an esteem of the survival rate of your
tenant companies one year after they left the incubator?
2.9 Do you have an esteem of the average number of
jobs per year created by tenant companies?
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3. SERVICES
3.5 What sort of services does the incubator offer?
Please tick the appropriate boxes and indicate whether
the services are provided by (a) incubator staff (b) an
external
3.1 Please indicate the physical facilities present in the
incubator:
Office space
Workshop space
Laboratory space
Mixed/other types of units
Common facilities, e.g. meeting rooms
3.2 Do tenants have to pay a rent?
Yes No
3.3 What is the criterion used to decide when tenant
companies must leave incubator units?
Companies must leave after a certain period of time –
please specify:
Companies must leave when they reached a certain
development phase – please specify:
Other – please specify:
No criterion
3.4 Do you offer any follow-up activities/services when
tenant companies leave the incubator? Which one(s)?
Services
Business planning and forming a company
Training to develop business skills
Accounting, legal and other related services
Market research and sales
Marketing and communication
Help with exporting and/or partner search
abroad
Help with e-business and other aspects of
ICT
Advice on development of new products and
services
Help with raising bank finance and grants
Help with raising seed and venture capital
Advice on recruitment of staff and personnel
management
Networking, e.g. with other entrepreneurs,
potential customers, other incubators, etc.
Mentors, board members and other senior
advisers
Other services - please specify
(a)
Stf.
(b)
Ext.
3.6 What is the usual development phase of companies when they leave the incubator?
Pre-start Start up
Seed Expansion
Maturity Withdrawal from market
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An International Survey on Synergies and Challenges
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4. Partnership
4.1 Do you operate within a cluster or an industrial district?
Which one? What sector of activity?
4.2 Are you a member of international networks? Which
one(s)?
4.3 What structures are you cooperating with?
Universities
Research centres
S&T Parks
Other incubators
Other Innovation centres
Chambers of commerce
Entrepreneurial Associations
Banks
Business Angels – Venture capitalist
Other:
5. Investment and relations with venture capital
5.1 To what extent do you think that venture capital
investors are complementary to the incubator activities?
Not at all To some extent
To a significant extent To a very high extent
5.2 Did you ever collaborate with venture capital? If the
answer is “yes”, please fill box n. 6; if the answer is “no”,
please fill box n. 7
Yes No
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An International Survey on Synergies and Challenges
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6. YES
6.1 How many of your tenant companies were able to
obtain finance through venture capitalists?
6.2 How many of your tenant companies did you
present to venture capitalists?
6.3 To what extent do you think that it was easy to make the first contact with venture capital investors region?
6.4 At what stage did the VC-funded tenant companies
meet the venture capitalists for the first time?
Pre-start
Start up
Seed
Expansion
Maturity
6.6 Besides investing, what other functions did the
venture capitalists carry out within the tenant
companies?
Advice & mentoring
Monitoring economic development
Administration
Networking
Strategic planning
6.5 To what extent do you think your relation with venture
capital could be improved?
Not at all
To some extent
To a significant extent
To a very high extent
6.7 What do you think could be done to improve your
contact with VC?
7. NO
7.1 Please describe the main reason(s) why you have no contact to venture capitalists
They are not interested in my incubator
I am not interested in Venture Capital
Companies are not interested in Venture Capital
It is impossible for me to contact them
Other-please specify:
7.2 To what extent do you think your relation with venture capital could be improved?
Not at all
To some extent
To a significant extent
To a very high extent
7.3 What do you think could be done to improve your contact with VC?
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An International Survey on Synergies and Challenges
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APPENDIX B : LIST OF RESPONDENTS
COUNTRY INCUBATOR
Cyprus Athena hi-tech incubator
Denmark Østjysk Innovation
Germany BIC (Business and Innovation Centre), Frankfurt an der Oder
India Technology Business Incubation Unit (TBIU), Indian Institute of Technology, New Delhi
Ireland Invent-DCU Ireland
Italy Almacube – Bolgna
Italy Incubatore Multimediale Lugo
Italy I3P Torino
Japan Sunbridge Corporation
Palestine PICTI Incubator
Romania BIC Romania
Singapore National University of Singapore Business Incubator
South Africa eGoli BIO
South Africa GODISA TRUST
South Africa Softstart
South Africa Chemical Technology Incubator
Sweden Uminova Innovation AB, Umeå
Sweden Företagsgeneratorn i Teknikbyn;
Sweden The Holdingcompany of Göteborg university
Tunisia Pépinière du Pôle Technologique des Communications El Ghazela
Tunisia Sfax-innovation
Turkey Ege University Science and Technology Centre
USA Connecticut Enterprise Centre
USA Bessemer Business Incubation System
USA Arizona Centre for Innovation
Business Incubation and Venture Capital
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USA San José SBC - California
USA Delaware Technology Park -
USA/Finland UCLA GAP virtual incubator
COUNTRY VENTURE CAPITALISTS
Denmark Biolink Capital
Europe European Venture Capital Association
Europe European Investment Bank
Italy Pino Venture Partners
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An International Survey on Synergies and Challenges
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doc_130225272.pdf
During this outline around business incubation and venture capital an international survey on synergies and challenge.
IPI
Istituto per la
Promozione
Industriale
IKED
BUSINESS INCUBATION AND
VENTURE CAPITAL
AN INTERNATIONAL SURVEY
ON SYNERGIES AND CHALLENGES
Joint IPI/IKED Working Paper
January 2005
ENRICO CALLEGATI
SILVIA GRANDI
GLENDA NAPIER
Joint IPI/IKED Working Paper
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
2
ISBN: 91-85281-05-0
Title: Business Incubation and Venture Capital – An International Survey on Synergies and Challenges
Authors: Enrico Callegati, Silvia Grandi, Glenda Napier
Publisher: IPI
© IKED International Organisation for Knowledge Economy and Enterprise Development
Reproduction is not authorised without permission in written form from the publisher. Only minor part of the paper could
be utilised and cited provided that the source is acknowledged.
ACKNOWLEDGEMENTS
This working paper is a result of a collaborative work jointly carried out by the Institute for Industrial Promotion (IPI) within
the Department for Centres and Networks in Partner Countries - Direction for Transfer of Knowledge and Innovation -
and the International Organisation for Knowledge Economy and Enterprise development (IKED).
Although all authors have been thoroughly involved in the working paper, Part I has mainly been prepared by Mr. E.
Callegati ([email protected], Part II by Mrs. G. Napier ([email protected]) and Part III by Mrs. S. Grandi
([email protected]). In addition, the authors wish to thank the International Network for SMEs (INSME) Association, which
made the creation of the working group possible, and all the incubators and organisations that kindly answered to
questionnaires and accepted to be interviewed.
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
Joint IPI/IKED Working Paper
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About the Institute for Industrial Promotion (IPI)
IPI is a government agency specialised in the promotion of growth and competitiveness of production systems in an
international globalized context, which imposes the adoption of innovative systems of governance intended to seize the
opportunities offered by increasingly larger and more competitive markets as well as valorising special territorial
characteristics with particular regard to the SME system.
The Institute's operations are oriented towards responding to the needs of the Italian Public Administration and the
governments of its partner countries relative to the definition and management of sectoral, factorial and territorial policies.
In addition, IPI intervenes in the planning, realization and management of programs, system actions and tools aimed at
supporting the development of entrepreneurs as well as manages systems at national and international levels favouring
the access of industrial businesses to innovation. IPI operates in the context of international, multilateral processes of
industrial cooperation with the objective of creating environments favourable to the development of relations between
different productive systems.
IPI
Viale Maresciallo Pilsudski, 124
I - 00197 Rome - Italy
Telephone: (+39) 06809721
Fax (+39) 06.80972.443
E-mail: [email protected]
Website: www.ipi.it
About the International Organisation for Knowledge Economy and Enterprise Development (IKED)
IKED is an independent, international non-profit organization focusing on the emerging issues of the knowledge-based
economy.
IKED strives to link the primary actors forming the knowledge-based economy: government, industry, academia and civil
society – facilitating international networks and policymaking forums; leading projects and forming recommendations to
turn policies into action.
In addition to mobilizing and enhancing Nordic expertise, IKED engages in activities that support the successful
integration of an expanded European Union, and is an active partner supporting structural policy reforms in various
countries worldwide. IKED addresses the driving forces and consequences of new technologies, including information
and communications technology (ICT), the rapidly changing innovation processes, and the conditions required for
dynamic enterprise development. Focusing on the crosscutting horizontal policy dimension of these issues, IKED is a
venue for addressing the broader economic and social implications relevant to the ascent of the knowledge economy.
IKED further develops programs that involve prime policy makers, government agencies, private sector associations,
NGOs, research institutes and other relevant stakeholders.
