The Incubation Process (September 2003)

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The Incubation

ProcessBy Dr. Carlos Eduardo Negro Bizzotto, PhD.

Gene Institute Fundao Universidade Regional de Blumenau

Santa Catarina - Brazil

September 2003


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iDISC 2003

Applications for permission to reproduce or translate allor part of this work should be made to:

infoDev Incubator Support Center (iDISC)SCN Qd.4 Bloco "B"Ed. Centro Empresarial VarigSala 1302, Braslia/DF - BrazilZip Code: 70710-926Tel./Fax: +55 (61)328-0779URL: http://www.idisc.netEmail: [email protected]


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SUMMARY

In this work, Dr. Bizzotto sheds light on the business incubation process, presenting the

generic elements of this process that despite the differences regarding region, culture andaims of the incubator, will be contemplated in the incubation process of any incubator. In thefirst part of this study, special attention should be addressed to the authors effort ofreviewing the incubation process, using incubation generic elements (pre-incubation,incubation, graduation) along with sample descriptions of the way in which they have beenimplemented in incubators in different countries. In the second part, the author establishes aGeneric Model of Company Incubation which will be used for making a comparativeanalysis of the different practices adopted by business incubators around the world.

Throughout this work, Bizzotto also takes into account the role of Information andCommunication Technologies and aims at identifying essential aspects that must be pursuedby the actors (entrepreneurs, government, universities) involved in promoting the businessincubation process.


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The Incubation Process

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1. INTRODUCTION

The end of the last century and the beginning of this have been marked by great changes insociety as a whole, and especially in business. Among these factors, one can point to theincrease in global competition and growth in unemployment. This new situation requires thatthe different players in a given region act in an innovative way in order to bring aboutsustainable social, economic and technological development.

One of the options, which have been widely used, is the establishment of businessincubators, which offer support for the creation and development of companies. The aims ofan incubator vary according to the region where it is located. We can mention the following:

A reduction in the company mortality rate A reduction in the unemployment rate The development of an entrepreneurial spirit The increase in the university-company interaction The development of a determined market niche Technological development

In order to reach their aims, incubators organize a process of incubation, which adds value tothe incubated companies, thereby increasing their chances of success. This incubationprocess varies greatly from incubator to incubator, due to the aims, regional characteristicsand the needs of the incubated companies.

In spite of the differences, there are generic elements that will be present in the incubationprocess of any incubator though the specific form of implementation may be different. Thisstudy will present the incubation process using these generic elements, describing the wayin which they have been implemented in incubators in different countries. Figure 1 presents

the countries in which experiences were found and on which this text is based.


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Figure 1 - Countries studied (in red)

Before presenting the generic elements of the incubation process of businesses, it isimportant to establish an incubation model, which includes all the elements necessary forthe generation and development of companies. In order to do this, the first part of this studywill describe the incubation models used by incubators and authors in various countries.

From these models, a Generic Model of Company Incubation will be established, and thiswill allow us to make a comparative analysis of the different practices adopted by businessincubators.

2. THE BUSINESS INCUBATION MODEL

The business incubation process greatly varies from incubator to incubator, and is influencedby, among other factors, by the goals to be reached and the characteristics of the region

where the incubator is situated. It is, however, necessary to define a Generic BusinessIncubation Model so that it is possible to make a comparative analysis between theapproaches implemented by business incubators in different countries.

This Generic Business Incubation Model should conform to the present-day concept of thebusiness incubator, which is being continually updated. This evolution can be seen in Figure2 (European Commission, 2002, p. 19).

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Figure 2 - Evolution of the Concept of the Business Incubator

The incubator of the Universidad Nacional Experimental Del Tchira, in Venezuela, uses anincubation model that has three phases (Rubio, 2001, p. 05):

Pre-incubation: the aim of this phase is to transform innovative ideas or projects into apotentially commercial business. This phase is conceived as a process of generationof potential clients for the next phase.

Incubation: in this phase entrepreneurs are offered the necessary infrastructure andstrategic support for the development of their activities.

Disincubation: the aim of this phase is to support the businesses so that they will beable to become established outside the incubator infrastructure.

In this model the incentive for innovative projects coming from the university is emphasized(pre-incubator). Parallel to the generation and development of the incubated businesses, thismodel proposes that there be a constant assessment of the performance of the incubatorand the incubated businesses, as shown in Figure 3 (Rubio, 2001, p. 07).


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Figure 3 - Incubator Model - Universidad Nacional Experimental Del Tchira

In terms of the incubation model, the proposal put forward by Rubio (2001) emphasizes theneed for a support phase for the elaboration / improvement of the Business Plan and asupport phase when the business is leaving the incubator.

Similarly, the technological incubator of the Standards and Industrial Research Institute ofMalaysia (SIRIM) proposes an incubation model that also has three phases (Manan, 2000, p.09):

Development of the entrepreneur: during this phase, the basic principles ofentrepreneurship are taught to the potential entrepreneurs with the aim of broadeningtheir capabilities, improving their knowledge and updating their skills.

Establishment of the Business: in this phase, entrepreneurs learn how to start up abusiness, putting into practice the knowledge acquired in the previous phase.

Market development: entrepreneurs learn how to transform an idea into a marketproduct, setting up a network of contacts and suppliers both regionally andinternationally.

This incubation model, though it is somewhat similar to the previous model, is more focused


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on the business than on the role of the incubator as a support for the generation anddevelopment of the incubated businesses. This same focus can be seen in the modelimplemented in Berytech, a technology park in Beirut, Lebanon (ESCWA, 2000, p. 28):

conception, start up and take off.A more generic incubation model has been proposed by Moreira (2001, p. 16), that of thebusiness accelerator ALAVANKE, in Florianpolis, Brazil, where the performance of theincubator and the role of the different players involved in the process are considered, as canbe seen in Figure 4.

Figure 4 - Model of the Process of Business Incubation Celta

This model was conceived from the point of view of the venture capital. The phases of thismodel are as follows:

a) Prospecting: In the prospecting phase, the incubator should have a positiveattitude to look for projects to be incubated. The encouragement and promotion ofentrepreneurial activities are developed together with universities and researchcenters, allowing for an improvement in the flow of businesses that are candidatesfor incubation.

b) Selection: The selection process consists of the analysis of the business

propositions of the company. When the projects have been made, the incubator

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will choose those with the best characteristics, and this will include a moredetailed analysis of the aspects that are contained in the business plan of thecompany, if it exists.

c) Negotiation: The conception of this model foresees that the incubator holds sharesin the incubated companies; so, in the negotiation phase the incubator will presentthe terms and negotiate the conditions to incubate the company. In this phase, thecontracts and instruments that will be used during the period when the businessremains incubated will be presented.

d) Auditing: After the negotiation phase, the incubator should find out more about thebusiness which it will be incubating and in which it will have a share. This processis called the audit, and includes a detailed analysis of the accounts and legalaspects in order to verify the fiscal and contractual situation of the company. The

aim of the audit is to minimize recurring risks from possible fiscal irregularities,liabilities with labor or clients / suppliers who might jeopardize the business of thecompany.

e) Incubation: The incubator consists of the formalization, through a contract, of theincubator / company relation. In this phase, the terms of the negotiation, whichhave been previously defined, are put into practice through legal instruments thathave been developed for this purpose.

f) Development: Once the formalities of the previous phase have been carried out,the incubator will work hard to structure the business model of the new company.

