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RUSSIAN BUSINESS INCUBATOR PROGRAM

PHASE ONE PROSPECT DEVELOPMENT & STRATEGIC PLAN

By: Michael Lazarowich

M. John Wojciechowski

Prepared For: Institute for the Economy in Transition

Moscow, Russia

School of Planning University of Waterloo

Waterloo, Ontario Canada April 18, 2002

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MISSION STATEMENT

• TO ASSESS THE STRUCTURE AND PROCESS AND IDENTIFY THE PARAMETERS

THAT WOULD ENSURE THE SUCCESSFUL IMPLEMENTABILITY OF A NATION WIDE

BUSINESS INCUBATOR (BI) PROJECT IN RUSSIA

• INVESTIGATE THE PROSPECT DEVELOPMENT INCLUDING:

1) COMPETITIVE ANALYSIS OF BI MODELS AND PROCESSES - (SWOT);

2) SITUATION ANALYSIS OF BI IN CANADA, AND EU (CASE STUDIES);

3) EVALUATION OF ‘BI GRADUATES’ – PROCESSES AND FINDINGS AND;

4) ASSESSMENT OF SETTING UP AND OPERATING BI

• SUGGEST OBJECTIVES, DATES, CONSULTATION AND COLABORATION BETWEEN

RUSSIAN AND CANADIAN TEAM S IN AN EIGHT MONTHS STRATEGIC PLANNING

PROCESS

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EXECUTIVE SUMMARY While incubators have grown in numbers, the uneven performance and poor

sustainability in many situations have become serious issues with the governments and

sponsors who continue to subsidize many of them. There has been much recent interest in

identifying ‘best practices’ that could then be used elsewhere. But these practices are

location-, culture- and time-specific, and can only be adapted to the conditions prevailing

in local situations.

The successful development of business incubation programs, often measured in terms of

impacts, effectiveness and sustainability, depend essentially on five inter-linked rings:

public policy, private partnerships, knowledge affiliations, professional networking and

community involvement. The successful mix of these ingredients however, is dependant

on the presence and identification of local assets, human skills and potentials.

Understanding the local assets-base is the most important factor in the successful

development of business incubation and yet it is often the least explored in the initial

stages of the project.

It is the purpose of this report to examine ‘best practices’ of setting up and operating

business incubators. Hence the strategic plan is a form of blueprint for the proposed pilot

project, identifying the parameters, goals, and processes of business incubator

development. The investigation of these components is referred to as PHASE ONE. The

purpose of PHASE ONE is to investigate the prospect development, thus setting the

direction for initiating PHASE TWO – the establishment of a Business Incubator Pilot

Project in Russia.

Finally, long-term and short-term objectives as well as potential stakeholders and funding

sources are identified within the proposed three-phased 8-month strategic action plan.

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OUTLINE OF THE PROSPECT DEVELOPMENT

This prospect development component of the report examines business incubators (BI) as

a component in the local strategy contributing to job growth and economic development.

The findings are subdivided into four sections: 1) Competitive analysis of BI models and

processes; 2) Situation analysis of BI in Canada and EU; 3) Evaluation of ‘BI Graduates’

– processes and findings and; 4) assessment of setting up and operating BI. Each section

will proceed with an outline of the objectives and will conclude with a set of

recommendations.

The first section defines the term business incubator and examines the competitiveness of

the four legal forms of business incubators identifying the physical structure (formal vs.

virtual), their adequateness to a market niche, the type of tenants that the business

incubator will attract/retain, the predominant success factors and the benefits of the

incubator type to the local economy, the ‘graduates’ and the business incubators

themselves. The section concludes with a summary of identified benefits from a

successful implementation of a business incubator for each of the stakeholders.

The second section will assess the magnitude, structure and effectiveness of different

incubators in US, Canada, EU. This section is based on a number of case studies from

secondary research conducted by the EU Commission, the National Business Incubator

Association (NBIA), as well as academic research. Special emphasis is placed on

strategies directed towards the business incubator’s ‘graduates’. Numerous cases studies

are used to report on the findings complimented by primary research of 2 incubators in

Canada. Furthermore this subsection assesses the monitoring techniques, and identifies

the data type that should be collected.

The third and final section assesses the process of setting up and operating a business

incubator. Size of the incubator, types and numbers of tenants, start-up and annual

operations costs, and funding sources are examined based on the EU Commission Report

(2002).

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1.0 THE COMPETITIVENESS OF BUSINESS INCUBATOR MODELS

Outline of Objectives

1. Define the generic business incubator model and its role in the

entrepreneurial activity and local economic development

2. Examine the four legal structures of business incubators determining their

structure, purpose, industry niche, tenant characteristics and success

variables

3. Clearly state the benefits of each model to the business venture, the various

stakeholders, the business incubator and the local community/economy

1.1 Definition and Function of Business Incubators

Besides start-up capital, many new and growing businesses also need a place to do

business and to receive timely advice, as they face the challenges of starting a business.

Business incubators furnish both the physical location and the expertise that new

businesses need to get started. Business incubators assist emerging businesses by

providing various support services such as assistance in developing business and

marketing plans, building management teams, obtaining capital, and access to a range of

other more specialized professional services. In addition, incubators provide flexible

space, shared equipment, and administrative services. Firms generally remain in the

incubator for about two-and-one-half years, after which it is intended that they graduate

to become independent, self-sustaining businesses (NBIA, 1996).

Incubator facilities help new companies survive the critical early stages of development,

thus lowering the failure rate. They encourage entrepreneurship and minimize obstacles

to new-business formation and growth. Most incubator facilities and programs are

sponsored by one of four kinds of groups: public (non-profit), private (for-profit), private

(non-profit), or educational. Funding sources are drawn from any combination of

foundations, banks, venture capitalists, and all levels of government and government-

sponsored commissions. The following subsections will define the generic business

incubator model, examine the four types of incubator facilities identifying their unique

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organizational structure, the type of businesses they attract and the incubators’ benefits to

various stakeholders.

1.2 Components of a Generic Incubator

Although business incubators can take a variety of shapes, there is a basic form that the

typical generic incubator takes. Nijkamp (1988) identified some of the rudimentary

elements that makes the existence of a business incubator possible. Supported by a

number of studies in the literature, Nijkamp concludes that any type of business incubator

should include at least these elements to be present in the community. Figure 1 illustrates

Nijkamp’s (1988) interpretation of a generic business incubator. At the bottom is the

location of potential entrepreneurs with universities, corporations, the general

community, the public sector, research laboratories and inventors being the most likely

sources. The presence of a local entrepreneurial base or culture is perhaps the most

important the yet the most underestimated variable in the success of the business

incubator. The next phase of the process is the identification of market opportunities by

the entrepreneurs. Demand will then be created for an incubator and there are two main

types of incubators that may be established. They can be either formal or informal

facilities. A formal business incubator consists of a physical building that houses and

assists the small business clients through services and counseling. The informal type is

limited more to a consulting role, and businesses are not housed in a central facility. The

informal type of business incubators are today also known as virtual incubators or

‘without walls’.