IKED
Stortorget 29, 5 floor
S - 211 34 Malmö - Sweden
Telephone: (+46) (0) 40176500
Fax: (+46) (0) 40176501
E-mail: [email protected]
Website: www.iked.org
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
Joint IPI/IKED Working Paper
5
TABLE OF CONTENTS
TABLE OF CONTENTS ........................................................................................................................................................5
INTRODUCTION...................................................................................................................................................................7
I. FOSTERING FIRMS THROUGH BUSINESS INCUBATORS...........................................................................................9
Business Incubation – a Global Concept ...........................................................................................................................9
Incubation Activity............................................................................................................................................................10
Classifying Business Incubators ......................................................................................................................................11
Some Incubator Experiences...........................................................................................................................................11
II. NEW FIRMS AND VENTURE CAPITAL.........................................................................................................................15
The Growing Impact of Venture Capital...........................................................................................................................15
Venture Capital Activity....................................................................................................................................................15
Classifying Venture Capital Investors..............................................................................................................................17
III. METHODOLOGY...........................................................................................................................................................21
Questionnaire Survey and Interviews..............................................................................................................................21
Characterisation of the answering sample.......................................................................................................................22
The “Yes” and “No” Incubators ........................................................................................................................................23
IV. SURVEY RESULTS.......................................................................................................................................................25
Public/private and Profit/non-for profit .............................................................................................................................25
Regional, National or International Focus........................................................................................................................25
Entry Criteria....................................................................................................................................................................26
Incubator Staff’s Professional background ......................................................................................................................27
Tenants’ profile and background .....................................................................................................................................28
Activities for tenant companies ........................................................................................................................................28
Incubators’ Investments...................................................................................................................................................29
External and Internal Provision of Services.....................................................................................................................30
Service - Help with raising seed and venture capital .......................................................................................................30
Service - Market Research and Sales .............................................................................................................................30
Service - Help with Exporting and Partner Search Abroad..............................................................................................31
Exit criteria for tenant companies.....................................................................................................................................32
Firms’ Development Stages when Leaving Incubator .....................................................................................................32
Follow-up activities...........................................................................................................................................................33
Networking and collaborative structures..........................................................................................................................33
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An International Survey on Synergies and Challenges
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Venture Capital as complementary partners ...................................................................................................................33
Overall Remarks – Bringing in the Venture Capitalist View.............................................................................................34
V. RECOMMENDATIONS...................................................................................................................................................37
VI. CONCLUSIONS.............................................................................................................................................................39
REFERENCES....................................................................................................................................................................40
APPENDIX A: THE SURVEY QUESTIONAIRE FOR INCUBATORS ................................................................................41
APPENDIX B : LIST OF RESPONDENTS..........................................................................................................................46
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
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INTRODUCTION
Regional and national competitiveness and economic growth are increasingly dependent on the underlying conditions
supporting risk-taking and innovative ideas. As a result, innovation is increasingly becoming a priority for firms,
organisations and governments in most countries throughout the world. At the same time, economic growth has been
coupled with access to information and communication technology (ICT), the ability among firms to introduce
organisational changes and the level of human capital together with research and development in small and large firms.
However, despite many efforts to identify the key factors determining economic growth, a number of countries are still
faced with challenges forcing them to rethink their current position. Wealth and social well-being for thousands of people
around the globe are dependent on societies’ willingness and ability to adapt themselves to the new opportunities
evolving in the Knowledge Economy (KE).
In this new era, innovation is becoming an important national asset, and governments are struggling to find the ‘golden
key’, which will allow them to reap the benefits from the development. But as acknowledged, there are no miracle cures,
and while some countries are reforming market structures or reviewing systems of intellectual property rights, others are
reshaping financial markets or designing technology-push strategies to increase innovation. In parallel with these efforts,
new entrepreneurial firms and small and medium sized enterprises (SMEs) are gradually recognized as generators for
innovation and economic wealth. Today, the study of - and policy focus on - entrepreneurship is rapidly gaining
importance and initiatives supporting the development of entrepreneurial activity have become a priority issue.
Business incubators are essential for strengthening the development of start-ups. These structures have developed
across the world, and are widely accepted as places where professionals offer an organised and resourceful
environment for young, entrepreneurial firms. Especially in societies with little entrepreneurial dynamism, the role of
business incubators has turned out valuable for local development. Similarly, venture capital (VC) contributes to
economic growth in entrepreneurial firms (Kjærgaard and Borup, 2004). Recently, the National Venture Capital
Association (NVCA) underlined the importance of venture capital availability by showing how venture capital has been a
successful tool in supporting high-risk innovative and growth oriented firms across sectors and regions in the United
States (NVCA, 2004).
But despite increased political and economic recognition of both business incubation and venture capital, severe
limitations in the research area still exist. While a number of studies on incubators have concentrated on showing best
practices, guidelines for fostering new start-ups, business incubation management, evaluation of incubator programmes
and effectiveness of business incubators on start-ups, only little research has been devoted to investigate the linkages
and interactions between business incubators and venture capital investors and to decide whether they are successful in
their attempts to cooperate (Bearse, 1998; Etzkowitz et al., 2000; Mian, 1996).
As a result, crucial questions such as how do business incubators and venture capitalists collaborate and to what extent
are firms fostered in business incubators prepared to meet external investor’s investment criteria, are hitherto left
unanswered.
Figure 1: Collaboration between Business Incubators and Venture Capitalists
Source: IKED and IPI
At the same time, empirical indications leave the impression that business incubators’ collaboration with venture
capitalists is not always working optimally (Gullander & Napier, 2003). Generally, business incubators’ roles range from
providing affordable space to ensuring core business support such as business development, financing and venture
capital availability. However, as illustrated in Figure 1, very often only few entrepreneurial companies developed in
business incubators (tenants) are prepared to match VC investors’ investment criteria in terms of business maturity,
business activity or even in communication and negotiation abilities. Consequently, instead of being targeted by risk
capital funds, tenant companies are - when leaving the incubators - forced to look for other financing opportunities in
order to expand their businesses. But accessing financial means is not an easy task for entrepreneurial firms. Therefore,
Joint IPI/IKED Working Paper
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
8
the risk is that low levels of investment readiness among companies fostered in incubators reduce their chance for
getting funded, which as a result could prevent them from performing well.
Given the described mismatch between young incubated firms and venture capital investors, business incubators should
strengthen their role as facilitator as to ensure that tenant firms can meet the expectations from external investors. In this
way, the economic resources and efforts allocated to operate and manage business incubators worldwide could better
contribute to the sustainability of tenant companies.
Based on the assumption that business incubators and venture capitalists are complementary sources of support for new
start-up companies, this working paper sets out to examine to what extent the described situation is accurate. In addition,
it points to possible avenues for improving collaborative complications between business incubators and venture
investors. By exploring the interaction and the collaboration between business incubation and venture capitalists from 16
countries worldwide, this paper contributes to the discussions related to innovation, entrepreneurship and financing in
different parts of the world.
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
Joint IPI/IKED Working Paper
9
I. FOSTERING FIRMS THROUGH BUSINESS INCUBATORS
Business incubation is increasingly playing an important role for new start-ups around the globe. In a growing number of
countries, incubators that support the development of young, innovative firms are introduced as a way to strengthen the
entrepreneurial activity (number of start-ups) and the ability for new companies to survive.
In this chapter, the business incubation concept is discussed and the following sections will serve as background for the
analysis in Part IV.
Business Incubation – a Global Concept
The idea that innovation fosters economic growth is broadly shared and accepted among economists worldwide.
Therefore, one of the most important challenges for economic systems is to encourage technological innovation among
research institutes, universities, agencies, and, above all, firms. With this respect, empirical evidence is increasingly
showing that young, innovative enterprises should be supported (AIFI, 2001).
This need stems from market failures and other shortcomings, such as the difficult relation between academic research
and business, the lack of innovation services, the absence of a real “market” for technology transfer, and the difficulties
connected to the passage from the seed capital to the venture capital stage. The spread of business incubators
represents one of the main answers to the needs of emerging, innovative firms.
The first business incubators were established in the early 1970s in most western countries. They originated from the
necessity to fight the social costs of economic slowdown through job creation. According to Lalkaka (2001), three
«generations» of business incubators can be identified. In the 1970s and early 1980s, incubators were basically
providing selected firms with low-priced room and collective services. Then, in the 1990s incubators started benefiting
from additional facilities, such as counselling, training and networking services, and access to professional support and
seed capital. Finally, starting in 1998, a new incubation model appeared in parallel, aimed at mobilising ICT, focusing
exclusively on hi tech-based ventures and relying more and more on intangible assets and services.
According to the American National Business Incubators Association (NBIA),
“Business incubation is a dynamic process of business enterprise development. Incubators nurture young firms,
helping them to survive and grow during the start-up period when they are most vulnerable. Incubators provide
hands-on management assistance, access to financing and orchestrated exposure to critical business or technical
support services. Most also offer entrepreneurial firms shared office services, access to equipment, flexible leases
and expandable space — all under one roof. An incubation program's main goal is to produce successful
graduates — businesses that are financially viable and freestanding when they leave the incubator, usually in two
to three years. […] Incubator clients are at the forefront of developing new and innovative technologies —
creating products and services that improve the quality of our lives — on a small scale today, and on a much
grander scale tomorrow” (NBIA, 2004).
In this definition all the main elements which characterize the activity of business incubators are outlined and possible
variations among different structure are taken into account. Nevertheless, some argue that the emphasis is too much
focused on physical features, and this is less applicable to “third generation” incubators - which sometimes are called
virtual incubators - because of the intangible nature of their facilities. Accordingly, a possible alternative definition may be
the following one:
“A business incubator is an organisation that accelerates and systematises the process of creating successful
enterprises by providing them with a comprehensive and integrated range of support, including: Incubator space,
business support services, and clustering and networking opportunities. By providing their clients with services on
a 'one-stop-shop’ basis and enabling overheads to be reduced by sharing costs, business incubators significantly
improve the survival and growth prospects of new start-ups” (European Commission, 2002).
This definition can be considered broader and perhaps more able to capture the whole variety of business incubator
activities. Nevertheless, simplicity is perhaps sacrificed in the attempt to grasp new, not yet well established evolutions.