Here, the interaction with investors and interested companies, and with thenetwork of relationships of the incubator, will be fundamental to confirm thestrategy that will be adopted. All the planning of the new company will bestructured in this stage, in addition to the development of the product / service,the definition of the need for finance, the projections of cash flow, the commercialand marketing strategies, the need for physical space, etc. The result of this stageis the structuring of a business plan for the new company, which will be areference for its period in the incubator.

g) Growth: The growth phase should also have the active participation of the

incubator and the investors or interested companies that may participate in thecompany. This is because it is in this phase that what was planned in the previousphase should become concrete and evolve into what will eventually become aprocess of commercial expansion. Those involved should work for the commercialpromotion of the company. The importance of a good network of relationships willmake a difference in this period and will open doors to present the company topotential clients and companies interested in the technology developed.

h) Monitoring: Once the company has reached a determined level in its growth curve,the level of control and participation of the incubator will be changed. At this point,the company will already have sufficient critical mass to be autonomous in terms

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of executive or day-to-day management. However, the process of the leverage ofbusiness will continue, and it will remain like this while the incubator holds a stakein the company.

i) Disinvestment: In this phase the stakeholders, especially the risk investors, willbegin to look for alternatives for the liquidity of their investments, with the resultthat the company will begin to prepare for the change of stakeholders.

This model includes the majority of the phases of the previous models and also presents anapproach that is based on the role of the business incubator and the players involved in theincubation process. In spite of this, the model does not explicitly include assessment of theperformance of the business incubator.

The report made by the European Commission (European Commission, 2002, p. 41) presentsan incubation model that includes the elements necessary for the generation anddevelopment of the incubated companies. This model is described from the simple processof entry-exit:

Entry: consists mainly of the entry made by the stakeholders (e.g., financialresources), management resources and projects presented by entrepreneurs.

Process: the various entries are conciliated in the incubation process through thesupply of physical space and other services to companies.

Exits: successful graduated companies, which produce a positive impact on the localeconomy in terms of employment and development.

Figure 5 schematically presents the model proposed by the European Commission,combining the entry-exit dimension of the incubator (shown in the bottom half of thediagram) with the elements related to the best practices (shown in the upper half).


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Figure 5 - Business Incubator Model (European Commission, 2002, p. 41)

As the model proposed by the European Commission includes all the elements and phases of

the business incubation models which have already been presented, it will be used as abasis for the description / analysis of the implementation of incubators in different countries.

It is important to emphasize that this study will focus on the process of incubation itself, inother words, it does not examine the question of physical space, financial support orservices which are not essential for the generation and development of companies. Only theelements, which, if they were not present, would prevent an entity from being called abusiness incubator, will be analyzed.

Therefore, the generic business incubation model will contain the following subsystems:

Prospecting and Attraction Selection Orientation, Accompaniment and Assessment of Incubated Companies Graduation Assessment of the Incubator


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In the following sections, each of these subsystems will be described in greater detail usingexperiences of incubators in different countries.

3. THE INCUBATION PROCESS

3.1. THE PROSPECTING AND ATTRACTION OF BUSINESSES

The success of an incubator is measured by the degree of success of the businesses thatconclude the incubation process. When these companies have a considerable impact on thesocio-economic aspects of the region, they will help to publicize the incubator.

The publicity given to successful cases is therefore vital for the success of an incubator, as itwill encourage new entrepreneurs to present their projects. This will mean that more peoplewill be interested in setting up new companies. With a higher number of projects, the qualityof those selected will be higher, and this will improve the chances of success of thosebusinesses, which have been supported (Bizzotto et all, 2001). The success of the incubatorwill thus be an effective instrument to attract new companies.

In addition to publicizing successful cases, the incubators have used a set of simple low-costactions, which have helped to increase the demand from projects / companies:

The existence of a website to publicize the advantages on offer, the form of entry andother information.

A link on the sites of companies, which have graduated, to the site of the incubator. A link on the site of each of the partners to the site of the incubator. The inclusion in the publicity material (brochures, posters, etc.) of the incubated

companies mentioning the fact that a specific incubator supports this company. Talks in schools, colleges and universities on entrepreneurship and the advantages

offered by the incubator. The organization of visits by students and / or graduates. Publicity material (brochures, posters, visiting cards, etc.) placed in the head offices

of the partners. Talks in associations (commercial and industrial associations, Lions Clubs, Rotary

Clubs etc.), publicizing the opportunities, which the incubator offers entrepreneurs. Articles on entrepreneurship and the generation of new companies in the regional

press. News in the press of successful cases in the incubator.


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Measures taken to attract new companies are in general included in the marketing strategyof the business incubators. However, in addition to these forms of publicity, it is essential

that the incubator act in a more pro-active way, promoting the prospecting of newcompanies. (Moreira, 2001, p. 13).

At the moment, the business pre-incubators generally carry out this prospecting. This hasmainly happened because of the proximity of these companies to universities and researchcenters. Nevertheless, any business incubator process should include active prospecting fornew projects / companies, regardless of whether the process will be carried out in anincubator or in a pre- incubator.

Taking as a basis the actions carried out in the Gene-Blumenau pre-incubator (now calledCRIEM), examples of ways of attracting new companies will be described (Bizzotto at all,2001).

3.1.1. DIRECTED DEMAND

The existence of large companies in the region where the business incubator is situated is animportant element in the process of the setting up of new companies, especially those that

have a technological base. The incubators should take advantage of this characteristic of theregion in order to encourage the appearance of Directed Demand.

In Directed Demand a company that is already established will serve as the Generating-cellof one or more companies, through the identification of technical or operational difficulties,which hinder its market expansion. With the clear identification of these difficulties, theincubator will attempt to attract entrepreneurs interested in the establishment of a businessthat will reduce or eliminate this problem (Figure 6).

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Figure 6 - Prospecting of projects Direct Demand

The management team of the incubator will work together with the established company, inorder to evaluate the business potential of the opportunity identified. The incubator will thenpublicize this opportunity to potential entrepreneurs. A selection process will then take placebetween the candidate entrepreneurs, in order to identify the most suitable entrepreneur(s)for the development of the project in question. In order for the selection to achieve its aims,the company that generated this opportunity will take part in the whole process. At the end,there will be a team, which has the skills to develop the business opportunity that has beenidentified.

This process of Directed Demand helps to increase the number of candidates in the pre-incubator process as it offers concrete opportunities to the candidates. In addition toincreasing the number of candidates, Directed Demand also offers a greater chance ofsuccess, as the new company will have the support of the company that is alreadyestablished on the market. Directed Demand also helps the regional economy to becomemore dynamic as new companies (which are generally dynamic) help to increase thecompetitive ability of the already-established ones. If we think in terms of a network, we cansee that various new companies may act in different part of the productive process of thealready existing ones.

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Figure 7 - The Dynamization of the Regional Economy through Directed Demand

3.1.2. PROGRAMMED SPIN-OFFS

The idea of the programmed Spin-Off Project is similar to that of Directed Demand, that is, itis the appearance of a new company from an already-existing company (the Mother-Company). The difference is that Directed Demand has the aim of exploiting a difficulty /opportunity in the productive process in the established company. In the case ofprogrammed Spin-Offs, the aim is to allow the Mother-Company to act in a new marketniche or to offer another product to its clients. So, in general, the two companies (the newand the established) will act in the same area, but in complementary niches.