Smilor (1986) then identifies the building blocks necessary for an incubator. These

range from presence of venture capital in the community, to pre-existing business

networks and an entrepreneurial base. The presence of both debt and equity financing is

highly desirable and should be complimented with a pool of ‘patient investors’ – that is,

investors who understand that the start-up phase of any entrepreneurial venture involves

high risk and hence must be supportive in this very crucial phase. The findings in the

literature indicate that the most significant contributing factor to attract ‘patient investors’

is a sound legal and regulatory framework and high levels of trust, which are interestingly

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brought about by the other building block – the business network. The network should

include a variety of formal ties with local institutions, the educational system and

business associations as well as informal ties with local clubs, organizations and

individuals thus extending the channels of information flow. The public and private

infrastructures, as the names imply, refer to the supportive network of physical facilities

(eg., vacant buildings and lots with adequate access) and technological capabilities (eg.,

high-speed internet connection), which would both reduce the costs of starting the

business incubator and facilitate the growth of the tenants. All of the listed items are

necessary for the successful implementation of an incubator program. The very top of

the figure indicates the possible sources of funding and/or legal status: universities, local

government, state/provincial or the private sector (Smilor 1986).

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Regardless of the sponsoring organization, however, the goals of business incubators are

to nurture young firms and to help them survive and grow during the start-up period,

when they are most susceptible to failure. Generally, incubators provide hands-on

management assistance, access to financing and support, such services as office

equipment, meeting areas, support staff, accounting, roundtable discussions, research and

libraries, and computer facilities, all at lower costs than usual.

According to the National Business Incubator Association, "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 or three years. Thirty percent

of incubator clients typically graduate each year." (http://www.nbia.org/, 2002)

1.3 The Four Types of Business Incubators & Benefits Identified

There are predominantly four types of incubators even though variations de exists are

often representative of the specific location, culture, availability of resources and time of

development/implementation. These are classified on the basis of sponsorship and

objectives. There public (non-profit), private (for-profit), private (non-profit), or

educational.

Public non-profit incubators are sponsored by local government, industrial or enterprise

development corporations and community based development associations. These type

of incubators attract manufacturing enterprises and new businesses with light production

processes. These are usually formal incubators – or physical structures with larger square

footage than average. Their benefits are job creation, economic diversification, linkages

with existing firms and tax base expansion (Allen 1986, 177). Revolving-loan fund

programs are set up to provide capital to start-up businesses that cannot get funding from

other sources. According to the U.S. Chamber of Commerce, there are more than 7,500

revolving loan funds in the United States today. Most are managed by local or state

economic development commissions, which provide partial funding in partnership with

banks or other financial institutions. The loans are usually within the range of $15,000-

$80,000. Frequently, these programs are set up to stimulate business growth or to fill

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gaps and encourage financial participation by banks or other institutions. Some loans are

earmarked for revitalizing an urban slum or an enterprise zone.

Aid from other programs is granted to help develop otherwise undesirable rural places

that are trying to attract businesses. For most gap loans, public financing programs take a

position on assets behind the primary lender(s). As a rule, revolving-loan fund programs

are careful not to use public funds to compete with private sources.

Each local economic development commission has its own policy on profitability. Some

programs strive to make a return on investment similar to that of banks, while others have

a break-even policy. Still other programs contend that, because they are using public

money for high-risk investment, they should make higher-than-normal returns. All

programs agree, however, that, when public monies are to be used for the public good, it

is in the best interest of the community to create jobs and improve the local economy.

Both private for profit and private non-profit incubators are sponsored by one or a few

private corporations. Hence it is possible to conclude that the creation of these types of

incubators can be facilitated by the entrepreneurial climate in the region – that is

depending on the network interactions between larger firms and local providers and/or

suppliers. The private non-profit incubators usually attract enterprises that demonstrate

the potential for the creation of local employment. The objective of these incubators is

the fostering of local entrepreneurial ventures and local economic development.

The private for-profit incubators attract new firms that show the ability to grow.

Basically, these incubators can be described as venture capitalist establishments were the

tenants exchange equity for the services and/or locale provided. The benefits of these

private incubators is to make profit on surplus commercial and industrial space and

collect on the equity shares once the firm goes public. In light of the above, the most

successful graduates from business incubators, originate from this type of incubators.

In educational (university affiliated) incubators, the focus is on technology and science

based industries. They are likely to be located close to a university and the university is

the primary source of funding. The benefits of these incubators is the product

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development and commercialization derived from research and the cooperation between

universities and industries.

Table 1: Four Types of Business Incubators, Industry Niches, Tenant Characteristics and Success Criteria

Incubator

Model

Formal vs.

Virtual

Niche Characteristics of Tenants/Graduates

Success Variables

Public (non-profit)

Formal

• Manufacturing • Light

Manufacturing • Transportation • Retail/Services • Administrative • Tourism • Agro-business • Rural incubators • Mixed used • Empowerment

Incubators

• Selection criteria focuses on potential of job creation

• Mainly tenants from the local community

• Graduates are usually micro-businesses (with less than 5 employees)

• Not always growth oriented

• Tenants remain in the local area after graduating

• Prioritize short stays (not more than 2 years)

• The higher the turnover the better (more jobs created locally)

• Management should focus on public relations, partnerships with local high schools and trade schools

• Financial Responsibility is a must

• Provide basic business assistance, counseling, training,

• Workshops and presentations from business consultants

• Willingness of the community to contribute

Private (non-profit)

Formal

• Depending on the interest/orientation of the corporation behind the project

• Often correlates to the regional industrial cluster

• Selection criteria considers job creation potential and creation of linkages with larger firms

• New and established businesses

• A mix of firms belonging to one industry sector

• Take advantage of tax incentives to redevelop old buildings (revitalization strategy)

• Dependant on rents and other services for financial balance

• Manager(s) familiar with industry

• Presence of entrepreneurial climate

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Private (for-profit)

Formal

&

Virtual

• Telecommunication • Biotechnology • Nuclear • Engineering

consulting • Human resource

consulting • Food processing • Financial services • ‘Urban incubators’

• Technology based firms

• The tenants exemplify a mix of knowledge intensive enterprises

• Highly educated in specific field

• Often more established businesses get through the selection criteria

• Presence of venture capital and other alternative financing options (business angels)

• Proximity to high-tech clusters

• Availability of highly-skilled labour

• Manager/President is expert in one of the technological fields

• Manager pursues the success of the tenant firms with a venture capitalist attitude (performs due diligence)

• Financial gain from IPO of the graduates

• Provide advice on global exporting, finances, industry-specific marketing

• Industry funded

Educational

Formal

&

Virtual

• Telecommunication

• Biotechnology • Medicine • Pharmaceutics • New materials • Avionics • Defense/military • ‘technology

incubators’

• Researchers and highly educated professionals

• Science based and knowledge intensive firms

• Large portion of firm’s costs go to R&D

• Access to R&D grants • Presence of local

entrepreneurial base • Presence of venture

capital and business angels

• Collaboration among University and industry

• Support from other business dev offices

• Larger firms in vicinity pertaining to the industry sector

• Financial success dependent on university funding

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1.4 Selecting the Type of Business Incubator

Evidently not all regions are adequate locations for the development of a specific type of

business incubator. In fact in some regions it may not be feasible to develop a business

incubator in the first place. According to the Global Entrepreneurship Monitor (GEM) studies

by the Kauffman Center for Entrepreneurial Leadership, Babson College and London

Business School, the factors which affect different levels of entrepreneurship are: 1) the

perception of opportunity, 2) the culture which respects entrepreneurs and accepts wide

disparities in wealth creation, 3) the policy and business infrastructures, investments in

tertiary education, and the demographics, as men aged 25 to 34 are most likely to start a

business.