Therefore, the future path of the development in business incubation activity will probably determine more exactly the
scope and the basic features of incubators. Hence, a better understanding of the business incubation activity requires a
classification of the various categories of incubators.
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Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
10
Incubation Activity
According to recent estimates carried out by the European Commission, there are around 3,000 business incubators
worldwide (European Commission, 2002).
Figure 2: Geographical Distribution of Incubators, numbers per region
150
900
1000
200
600
150
0
200
400
600
800
1000
1200
Eastern Europe Western Europe North America Souh America Far East Africa, Middle East
and Others
Source: (European Commission, 2002)
A rough breakdown of incubators by country is shown in Figure 2. Evidently, North America has the highest
concentration of business incubators worldwide, which, not surprisingly, is explained by the strong tradition of incubators
in the country as the first ones appeared in the United States.
Today American business incubators are pioneering new models and practices in the area, such as virtual structures and
“dotcoms”. The American NBIA network involves more than 500 business incubators, mainly located in the US, and it
can be regarded as one of the most important, influential and largest incubator networks worldwide.
Turning to South America, Brazil now has about 160 business incubators, starting with ten a decade ago. Incubators are
also operating or being planned in other South American countries although the programmes elsewhere are less
advanced than in Brazil. In the Far East, from its beginnings in 1987 with a catalytic UNDP input, the China incubation
program has developed into the largest of its type in the developing world. In Japan and Korea, starting from more
autonomous resources, incubators steadily increased in number and importance throughout the 1990s, and similar
developments are taking place in Thailand, Malaysia and Indonesia. Africa and Middle East are among the least
economically developed regions in the world, and this is reflected in the poor presence of business incubators, too.
Nevertheless, several UN agencies and governmental programmes established significant incubation initiatives, for
instance, in Egypt, Tunisia, South Africa and Turkey, and numbers are expected to increase in the future.
Box 1: The Impact of Business Incubation in Europe
• 90% of all start-ups set up inside a business incubator are still active three years later.
• The public cost of creating jobs inside incubators is €4,000, which is very low compared with other public means and
programmes.
• The 900 European business incubators assist in creating 29,000 new sustainable jobs every year in enterprises,
which are much more viable than enterprises set up outside incubators.
Source: (European Commission, 2002)
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
Joint IPI/IKED Working Paper
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With regards to Eastern Europe, UNDP technical assistance in 1990 helped pioneer the concept in Poland, starting with
the first incubator in Poznan. The creation in 1992 of the Association of Polish Business Incubators and Innovation
Centres became the catalyst for growth. Nowadays, mainly through the European Business and Innovation Network
(EBN), incubators are being established throughout the region, benefiting from best practices, resources and networking
in Western Europe
1
.
Applying a broad definition of incubators, there are currently thought to be around 900 business incubators in the
Western Europe (EU15). The European Commission (2002) calculated for each EU country the Incubators/SMEs ratio,
which can provide a rough estimate of the development of business incubation activity. Incubators were mostly present in
Scandinavia, France, and the UK and they were least present in Greece, Italy and the Netherlands.
Classifying Business Incubators
A number of incubator definitions exist and many attempts have been made to classify the business incubators (OECD,
1997; AIFI, 2001; European Commission, 2002). Naturally the definition varies according to the chosen criteria. OECD
(1997) has proposed a typology of incubators based on their overriding objective and characteristics of tenant firms.
Three main types can be classified in this way:
• General/Mixed-Use Incubators are mainly committed to promoting continuous regional industrial and economic
growth through general business development.
• Economic Development Incubators are business incubators whose main aim is to stimulate specific economic
objectives such as job creation and industrial restructuring, often the result of local government initiatives.
• Technology Incubators are incubators whose primary goal is to promote the development of technology-based
firms, as spin-offs from universities and science parks, in order to promote technology transfer while
encouraging entrepreneurship among researchers and academics (OECD, 1997).
In a study commissioned by the European Commission and published in 2002, the authors propose a more clear-cut
classification. They differentiate incubators by identifying those that are for-profit from those that are not. This typology,
although simplistic, addresses the need for a clear and always applicable division, whereas other classifications may
create ambiguities and overlapping. In any case, this approach acknowledges the difficulty of classifying structures
whose evolution does not follow predefined patterns, but on the contrary are constantly innovating and renovating, in
order to adapt to the new developments and needs arising from the economic environment.
Some Incubator Experiences
A number of incubator studies collect best practices and practical advices for business incubator managers. Among
those, NBIA (2004) identifies two core principles characterizing effective business incubation. First, the incubator aspires
to have a positive impact on its community's economic health by maximizing the success of emerging companies.
Second, the incubator itself is a dynamic model of a sustainable, efficient business operation. Coming to more
operational measures, several studies attempted at selecting best practices for business incubators (OECD, 1997;
European Commission, 2002; NBIA, 2004), and they can be summarized as detailed in Box 2.
1
In Europe, EBN (www.ebn.be) is the most relevant incubator network. It fosters the establishment and development of Business and
Innovation Centres (BICs), which carry out incubation and other business support activities, throughout the European Union and
neighbouring states, including candidate and associated countries.
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An International Survey on Synergies and Challenges
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Box 2: Examples of Best Practices for Business Incubators
• Obtain consensus on a mission that defines the incubator’s role as integrated in a broader framework, territorially or
sector oriented (especially when non profit oriented). Therefore, a partnership of public and private stakeholders is
desirable in the setting up of incubators.
• The most successful incubators have a definite target market, and tenants are screened on that basis. In addition,
focusing on “cluster-based” technology can increase efficiency and synergies.
• A realistic business plan has to be developed. It should entail public funding but dependence on subsidies should be
minimised.
• Managers play a key role for the overall performance of incubators. Their competences and motivation must be
carefully assessed.
• Business support services are also a core element for the survival and growth of tenant companies. They should be
charged, but their price should be below that of outside market.
• Experience share and international networking can be useful both for the spread of more precise best practices and
for the potential access to a larger span of resources and opportunities.
• Exit criteria should be adopted so as to ensure an efficient turnover of enterprises. On the other hand, aftercare to
graduate companies is also important.
• Evaluation mechanisms should be put in place. They can provide a tool for assessment of incubator and company
performance, thus suggest changes and improvements in activities.
• Location should be chosen carefully and the principle of location advantages should be considered.
Sources: (NBIA, 2004; OECD, 1997)
Nevertheless, the activity of incubating young enterprises is far from straightforward. When an incubator is not carefully
planned, or managed, it can be of limited value - or even harmful - to the economic system as a whole. Some of business
incubators’ deficiencies are listed in Box 3 (OECD, 2002; NBIA, 2004).
Box 3: Examples of Business Incubator Deficiencies
• Business incubators tend to rely solely on public funding, thus not correlating expenses with overall performance.
• Incubators can have the tendency to overemphasize the activity of providing tailored services to client enterprises, to
the detriment of networking with industry and investors.
• When business incubators have functions, business model and operative modalities, which are not tailored to, the
community they are serving (whether this is real or virtual), their impact on the overall economic performance could
be limited.
• Incubators that are not part of a broader economic development strategy can prove themselves useless, as they
could be facing too hard a task for their potential.
Sources: (NBIA, 2004; OECD, 1997)
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An International Survey on Synergies and Challenges
Joint IPI/IKED Working Paper
13
As detailed in Box 3, most inadequacies found in business incubators are related to the lack of networking with other
actors of economic development. In fact, the object of our research is a particular case of this relation, that is, the
connection between business incubators and venture capitalists. Therefore, the following chapter will address the second
element of our research, namely the venture capital investors.
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An International Survey on Synergies and Challenges
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Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
Joint IPI/IKED Working Paper
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II. NEW FIRMS AND VENTURE CAPITAL
For many entrepreneurial firms around the world, getting access to external capital is a difficult task, and a shortage of
risk capital is one of the greatest hurdles when starting up a new company, particularly in high-tech and high-growth
business areas. In this chapter, the role of venture capital investor is highlighted and some recent trends from venture
capital markets around the globe are brought forward. As with the Part I, this chapter will serve as background
information for the analysis in Part IV.
The Growing Impact of Venture Capital
Venture capital markets have evolved rapidly around the world since the 1980s and 1990s fuelled by both private and
public efforts. However, today’s size of the global venture capital market is remarkably smaller compared to before the
crash of markets in 2001. Venture capital markets displayed a sharp reversal, and the provision of funding to the
industries experienced heavy consolidation as the numbers of venture funds were reduced worldwide. Equity markets
collapsed and many of the “dotcoms” that had obtained heavy funding rapidly faltered.
Figure 3: Venture Capital Investments in Selected Countries (1999-2002)
Source: (Global Entrepreneurship Monitor, 2004)
As shown in Figure 3, the level of venture capital investments differs between countries, and whereas countries such as
Israel and the United States invested up to 1.2% of GDP in new ventures in 2000, other countries such as Poland,
Belgium, Norway and Portugal invested much less. In 2001, the $100 billion invested globally was less than half of the
$250 billion invested in the previous year (PriceWaterhouseCoopers, 2003). Evidently, the flows of investments have
changed remarkably along with the economic downturn in 2001. Today, most countries are recovering and investment
activities are generally back at the pre-bubble level in 1998.
Venture Capital Activity
A broad assessment of financial sources is important for companies during the various stages of business development.