In this context it can be seen that, through creation of Spin-Offs, the Mother-Company maybroaden its portfolio of products and/or services in less time and at a lower cost. But isshould be emphasized that the Spin-Offs will have a greater chance of success when theyact in the same business area as the Mother-Company as they will then take advantage ofthe existing structure. The support for a number of Spin-Offs will thus enable the Mother-Company to participate in a wide area of the market.

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Figure 8 - Extension of Market Participation of the Mother-Company

It can therefore be seen that the programmed Spin-Off strengthens a determined area ofbusiness in a given region. As a consequence, there is a trend for an increase in the numberof companies interested in taking part in this kind of program, which improves the image ofthe incubator.

3.2. THE SELECTION PROCESS

The crucial point for the success of any incubator is undoubtedly the selection process ofnew companies. The number of graduated companies will be directly proportional to thequality of the selection process. The aim of the selection process is therefore to identifythose business proposals that have a greater chance of success.

Although the selection process, which have been used in different incubators, have the same

aim, the stages and the criteria used vary greatly from one incubator to the next and fromone country to another. In terms of European incubators, the Centre for Strategy & EvaluationServices (CSES) has elaborated for the European Commission, the project Benchmarking inBusiness Incubation, which describes the selection process of incubators in Europeancountries. The following are some of the results:

a) Business Innovation Center Liguria, Italy: In terms of admission criteria, the BIC doesnot currently practice sectoral targeting of potential tenants. The incubator waspurposely built for mixed usage to reflect the need for economic diversification. In

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terms of admission assessment criteria, the incubator conducts a rigorous analysis ofthe viability of a prospective tenants business plan before granting admission(European Commission, 2002a).

b) Bordeaux Productic, France: In terms of admission criteria, the incubator conducts arigorous qualitative assessment of a prospective tenants business proposal. Onlynew start-up firms are admitted existing firms are not eligible to apply for incubatortenancy. Incubator management then assess the viability of the business plan (over atwo-three week period) and the skills and credibility of the prospective entrepreneur(European Commission, 2002b).

c) Centre for Advanced Technology, Denmark: In terms of the admission process,potential tenants are automatically entitled to a DKK 50,000 grant from the incubatorto develop and work on a business plan a substantial percentage of the money must

be spent on specialist consultancy advice on the development and elaboration of thebusiness plan. Qualitative selection criteria are then used to evaluate firstly theviability of a potential tenants business plan and secondly the degree to which thefirm is sufficiently innovative to be admitted. Other selection criteria such as thedegree of complementarity with existing tenants are also taken into consideration(European Commission, 2002c).

d) Taguspark, Portugal: Taguspark has developed a methodology for assessingentrepreneur skills. This consists of four dimensions or enhancers/inhibitors individual competencies, project characteristics, the project team, technology/market.

Considerable emphasis is placed on assessing individual skills alongside projectcharacteristics rather than separately from one another. The methodology wasdeveloped after three years of research into the characteristics of start-ups thatparticipated in IAPMEIs contest of ideas scheme. It is hoped that when furtherdeveloped, the methodology might be used by investors to identify projects (EuropeanCommission, 2002d).

Another important study on business incubators, and which includes the selection process,was developed by the United Nations Economic Commission for Europe UNECE (2002).

The following are among the results:

a) Australia:

The five most important tenant entry criteria in descending order were:i. Projected viability of the business;ii. Ability to pay for rent and space;iii. Compatibility of business to incubator objectives;iv. Completion of the application package;v. Projected growth potential of business.

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b) Birmingham Business Assistance Network - Birmingham, Alabama, USA:

Criteria for entry of new firms include:

i. A business concept involving technology-based products or services.

ii. Potential synergy with RPIs academic and research programs.iii. Demonstrated financial resources to sustain the business during thestart-up phase.

iv. A capable and motivated entrepreneur or entrepreneurial team.v. An acceptable written business plan.

Eligible candidates for the program include:

i. Emerging service or light manufacturing businesses;ii. Firms with job creation potential;iii. Firms with the ability to export a product or service beyond the county;

iv. Firms with potential to replace currently imported products to the localeconomy;v. Firms financed or finance-able.

Ineligible candidates include:

i. Retail;ii. Construction contractors;iii. Businesses whose job creation is primarily commissioned sales, such as

real estate and insurance;iv. Professional counselors such as accountants, attorneys and financial

planners.

Storm, Laird and Huang (2002, p. 04) developed a project for the implementation of anincubator in Bolivia. Their selection criteria in this project were as follows:

Viable initial business plan.o Product/business concept and the problem that it solveso A brief description of the management teams qualifications that make the

company successfulo A synopsis of the companys strategy for succeedingo Target customerso A brief description of the market along with the ingredients for success that

makes the company unique in that marketo Potential market and market sizeo Proposed sales and distribution channelso Any alliances/partnerships that the company has formed or is seekingo List of personal and professional references including vendors, suppliers and

customers


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o A capsule summary of key historical and forecasted financial data, such asannual revenue and net income and assets & liabilities, for five years

One to two years of positive and/or growing free cash flow

Minimum annual revenue of $50,000 USD up to $10,000,000 USD A desire to use the services offered by the incubator and willingness to work

collaboratively with the incubator Early-stage companies New or existing Bolivian companies that are in need of assistance to grow, obtain

funding or improve operations. The principals must be fully committed and involvedwith the development process.

In the Israel Incubator Program, the basic principles to be followed in the selection processare as follows (ESCWA, 2000a):

The company should have innovative technological ideas Entrepreneur + team of 3-6 Budget should not exceed $172,000; grant: 85% Project approval: experts + project

committee + steering committee Agreement signed to ensure developers rights and reimbursement to the State

Entrepreneur carries out ideas to the stage of production definition and provenfeasibility; learns how to operate as commercial venture; after graduation, can obtainState support and outside investment

Kumar and Kumar (1997, p. 18) underline that the list of criteria used for selecting tenantsincludes job creation and local ownership. As well, the tenant company must be able to pay

its own operating costs, provide a unique opportunity, be a new startup enterprise with fast

growth potential, have clients who are in some cases required to have a business plan, and

have business liability insurance. In terms of exit rules, most incubators impose a time limit

on tenant residency.According to Wolfe (2000) the selection process should allow the incubator to identifywhether the company is at a suitable moment for type of services, which are offered, by theincubator. Here the EiR (2003) incubator asks the candidates a number of questions:

Do you own the rights to key driver technology, intellectual property (IP) or a productthat has been developed in Australia?

Has your technology, IP or product been incorporated, or is capable of being

incorporated, into Information and Communications Technology (ICT) business that


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provides equipment, software, services or content, or an incubator that has ICT as akey business driver?

Has the technology, IP or product the capability of being competitively marketed on

the international ICT market? Have you started, or are planning to start, commercialization of your product or IP

through a West Australian based company? Have you got fewer than 10 employees, a turnover of less than $1m in the last

financial year, and are you seeking 1st round financing? Do you need development support in the form of the 3Ms (Marketing, Management

and Money) to help realize the potential of your product, IP or technology? Are you willing to trade equity in your business for the opportunity to participate in a

structured program of support and investment in the EiR incubator? Do you have a key competitive advantage in your product sector?

In terms of the selection process, it is important that the process be assessed according todifferent points of view. In order to do this, it is usual to involve experienced consultants andadvisers, but who work in different areas. Figure 9 presents different points of view for theassessment of projects that are submitted to the incubator, these points of view wereobtained from criteria which have been preciously presented.