If those preconditions are not adequately developed - that is, they are not at carrying capacity

- other initiatives such as government funded and managed business development offices and

service providers may be required to pursue concomitant economic development objectives

with the special purpose to build these preconditions.

Recommendations

I. To assure the adaptability of the business incubator to the local community

and economy, the business incubator must be integrated into the local

strategic economic development plan. The support of the local leadership

and identification of acknowledged local ‘champions’ is a must.

Personalities, business and political, can play seminal roles. By pulling the

right strings and pushing open the right doors, the ‘champions’ are able to

help overcome barriers and leverage support.

II. The type of incubator chosen for the region must coincide with the local

potential of individual skills and assets as well as the synergetic effect of the

local educational environment, the quality of the regional financial sector,

experienced management consulting and most importantly the competitive

regional economic base

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III. A cluster analysis of the local industries is recommended in order to clearly

identify the backward and forward linkages between major local employers

and the servicing small-and-medium enterprises. The cluster analysis will

also identify the interest of firms in innovative solutions, research and

development.

IV. The systematic identification of the competitive advantage of the region and

individual firms will compliment other eligibility criteria (to be a tenant in

the business incubator) and thus will set the specialization of the business

incubator

Identification of Benefits to Stakeholders

The benefits of a well-managed incubator can be many-fold for different stakeholders (Molnar 1997):

• For tenants, it enhances the chances of success, raises credibility, helps improve

skills, creates synergy among client-firms, facilitates access to mentors, information and seed capital.

• For governments, the incubator helps overcome market failures, promotes regional

development, generates jobs, incomes and taxes, and becomes a demonstration of the political commitment to small businesses

• For research institutes and universities the business incubator helps strengthen

interactions between university-research-industry, promotes research commercialization, and gives opportunities for faculty/graduate students to better utilize their capabilities,

• For business: the business incubator can develop opportunities for acquiring

innovations, supply chain management and spin-offs, and helps them meet their social responsibilities.

• For the local community: creates self-esteem and an entrepreneurial culture, together

with local incomes as a majority of graduating businesses stay within the area.

• For the international community: it generates opportunities of trade and technology transfer between client companies and their host incubators, a better understanding of business culture, and facilitated exchanges of experience through associations and alliances.

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2.0 BUSINESS INCUBATION AND ECONOMIC DEVELOPMENT

Outline of Objectives:

1. Define business incubators according to their functional type

2. Illustrate the fostering elements of business incubator program

3. Identify arguments for and against state funding

4. List and explain the limitations of business incubator programs

5. Examine strategies targeted at different types of Graduates (Case Studies)

The National Business Incubation Association (NBIA) reports that throughout the United

States small businesses generate approximately two out of every three new jobs. At almost

any time, roughly 7 million people are starting new businesses. All across the country,

business incubators are providing entrepreneurs with tools that encourage technology transfer,

enhance the local economy, and create new jobs. NBIA has estimated recently that roughly

1000 business incubators are operating in the United States alone (http://www.nbia.org/,

2002). According to a recent study conducted by the European Commission, 3000 business

incubators are operating worldwide. Unprecedented growth of business incubators has been

reported in transitional economies such as China, India, Malaysia, Brazil as well as is Eastern

European countries.

Business incubation programs generally work with new businesses from before they have

brought products to market until they have graduated, that is, obtained sufficient size and

earnings stability to be able to survive without on-going assistance. The previous section of

this report examined the four legal basis of a business incubator program (public [non-profit]

private, [for profit, non-profit], and educational). With regard to identifying, measuring and

monitoring the impact and benefits of a business incubator program to local economic

development it is recommended that the type of business incubator be also well defined.

Incubation programs can be generally categorized into three major types: 1) empowerment, 2)

mixed-use and 3) technology. Empowerment incubators foster the growth of businesses

located in areas characterized by high unemployment or deteriorating neighborhoods. These

incubators usually support companies whose founders had to overcome a significant lack of

personal economic resources, business literacy and/or education. Mixed-use incubators

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encourage growth of all kinds of businesses such as light manufacturing, heavy manufacturing

and construction firms, and wholesale, distribution, mail order, and professional services.

Technology incubators foster the growth of firms involved in emerging technology.

2.1 A new Breed of Incubators: The ‘New Economy’ Technology Incubators

The Harvard Business School in its recent survey identified 356 such incubators around the

world (Hansen, 2000). Of these 222 are in the US (that is, about 25 % of the total U.S.

incubators). The others include Canada (14), UK (28), China-Hong Kong (11), and Brazil

(10). The growth of ‘new economy’ incubators is reflected in the fact that whereas in 1994,

only 1 out of every 25 technology incubator companies was IT related, by 1999, this figure

had risen to 20. Many of these incubators are associated with major universities and have as a

primary objective commercializing technology (Refer to Exceler@tor Case Study under

Section 4.4).

‘New economy’ type business incubators are often virtual. New economy incubators are

usually funded by venture capital companies or set up by large multidisciplinary consultancies

that are able to offer a complete range of technological, advisory and other business support

services to their clients. Large multinationals have also been keen to capitalise on their

expertise in the e-economy, namely the rapid development of the B2B and B2C sectors, e-

commerce, m-commerce (mobile phone commerce driven by WAP technology) and v-

commerce (voice activated commerce) by offering advisory expertise to new high-tech start-

ups within a virtual incubator model. Amongst technology incubators, a key factor is the

extent to which an incubator plays an active role in the broader regional (technology)

development strategy of the area where it is based. For new-economy incubators the primary

objective being is the generation of returns to investment to their own shareholders. Due to

the high risk involved and often low return rates (due to the fierce global competitions) some

incubators resorted to selling consulting services to established companies, or to partnering

with local universities and research institutes. An analysis of best practice suggests that

incubators should not be treated as stand-alone operations but rather integrated into a network

of key stakeholders, agencies and schemes that work together to promote innovation,

competitiveness, technology transfer and other key public policy objectives.

In light of the above the strategic objectives and modus operandi of ‘new economy’

incubators differ fundamentally from their ‘traditional’ equivalents:

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• ‘New economy’ incubators are private-sector, profit-driven with the pay-back

coming from investment in companies rather than from rental income; • Secondly, they tend to focus mainly on high-tech and internet-related activities

and unlike ‘traditional’ incubators, do not have job creation as their principal aim;

• Thirdly, ‘new economy’ incubators often have an essentially virtual presence

with financial and business services at the core of the offering unlike their ‘traditional’ counterparts that usually centre on the provision of physical workspace.