At the pre-seed stage, firms are generally financed through owner/inventor, family and friends and a variety of creative
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Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
16
methods of acquiring access to resources without raising capital from external sources. The demand for funding is
relatively small, and the period of self financing is limited with an increasing need of funding following the development of
the project.
Figure 4: The Business Finance Chain
VENTURE CAPITAL
PRIVATE EQUITY
Low Firm Evaluation Medium Firm Evaluation High Firm Evaluation
High Informal market Informal/Formal Market Institutional Market Institutional Market High
A
m
o
u
n
t
o
f
I
n
v
e
s
t
m
e
n
t
Business angels
Corporate Venture Capital
Public investors
Venture capital funds
Business angels
Corporate Venture Capital
Public investors
Venture capital funds
Stock Markets
Private Equity
I
n
v
e
s
t
o
r
’
s
R
i
s
k
A
v
e
r
s
i
o
n
Low 1. Stage 2. Stage 3. Stage 4. Stage Low
Pre-seed
Financing provided to
research, assess and
develop an initial
concept before a
business has reached the
start-up phase. Firm has
no track record and little
business development.
Seed
Financing provided to
companies for product
development and initial
marketing. Firm may be in
the process of setting up or
may have been in business
for a short time, but have
not sold their product
commercially. Some sales
might have been
demonstrated on small scale.
Expansion
Financing provided for the
growth and expansion of an
operating company, which
may or may not be breaking
even or trading profitably.
Capital may be used to finance
increased production capacity,
market or product
development, and/or to
provide additional working
capital.
Bridge
Financing made available
to companies in a period
of transition such as
turnaround, MBO, MBI
or when the company
develops from being
privately owned to
becoming publicly
quoted.
Source: (Andersson et al., 2005)
As shown in Figure 4, different investors complement each other successively as the development of the firm proceeds.
The entry of new investors does not necessarily imply that the existing investors are diluted, but rather that they remain,
sometimes with a lower profile becoming more or less “silent partners”.
As the entrepreneurial company grows, so does the urgent need for additional risk capital. First, informal private
investors, i.e. the business angels are considered the main source of funding. At a later stage the formal venture
capitalists, managing funds originating from sources such as pension funds and insurance companies, enter the
development scene.
In general, entrepreneurs are faced with two funding gaps. The first funding gap arises when the investment-seeking firm
has to identify external investors (after having supported the firm himself with founder’s capital). At this stage, the
entrepreneur typically needs capital for prototyping and investigating different marketing strategies. In this period
business angels play a crucial role as investors. The second funding gap arises once the business angel’s financial
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
Joint IPI/IKED Working Paper
17
sources are not sufficient and large investments are needed for the growth stage of the firm, often focusing on heavy
marketing investments. At this stage the formal venture capitalist often enters the financing scene for the start-up firm.
Classifying Venture Capital Investors
According to the Global Entrepreneurship Monitor 2004, only less than 0.01% of entrepreneurs launched their new
business with the support from classic venture capital or business angel investments (Global Entrepreneurship Monitor,
2004). In other words, most entrepreneurs are forced to look for alternative financing opportunities such as banks, or to
develop their business without any financial support. However, for those lucky few, business angels or classic venture
capital funds are typically the main option.
Business angels are high net-worth individuals who provide early-stage companies with financial and non-financial
assets such as skills, professional networking, coaching and expertise. Angel investors often have a background as
successful entrepreneurs/businessmen and accumulated sustainable amounts of capital. Generally, business angels
hold unique insights within certain business areas and they tend to operate with a very committed, strong hands-on
approach. Normally business angels invest smaller amounts compared to the institutionalized venture capital firms
ranging between € 25,000 - € 250,000 (Harrison & Mason, 2002; Vækstfonden, 2002).
Figure 5: Informal and Classic Venture Capital Investment (by country)
Source: (Global Entrepreneurship Monitor, 2004)
As shown in Figure 5, informal types of investors invest up to 10 times more capital in start-up companies compared with
classic venture capital. Especially in countries such as China, New Zealand and Chile, informal investors play a crucial
role as grassroots financing for new firms. Other countries like the Nordic countries have experiences with building
business angel networks in order to increase the flow of business angel investments to entrepreneurial firms. Business
angel networks are new types of public or private organisations that increase business angel investments by providing
screening of entrepreneurial projects and matchmaking events (Gullander & Napier, 2003).
Classic venture capital also plays a significant role for fuelling entrepreneurship, although most venture capitalists invest
in slightly later stages compared with business angels. Venture capitalists are often key actors in the division of labor
between universities or other institutions breeding new technologies and commercial activities.
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An International Survey on Synergies and Challenges
18
Generally, the funds are administrated by investment managers and have an average investment horizon between 2-5
years in each portfolio company. In this working paper, venture capitalists are understood as investments by business
angels or classic venture capital funds in early stages of business development. Their objective is to help build a
company from conception, add value and, when the company reaches maturity, realize profits from their investments.
Obviously, venture capital fund invests either before there is a tangible product, or before the company has developed an
organisation, or they provide capital to a company in its primary or secondary stages of development. They can also
provide the finance required for helping the company to reach critical mass on its way to success e.g. in the expansion
stage.
The funds take ownership stakes in portfolio companies and engage actively in the management and development of a
firm.
Table 1: Examples of Investors’ Investment Criteria
Suppliers of capital Criteria for accessing funding sources
Family, Friends and Fools Personal relationship based on trust
Business angels
Meeting or matching of individual entrepreneurs with business an-gels
Atmosphere of trust between individuals
Credible business plan in the eyes of the Business Angel
Good management team
Fiscal incentives
Market knowledge of the entrepreneur
Availability of exit route
Return on investment (capital gain)
Banks
Availability of guarantees or collateral
Perceived ability to repay the loan
Company track record
Rating
Good management
Repayable short-term loans
Innovative nature of business projects
Business plan quality
Management team
Venture capital
Business plan credibility
Business plan with patent technology
Track record (over previous years)
Ability to grow fast and deliver quick ROI
Management team quality
Public funding
New jobs
Investment in productive tools
Source: (Adapted from EURADA, 2004)
As found in Table 1, different investors have varying criteria for investments. Whereas business angels weight a factor
such as the atmosphere of trust between entrepreneurs and business angels and the personal meeting with the
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
Joint IPI/IKED Working Paper
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entrepreneurs high, classic venture capital investors tend to weight growth potential, technology and track record higher.
In contrast, banks are more focused on guarantee and collateral and the firms’ ability to repay the loan. For public
investors, employment and productive tools are important reflecting the public sector’s social and economic
responsibility. Consequently, policies designed to foster more investments should acknowledge these differences and
investment seeking entrepreneurs should be aware of the varying motives and criteria when they look for capital in the
market.
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An International Survey on Synergies and Challenges
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Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
Joint IPI/IKED Working Paper
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III. METHODOLOGY
The need of further investigation in the relationship between risk capital and incubators emerged as one of the not fully
developed and unsolved questions; therefore it was decided to attempt shed light on and draw attention to this topic
through a survey, which would cover a large span of countries, i.e. following the INSME
2
rationale.
Based on direct visits to incubators and some preliminary interviews as well as reviews of literature and secondary data
analysis, the research idea and objectives have been identified. It has to be specified that the intention was to collect a
significant number of inputs and multiplicity of points of view that could be of support to analyse the complex reality,
rather than conducting a comprehensive study with a full statistical significance.
In this chapter, the methodology in the study is briefly outlined and some consequences of the applied method are
discussed as well as some characteristics of the interviewed incubators are highlighted.
Questionnaire Survey and Interviews
In order to investigate the research field, a questionnaire survey has been designed in order to collect quail-quantitative
primary data. The task has been carried out through the work of a joint group consisting of IPI and IKED officers, whose
expertise are in risk capital or intermediary organisations, among which incubators are classified.
The questionnaire (see full text in Appendix A) includes 38 questions organised in seven sections, starting from general
data regarding the incubators and useful to characterise the sample, i.e. their tenant companies, their provided services
and their partnerships. While in this part some questions related to financing and innovative finance were included, the
last three sections were designed to investigate the core issue of this research.
The questionnaire was sent by email, with a phone pre-contact or post-contact to enhance response motivation, to 40
incubators worldwide. In particular, the incubators were selected through the international networks of IPI, IKED, NBIA
and INSME databases and the sample was constructed to reflect the proportionality in the geographical distribution of
business incubators in the world regions as reported by the European Commission (2002) and represented in Figure 2.
Out of the 40 incubators that received the questionnaire, a total of 28 returned the questionnaire (see list of respondents
in Appendix B), which results in a response rate of 66%. As shown in Figure 6, the respondents represent 16 different
countries worldwide including Cyprus, Denmark, Finland, Germany, India, Ireland, Italy, Japan, Palestine, Romania,
Singapore, South Africa, Sweden, Tunisia, Turkey and the United States.
Figure 6: Surveyed Business Incubators, by geographical region
2
10
6
3
7
0
2
4
6
8
10
12
Eastern Europe Western Europe North America Far East Africa, Middle East,
other
Source: IPI and IKED
2
INSME, The International Network for Small and Medium Sized Enterprises, is a non-profit Association open to international
membership. Its mission is to stimulate transnational cooperation and public and private partnership in the field of innovation and
technology transfer to SMEs and in this framework particular attention is devoted to the promotion of North-South multilateral dialogue
and co-operation (www.insme.org).
