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Incubate, don't hybernate

Friday 4th August 2000

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Unitec's is one of a slew of incubators planning to launch this year. The Ministry of Economic Development has received proposals from 19 would-be incubators, 12 of which are in "active development" at the moment.

Fostered growth

What is an incubator? Typically, it's a safe working environment provided at minimal cost to a start-up company or an individual with a good idea and a business plan. The aim is to help them get on their feet, commercially speaking.

They tend to be acts of charity: in the US, the home of incubation, only 8% are profit motivated and the majority are local-

government or educational initiatives. New Zealand's incubators are no exception; they're all fighting for a share of government money, both local and central, as well as for private-sector capital - and boy, can they spend it. Unitec has spent around $1.7 million on its incubator building alone. On Auckland's North Shore, construction has just started on the "enterprise centre", an incubator at Massey University's Albany campus, funded in part by the Tindall Foundation and with $500,000 from North Shore City Council ratepayers. Rumour has it the fund has raised over $2 million already. Further south, both Victoria University in Wellington and Canterbury's Development Corporation have programmes under way, as does the Dunedin City Council.

The growth of incubators isn't merely a New Zealand phenomenon. Around the world countries as diverse as Australia, Uzbekistan, Brazil and India are starting incubator programmes. Israel already claims many a success. The Indian Institute of Technology in Bombay has a project to help students start their own businesses. Europe has around 30 incubators, most of which didn't exist a year ago, partly driven by the upsurge in venture capital that's lying around. According to The New York Times, available venture capital in Europe has increased from $US500 million a year ago to about $US6 billion today.

Ulterior motives

Not everyone is welcoming their arrival in New Zealand. Against the tide of supporters a handful of sceptics are qualifying, if not questioning, incubators' success. "I can't think of one significant business that has come out of an incubator," says John Kernohan, head of Auckland University's commercial arm, UniServices. You'd think Kernohan would be a supporter, given that many incubators are associated with educational institutions. In fact, Kernohan does plan to get involved in the local scene but warns that incubators are not the killer application many hope they will be. How come? Kernohan is a regular overseas traveller and visitor to incubation and science park projects in Israel, the US, Germany and parts of Asia. He has yet to be impressed by these attempts to replicate the kind of natural incubation that occurs in places like, say, Silicon Valley or around the leading educational centre, MIT (Massachusetts Institute of Technology). The key problem, he says, is the mixed motivation. "Most incubators have ulterior motives," he says, meaning netting public money for pet research projects or acting as job creation for unemployed scientists.

Kernohan recently attended Bio 99, a US biosciences conference in which a report from NYU (New York University) claimed only 4% of incubator clients went on to create successful businesses. The study said incubators are better described as "hibernators".

The scepticism is in no way impeding the growth of incubators worldwide. Four new incubators open their doors each week around the world, says Mike Doig, chief executive of Vic Link, Victoria University's commercial arm. In North America alone there are almost 600 incubators, according to the Ohio-based National Business

Incubator Association (NBIA), up from only 10 in 1980.

"They're definitely the way to go," says Tindall Foundation founder Stephen Tindall, recently returned from visiting incubators in Singapore. "The amount of small businesses that are spinning off out of those incubators is amazing." For example, Singapore's Technopreneurship Investment Programme (TIP) has recently granted $690,000 to Hamilton-based Deep Video Imaging, which will also receive support and guidance from the TIP incubator programme. Tindall and venture-capital firm IT Capital own 80% of the company, which produces 3D liquid crystal displays that can be viewed without the need for special glasses. DVI hopes the New Zealand government's new R&D scheme will match the grant.

The way Tindall and company see it, the country should have a number of these hothouses dotted around the country all producing DVIs and hopefully tomorrow's Nokias or Microsofts.

Incu-whats?

So incubators are hot but, er, just what are they?