CONCEPTUAL MODEL AND COMPONENTS FOR SUCCESSFUL DEVELOPMENT OF TECHNOLOGY BUSINESS INCUBATOR

Depending on the type of business incubator program, numerous support sources will have to

be coordinated and various stakeholders will have to be brought on board. Lalkaka (2001)

identifies five inter-related rings, which have the potential to foster venture creation:

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2.2 Getting Support (Human, Knowledge, Social, Financial) for Business Incubator Program

Lalkaka (2001), based on a review of a number of incubators from both developed and

transitional economies, lists a number of problems and risks of business incubator programs –

often used as arguments against state funding:

• Elitist: as it caters to a selected group of potential “winners”, • Dependent on government support: in policy, infrastructure, initial funding, • Limited in out-reach and makes only a marginal contribution to job-creation in the

short term, • Not yet demonstrated to provide additionality, as most businesses start outside an

incubator, • Expensive: as it provides focused assistance and work-spaces to only a selected few, • Duplicative: as it may undermine existing markets for business development services, • Skills-intensive: as it requires experienced management teams, • Creates dependency by sheltering entrepreneurs from the harsh realities of the market, • Calls for good business infrastructure in a good location, and • Requires external subsidy for some years before it can become self-sustainable.

Lalkaka (2001) suggests that although these obstacles are legitimate, the conflicts can be

avoided through “realistic briefings to policy-makers, by careful planning of the incubator,

consensus building, patient support and strong leadership” (pg. 9). Furthermore he outlines

the scenarios and arguments, which should be used to gather state support for the business

incubation program:

• When it helps overcome market constraints, improves the access to information,

finance and divisible work space not freely available,

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• Extends the state’s role in providing public goods--knowledge, research, infrastructure,

• Becomes a visible symbol of the state’s commitment to the creation of good jobs (direct, indirect and through multiplier effects),

• Stimulates innovation and entrepreneurship as prime forces in the new economy, • Promotes the cultures of technology commercialization, risk-taking, teamwork,

sharing, • Reduces the costs and consequences of business failures, and facilitates the transition

from a command to a market economy, • When it empowers backward areas (urban and rural), youth and women entrepreneurs,

and promotes employment in the longer term, • Helps develop synergy between university, research, state and civil society, • When support is limited to initiate the establishment, not a continual operating subsidy • Generates taxes paid by corporations and workers, typically in excess of net subsidy,

and raises incomes, sales and exports for the community and country,

2.3 Limitations of Small Business Incubators

One major problem among public and private incubators is their apparent differences in

philosophy. An example of this difference is seen in public incubators stipulating rent below

market rate. “This policy increases the benefit to the tenants but hampers the profitability of

the incubator and its ability to cover operational and maintenance costs – which are both a

priority of most private incubators” (Nyrop 1986, 7). This brings us to a larger problem

faced by all incubator managers – incubator finances. In fact financial difficulties are often

manifestation of deeper problems. An incubator may be suffering from low occupancy rates,

poor pricing structures, lack of capital investment or other such issues that appear to be

monetary problems. Certainly, the vital aspect for all incubator types is the management

team. Larger and usually for-profit incubators have a wide variety of mangers experts in their

respective fields including, marketing, finances, strategic planning, product development,

public relations etc… However, managers of smaller business incubators usually have to

perform all of the above functions. A lot of cases studies report that the reason why business

incubators have failed can be partially attributed to the fact that the management has been

overwhelmed with the task to improve fiscal matters rather than concentrating on the success

of the incubating firms.

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2.4 Strategies directed at Graduates’ Success: Two Case Studies

The retention of the graduates is the most important benefit with regard to economic

development. Not only will the investment of public money be recycled in the community

(through income and corporate taxes) but more importantly the entire business incubator

process contributes to capitalizing on local entrepreneurial talent and nurturing small

businesses. This section examined the strategies undertaken by the TBDC – a non-profit

mixed business incubator in Toronto. The business incubator began operating in 1988 and

was originally subsidized by both provincial and municipal agencies. For the past 5 years it

has been self-sustainable relying predominantly on income from rental fees and business

counseling services provided to both the tenants and other entrepreneurs/small businesses in

the community. At its conception the City gave approximately $65,000 in funds to select the

location and prepare a business plan. The entire start-up costs were approximately $4 million.

2.4.1 The Toronto Business Development Incubator (TBDC)

For more than a decade, the Toronto Business Development Center (TBDC) has successfully

accomplished its mission "to nurture the growth and development of new and existing

businesses." Since its inception, the Center has been an active participant in the growth and

success of hundreds of new and existing business ventures. TBDC is a mixed incubator and

approximately 80% of all graduates is still in business and all but two (over a period of five

years) are still currently residing in the Greater Toronto Area (GTA). TBDC’s success can be

directly linked to its four-stage development cycle, designed to target the possibilities and

reveal the full potential of each business. Following a change in management and general

philosophy, today the business incubator graduates its tenants after 3 years. It is important to

note that the four-step development cycle is costumed to the business depending on whether it

is in an early start-up phase or a mature venture.

Stage 1: Exploration

This stage is perhaps the most crucial stage for the management of TBDC. In this stage the

potential client of the business incubator participates in a number of business oriented

workshops which inform the client on business processes, need for funding and the personal

effort required in running a personal business. Often at this stage the management can

differentiate between firms that are in the early start-up phase of the business cycle and those

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that have enough experience to progress into the second stage. Before a participant of the

workshop can become a tenant he/she is mandated to write a business plan.

Stage 2: Planning

TBDC helps its clients to develop a top-rate plan with clearly defined priorities, attainable

goals and a well-charted direction. It is important to note here that an adequate business plan

is not necessarily directed at investment (both debt or equity), but one that identifies a viable

opportunity and provides a ‘road map’ to capitalize on it. More mature firms are often well-

equipped with a business plan. In this case TBDC’s management identifies finance sources.

Stage 3: Implementation

At this stage TBDC provides its clients with a thorough understanding of a wide range of

business disciplines including management, finances, administration, marketing, In addition

to providing training and consultation in all aspects of business development, TBDC also

provides access to a vast network of business specialists, professionals and funding sources.

This is perhaps the most important stage for both the business incubator and its tenants. The

networking component is particularly valuable with regard to increasing exposure, recognition

and building a stable clientele list.

Stage 4: Graduation & Monitoring

The management team at the business incubator makes it very clear to all new tenants that

graduation is expected within three years. A number of strategies are implemented to pursue

this objective:

• Constant adherence to the four-stage model of business development

• Increasing rents for more mature tenants

• Increase in service fees for consultation services

Since the new management has been operating at the TBDC (2000), two monitoring reports

have been published with regard to the graduates. The reports indicated that100% of all

graduates are still operational ad that they have generated 126 new jobs in the community.

2.4.2 The Axceler@tor

The Exceler@tor is an information technology and telecommunications focused incubator,

providing infrastructure and services, to accelerate high potential disruptive and platform

technology businesses globally. The Exceler@tor is a centre for innovation, providing a

unique, collaborative environment with direct access to the University of Toronto and the

21

wider resources of Toronto’s technology and financial communities. The Exceler@tor’s

vision is to be the foundation of a successful technology hub in Toronto, to become

recognized as a leading International institution, fostering a culture of entrepreneurial

opportunity, facilitating wealth creation locally. The Exceler@tor is a joint initiative between

Universities, Industry (Technology and Financial) and Government.