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An International Survey on Synergies and Challenges
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As shown, the majority of the respondents are from Western Europe, followed by North America and Africa, Middle East
and others. This distribution is to some extent similar to the estimates of incubators worldwide carried out by the
European Commission in 2002 (Figure 2).
Furthermore, to collect the point of view of representatives of the innovative finance system four direct interviews were
organised with Danish and Italian Venture Capital Organisations as well as with the European Venture Capital
Association and the European Investment Bank (Appendix B). The interviews were carried out either by telephone or
personal meetings.
Characterisation of the answering sample
Thanks to some introductory questions, the set of organisations that answered to the questionnaire can be described
according to some variables. In the survey, the majority of incubators operate as public entities, while only 25% of the
incubators are organised as private companies. Compared to other incubator surveys carried out in Europe (see for
instance European Commission, 2002, in which the largest part of the incubators consisted of private entities), the
percentage of privately held incubators in this survey is lower. Yet, there are no clear patterns in terms of countries or
regions, as both public and private incubators are roughly equally distributed throughout the regions.
Figure 7: Legal Status of Business Incubators
10
7
5
6
0
2
4
6
8
10
12
Public Entity Private Company Private Public
Partnership (PPP)
Other
Source: IPI and IKED
Furthermore, 20 out of 28 incubators are operating as non-for-profit organisations, whereas only five describe
themselves as for-profit incubators. However, when comparing the profit orientation with the legal status, it is seen that
the profit-oriented incubators are both found among the private companies as well as public entities. In other words, we
confirm that the sample was chosen in line with the observation that profit orientation is not necessarily limited to private-
sector incubators.
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An International Survey on Synergies and Challenges
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Figure 8: Non-for-profit or profit oriented incubators, numbers
22
5
1
0
5
10
15
20
25
Non for profit For profit n.a
Source: IPI and IKED
The “Yes” and “No” Incubators
In order to examine the collaboration between the incubators and venture capitalists, the incubators were asked to
consider if they had been collaborating with venture capital investors or not (see Appendix A question 5.2)
3
. In the
following analysis, the results were clustered based on whether the respondents have or have not experienced some
kind of collaboration with venture capitalists. In practice, those incubators who have collaborated with VCs have either
presented some of their tenant companies to investors and/or venture capitalists have invested in the firms.
In the following analysis, we will refer to those incubators, which have collaborated with venture capitalists as ‘Yes’
incubators, while those that have not collaborated with VC are referred to as ‘No’ incubators. Then, for the questions with
a major difference between the answers from the two groups of incubators, the results are presented and compared for
the ‘Yes’ incubators and the ‘No’ incubators, respectively. This is done in order to identify the key factors determining a
positive collaboration between incubators and VCs.
Figure 9: “YES” and “NO” Incubators
0
2
4
6
8
10
12
14
16
18
Yes, we have collaborated with venture
capitalists
No, we have not collaborated with venture
capitalists
Eastern Europe Western Europe North America Far East Africa, Middle East, other
N
u
m
b
e
r
o
f
i
n
c
u
b
a
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s
Source: IPI and IKED
As shown in Figure 9, among the 28 interviewed incubators, 16 respondents have experienced some kind of
collaboration with venture capitalists in connection with their work as incubator managers and will be referred to as the
‘Yes’ incubators. On the other hand, the ‘No’ group consists of 12 incubators.
3
Question 5.2 “Did you ever collaborate with Venture Capital? If yes, please fill out box 6, if no, please fill out box 7”.
Joint IPI/IKED Working Paper
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
24
In the “Yes” and “No” perspective, the sample seems quite balanced and, therefore, potentially useful to the objective of
the study to collect inputs and insights on the relationships among incubators and the innovation finance system.
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
Joint IPI/IKED Working Paper
25
IV. SURVEY RESULTS
As discussed, business incubation has increased its impact on firm formation along with venture capitalists increasingly
being recognized as fuel for entrepreneurship and economic growth. Despite the somewhat significant role played by
both incubators and venture capitalists so far, their mutual relationship and impact are somehow uncertain. Based on the
quantitative survey of business incubators in 16 different countries worldwide, some aspects in the collaboration between
incubators and venture capital investors are reviewed in this chapter. It should be underlined that the following results are
not viewed as fully applicable for all other incubators in the world, but rather they reflect the current situation in the
interviewed incubators. Based on this analysis, some synergies between incubators and venture capitalists are
discussed and some future challenges in the collaboration are brought forward in order to provide policymakers and
business incubators with recommendations in this field.
Public/private and Profit/non-for profit
Comparing the origin of the incubators, public or private, no differences are found between the business incubators that
have collaborated with venture capital (the “Yes incubators”) and those incubators that have not collaborated with VC
(the “No incubators”). However, the difference between non-for-profit and for-profit incubators is significant between the
two groups.
Figure 10: Profit Orientation and VC Collaboration
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Yes No
Non for profit incubators Profit oriented incubators n.a.
%
o
f
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c
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b
a
t
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r
s
Source: IPI and IKED
While 100% of the ‘No incubators’ are characterising their incubator activity as non-for-profit, as shown in Figure 10, one
third of the ‘Yes incubators’ are working for-profit.
These results indicate that profit oriented incubators –compared with non profit incubators - tend to have more contact
with VCs. This could be explained by the assumed stronger emphasis on revenues among profit oriented incubators, as
venture capital usually is an opportunity for the incubators to increase investments and thereby achieve higher revenues.
Regional, National or International Focus
Generally, incubators can operate with regional, national or international scopes. However, when examining the
interviewed incubators, we find that the majority (80%) of the incubators that have not collaborated with VC is primarily
operating regionally in their business activities and none of them are international oriented in their work.
Joint IPI/IKED Working Paper
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
26
Figure 11: Internationalisation and VC collaboration
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Yes No
Regional National International
%
o
f
i
n
c
u
b
a
t
o
r
s
Source: IPI and IKED
Meanwhile, as shown in Figure 11, the “Yes incubators” tend to span their activities more widely. About one third of
incubators that have experienced VC collaboration have a regional focus, 38% operate nationally and 30% of the
incubators extent their business internationally. Hence, apparently the broader the incubators are focusing
geographically, the more the incubators are likely to collaborate with VCs.
One explanation could be that venture capitalists are not always located within the specific region of a single incubator.
Therefore, incubators with a broad geographical focus tend to increase the chance for accessing venture capital funds.
Similarly, it is assumed that venture capitalists - due to the potential wider market vision in these companies - prefer to
invest in tenant companies located in incubators with international links and networks.
Entry Criteria
Most of the interviewed incubators apply some kind of entry criteria defining the profiles of the tenant companies entering
the business incubators. Among the interviewed incubators factors such as established businesses, certain geographical
location, high growth potential or innovation, are used as entry criteria. However, while “No incubators” in average apply
two entry criteria for new firms entering the incubator, the “Yes incubators” apply a higher number of entry criteria – in
many cases up to 3-4 entry criteria per new tenant. In other words, it seems that the more selective the incubator
managers are when selecting new firms, the more positive experiences they have when trying to access venture capital
funds.
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
Joint IPI/IKED Working Paper
27
Figure12: Entry Criteria and VC Collaboration
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Yes No
1 Entry Criteria 2 Entry Criteria 3 Entry Criteria 4 Entry Criteria
%
o
f
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c
u
b
a
t
o
r
s
Source: IPI and IKED
Moreover, a single entry criterion such as innovation seems to be more important for the “Yes incubators” compared with
the “No incubators”. Whereas half of the business incubators without VC experiences require that new tenant companies’
business models are based on innovation, 75% of the “Yes incubators” prefer innovative tenants. These findings
suggest, that the incubators that have succeeded in collaborating with venture capitalists tend to be more selective and
prefer innovative firms more often compared to the “No incubators”, and are therefore more likely to present innovative
firms to the investors compared to the “No incubators”.
Incubator Staff’s Professional background
Generally, business incubators are often accused for not establishing or maintaining sufficient contacts with the private
sector. As a result, the final outputs and products from incubators are not always adapted to the needs of the market.
Exploring the ability among incubators to respond to the need of venture capitalists, we examined whether the
professional background of the incubators’ staff would influence their ability to communicate with VC.
Figure 13: Private sector background and VC Collaboration
0
10
20
30
40
50
60
70
80
Yes No
Staf f with public/private sector background Staf f with only private sector background
%
o
f
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a
t
o
r
s
Source: IPI and IKED
According to the survey, differences between the staff members’ background in the ‘No’ and ‘Yes’ incubators occur.
Whereas only around 50% of the staff in incubators without VC collaboration has a professional background in the
private sector (they have previously worked either as entrepreneurs, firm managers or firm consultants), about 75% of
Joint IPI/IKED Working Paper
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
28
the staff in incubators with VC experiences has professional backgrounds from the private sector. Moreover, while 20%
of “No incubators” has staff members that have only been working in the private sector, this number is more than double
in the “Yes incubators”. Therefore, these figures indicate that business incubators with primarily private sector staff are
more likely to have good relations with VC.
Tenants’ profile and background
In order to increase the number of tenant companies leaving business incubators and instantly becoming targets for
venture capital investors, it is necessary to understand (in order to improve) the business profile and background of the
companies fostered in incubators.
Figure 14: Spin-offs from Universities and VC Collaboration
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Yes No
New start-ups Spin-off from universities Spin-off from existing firm Spin-off from R&D centre
%
o
f
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c
u
b
a
t
o
r
s
Source: IPI and IKED
As shown in Figure 14, spin-offs from universities and existing firms are more often found within the incubators having
experienced some kind of collaboration with venture capitalists. On the opposite, incubators without VC experience tend
more often to foster either new firms or spin-offs from R&D centres.