Figure 9 - Different Points of View in the Selection Process

The assessment of projects / companies from different points of view and the use of well-defined criteria guarantees a high success rate. In general terms, the process can be seen asa "successive filtering", as can be seen in Figure 10 (Bizzotto at all, 2001).


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Figure 10 - The Selection Process as a Successive Filtering

According to Wolfe (2000), the Boulder Technology Incubator in Colorado,

Has a rigorous 60-day screening process for prospective clients, accepting just one out ofevery five applicants. Donahue and the Executive Vice-President make the initial assessment

of incubator applicants, who must also gain approval from an eight member executive

committee and the full board of directors. Evaluators look for the following criteria: innovative

technical ideas; legal patent protectability; product feasibility without undue risk, technical

knowledge and edge; market niche and understanding of the market; broad application base;

growth and job potential; adequate startup funds; financial pro forma statements;

professional experience and education; recognition of marketing, financial and management

needs; community benefit/awareness; and ecological benefit. Donahue says BTI is looking for

entrepreneurs who have potential to become lead management in their growing companies

or, if they cant serve in that capacity, have the flexibility and savvy to take the role best

suited for them. As BTIs hallmark is placing a team of advisors around its incubator clients,

applicants also must be receptive to learning. Since the incubator receives many applicants

from the scientific community, another criteria for clients is whether a prospect has

adequately scoped out the market before making its business pitch.

Another example of the use of different experts for the selection of companies is the program

of the Advanced Technology Development Center (ATDC), Georgia Institute of Technology,Atlanta, Georgia. The program is based on a four-step process (Wolfe, 2000):

1. A simple review by internal incubator consultants, who in this case are industry-experienced individuals with an MBA or mix of technology and manufacturingbackgrounds. This is the minimum eligibility requirement stage. To become a member,the project must meet the four pillars of a sound business project: management,money, technology and market. This first stage ultimately means member companieshave already extended a fair amount of effort on their projects.

2. Graduate students, with guidance of senior consultants, assess in a very general

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sense the potential market size, need for such a product, marketing strategy,distribution channels and competitive analysis. This assessment, although general, isvery thorough.

3. If the market is promising, then the third stage is an in-depth telephone interview withthe applicant to explore the four pillars in more detail and to address the fourcharacteristics of a quality applicant. These are: an experienced entrepreneur orprincipal willing to hire business management to run the company within a six-monthperiod; proprietary advanced technology; financial resources to sustain operations fora reasonable period; and a market worth at least $50 million and/or growing at 20percent and a strategy for capturing this market.

4. In the final stage the in-house consultant assembles a review committee of staff andexternal consultants who can help validate the credibility of the companys business

plan. This involves the closest look at the four pillars and determines where thestrengths and weaknesses are.

Wolfe (2000) also mentions that the Austin Technology Incubator (Austin, Texas) uses astrict selection process. First, the company must submit an executive summary to ATI byemail or hard copy. ATI conducts an internal review within one week. If the assessment ispositive, a presentation is scheduled within another week. In this presentation, theprospective company must make a 10-minute PowerPoint presentation that covers thebusiness plan. If they pass over this hurdle, the company must present their business idea to

ATIs success committee, which consists of external industry experts. The successcommittee meets one or two times a month; thus, it normally takes only two to four weeksbefore this presentation can be scheduled.

Although the majority of incubators have a rather strict selection process, a number ofincubators have a more informal selection process. This is the case of the RensselaerPolytechnic Institute (RPI) Incubator Center (New York), which doesnt have a formal

screening process. Entry requirements include wanting to start a technology company and

having a business plan, but if the plan isnt completed Incubator Manager Bela Musits will

help the founder write a plan of 10 to 15 pages. Acceptance of the client is at Musitsdiscretion and often depends on the availability of space(Wolfe, 2000).

In the same way, the United Kingdom does not use formal criteria. As the EuropeanCommission (2002e) emphasizes, apart from the age criterion, and the need for a business

plan there are no formal admission criteria.

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Regardless of the selection process, Fiates and Chierighini (in Leal and Pires, 2001, p. 87)make a number of recommendations in order to guarantee the quality of this process:

Dont ignore the interview. It is essential to give the entrepreneur the chance for himto sell himself and show his professional and human qualities, thus giving theincubator a chance to make a more precise evaluation and ensure safer results.

Be tough in the evaluation in order not to have weak results: the evaluation process ofthe enterprises (both during the selection process and during the incubation in itself)requires a consistent, firm and decisive attitude from the management of theincubator. It is much better to be strict in the evaluation and discuss ways to correctto path of the company rather than arrive at a point where the company is notconsolidated, where it needs to leave the incubator and will certainly not be

successful on the market.

3.3. ORIENTATION, ACCOMPANIMENT AND ASSESSMENT OF THE

INCUBATED COMPANIES

The role of the incubator can be seen in the services that it offers during the period when thecompany remains there. One can also distinguish the different kinds of incubators from thetypes of services and programs that are offered.

During this phase, all the efforts of the administration of the incubator should be directedtoward offering services and programs which will complement the profile of the team andstrengthen the company for its future entry on to the market.

Thus, in the successful incubators one can see continuous monitoring of the residentcompanies, which guarantees that the management team of the incubator can identify theproblems and / or potential difficulties which are developing in the resident company, even

though the incubator is offering a suitable infrastructure, effective training and working toimprove the possibility of access to the market. Among the problems which residentcompanies generally face, the most common are technical difficulties, project managementproblems, the difficulty to achieve market penetration, and lack of experience, as seen inFigure 11 (Bizzotto at all, 2001).


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Figure 11 - Difficulties of Incubated Companies

According to the material available on the site of the virtual incubator (VentureAhead, 2003),located in India, one of the most valuable components of being associated with an incubator

is the availability of on-going, in-depth business counseling. The opportunity for immediate

feedback and assistance leaves the firm with more time for productive work and reduces the

number of costly mistakes.

Markley and McNamara (1994) stress that the use of business counseling and referralservices provided by the incubator manager is of particular interest in terms of small business

development. One benefit of location in the incubator is access not only to basic business

services such as those described above, but also the availability of supportive counseling

services as a new business starts up. In this incubator [Midwest Incubator, Purdue

University, USA], 49 percent of firms used business counseling services provided by the

manager at least several times a year, while an additional 10 percent used these services on

a more infrequent basis. These services were available as needed from the manager

whenever problems or concerns developed. The proximity to such services is a benefit of

location in the incubator facility.

Similarly, Fiates and Chierighini (in Leal and Pires, 2001, p. 88) state: the evaluation processof the companies might be the great challenge for incubators in the next years. The

entrepreneurs are increasingly expecting and demanding contributions, recommendations

and orientations with a high added value for the management of their businesses. It is no

good just saying that it is good or bad. The companies need help in order to consolidate their

planning and identify the main challenges, deficiencies and opportunities. This requires an

assessment team that is increasingly more customized and more focused on reality and the

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needs of the entrepreneurs, which is neither simple nor cheap. CELTA has been attempting to

overcome this question through the involvement of the CERTI Foundation technical team in

the assessment process of the companies and experts from partner organizations willing to

help to consolidate the companies and improve the incubation process.Wolfe (2000, p. 06) emphasizes that the monitoring of the development of the incubatedcompany should:

Develop milestones designed to meet the specific goals of the client and theincubator.