The Incubator was initialized by the Innovations Foundation (IF) - a technology

commercialization office at the University of Toronto. The twenty year old foundation in

2001 investigated the opportunity of establishing a non-profit technology incubator based on

close interaction between six universities (in Southern Ontario allowing maximum use of

resources and opportunities) lead by the University of Toronto, the local high-tech industry

and Research Council of Canada – the national agency for coordinating funding and programs

for research and development in both industry and educational institutions.

Once a board of senior industry advisors had been appointed, the creation of The Exceler@tor

became a reality, with technology and other support from industrial partners, and a line of

credit from the Innovations Foundation. Today the business incubator is 12,500 sq. feet and

has a staff of 20 highly skilled technical consultants and managers. However, The

Exceler@tor is somewhat different from other incubators. Whereas a traditional incubator

provides space with very limited technology, infrastructure and business support. The

Exceler@tor’s goal is to help companies outgrow it and provide opportunities to add further

value to their enterprise. The key success factors for The Exceler@tor are the following:

• Strong link with the University of Toronto • Robust operating principles (not for profit) • Low overhead facility (sharing resources with IF) keeps fixed costs to minimum • Technology focused (ITC) with special interest areas (i.e. wireless and e-Health)

Tenants of The Exceler@tor

The Exceler@tor focuses on information technology and telecommunications. In general, as a

technology incubator, the Exceler@tor admits companies that have unique technology

applications. These technologies are usually disruptive or a platform technology as they have

the greatest potential to turn into major opportunities. It is encouraging to see technologies

with patents either issued or applied for, but this is not a requirement, especially as in some

cases, the patent process is not that effective for software businesses.

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A focus on specific types of technology allows the greatest synergies in the provision of

services and enhances networking opportunities as a result of many of the companies working

in similar areas. It also enhances the opportunities for collaboration between companies

within the Exceler@tor and between them and the external partners and sponsors. The main

entry criteria are constantly being reviewed, but currently include:

• Company formed (not individuals) • Company has significant growth potential and aspirations • Technology based in the area of information technology and telecommunications • Sponsor found (usually Innovations Foundation) who will do the initial investigation • Technology unique, usually disruptive or platform (frequently possible to patent –

although patenting is not necessary) • Not a direct competitor with an existing Exceler@tee (can be with virtual clients – that

is clients that are not physically in the incubator) • Will gain real value from being in the Exceler@tor, especially from the networking

opportunities • References available • Have the ability to pay for the level of services they require for at least 3 months. • Willing to sign service agreement and agree to all terms which includes provision of

some simple monthly corporate information with which we can track the impact of the Exceler@tor.

Companies are allowed to stay in the Exceler@tor provided that:

• They are still growing and moving forward on the implementation of their business plan • They are not disruptive to the Exceler@tor as a whole • They remain solvent • They do not occupy more than 25% of the Exceler@tor’s workstations The incubator is currently examining the opportunities of developing a local science

park/discovery area into which graduates/alumni can move. However, it is expect that all

Exceler@tees will exit the Exceler@tor within 3 years of entering, although this date is not

fixed. In the case when the tenant stays longer than the prescribed three years, service and

rental fees increase. Due to the incubator’s early age, there have not been any graduates yet. Networking in the Exceler@tor

There are three types of networking opportunities: within the Exceler@tor, within the

University/sponsor community and with the external business community. The Exceler@tor

is organized to maximize the networking opportunities between each of these communities.

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Within the Exceler@tor, there are a number of events organized to stimulate interaction

between the various companies. In addition to these events, the social hub of the Exceler@tor

is the coffee shop on the third floor, which has both an informal lounge and some additional

facilities such as a pool table. Interaction with sponsors and the University community will

also be catalyzed by a number of events, such as lunch-and-learn opportunities. As well, there

are many interactions with staff and students from Rotman Business School who are

interested in working with Exceler@tees.

In addition, sponsors and other organizations participating are keen to see how companies in

the Exceler@tor are progressing. This interaction may range from an informal meeting to a

formal mentoring program, depending on the interests of the parties.

The Exceler@tor is already establishing itself as a destination for innovation events and

networking opportunities with the wider business community. These activities will see a

stream of local, national and international visitors in the Exceler@tor weekly. There will be a

formal program where Exceler@tees will be notified in advance of these visits and asked if

they want to make a short presentation in addition to many other informal opportunities.

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Recommendations

I. The micro-economic framework should stimulate innovation and markets for new goods

and services, together with a master plan prepared in consultation with local

communities, entrepreneurs and stakeholders.

II. Commensurate investments are required in scientific research and technology

development, engineering and management consultancy, technical education,

environmental preservation, transport and communications infrastructure.

III. Long-term plans should be formulated for developing the convergent enterprise support

systems encompassing the full range of small business development services, anchored

possibly in a business incubator and technology park. Locations for these support

complexes should be environmentally attractive and well connected to technical

universities and research laboratories, cultural and recreational facilities. While it is

easier to start in a developed urban environment, the political wisdom may call for

balanced expansion to peripheral regions.

IV. The selection of proactive sponsors and organization structure could originate from

strong initial government support, with responsibilities moving progressively to

knowledge institutions, non-governmental agencies and the private sector.

V. Programs are required for kindling nascent entrepreneurship from school onwards, and

structured efforts to search for new tenant businesses, their selection and graduation.

VI. Networks should be developed with agents at the national and international levels

particularly consulting, and service sectors, venture capital, banking, legal and

accounting services, business associations and chambers, state and community

leaders, together with firm linkages to technical universities and research

institutes.

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Good Practices for Managed Work-spaces & Their Adaptation

Good Practice Adaptation 1. Commit to the core principles of venture creation as the first step.

In order to avoid misunderstandings and conflicts, the core principles must be early explained to all the stakeholders of the incubator and their commitment obtained as early as possible.

2. Collect and assess salient information to decide on whether the project is feasible or not.

In many countries, information is often spurious, incomplete and biased. It may also be over-optimistic, to "sell" the project and obtain funds.

3. Design the services and facility to be self-sustainable in an overall community context and in a medium-term horizon

Business development services, including incubators and parks, need initial state support, because benefits usually out-weigh the net state subsidy when all the employment, income, taxes and other benefits are considered.

4. Structure the organization to optimize governance & maximize assistance to tenant companies.

In some countries there is a tendency for the bureaucracy to interfere or micro-manage, resulting in loss of initiative and accountability at operational levels and consequently poor performance.

5. Engage stakeholders to help companies and mentor the operations.

Most entrepreneurs in restructuring companies are good at networking, but this process should be also managed by enlisting possible academic, government, private and international assistance

6. Recruit staff who will manage the facility as a business and a Director with the capacity to help companies grow

Initially, the local manager may be supported by a carefully recruited expert for a short period. Hands-on training of staff would be done at a comparable operational facility, or locally by trainers familiar with international practices.

7. Choose a building that will enable the incubator to generate sufficient revenue and also support business incubation.

The buildings should be of high quality, functional and well equipped (telephone exchange, computers, copiers, faxes, satellite communications) in order to attract international and national tenants.