Activities for tenant companies
Another indicator for the company profiles is the type of business activities, which the tenants are carrying out.
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
Joint IPI/IKED Working Paper
29
Figure 15: Tenant Companies’ Activities and VC Collaboration
0
10
20
30
40
50
60
70
80
90
Yes No
ICT R&D Advanced/high tech manufacturing Sales, marketing, distribution
%
o
f
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t
o
r
s
Source: IPI and IKED
As shown in Figure 15, firms working with research and development and information and communication technologies
are more often found in the incubators, which have collaborated with venture capitalists compared to those incubators
that have not collaborated with VC. Whereas up to 80% of the firms in the “Yes incubators” have ICT as their main
business activity, only half of the firms in the “No incubators” are occupied with ICT. The results in Figure 14 and 15
indicate that incubators, fostering technology and research-based firms, tend to be more attractive for venture investors.
Incubators’ Investments
As discussed, for most investors factors such as the “personal feeling”, trust and strong confidence in the entrepreneurial
firm are paramount when making a new investment. Normally, VCs realise new investments because they believe in both
the new business idea and in the entrepreneurial team behind the idea. However, investors can be encouraged to invest.
Sometimes one investor manages to convince other investors that an idea is worth “believing” in, simply by investing in
the idea himself. Similarly, this mechanism could describe incubators’ seed investments in tenants. If a business
incubator invests in one of its own tenant companies, it signals to other investors such as venture capitalists, that this
company is worth investing in.
Figure 16: Incubators’ own Investments and VC Collaboration
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Yes No
Incubators are not investing in companies Incubators are investing in companies
%
o
f
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c
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a
t
o
r
s
Source: IPI and IKED
According to the survey, as shown in Figure 16, the business incubators that have financed some of their companies with
either loans or equity tend to have better collaboration with VC compared with the incubators that have not invested in
the tenants. Whereas more than 30% of the “Yes incubators” have invested capital in their firms, none of the “No
incubators” has invested in their tenants before presenting them to the VC.
Joint IPI/IKED Working Paper
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
30
As discussed, it is very often viewed positively - when presenting tenants to VCs - if the incubators can show that they
have been willing to risk and invest in the companies themselves.
Another explanation could be that many of the firms, which have been invested in by incubators, are presumably more
developed and matured (due to the extra capital) compared to those firms which have not received any additional capital
from incubators, and they therefore appear more attractive for investors. This point will be turned to later.
External and Internal Provision of Services
Generally, business incubators provide a number of services to the tenant companies during the period in the incubator.
Analysing these services, it is found that the “Yes incubators” tend to provide more services externally (services provided
from sources outside the incubators), whereas the “No incubators” more often provide services internally (services
provided from sources inside the incubators). In other words, outsourcing of incubator services tend to co-exist with
increased venture capital in incubators.
The openness to external sources - both in services and in networking - facilitates a better collaboration with VC.
Presumably, the benefits of being more open are that the tenants can benefit from a larger span of views and services,
thus reaching potentially the best service in the market. In that way, incubators provide more competitive services, which
in turn are expected to make the enterprises better equipped and prepared for external investments. In the following,
some examples of incubator services are highlighted.
Service - Help with raising seed and venture capital
The “Yes incubators” tend to provide assistance with raising venture capital more often compared to the ‘No’ group of
incubators. In addition, when the ‘Yes’ group provides the service, it is likely to be provided by person working inside the
incubator.
Figure 17: Help with Raising VC and VC Collaboration
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Yes No
No help with raising VC provided
Help with raising VC provided
externally
Help with raising VC provided
internally %
o
f
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c
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a
t
o
r
s
Source: IPI and IKED
This survey result could indicate that those incubators, which have been collaborating with venture capitalists, have in-
house human resources capable of advising and communicate with external investors.
Service - Market Research and Sales
The ‘No’ group of incubators tends to provide help with market research and sales more internally. As shown in Figure
17, 57% of the incubators provide the service internally, while 36.4% use external consultancy.
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
Joint IPI/IKED Working Paper
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Figure 17: Market Research and Sales and VC Collaboration
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Yes No
No help with market research and
sales provided
Help with market research and
sales provided externally
Help with market research and
sales provided internally %
o
f
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c
u
b
a
t
o
r
s
Source: IPI and IKED
On the other hand, the ‘Yes’ group of incubators tends to provide the service externally, which might indicate that they
have a better contact with professionals outside the incubators regarding market research and sales. Therefore, external
consulting in market research and sales seems more likely to be associated with a successful performance in relation to
Venture Capital.
Service - Help with Exporting and Partner Search Abroad
When the ‘No’ group of incubators provides help with exporting and partnering, it is more often based on internal
resources, and around 40% of incubators do not offer this service at all.
Figure 18: Export Help and Partner Search and VC Collaboration
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Yes No
No help with export and partner
search provided
Help with export and partner
search provided externally
Help with export and partner
search provided internally %
o
f
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a
t
o
r
s
Source: IPI and IKED
On the contrary, the ‘Yes’ group has a higher percentage of incubators that provide the service through external
professionals. Hence, the export and partner search service seems more likely to be associated with a successful
performance in relation to venture capital, and even more if the service is provided externally.
Joint IPI/IKED Working Paper
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
32
Exit criteria for tenant companies
Incubating is by definition supposed to be limited in time, as its core function is to support start-up firms in certain stages
of business development. Therefore, once the tenants companies have spent certain a period of time, reached a certain
turnover or implemented certain activities inside the incubator, the firms are requested to leave and forced to continue
the business development outside the incubators.
Figure 19: Time restriction as Exit Criteria and VC Collaboration
0
10
20
30
40
50
60
70
80
90
Yes No
Time restriction as exit criteria for tenants
%
o
f
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s
Source: IPI and IKED
As shown in Figure 19, for the majority of the ‘No’ incubators companies must leave the incubator after a certain period
of time, normally after 2-3 years. On the other hand, the ‘Yes’ group of incubators tends to use time as a criterion for the
firms less often, but they rather refer to a certain development stage or employment status as a reason to change
location.
Firms’ Development Stages when Leaving Incubator
As discussed previously, entrepreneurial firms go through certain stages of business development (pre-seed, start-up,
seed, expansion) before reaching maturity and a number of activities characterise each development stage (see also
Part II).
Figure 20: Expansion and VC Collaboration
Source: IPI and IKED
Following the findings in Figure 20, ‘Yes’ incubators claim that the development stage is usually the expansion one for
firms leaving the incubators. On the other hand, more start-up firms in ‘No’ incubators leave the incubators as shown in
Figure 20. These results could indicate that the ‘No’ incubators - due to decisions on more rigorous time restrictions are
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Yes No
Pre-seed Start-up Seed Expansion Maturity Withdrawal f rom market
%
o
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s
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
Joint IPI/IKED Working Paper
33
asking the tenant firms to leave too early. As a result, investors might not willing to invest in them because of the higher
risk connected to these firms.
Follow-up activities
According to the research, incubators experienced with collaborating with VC tend to offer more follow up activities to
companies that have left the incubators compared to incubators that have not collaborated with VC.
Figure 21: Networking and VC Collaboration
0%
20%
40%
60%
80%
100%
Yes No
No follow up activity Consultancy Networking Training
%
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s
Source: IPI and IKED
Evidently, external networking activities seem to be more often among the follow-up activities provided by the ‘Yes’
incubators.
Networking and collaborative structures
Not surprisingly, the group of “Yes incubators” tends to view venture capital investors and business angels as integrated
external structures with which they can collaborate. On the contrary, the “No incubators” tend to view Banks more as a
part of their external networks compared to “Yes incubators”.
Figure 22: Collaborating Structures and VC Collaboration
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Yes No
Banks
VCs and Business Angels
Other Innovation Centres
Other Incubators
Research Centres
Universities
%
o
f
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a
t
o
r
s
Source: IPI and IKED
Venture Capital as Complementary Partners
As shown in the survey, the ‘Yes’ incubators are generally more positive towards the value of venture capital, and tend to
see venture capital investors more as complementary to incubators compared to the ‘No’ group of incubators.
Joint IPI/IKED Working Paper
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An International Survey on Synergies and Challenges
34
Figure 23: VC as Complementary to Incubators and VC Collaboration
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Yes No
VC is to a high extent
complementary to incubators
VC is to a significant extent
complementary to incubators
VC is to some extent
complementary to incubators
VC is not at all complementary to
incubators
%
o
f
i
n
c
u
b
a
t
o
r
s
Source: IPI and IKED
As shown in Figure 23, 10% of the ‘No’ incubators view venture capital as not relevant for incubators, and whereas all
incubators in the ‘Yes’ group see venture capital as a complementary partner to incubator, 90% of the ‘No’ incubator
answer this. These finding reflect that although, the ‘No’ incubators have not collaborated with venture capital investors,
the majority of the incubators still view incubators as valuable and complementary to their work.
Overall Remarks – Bringing in the Venture Capitalist View
In theory, incubator and venture capital investor are complementary actors playing a crucial role in the innovation system
by equally supporting the breeding ground of new firms.
In practice, the situation is somewhat different, however. Whereas incubators have difficulties in accessing venture
capital sources either because they are prevented from doing so or simply have no interest in interacting with VC, the VC
investors tend to view their role as slightly more later-stage compared to the incubators. In the following the various
qualitative inputs collected from both incubators and venture capitalists are discussed.