Develop and implement a systematic process for monitoring the clients progress inmeeting milestones.

Utilize monitoring processes to modify the services package offered to clients. Utilize monitoring processes to graduate clients from the program.

In terms of this monitoring process, Kumar and Kumar (1997, p. 19) stress that:

Another service provided by technology incubators that is extremely popular with most

technopreneurs is mentorship. The basic idea underlying a mentoring program is to link new

entrepreneurs with highly successful and experienced entrepreneurs (mentors) so that the

mentors can provide advice and assistance to new technopreneurs on a regular basis.Various versions of mentorship programs exist. In some cases, there may be one mentor to

one technopreneur, a shadow board of three to five mentors to one technopreneur, or a

combination of the two. For example, each entrepreneur at ATI is assigned an advisory

committee that consists of 5 or 6 members from disciplines such as accounting, law,

marketing, etc. These members are volunteers who provide services free of charge. Also,

mentoring programs for new startup businesses may be structured differently from mentoring

programs for businesses, which have passed the initial startup phase and are moving into the

growth stage. Generally, mentoring programs require that technopreneurs pay an affordable

hourly fee. This helps in weeding out non-serious companies. In many cases the incubatorssubsidize the fees paid by technopreneurs in the mentoring programs. At TEC, Calgary, a

number of organizations provide professional services to tenants at preferred rates; the

Centre's staff calls on an extensive network of local, provincial and international contacts.

The requirements for participating in mentorship programs vary but most programs insist on a

business plan. It is believed that mentoring programs provide a myriad of benefits such as

quality advice and networking opportunities with industry contacts.

The process of the orientation, accompanying and assessment of the incubated company is

essential for the success of the incubator as it is this process which will identify and indicate


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the services and support necessary for the consolidation of the company in question. As thisprocess of monitoring is personalized (for every company) and wide-ranging (involving allthe companies), the incubator will always have an x-ray of the difficulties and

opportunities of its incubated companies (Figure 12). The management team of the incubatorwill now be more able to plan the development of each company:

Figure 12 - Process of the Monitoring of the Incubated Company

The continuous monitoring of the client companies is therefore a critical process in theadding of value, and, consequently, critical for the success of the incubator and theincubated businesses. This is even more important for the business with a specific focus,

such as those that support the development of companies in the software area. In thesecases, the incubator should offer a set of specific services (Teixeira, 2001), and the constantmonitoring process will enable the identification and the improved organization of theseservices.

The strategic importance of this process is so great that is seems unsuitable to call itmonitoring, as this term has the connotation of observation and unilateral action.A more suitable term proposed by Landsberg (1997) is coaching. For Landsberg, the processof coaching involves providing feedback, but also uses other techniques such as motivation,

effective questioning and consciously matching your management style to the coachee'sreadiness to undertake a particular task. It is based on helping the coachee to help

her/himself through interacting dynamically with her/him - it does not rely on a one-way flow

of telling and instructing.

According to the site of the Ten 3 (2003), the process of coaching involves:

Clear goals and outcomes. Collaborative endeavor.


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Continuous effort regularly monitored to ensure that you are on target with agreedgoals.

Regular communication and meetings (face-to-face or virtual). Absence of good/bad or success/failure judgment. An attitude characterized by awareness and curiosity.

The process of coaching will thus promote the interaction between the incubated companyand the management team and the consultants of the incubator, having as an aim:

Acting as an external expert observer making sure that the client's aim is true andtheir actions are congruent

Helping clients to identify and define their specific goals, and then organizethemselves to attain these goals Providing help in motivating and keeping the client motivated to reach their goals

It is important to stress that the process of coaching must not be confused with training ormentoring. Chart 1 shows the main differences between coaching, training and mentoring(Ten3, 2003).

Coaching Training

Continuous One-time eventDay-to-day application of skills Test practicingReal-time control and feedback No application feedback

Coaching versus MentoringCoaching Mentoring

Building an individual's personal cross-disciplinary skills

More job-specific person-to-person teaching

Helping clients to apply themselvespersonally in new ways

Helping clients to learnfunctions they've never donebefore

Give and take approach to learning,requires a lot of listening

Passing along of oneperson's knowledge toanother

Table 1 - Coaching, Training and Mentoring

Coaching may be implemented in different ways, depending on the situation and thestructure of the business incubator. A number of incubators use people who are connectedto the institution, which maintains the incubator while others depend on the participation ofvolunteers. A number of examples of how incubators implement coaching, mentoring or

another monitoring strategy of the incubated companies are now described:


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a) Centre for Advanced Technology CAT (Denmark)CAT has set up monitoring and evaluation systems to provide support and guidance to

SMEs to facilitate their development. Evaluation and monitoring is undertaken bothformally and informally as part of the tenancy agreement start-ups benefit fromadvice and guidance during these sessions with incubator managers (EuropeanCommission, 2002c).

b) Bordeaux Productic (France)The tenancy agreement devised by Bordeaux Productic makes provision for ongoingevaluation, monitoring and guidance both during the incubation period (1-4 years) andequally importantly, post-incubation when tenant companies graduate into the widerbusiness community. Graduate companies are monitored for at least a year post-

graduation, which enables the incubator to assess the longer-term impacts of itsactivities in terms of new job creation, multiplier and other indirect effects. Effectivemonitoring of graduate firms has also improved the accuracy of monitoring data onincubator performance many incubators elsewhere in Europe lose track of theirfledgling incubatees once they have flown the nest. The incubator also conducts anannual survey of its members to assess demand for services and evaluate theperformance of its tenants over the course of the year (European Commission, 2002b).

c) Dublin Business Innovation Centre and Guinness Enterprise Centre (Ireland)Dublin BIC has set up a comprehensive monitoring scheme to evaluate the

performance of its graduate companies post-incubation. This enables the BIC tomonitor the wider impacts of its activities in terms of wealth and job creation in thewider community by ex-tenant firms (European Commission, 2002f).

d) BIC Liguria (Italy)BIC Liguria undertakes a regular survey of its members both to ascertain theperformance of tenant companies (restricted to total turnover and number ofemployees) and to gauge SME demand for specific services (both in-house andexternal) such as high speed internet access, advice on meeting product and qualitystandards and legal advice on patents. The BIC also conducts evaluation and appraisal

of its tenants and provides advice and guidance on overall business direction. At anyone time, 3 or 4 tenants out of the aggregate population of 55 tenants will beundergoing an evaluation by the incubator management (European Commission,2002a).

e) Software Business Cluster San Jose (California USA)The SBC assesses the needs of its clients on a continuous basis during their stay inthe incubator. Initial, basic needs are assessed during the application and screeningprocess. Once the business becomes a client of the SBC the executive. Directorand/or managing director meet with the business regularly so that at any given timethey have a list of three to five priority items identified by the client. When the client

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other characteristics and shepherds the company through the entire EntrepreneurSuccess Model program. Each client is also appointed its very own advisory board,tailor-made from the BTIs large advisory pool.

Product Development

The advisory board works with the company to analyze, improve and further developits product or service.

Market Development

The advisory board helps the company hone its marketing analysis and marketingstrategies.

Organizational DevelopmentThe advisory board helps the company develop its management team, corporatestructure and board of advisors.

Financial Development

The advisory board examines all cash flow statements, pro formas, business valuationand financial assumptions.