8. Recruit and select firms that have the potential to develop their technology product/service, to grow and create jobs, income, taxes and other benefits.

The director must resist political pressure from stakeholders to recruit companies that do not meet criteria. The business plans and reliability of the entrepreneurs should be rigorously evaluated. A marketing effort is needed to recruit anchors and tenants with business and innovation skills.

9. Customize the delivery of assistance and address the developmental needs of each company.

The incubator staff must be fully familiar with specific needs of the companies, Foreign advisors may assist the companies and local staff in the start-up period, with rapid transfer of skills.

10. Engage in continuous evaluation & improvement as program progresses and needs of clients change.

Careful monitoring of progress and bench-marking of performance should be done monthly by the staff and by the board. Deviations from plan should be promptly identified and corrected.

Key Issues in Business Incubator Development

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• Critical Mass: The size of the community is important. Mobilizing cooperation and

demonstrating viability requires a certain scale of operation

• Markets: Rather than depend on vagaries marketing and distributing the products of the

business incubator communities can be designed to include bulk procurement of materials,

warehousing and focused distribution channels. In the community, local business can be

supported by making credit facilities and money management training available to local

entrepreneurs.

• Replicability: Demonstrations of "best practices" and model projects have to be replicated

widely if their impact on a national scale is to be significant and sustainable. This requires

affordable charges for services, with the prospect of the programs becoming self-supporting in

the future.

• Improvement Services: Management, quality control, production, commercialization

processes and related skills are generally inadequate in many smaller communities and must

usually be upgraded if local businesses are to compete in a regional or national market. In

specific situations, multi-purpose workshops and shared work spaces for businesses facing

similar challenges may be warranted.

• Integrated Package: A convergence of support functions in an integrated package including

skills enhancement, counseling and financing, is ideal in a business incubator program. Other

related national and donor-supported activities should be inter-linked.

• Grassroots Involvement: Exhortations regarding "participation" by the local community in

design and implementation of development schemes implies that the program is externally

imposed on their lives. In most poor communities, working is a part of living itself, not a

separate wage-earning activity. The development process also has to become an intrinsic part

of living.

• Vital Concerns: Growth with equity, gender equality and environmental preservation have to

be continuously kept in the forefront of planning.

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3.0 STARTING UP AND OPERATING A TECHNOLOGY ORIENTED BUSINESS INCUBATOR PILOT PROJECT

Outline of Objectives

1. Introduce the basic components of a business incubator pilot projects

2. Summarize the findings from the CSES report on Benchmarking Business

Incubator Performance:

a. Selecting location

b. Selecting quantity and quality of business incubator clients

c. Assess the financing start-up costs and operating costs, associated

breakeven points and sources of funding

d. Propose sources of funding specific to this project

e. Propose an NGO for leading the pilot project

Business incubators evokes an image of a specific building or complex where businesses

locate, pay relatively low rents for space, and share common support services. These

businesses also can have access to a wide variety of business development and professional

consulting services. Incubators offer small business clients financial and professional

assistance that typically includes:

• Flexible space and leases. • Access to a network of business and technical consultants. • Relationships with financial institutions. • Use of university resources.

An incubator's main goal is to be financially stable and produce successful graduates, or

businesses that are more financially viable and stable when they leave the incubator, usually

in two to three years. Businesses incubated today often are at the forefront in developing new

and innovative technologies, creating products and services that can enrich citizens' lives and

their communities.

Perhaps the most important aspect of business incubation is the fact that it uses local

institutions and resources to build a local capacity for business startup. The incubator employs

financial resources, professional networks, and intellectual capital to broaden the local

economy one enterprise at a time. According to NBIA, an incubator program helps build an

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entrepreneurial culture within a community by pulling together the support of financial

institutions, business owners, community leaders, schools, government, and business

assistance professionals. Adding this depth to an economy can provide greater insulation

against the effects of the negative business cycles that occur from time to time. This section

will summarize the findings from the report by CSES for the European Commission (2002)

on business incubation principles, specifically regarding issues relating to the financing of

incubator start up and operating costs. The study is based on surveys and interviews

conducted with 125 business incubators in the European Union.

Location of the Business Incubator

The location of a business incubator largely reflects the aims it pursues. Thus, a specialised

incubator that focuses on promoting technology-based enterprises may well be located on

‘greenfield’ site, for example on a science park adjacent to a university, whilst a multi-

purpose incubator could be in an inner-city area or on an industrial estate. New-economy

incubators, in contrast, tend to be concentrated in metropolitan areas, particularly in cities and

regions that combine strengths in technology, creative talent, entrepreneurship, professional

services and finance. Large urban centers and prestigious capitals are adequate locations

because that is where entrepreneurs and investors work, live, play and network.

Very few new-economy incubators are housed in newly built facilities, but for reasons largely

unrelated to cost. At least in the beginning, when they were managing to raise large amounts

of funding, it was more important to launch operations as soon as possible, often in cities

where office space is scarce. For young entrepreneurs and information technology workers

there is also a sort of "shabby chic" appeal in occupying converted lofts, former warehouses,

or antiquated offices. The CSES research suggests that to operate successfully, incubators

need to have sufficient capacity to accommodate a minimum of around 20 tenants at any one

time and hence to achieve economies of scale. According to the survey, a typical incubator

has around 3,000 square meters of incubator space. These findings do not however, apply to

‘new economy’ technology incubators. Their profitability is much more dependant on the

equity shares rather than rental fees. Some of them may host only two or three companies

while others may operate as virtual incubators that do not provide office space at all.

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Business Incubator Clients

The success of business incubation programs is directly dependant on the quality of its tenants

and the ability to provide these tenants with added-value services while fulfilling their

networking needs. The strategic selection of incubator clients is hence, pivotal to the success

of both the incubator and of its clients. Somewhat related yet perhaps a paradox is the is the

necessity to achieve a critical mass in order to maximize the economies of scale with regard to

service provision and costs. This is perhaps the most complex aspect of selecting the types of

clients, the numbers of clients served (both in the incubator and in the community) and the

type of services provided – all of which become benchmarks also for selecting the size, and

expertise of the business incubator’s management team.

In light of the above, the CSES study concluded that a business incubator should have about

18-22 clients in the incubator and about 10 other clients in the community providing

consulting services and networking opportunities. On the other hand, new-economy

incubators tend to have considerably fewer tenants because of the significant investment they

make in each incubatee (typically ranging from €500,000 to €1 million in the form of seed

capital and support services) (CSES 2002). It is also important to mention a shift that was

observed in the investment strategies into ‘new-economy’ technology incubators. Although

investors were more interested in early-stage startup firms, they have recently shifted towards

investment in more mature technology-based firms to start new businesses.

Financing Start-up and Operating Costs

According to the survey, the average cost of setting up a business incubator is just under € 4

million. In terms of the sources of finance typically used during the set-up phase, the survey

data suggests that the overwhelming majority of the financing comes from public sources.

Just over a fifth of the set-up costs are subsidized by the EU and other international agencies

whereas almost 50% are funded by national, regional and local authorities. 13% of set-up

costs come directly from private sector sponsors. With regard to operating costs the survey

revealed that on average typical incubator has operating costs of approaching €500,000 per

annum.