It seems for those incubators that have collaborated with venture capitalists, that initiating contact with the venture capital
investors is not the most challenging part. The main challenges are rather related to follow up activities with investors,
which is difficult because investment decisions apparently take long time to realize for investors. Among the incubators
that have tried to collaborate with venture capitalist, more frequent contacts and closer dialogues between incubator and
VC are brought forward as tools to improve the collaboration.
On the other hand, there is the group of incubators that has never succeeded in cooperating with venture capitalists
(referred to as the “No” group). According to this group, the lack of collaboration is explained by the difficulties in locating
or contacting VCs or because VCs are not interested in their tenant companies. Other incubators refer to venture
capital’s risk aversion against young start-up companies or that tenant companies are not interested in venture capital.
According to the interviews carried out with venture capitalists (see Appendix B), the collaboration with incubators can be
viewed as an excellent constellation (alias public-private partnership) since venture capitalists contribute with the hands-
on, business-oriented experiences and external networking activity that some incubators lack. In fact, the combination of
networking and active involvement provided by the investors can be the single leading factor determining whether an
investment (in a tenant company) turns out successfully or not. However, regardless of these positive elements, the
collaboration is also viewed as somewhat troublesome.
In many cases, venture capital investors point to the lacking ability among incubators to plug into market oriented and
relevant activities and research, hence listing this issue as one of the main reasons for not collaborating more with
business incubators. Moreover, generally seed investors are limited in numbers and represent a scarce source of capital
particularly since the global economic downturn as previously highlighted. Following, the shortage of risk capital makes
the competition between incubators harder, and not surprisingly venture capital firms choose to invest their capital in the
most promising and secure firms. The increased risk aversion among investors is accumulated the capital around a few
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
Joint IPI/IKED Working Paper
35
firms, and – if given the possibility – only the most investment-ready firms are invested in. The venture capital funds
underline the necessity of increasing the investment readiness among the tenants firms, which likely requires a
strengthened dialogue with VC in order to understand what their investment criteria are.
Joint IPI/IKED Working Paper
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
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Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
Joint IPI/IKED Working Paper
37
V. RECOMMENDATIONS
Based on the survey and analysis of the incubators from 16 countries, it is found that venture capital availability is a
major challenge for business incubators across the world. Generally, risk aversion and lack of interest among VC, poor
communication channels and little follow-up activities are listed as the main obstacles in the collaboration between
business incubators and venture investors. However, despite the difficulties, some business incubators have been more
successful in collaborating with VC than others.
Challenges vary between the two groups of business incubators in the survey. For those incubators that have never
been successful in cooperating with VC (the so-called “No incubators”), creating the preliminary contact, developing a
sufficient deal flow of tenant companies, widening the geographical focus and strengthening their own financial
engagement in the firms are issues that should be addressed in order to improve access to VC. Among this group of
incubators, one could foresee to plan and to implement an action directed to raise the awareness of the importance of
VC funds for the development of enterprises. This is because several managers from “no” incubators did not seem to
give importance to the availability of VC funds for their enterprises. In addition, in many countries, namely the developing
ones, a proper VC activity does not exist. Therefore, here incubators activity will always be prevented from seizing the
fruitful opportunity of establishing a good relation with VC, and also their role with respect to their community will be
negatively influenced by these conditions.
On the other hand, the incubators which already are in some dialogue or collaboration with VC (the “Yes incubators”)
face different challenges such as developing sufficient follow-up activities and meeting with venture capital, strengthening
their position in the venture capital investment processes and ensuring mutual awareness about VC and companies.
Figure 24: Strengthening the Collaboration between Business Incubators and Venture Capitalists
Source: IPI and IKED
According to the result of the studies certain sectors are more interesting for VC than others (i.e. ICT and high knowledge
content ones). Accordingly, those incubators that are focusing on factors that are not considered attractive by VC will
have to take into account the fact that their tenant companies will need to make a stronger effort get funded by VC.
Positive factors that seem to influence VC’s investment decision are longer incubation retention time of tenants, in line
with the fact that companies reaching later stages gradually become more interesting for institutional investors. In
Joint IPI/IKED Working Paper
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
38
general, seed capital is more appropriate in the early stage and the fact that it is generally connected with high risk is
coherent to the often impossibility to be rentable.
Similarly, the provision of services also after leaving the incubators, showing trust between the incubator management
and the company, seems to improve the relationship with VC. In addition, this characteristic can potentially improve the
performance of enterprises, as the period after leaving incubator units is usually a critical one for their survival. Follow-up
activities, if carefully planned, tailored and implemented, can represent a bridge between the incubator-supported stage
and the VC-supported stage of a company.
In addition, selectivity (i.e. tight and/or multiple entry criteria) is helping as well to be more interesting to institutional
investors. This probably indicates that incubators that tend to have a mission more linked to job creation in an under-
development area will have less chance of being interesting for VC, as their mission might not be focused on highly
profitable and innovative businesses. Moreover, the fact that enterprises already passed a selection when they leave the
incubator helps the further selection activity performed by VC.
Furthermore, among the positive factors that influence the correlation between the existences of relationships with VC is
the profit vocation of the incubator as well as the tendency to directly invest capital in the tenants companies.
Also the openness to external sources, both in services or in networking, facilitates the collaboration with VC, indicating
that providing services with internal resources may not be the best choice, as this, indeed, could lead to services that are
not at market quality level, due to internal limited resources or experiences that can be gained by incubators managers.
These factors can lead us to elaborate some further recommendations, which could be directed to incubator managers,
to public authorities, and to other stakeholders involved in the process of setting up and running business incubators
(Figure 24).
Incubators should ensure that they are providing sufficient training to the companies preparing them to meet venture
capital investors and they should engage in follow-up activities allowing them to join and influence the investment
decisions among VC.
Communication and links between VC and business incubators should be improved, both by offering more training to
incubators management, providing them with higher visibility of procedures, practises and names of VC as well as by
creating more opportunities to foster relationship between them. This would improve mutual awareness and knowledge
and, therefore, improve convergence of incubation management strategies to those of VC and vice-versa, thus improving
numbers of deals and shorten lead-time
Awareness and training should also be done at enterprise level, in order to facilitate their professionalism when meeting
institutional investors, fostering their chances to be attractive. Indeed, lack of “marketing” and capacity of promoting
themselves could represent a major source of loss of investment opportunities, both for VC and enterprises. Marketing
strategies towards VC should be also carefully and periodically addressed in order to make an incubator, and especially
its tenants, more attractive and visible compared to others. Finally, public financing to incubators seems to be needed
even more when incubators have non-profit and job development missions, as companies retained might not be fully on
the market, thus less interesting for VC, although important for local development.
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
Joint IPI/IKED Working Paper
39
VI. CONCLUSIONS
Venture capital funds can provide a vital help to enterprise development, which by definition is complementary to that of
business incubators. Therefore, a good and fruitful relation between business incubators and venture capital can possibly
guarantee a vital and fertile economic environment, in which entrepreneurial ideas can grow easily and with a trouble-
free availability of financial, material and immaterial help at each and every development stage, hence ensuring a
maximization of job and well being creation.
Nevertheless, in reality, relations between business incubators and venture capitalists are not always as efficient as one
could expect. Not surprisingly, this is due to several factors such as the general intrinsic mistrust of stakeholders when it
comes to risky investments or the lack of essential reciprocal information between business incubators and venture
capital investors.
To conclude, several interesting findings emerged in this survey, whose objective was to improve the understanding of
the factors influencing the relation between business incubators and VCs. The multiplicity of elements resulting from this
study partly confirms the thesis of the relevance of the chosen subject, and hopefully will start paving the way for a
broader and deeper research activity, which could in turn help investigating, developing and strengthening the best
instruments to ensure a profitable and successful relation between business incubators and VC, thus improving the
efficacy of local economic development strategies worldwide.
A possible field of investigation could be the relation between business incubators and single sources of innovative and
traditional finance, such as business angels, traditional banking and public source of capital, seed capital and so on; this
could help to better understand the connection between the development stage of enterprises when they leave the
incubator, and the availability of finance for them, eventually estimating the optimal critical mass of financing flow
requested.
Furthermore, possible future research trends could regard the connection between access criteria of incubators and the
performance of VC financing.
Finally, region or country-focused researches could also be carried out, so as to take into account specific country factors
affecting the treated variables and analyse the influence of “territorial” factors into venture capital and SMEs growth.
Joint IPI/IKED Working Paper
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
40
REFERENCES
AIFI (2001), “Incubatori privati: realtà internazionale e modello italiano”, internal publication, Milan.
AIFI (2001), “Il mercato italiano del Venture Capital e Private Equity”, internal publication, Milan.
AIFI (2002), “L’incubazione non profit in Italia”, internal publication, Milan.
Andersson, T., Napier, G. and Schwaag Serger, S. (2005), “The Venture Capital Market – Trends and Issues in the
Nordic Countries”, IKED, Malmo. Forthcoming.
Bearse, P. (1998), “A question of Evaluation: NBIA’s Assessment of Business Incubators”, Economic Development
Quarterly, 12(4): 322-333.
Etzkowitz H., Webster A., Gebhardt C., Cantisano Terra B.R. (2000), “The future of the university of the fu-ture: evolution
of ivory tower to entrepreneurial paradigm”, Research Policy, 29, 313-330.