Client Funding

The advisory board determines if the company is ready for its initial capitalinvestment. The team here consists of experienced investors who prepare thecompany for the due diligence process.

g) University of San Diego CONNECT San Diego (California USA)University of San Diego CONNECTs Springboard Program was started to assist hightechnology and biotechnology entrepreneurs who are in the very early stages ofdeveloping a concept and strategy for a business. Upon acceptance into theSpringboard program, the entrepreneurs spend four to eight weeks in coaching

sessions with experienced business people to help them develop their businessopportunities. Upon completion of the program, the entrepreneur is invited to make apresentation of his or her idea to a select group of CONNECT sponsors and members.This group will usually include a venture capitalist, accountant, corporate and patentattorneys, marketing professional and an executive from a successful company in thesame industry. Experts will also be drawn from insurance, real estate, humanresources and other areas as needed. The goals of the one-and-a-half-hourSpringboard meetings are to provide the entrepreneur with candid recommendationsfor the development of their business plan or concept and to help define the desiredoutcome of their efforts (Wolfe, 2000).

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h) Arizona Technology Incubator Scottsdale (Arizona USA)The Arizona Technology Incubators advisory board program was started to providehigh-quality service to clients and to ensure client and incubator success. Individual

company advisory boards are brought into operation following an initial client-trainingworkshop. All ATI clients are required to attend the two-and-a-half-day workshopsconducted by Management Action Programs, Inc., which focuses on issues such asself-appraisal, growth goals, growth strategies, action steps, progress and correctivestrategies. Highly trained instructors run these workshops. During the workshop thetenants develop steps that they need to accomplish in order to become successful.Once the workshop has been completed, ATI appoints an advisory board to meet witheach client. The advisory board is made up of five to eight people with differentfunctional backgrounds. The incubator manager attempts to identify one marketing

person with experience in the firms industry, finance, legal and accounting persons.Advisers are all volunteers, some retired and some still employed. The process ofpicking each company's advisory board is carefully executed to ensure diversity andchemistry among board members. In addition, board members are matched withcompanies on the basis of similar industry experience whenever possible. The clientcompany CEO and the advisory team select five critical goals the incubator companymust achieve. The team then meets monthly to monitor the company's progresstowards those goals. These meetings encourage the entrepreneur to think about whathe/she needs in the area of business assistance and encourage discipline with regard

to the business plan and its execution. If the company is not meeting goals, itsadvisory board will help devise a plan to help achieve those goals. In two cases amember of the advisory board has invested in a company and became itsCEO/President (Wolfe, 2000).

i) Incubator for Technological Entrepreneurship at Kiryat Weizmann (ITEK) Ness-Ziona(Israel)As with other incubators sponsored by the Israeli Ministry of Trade and Industry (theIncubators Authority of the Chief Scientists Office), ITEKs clients face milestonesimposed by the Incubators Authority. These milestones are derived from the

technoscientific- business review performed by an expert appointed by the Office ofthe Chief Scientist. The resulting milestones are mandatory, and may be technicalachievements, recruiting specific manpower or starting a strategic activity, forexample. Each milestone is associated with a date for completion, which may bechanged if justified. A request for revising milestone dates is made to the incubatormanager, who constantly follows up on each project. Additionally, ITEK clients mustmeet voluntary milestones set by the project management for each company.Normally these are of a technical character. The incubator-appointed project managerand the incubator manager review them internally. In some cases the incubators R&DCommittee is requested to participate in an assessment. Voluntary milestones are

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reviewed during the regular meetings between the project manager and the incubatormanager, either at a regularly scheduled meeting or at a meeting called on as as-needed basis (Wolfe, 2000).

j) Unit for Technological development (UNITEC) of the University of the Vale do Rio dosSinos (UNISINOS), So Leopoldo (Rio Grande do Sul, Brazil)Unitec provides a constant accompaniment of the incubated companies throughmeetings, monthly reports and semestral self-evaluations. These procedures aim atdetecting or preventing problems and identifying measures to be taken for thecorrection of these problems. This is important in order not to leave the incubatedcompany on it own. On the other hand, if it did not need help, it would not need to beinside the incubator (Paulain Leal and Pires, 2001).

k) Gene-Blumenau Institute, Blumenau (Santa Catarina, Brazil)CRIEM (the pre-incubator of the Gene-Blumenau Institute) has a Nucleus forAccompanying Projects (NAP) that closely follows the development of the incubatedcompanies. Each incubated company has an Academic Tutor and a Business Tutor(being implanted). The Academic Tutor (a professor of the Department of Systemsand Computer Science of the Regional University of Blumenau) orients the companyas to the technological aspects of the product or services, while the Business Tutor(an entrepreneur from the region) helps the companies in questions related tobusiness: strategy, marketing, network of contacts, etc.. In addition to tutors, the

companies are advised and accompanied by the Director of the pre-incubator. Thefunction of each tutor can be seen in Chart 2 (Bizzotto at all, 2001).

ACTIVITIES ACADEMIC TUTOR BUSINESS TUTOR

Identify businessareas

Identify technologicalareas

Orient toward business

Identify potentialopportunities

Discuss technology Evaluate opportunities

Market analysis Orient to product Evaluate market and discusspartnerships

Test (generalassessment)

Product (assessment) Market (assessment)

Chart 2 Specific Tutors activities

The relationship between the tutors, NAP, the directors of the pre-incubator and thecompanies can be visualized in Figure 13.

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Figure 13 - Project Accompaniment Nucleus Gene Blumenau Institute

Information and Communication Technologies (ICT) can make a great contribution to the

implementation of an accompanying process and quality orientation as the use of ICT allowsfor a better diffusion of information and increases the possibilities of interaction between theincubator team and the client companies.

The CELTA incubator (www.celta.org.br), for example, uses a work tool (WEB) to improvethe assessments of the incubated companies. The entrepreneur can access the CELTA pagefrom anywhere in the world and can make requests or accompany the assessment of hiscompany. In the WEB system, two modules can be highlighted:

The Module of the Competitive Intelligence SystemThe focus of this intelligence system is to provide a decision platform, which is basedon a continuous and systematic process that integrates the internal and externalenvironments of the company through information on their competitors, clients,market, products, technologies and the environment. This information, analyzedtogether, enables necessary decisions on the development of their businesses to bemade. The alignment of these decisions to their Business Plan makes the CELTAtechnologically based companies increasingly agile to deal with the increased speedof technological changes and business, improve their market competitiveness and

make them more attractive for new investments. The Module of the Management of Knowledge

Integrated into the Competitive Intelligence System, the module of managementknowledge provides all the base of information necessary for the decision-makingprocess. It is segmented and organized according to company in the themes, whichare essential to their business. The information originally comes from various sourcesthat include public bodies, the network of relationships of the participatinginstitutions, and the base of experience and know-how of experts in a wide range of

areas of knowledge.


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In the case of the Gene-Blumenau Institute, the CRIEM pre-incubator uses an informationsystem that gives Internet access to the documents on quality and the assessment reports,

etc, at any moment.The system which is being used is the LearnLoop, which is a free software developed byUnirede. Using this system, CRIEM provides all the documentation that is of interest of thecompanies and / or coordination (internal documents, communiqus, assessments, etc.). Anumber of documents may only be accessed by determined users, as is the case of theassessment reports, which are of interest only to the company, the management team of theincubator, and the tutors. For this purpose, groups were set up, where the files available mayonly be accessed by the registered users, thus preventing the entrepreneurs of one company

seeing the documents of another company.