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Payroll and related benefits constitute the highest proportion of outlays. A key performance

benchmark here is the extent to which overheads such as these can be minimized and

resources devoted to incubator services that directly benefit client companies. New-economy

technology incubators, which profits come from equity shares in client firms lower payroll

costs by giving stocks to the employees of the business incubator. This strategy beside

reducing operating costs also has a positive impact because it helps to align the interests of the

staff with those of the incubatees they serve.

Similarly to the funding sources for starting costs, operating costs are extensively reliant upon

revenues from international agencies as well as national and regional authorities (37%).

However, and in contrast to start-up costs, operating costs are largely covered by revenues

from rentals and service charges (40%). The remaining revenue sources include bank loans,

and other private sector organizations. Interestingly, and due to the inability to rely only on

equity revenues, technology incubators are now forming hybrid cost-recovery schemes, which

include both rental and service fees and reduced equity stakes. Out of the entire sample only

40% indicated that a breakeven point has been set in the business plan (primarily because the

majority of incubators in the survey is oriented as a public non-for-profit organization). The

following chart illustrates the distribution of estimated breakeven time by the participants in

the CSES survey.

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Potential Funding Sources for Pilot Project: Multilateral Assistance

The large regional development banks have, not yet financed incubator-type programs. EBRD

is presently supporting a technology park program in Russia. A technical assistance

component for incubators was part of a World Bank private sector development loan to

Poland. This program was transferred to PHARE. The Bank presently supports micro-

enterprise development projects for employment generation with the Polish Ministry of Labor

and Social Policy. This includes 37 small business assistance centers and 23 business

incubators and enterprise development funds. The International Finance Corporation has had

interest in incubator-type arrangements in St. Petersburg, Russia, and Pilzen, Czech Republic.

The European Union, through the PHARE program, has been extremely active in central and

eastern Europe through TACIS in Russia. For instance, in Poland, it has helped set up 30

business support centers and four business incubators in the 1991-95 period. In the Czech

Republic, PHARE helped establish three Business Innovation Centers (BIC’s), as well as

various consulting, information, training and business promotion programs. In Hungary,

PHARE supports the Hungarian Foundation through the Columbus program of EU. EBN

plays a leading role in PHARE-assisted Business Support Centers (BSC) and Innovation

Centers. For instance, Lodz (Poland) is twinned with Lyon (France) at the level 23 of

BSC/BlC and the chambers of commerce and industry.

A potential NGO for the Pilot Project: UNIDO – Strengths and Opportunities

Within UNIDO’s (United Nations Industrial Development Organization) prime mandate of

promoting industrial development, support to small and medium enterprises is one of its six

programmatic themes. Business incubators have now become a component of national small

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enterprise strategies. Further, the majority of tenants in incubators world-wide produce

innovative goods and technical services in agri-based, chemical and engineering sectors and

in advanced materials, microelectronics, information and bio-technologies. These are all

within UNIDO’s competence.

UNIDO has specific experience in establishing incubators as an executing agency. Its work in

Turkey, Poland, Czech Republic, Romania, and Uzbekistan, and more recently in Columbia,

Dominican Republic and Pakistan has provided the basic capability to build upon. UNIDO

has had research experience in preparing publications of guidelines for business incubation

and software in financial planning for incubators. Further, a good network of incubator

contacts and consultants was established. Importantly, UNIDO has the unique capacity of

bringing together a range of specializations, within the organization to address the demand of

technical assistance services for incubation systems. Incubator development clearly must take

fully into account the current priorities in the international dialogue on safeguarding the

environment, rational use of energy, employment generation and full involvement of women

entrepreneurs in the development process. No other multilateral or bilateral agency has such

integrated in-house capability,

UNIDO has proven skills in the development and implementation of industrial development

systems. Focused on a Business Incubation System, such a Strategy would take the lead in

characterization, expansion and diversification of ‘incubator” operations. Using internal and

external analytical skills, UNIDO would contribute towards better understanding of the

nurturing of small enterprises with potential for growth. Implementing these lessons through

an incubator modality would enable UNIDO to leverage limited personnel and financial

resources for maximum impact. Support for the incubation process would be consistent with

philosophies to support maximum latitude in individual self-determination. Finally, UNIDO’s

considerable world-wide experience with larger enterprises and governments would develop

into new paradigms for linking small and large enterprises for mutual benefit while advising

on the development of supportive government structures.

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Recommendations

Governments should solicit carefully assistance from the state government both at the

federal and regional levels and funding from multi/bilateral organizations such as UNDP,

UNIDO, World Bank, European Union funds, to initiate innovative concepts and support

local initiatives, within the framework of national priorities and local culture.

It is a difficult task to measure the effectiveness of intervention programs that assist start-up

businesses. The entrepreneurial start-up stage is complex and often requires different types of

interventions ranging from one-on-one mentoring, to contacts for suppliers, customers and

sources for financing. Information reviewed to date indicates that most incubators have not

been evaluating the effectiveness of their programs, other than by considering the total annual

revenues or the total number of jobs created by the incubated firms. A few facilities have

stated that they consider tenancy in their buildings as an important measure of potential

success. In light of the above it is important to understand and implement benchmarking

techniques with regard to the business incubators’ start-up costs, operation costs, and impact

and effectiveness in the initial stages of developing the program and/or pilot project.

Furthermore, the development of a benchmarking framework needs to be sensitive to the

diversity of incubator models and operations. The EU Commissioned Final Report on

evaluating business incubator programs (2002) assessed 125 European business incubators

and identified a feasible list of benchmarks that would adequately show and evaluate a

business incubator program’s performance, management and promotion:

• Capital investment and operating costs: It is inappropriate to set benchmarks for incubator capital investment and operating costs because these will vary widely depending on the type of incubator. For example, a biotechnology incubator requires dedicated laboratory space as well as office space, whereas an incubator providing just office to new start-ups will require less capital investment.

• Proportion of revenue dependent on public subsidies: Whilst the public funding

requirements of incubators will inevitably vary depending on location-specific factors such as the dynamism of the regional economy and the extent of market failure, the CSES recommends that incubators should try and increase the proportion of operating costs derived from their own activities (rent, advisory services, etc) rather than rely continuously on funding from outside agencies.

• Incubator space/number of tenants: The average incubator space in the survey was

3,000m². There is a good deal of evidence to suggest that a minimum of 2,000 m²

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space is needed (enough to accommodate 20- 30 companies) to achieve economies of scale. We suggest a range of between 2,000 m² to 4,000 m² as a benchmark depending on the type of incubator.

• Length of tenancy: A benchmark of 3 years is suggested. It should be noted that the

benchmark applies to the average incubator and would not be appropriate for some specialist types of incubators, e.g. biotech incubators, high-tech R&D and high-tech manufacturing because of the longer product development lead times associated with those business sectors, amongst others.

• Number of Managerial Staff/Ratio of Staff to Tenants: The benchmark of at least

two managers assumes an average of 20-30 tenants and allows sufficient flexibility to cover absence (training and professional development, conferences, holidays, sickness etc.) while still ensuring that tenant firms have permanent access to managerial-level advisory support at all times. Given that the real added value of incubation lies not in real estate aspects but in the quality, relevance and utility of business advisory, the ratio of incubator managers to incubator tenants should ideally not exceed 1:20.