EURADA (2004), “All Money is not the same – SME Access to Finance”, Brussels.
European Commission, DG Enterprise (2002), “Benchmarking of Business Incubators”, Brussels.
France Technopoles Entreprises Innovation (2003), “Annuaire 2003”, FTEI, Nantes.
Global Entrepreneurship Monitor (2004), “Global Entrepreneurship Monitor – 2003 Executive Report” Bab-son College.
Gullander, S. and Napier, G., (2003), ”Business Angel Network Handbook”. Handbook prepared for the Nordic Innovation
Centre, Stockholm School of Entrepreneurship.
Harrison, R. and Mason, C. (2002) “Barriers to Investment in the Informal Venture Capital Sector”, Entrepreneurship and
Regional Development, pp. 1-17, Routledge, London
Kjærgaard, R. and Borup, J. (2004), “The Significance of Venture Capital for Firm Growth”, Vækstfonden, Copenhagen.
Lalkala, R. (2001), “Best Practices in Business Incubation”, paper presented at the International Conference on Business
Centres: Actors for Economic and Social Development, Brussels, November 2001.
Mian, S.L. (1996), "Evidence on Corporate Hedging Policy," Journal of Financial and Quantitative Analysis (September),
419-439.
NBIA (2004), website: www.nbia.org
NVCA (2004), “Venture Impact 2004”, Arlington.
OECD (1995), “Government Venture Capital for Technology Based Firms”, Paris.
OECD (1996), “Venture Capital and Innovation”, Paris.
OECD (1997), “Technology Incubators: nurturing small firms”, Paris.
PriceWaterhouseCoopers (2002), “Global Private Equity 2002”.
Vækstfonden (2002), “Business Angels i Danmark”, Copenhagen.
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
Joint IPI/IKED Working Paper
41
APPENDIX A: THE SURVEY QUESTIONAIRE FOR INCUBATORS
IPI – INSTITUTE FOR INDUSTRIAL PROMOTION
Direction for Transfer of Knowledge and Innovation
Centres and Networks for Partner Countries
IKED – INTERNATIONAL ORGANIZATION FOR
KNOWLEDGE ECONOMY AND ENTERPRISE
DEVELOPMENT
Joint working paper on incubators and
venture capital
1. GENERAL DATA ON INCUBATOR
1.1 Name and Country:
Contact person: Mr./Ms. Incubator Year of Establishment:
1.4 Is the incubator designed to be:
For profit
Non for profit
1.2 How would you best describe the incubator?
Business & Innovation Centre (BIC)
Science/Technology Park Incubator
Sector-oriented incubator – please specify sector
'Virtual' business incubator, i.e. no in-house space let to
clients.
Other type - please specify:
1.3 What legal status does the incubator have?
Public entity Private company
Public-private partnership Other
1.5 Who were/are the main partners involved in setting
up and operating the incubator?
EU and/or other international development agencies
National authorities
Local authorities
Firms
Banks and other private sector organisations
Universities and other R&D organisations
Community and voluntary organisations
Other partner organisations
1.6 On what geographical basis does the incubator
operate?
International National Regional
1.7 How many people are currently working in the
incubator?
1.8 Please indicate the background of key personnel in incubator (thick more than one box if necessary):
Entrepreneurs Firm managers
Previously worked for public authorities/agencies Previously worked in universities
Firm consulting
Joint IPI/IKED Working Paper
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
42
2. GENERAL DATA ON TENANT COMPANIES
2.1 How many businesses has the incubator assisted since
it started operating?
2.2 How many tenant companies are currently located in
the incubator?
2.3 How many people on average work in your tenant
companies?
2.4 What are the main business activity/ies of tenant
companies?
Sales, marketing and distribution
Business and financial services
Advanced/high tech manufacturing
Information and communication technologies
Research and development
Other manufacturing activities
Other service activities– please specify
A combination of some/all these activities
2.5 How would you best describe tenant companies when
they entered the incubator? Please indicate the main
category/ies:
New start up
Spin off from university
Spin off from R&D centre
Spin off of existing firm
Other - please specify
2.6 How do you finance tenant companies?
No financing Equity Non refundable grants
2.7 What sort of criteria are used to screen tenants for
admission to the incubator?
A business plan must have been prepared
Financing must be in place
Business must have an innovative project
Business must demonstrate high growth potential
Other criteria - please specify:
No criteria
2.8 Do you have an esteem of the survival rate of your
tenant companies one year after they left the incubator?
2.9 Do you have an esteem of the average number of
jobs per year created by tenant companies?
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
Joint IPI/IKED Working Paper
43
3. SERVICES
3.5 What sort of services does the incubator offer?
Please tick the appropriate boxes and indicate whether
the services are provided by (a) incubator staff (b) an
external
3.1 Please indicate the physical facilities present in the
incubator:
Office space
Workshop space
Laboratory space
Mixed/other types of units
Common facilities, e.g. meeting rooms
3.2 Do tenants have to pay a rent?
Yes No
3.3 What is the criterion used to decide when tenant
companies must leave incubator units?
Companies must leave after a certain period of time –
please specify:
Companies must leave when they reached a certain
development phase – please specify:
Other – please specify:
No criterion
3.4 Do you offer any follow-up activities/services when
tenant companies leave the incubator? Which one(s)?
Services
Business planning and forming a company
Training to develop business skills
Accounting, legal and other related services
Market research and sales
Marketing and communication
Help with exporting and/or partner search
abroad
Help with e-business and other aspects of
ICT
Advice on development of new products and
services
Help with raising bank finance and grants
Help with raising seed and venture capital
Advice on recruitment of staff and personnel
management
Networking, e.g. with other entrepreneurs,
potential customers, other incubators, etc.
Mentors, board members and other senior
advisers
Other services - please specify
(a)
Stf.
(b)
Ext.
3.6 What is the usual development phase of companies when they leave the incubator?
Pre-start Start up
Seed Expansion
Maturity Withdrawal from market
Joint IPI/IKED Working Paper
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
44
4. Partnership
4.1 Do you operate within a cluster or an industrial district?
Which one? What sector of activity?
4.2 Are you a member of international networks? Which
one(s)?
4.3 What structures are you cooperating with?
Universities
Research centres
S&T Parks
Other incubators
Other Innovation centres
Chambers of commerce
Entrepreneurial Associations
Banks
Business Angels – Venture capitalist
Other:
5. Investment and relations with venture capital
5.1 To what extent do you think that venture capital
investors are complementary to the incubator activities?
Not at all To some extent
To a significant extent To a very high extent
5.2 Did you ever collaborate with venture capital? If the
answer is “yes”, please fill box n. 6; if the answer is “no”,
please fill box n. 7
Yes No
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
Joint IPI/IKED Working Paper
45
6. YES
6.1 How many of your tenant companies were able to
obtain finance through venture capitalists?
6.2 How many of your tenant companies did you
present to venture capitalists?
6.3 To what extent do you think that it was easy to make the first contact with venture capital investors region?
6.4 At what stage did the VC-funded tenant companies
meet the venture capitalists for the first time?
Pre-start
Start up
Seed
Expansion
Maturity
6.6 Besides investing, what other functions did the
venture capitalists carry out within the tenant
companies?
Advice & mentoring
Monitoring economic development
Administration
Networking
Strategic planning
6.5 To what extent do you think your relation with venture
capital could be improved?
Not at all
To some extent
To a significant extent
To a very high extent
6.7 What do you think could be done to improve your
contact with VC?
7. NO
7.1 Please describe the main reason(s) why you have no contact to venture capitalists
They are not interested in my incubator
I am not interested in Venture Capital
Companies are not interested in Venture Capital
It is impossible for me to contact them
Other-please specify:
7.2 To what extent do you think your relation with venture capital could be improved?
Not at all
To some extent
To a significant extent
To a very high extent
7.3 What do you think could be done to improve your contact with VC?
Joint IPI/IKED Working Paper
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
46
APPENDIX B : LIST OF RESPONDENTS
COUNTRY INCUBATOR
Cyprus Athena hi-tech incubator
Denmark Østjysk Innovation
Germany BIC (Business and Innovation Centre), Frankfurt an der Oder
India Technology Business Incubation Unit (TBIU), Indian Institute of Technology, New Delhi
Ireland Invent-DCU Ireland
Italy Almacube – Bolgna
Italy Incubatore Multimediale Lugo
Italy I3P Torino
Japan Sunbridge Corporation
Palestine PICTI Incubator
Romania BIC Romania
Singapore National University of Singapore Business Incubator
South Africa eGoli BIO
South Africa GODISA TRUST
South Africa Softstart
South Africa Chemical Technology Incubator
Sweden Uminova Innovation AB, Umeå
Sweden Företagsgeneratorn i Teknikbyn;
Sweden The Holdingcompany of Göteborg university
Tunisia Pépinière du Pôle Technologique des Communications El Ghazela
Tunisia Sfax-innovation
Turkey Ege University Science and Technology Centre
USA Connecticut Enterprise Centre
USA Bessemer Business Incubation System
USA Arizona Centre for Innovation
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
Joint IPI/IKED Working Paper
47
USA San José SBC - California
USA Delaware Technology Park -
USA/Finland UCLA GAP virtual incubator
COUNTRY VENTURE CAPITALISTS
Denmark Biolink Capital
Europe European Venture Capital Association
Europe European Investment Bank
Italy Pino Venture Partners
Joint IPI/IKED Working Paper
Business Incubation and Venture Capital
An International Survey on Synergies and Challenges
48
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