3.4. GRADUATION

After going through all the process of incubator, receiving the services and the programsoffered by the pre-incubator, the company is now prepared for the forthcoming challenges:leaving the incubator, setting up in an independent room and consolidating itself on themarket of its choice.

This is a vital moment, as, though it may be prepared, the company needs extra support inorder to graduate successfully. In order for this to happen, the incubator must implementprograms and actions that allow the company to obtain additional resources and distributeits product, thereby extending its market operation.

The great problem here is the definition of clear criteria for the exit of companies, as thecompanies, in the majority of cases, wish to remain in the incubator for longer. According toVernon Smith (apudOECD, 1999), ... after a few years it was clear the units were becoming

permanent homes for most of the tenants. Our strategy had been to move everyone out after

four years. The problem came when you asked them to move on. In so many cases there was

nowhere suitable for them to go. It all sounds very well, having a steady flow of tenants, with

new ones coming through all the time, but it just does not work that way.

In Australia, for example, almost two thirds of the incubators have exit criteria. In 61% of theincubators there is a time limit (OECD, 1999, p. 36). Almost 46% of the incubators increasetheir tenancy rent as a way of encouraging the companies to graduate.

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In Canada, Lavrow and Sample (2000, p. 25) carried out a study on the characteristics andthe best practices used by the Canadian incubators. They reached the following conclusionas to the exit process (graduation):

The business incubator and the incubatee will mutually agree from the beginning on their

goals. One or more of those goals will signal when to leave the incubator. According to the

current research available, the average duration of incubation is two to three years but

ranges from three months and up. Some incubators list time, space and employee counts as

determinants for exit (similar to the criteria we use for our teenagers). Moreover, some

incubatees will need to be cut loose when failure is evident. Conditions for exit and follow-up

are important for both an incubatee and the incubator, since they allow for the continuity in

the incubators development, renewal of its client base, and gives the incubatees an

additional sense of urgency, thus setting the pace for its activities.

The Technology Innovation Centre, of the Technology University of Jamaica, stresses that thecriterion for exit is time, in addition to disconnection, when the company has not reached theagreed goals (TIC, 2003, p. 03).

For Wolfe (2000, p. 77), incubators should establish graduation policies including specificcriteria relative to the incubators mission and the incubators ability to provided continued

value to the client. These policies should be included in all leases and materials supplied to

serious applicants, and management must ensure they are understood and accepted. Samplecriteria are outlined below. An incubator can establish a maximum amount of time for which a

client can receive services. This should be customized by cluster and reflect the period in

which the client should realistically progress to accelerated growth or be supported by

private sector providers.

Wolfe continues, An incubator should establish limits on the resources it commits to any oneclient. This may be designated in terms of hours of assistance or retable square feet

occupied. Value: An incubator should make a self-assessment of its ability to provide

continuing value to the client. Clients who have progressed beyond the incubators capacityto provide sufficient value should graduate and begin utilizing private sector providers.

Another criterion for graduation is the profitability of the company, as in the case of theIndiaCo incubator (Patwardan, 2003, p. 05). Nevertheless, regardless of the graduationcriteria, as Scaramuzzi emphasizes (2002, p. 30), the incubator should clearly define andcommunicate to applicants its graduation policies. Such policies should include the time

limits, and the type/amount/value of services that would be provided by the incubator during

the incubation process. In certain incubators, there is no pre-established time limit forgraduation. This is the case of the Centre for Advanced Technology (Denmark), where there

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are no strict rules on the length of time an individual tenant can stay. The timescale depends

entirely on the type of industry the tenant is in. For example, one tenant has been in the

incubator for almost ten years, but works in a highly specialized industry (laser displays)

which involves a great deal of research with a relatively long time to market. The overridingaim is to support the development of high-growth companies, with flexibility in terms of exit

criteria(European Commission, 2002c).

In addition to the exit criteria, it is important that the incubator has a close contact with thegraduated companies. One example of this interaction is that of the Centre dEntreprisesHracls (Belgium), where a strong effort is made to keep in touch with incubatorcompanies after they have left and there is an annual follow up asking for basic information

such as numbers of jobs. The incubators objective in doing this follow up is to ensure that

the incubator has information on outputs. But it also provides information to continuenetworking activities(European Commission, 2002a).

Another example is that of the Technologie Centrum Chemnitz (Germany) where one finds anational follow-up survey of technology centre graduates. The emphasis will be on examining

the characteristics of these companies, in particular the extent to which the aim of promoting

successful technology-based companies is being achieved, rather than on obtaining feedback

on the assistance obtained from technology centres(European Commission, 2002g).

3.5. ASSESSMENT OF THE INCUBATOR

It is essential to make a continuous assessment of the performance of the incubator so thatit can continuously improve its n process. This assessment is extremely important for theincubator to have quantitative data on regional development. Lewis (2001, p. 08) stressesthis point when stating: the evidence regarding the social and economic contributions of

business incubation is still murky.

For Scaramuzzi (2002, p. 26) there are three dimensions of the activities of an incubator,which are important for its success:

Best Practices for the Incubator Creation and Management. They include the strategy,positioning and the long-term sustainability of the incubator, as well as its internalorganization and governance system.

Best Practices for the Incubation Process. They include the admission, incubation, andexit mechanisms adopted by the incubator for client companies.

Best Practices for Performance Assessment. They include the monitoring and


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evaluation processes adopted to measure both the performance of incubator itself,and the added value of the incubator in fostering business development.

As can be seen, the first two groups of best practices can be linked to precise aims anddeliverables from the incubator; in other words, they result in a product. The third grouprefers to the continuous monitoring and assessment of the other two groups (Figure 14).

Figure 14 - Groups of Best Practices

Morais (1997, p. 37) proposes four dimensions for the accompanying and assessment of the

incubator:

1. Results or products.2. Input used by the incubator, whether they are physical-financial, technological,

material or human resources.3. Organizational processes.4. Socio-economic, political and cultural context, referring to the institutions that are

more directly linked to the incubator process.

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Sarfraz Mian (apudScaramuzzi, 2002, p. 30) proposes an assessment model based on threesets of indicators:

a) Performance outcomes which include program sustainability and growth, tenantfirms survival and growth, contribution to the incubators sponsors mission, andcommunity-related impacts.

b) Management Policies and their effectiveness measuring the effective use ofresources against the incubators objectives. The elements assessed include thegoals, organization and governance of the incubator, financing and capitalization,operational policies and target markets.

c) Services and their value added assessment of the perceived value added to theclient firms in terms of services and facilities provided, and the perceived value

associated to the knowledge sharing and to the incubators environment.

Scaramuzzi (2002) summarizes a study made by UNIDO, in 1997, related to the incubatormovement in developed countries, which contains the following points:

In developing countries, business incubation practices are recent, although rapidlyexpanding, and statistics and assessment studies are limited, sometimes dated, and non-homogeneous in their approach. A suggested methodology for incubator performanceassessment is provided by a UNIDO study conducted in 1997. The seven countries reported

in the study accounted for about one half of all incubators in developing economies - 143incubators out of about 300 then estimated. The study reports some comparative datarelated to incubators average investments, size (in terms of building space), average tenantfirms and number of employees. In this study, evidence shows that incubators in LatinAmerica tend to be smaller in terms of built facilities, firms incubated and number ofemployees. China and Eastern European countries tend to show larger incubator facilities.