• Proportion of Management Time Advising Clients: Currently, the proportion of

management time spent advising clients, highlighted in the survey, stands at 39%. The CSES report recommends that, ideally, it should be possible to ‘free-up’ management so that more time is spent advising tenants and less on administrative matters.

• Survival rate of tenant firms: The survey revealed that the survival rate of firms

reared in an incubator environment was significantly higher than the business success rate amongst the wider SME community, estimated at 30-50% (over a 5 year period). In the survey, there was a notable clustering of incubators reporting a survival rate amongst tenant firms of 80-90% and the benchmark is based on this. The survival rate of incubator tenant firms operating in more high-risk sectors such as high-tech industry may well be lower. We would emphasize that survival rates are one indicator of the performance of incubators, of more importance is the extent to which incubators can contribute to the accelerated development of innovative, high-growth firms and their capacity to create new jobs.

• Job creation - average jobs per tenant company / new jobs per incubator: Whilst

employment creation is one of the key objectives of business incubators, setting a benchmark for the number of jobs created per firm or per incubator would be inappropriate because the number of jobs created will vary greatly depending on the type of companies being incubated, the amount of tenants the incubator can accommodate and the amount of available space. The number of jobs generated by a typical tenant company will vary depending on the type of industry the firm specializes in, the extent to which industry is technology or labor intensive.

• Cost per Job: The average gross cost per job according to the incubator survey was

€4,400. When set-up costs and the amortization of capital are taken into account, the figure rises to €6,700. Rather than setting a benchmark, we have set a range, which we feel is more appropriate given that incubators receive widely differing levels of support from the public sector depending on location-specific factors.

35

STRATEGIC PLAN: SETTING UP A BUSINESS INCUBATOR PILOT PROJECT This section of the report discusses the 8 Month Strategic Plan presented on page 34. The

following discussion is sub-dived into subsections that correspond to the components

identified in the diagram

PHASE ONE (MARCH 2002 TO JULY 2002)

PROSPECT DEVELOPMENT REPORT

The prospect development component prepared by the Canadian Team (Michael Lazarowich

and M. John Wojciechowski), investigates various aspects and strategies of business

incubation. The report was prepared with technology incubators in mind – a direction chosen

based on consultation between Mr. Mau and Mr. Lazarowich. The technology incubator

theme is emphasized in section 1 when examining the four types of business incubators, their

industry niches, tenant characteristics and success criteria. A more detailed discussion of the

differences between technology incubators and traditional incubators can be found in section

2.1 while section 2.4.1 provides a case study of the Exceler@tor – a technology business

incubator in Toronto, Canada. Finally in the last section of the Prospect Development Report,

specific attention is given to the differences in starting and operating costs of setting up a

traditional incubator and a ‘new economy’ technology incubator. The findings and

recommendations from this report should be used to assess the feasibility, effectiveness and

impact of pursuing the development of a technology business incubator with regard to its

location and target market. It is imperative to note however, that the type and location of the

business incubator selected will ultimately depend on the assets, skill and potentials of the

local community and economy.

CONTEXT ANALYSIS REPORT

The Prospect Development Report and the Context Analysis Report are vital components of

PHASE ONE. The Context Analysis Report should include information on the local:

Infrastructure (both hard and soft)

• Economy (and local political will to generate growth in the SME sector)

• Technology

• The Political Framework

• The Socio-Cultural Framework

• The Entrepreneurial Framework

36

Once the local socio-economic structures are identified it is possible to compliment the

findings with the recommendations from the Prospect Development Report. It is important to

note that the strategy most suitable for the implementation of the Business Incubator Pilot

Project is and/or should be determined by the local strengths, weaknesses, opportunities and

threats. The Context Analysis should be well complimented by investigating both positive

and negative experiences from previous business incubator projects in Russia. Both

Components will determine the direction of implementing PHASE TWO – the Business

Incubator Pilot Project.

PRIORITY SETTING MEETING (MID - JUNE 2002)

During the meeting the two teams should share the findings from the two preceding

components, identify priority issues and divide responsibilities among the two teams.

Certainly, the most important issue, is obtaining funding from regional and national levels of

government as well as bilateral and multilateral organizations. TACIS, is particularly well

equipped to provide funding for this type of project but other sources should also be explored

including UNIDO and the Canadian International Development Agency (CIDA). Considering

that the application and selection process is fairly time consuming it is recommended that this

issue be investigated already before the meeting. An Interim Report should be prepared at

the end of the meeting sessions to compile all the information together gathered from the

Prospect Development and the Context Analysis Reports including a more accurate time table

with objectives and responsibilities for both the Russian and Canadian teams.

PHASE TWO (July – October 2002)

PILOT PROJECT PLANNING

The Strategic Program Development needs a team of devoted government, industry and local

stakeholders that can create a steering committee for the project. The steering committee

should be comprised of local leaders that can persuade the procurement of funding and human

capital for the project from diverse sources.

At this stage the teams of consultants, facilitators and steering committee should be involved

in option identification of best suitable location and target market for the business incubator.

This strategic process should be based on market testing and/or personal knowledge of the

socio-economic potential and skills and entrepreneurial climate in a certain region or locality.

37

In light of the above it is important to include people local to the community on the steering

committee and/or perform local entrepreneurial surveys assessing the local assets.

This stage should finally conclude with the application for funding the Business Incubator

Pilot Project. Proceeding the Business Planning Component incubator sponsorship and

incubator financing should be identified and solidified.

BUSINESS PLAN COMPONENT

Through a series of meetings with local government, interest groups, Russian and Canadian

consultants and funding agencies, the planning phase should result in a business plan for the

pilot project. The business plan should incorporate the findings from the entrepreneurial

surveys, the operating aims and procedures identified by the steering committee, services

network, facility specifications, organizations and staffing, costs, revenues and funding. The

business plan must include content analysis of the following sub-sections:

OUTLINE OF THE BUSINESS PLAN

Mission Statement and Strategic Objectives Incubation Design a) Incubator Type

b) Location c) Site and Premises

d) Facilities and Services Legal Structure

a) Legal Status b) Ownership

Organizational Structure a) Steering Group

b) Executive Board c) Advisory Committee d) Management Team

e) Advisory support (foreign, local) Financial Planning Operational and Procedural Framework a) Promotion of the Business Incubator

b) Entrepreneur Detection Procedures c) Admission and Exit Criteria d) Service Provision and Pricing Strategy e) Training and workshops for Staff and Management Evaluation of the Incubator Activity

Implementation Strategy Risk Profile

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PHASE THREE (NOVEMBER - ?)

Phase three is the implementation stage. This phase should be a continuously evolving

process with the ability to adapt to the location-specific scenario. Functional plans should be

systematically revised and consulted to measure progress and/or improve on operations and

should be accompanied by adequate and responsible budgeting of resources, aiming towards

the predetermined breakeven point and self sustainability. The following diagram illustrates

the implementation stage over a 2-3 year period. This stage should be complimented by

ongoing evaluation, monitoring and optimization.

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REFERENCES

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