Although the study does not present data on survival rates of incubatee companies, itsuggests the main indicators that should be considered to conduct assessments of

developing countries incubators performance, including:

Enterprises incubated in the incubation process and their survival rate Jobs generated in the incubator Jobs and sales created by graduate businesses after six years Public investments per year Research commercialized by incubated firms Survey of tenant evaluation of incubators added value


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Sustainability of the incubator, measured by revenues and costs generated Taxes and other contributions by tenants and graduates Social impact, measured by public opinion surveys and research contracts between

industry and university Changes in state policies and their financial commitments.

It is widely recognized, however, that the mere survival of tenant firms cannot be considereda sufficient criterion of success. Technology-based businesses tend in particular to growfaster than other businesses and are often quoted on secondary stock markets in very shorttimeframes. The current trends regarding survival rates of tenants firms should always becompared to the growth rates of graduated firms after 3 to 5 years, in order to avoid thatincubators become a mechanism simply supporting the survival of businesses in aprotected environment, and not their expansion in the open market.

An in-depth analysis of the demand and supply of incubation in developing countries wouldbe useful, especially if linked to the monitoring and evaluation of the results achieved bybroader private sector development strategies. Micro-enterprise development, as well as theavailability of data, which tends to reflect the level of informality in the economy, tends tovary from country to country. This makes the monitoring and assessment effort particularlychallenging and complex. As regards the demand, a survey regarding the needs of small

businesses in the Eastern European transition economies was commissioned some time agoby UNIDO to the European Foundation for Entrepreneurship Research (EFER). The surveydoes not focus on incubation and start-ups, and is conducted on a regional basis.

However, it explores the perceived value of training and a support service offered to smallbusinesses in the region, and gives some interesting indications regarding the demand ofsmall businesses in emerging contexts. For example, small firms recognize:

The need for support in key areas such as marketing, finance and management; Shortage of skilled labor force was perceived as a limiting factor to growth; Limited market development and regulatory and financing barriers were perceived as

major external barriers to growth; Problems perceived with taxation, social security and labor law; Lack of access to finance, absence of long term credits, bureaucratic procedures and

high interest rates; Lack of clarity in government policies for SME support; Absence of relevant and/or effective support institutions.


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Strategies improving the enabling business environments (legal, financial, fiscal, market,etc.), and the quality of the local labor markets and management skills, seem to be perceivedas the most valuable elements for micro and small enterprise development. A stable macro-

economy, an adequate trade environment, a competitive financial sector, the local availabilityof infrastructure and skilled workforce, are also considered the fundamental conditions forprivate sector development. Institutional barriers including the regulatory environments,tax regimes or labor market rigidities represent a serious obstacle to entrepreneurshipdevelopment. In 1996, a survey of almost 4,000 firms in 69 developing countries wasconducted by the IFC to assess the evaluation of different aspects of the institutionalframework for private sector development. In many of the countries surveyed, firms statedthe minimal institutional infrastructure for a market economy was nonexistent or very poor.

As a general recommendation, integrating two main layers of information should preferablypursue incubator monitoring and evaluation in developing countries:

Measurement of incubator effectiveness versus alternative approaches. Thismonitoring and evaluation activity should be carried out for measuring theperformance both of the incubator itself, and of the companies that are incubated in it;

Measurement of the enabling factors for private sector development and of the maininstitutional and structural gaps at country levels.

As Markley and McNamara (1994) emphasize, incubators have been evaluated in terms oftheir impact on economic development, more specifically on job creation, firm success,

increase in employment and sales, and whether or not the firm locates within the local area

after leaving the incubator.

According to the work developed by the Rio de Janeiro Network of Incubators, in Reinc(2001), in order to develop an assessment model, it is necessary to analyze and documentthe various inter-relations and influences which affect the way in which the incubator will

reach its own goals and aims or those of other stakeholders. A model of how the players and

stages of the operation of the incubator are related and how they are affected can be seen in

the following diagram, called a path-diagram(Figure 15).


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Figure 15 - Path diagramSource: The Evaluation of Business Incubation Projects: A Comprehensive Manual, National Business Incubation Association, p.

89, 1993.

The REINC group of researchers has used the BSC methodology as a base to elaborate anassessment model for business incubators. The simplified structure of performanceindicators for incubators can be seen in Figure 16.

Figure 16 - Simplified structure of indicators for incubators

When we analyze the internal processes of the companies, we can see whether the fact thatthey have improved is because the company has also invested in its own training andinfrastructure, which have also increased its expenses, in an analogical form to theincubator.

The improvement of its internal processes in terms of client satisfaction will in turn improvethe image of the company and may increase the financial support and loans, which will

increase its turnover. This is a clear example of a trade-off which should be solved by the

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company, in other words, up to what amount are the investments (release of funds) inprocesses and personnel training so efficient that they generate improvements which willhave a positive impact on client satisfaction, and consequently result in an increase in

income (entry of funds).If the internal processes are significantly improving, this means that they are developing, andthat they will, in turn, generate a perceived socio-economic impact, which is seen by theclients of the incubators.REINC has proposed the following indicators for the assessment of business incubators:

Indicators of pre-incubation processes: Number of students in entrepreneurship subjects Number of times interested people are attended Number of times the official announcement is taken away or copied / Number of plans

made Number of projects encouraged / carried out

Indicators of selection process: Number of candidates / Number of selected candidates Business plans presented / selected Number of students in entrepreneurship subject / Number of proposals from students

in this subject

Indicators of the residence period: Percentage of non-payments Percentage of occupation Total income from resident companies Average residence period

Mortality and success rates Number of employees Quantity of skilled jobs generated Number of products generated Salaries paid Number of trainee periods Tax generated Index of operational costs covered by the companies


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Growth rate of the companies Client satisfaction (companies) Number of patents generated Risk capital investment in the companies

Indicators of the graduate companies: Total turnover Mortality and success rates Number of employees Number of skilled jobs Number of products Investments / number of companies Number of generated companies Modernization impact of the companies Import potential of the companies World-class innovation

Indicators of the process of attracting resources: Number of projects prepared / approved

Indicators of the management of the incubator: Index of self-sustainability Operational cost of the incubator / jobs and companies generated, etc. Technology transfer (contracts with the university, spin-offs) Satisfaction of the incubator team Qualification of the incubator team % Of the total costs covered by the incubator


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4. CONCLUSION

From this study, it can be seen that, although the basic elements of incubators are similar,there is a great difference in the ways in which the incubator process is implemented. Thisdiversity is a result of the regional characteristics and the aims of the incubator, among otherfactors.

Of the elements that have been discussed, the accompanying and coaching of the incubatedcompanies are critical factors for their success, which depends to a great extent on thequality of this process. Even though the selection process (which is also very important) maynot have been good, the constant coaching of the incubated companies allows the problems

to be identified and solutions to be immediately proposed. Effective coaching additionallyallows the incubator to more precisely identify the services, which are required by thecompanies. From the result of the coaching, the incubator can plan the consultancy, training,etc., which will be offered to the companies.

It is important to emphasize that, analogically to the coaching, the assessment of theperformance of the incubator is a critical element for its success. With an effectiveassessment, the incubator may continually improve its processes, attending and exceedingthe expectancies of all the players involved in the process.

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