The first true incubator programme was developed in the US in the 1950s. The idea was to help nurture businesses and to develop ideas into products. Not just a research and development lab - research for research's sake is a noble endeavour, but isn't part of the incubator philosophy. Instead, tenants at an incubator must provide a sound business case, submit to a continual round of assessment and present their research to a committee or board on an ongoing basis. In return, they receive support from mentors and relevant technical support - be it telco gear, a PC with software tools or a chemistry lab.

"The best thing about being in the incubator is there's no excuse for being unmotivated," says Roger Smith, director of GeographX, a tenant at Vic Link's Innovation Greenhouse. The Greenhouse was set up early last year. "It's a great climate for motivating each other, swapping ideas and offering practical assistance." Smith has been in the incubator for 12 months and says, although he's not expecting to launch an IPO in the next six weeks or anything like that, the day will come when he will go out on his own. "The support here is great - we share facilities and we have a firm belief that there's no point in re-inventing the wheel. If someone else has already done it, why repeat it?"

Vic Link's Doig reckons incubators are important for an economy in change. "In the transition from a commodity-based economy to a knowledge-based economy there will be failure among small businesses because the speed of transition is so great. New Zealand, if not the whole world, is going through just such a transition." Not only do today's crop of entrepreneurs have to cope with the normal complexities of starting up a small business, Doig says, they have additional risks that come from trying to operate at a time when technology is changing the playing field almost overnight.

That's why businesses need a bit of mollycoddling - just to keep them alive.

"The regions that grow knowledge-economy businesses will have a competitive advantage over those that don't. The same thing happened during the Industrial Revolution," Doig says. Countries slow to adapt to the new way of doing business - Spain and Portugal, for example - suffered as a result.

Vic Link's Innovation Greenhouse is currently running at 95% capacity, with 22 companies focused on the e-business end of the market.

Costly adolescents

Unitec's incubator is yet to open its doors, but faculty dean Gael McDonald says the key to success will be in picking the right candidates followed by effective monitoring. There's a 28-step process to go through before a company or a project is accepted, and then there's on going assessment, including milestone reporting, monthly reviews - and a support team to help them along, McDonald says. "They're assigned a mentor in much the same way a PhD student would be, and they must pitch their product's development to the board. They're also forced to share facilities, so they intermix more readily."

As to how long the tenants will stay inside the protected walls of the incubator, that's to be assessed on a case-by-case basis, rather like deciding when teenage children should leave home. And just like the teenagers, they are welcome back to help raise the next generation of tenants.

As with all start-ups, New Zealand incubators struggle with finance. Unitec's Howard Frederick spent most of last year raising funds and managed to accumulate $1 million for his then employer, Victoria University.

The role of government is still unresolved. When the Australian government announced a similar pilot scheme last year it stumped up with $A70 million. In New Zealand the Ministry of Economic Development (MED) set up a fund and called for interested parties already in the incubation game to apply for a grant. Some 19 incubators applied for a share of only $2 million. Once all the proposals were received, averaging over 100 hours of time and effort each, according to Frederick's assessment, the MED then put the incubator pilot scheme on hold for the short-term future while it works out which direction to take.

"We had 19 proposals and rather than spread a small amount of money thinly around them, we decided to pull back and have a look at our options," says a ministry spokesman. One possibility is not to fund incubators directly but rather to set up an incubator support network that could offer advice and assistance to all New Zealand incubators across the board.

With government resources scarce on the ground, just how many incubators can New Zealand cope with? "Really, the question is unanswerable - how long is a piece of string?" answers McDonald. She says any business sector can take advantage of incubation as a way to boost its market share. Agriculture, finance, high technology, toy manufacture, it doesn't matter what it is, just whether they choose to set one up. McDonald has already been approached to help set up an incubator in the agricultural sector, but since she's yet to open the doors on her own, that has taken a back seat for the immediate future. "One thing at a time."

Frederick says the state of Florida is about the same size as New Zealand and has five large incubators. He could see New Zealand supporting that number happily.

Technical support is another part of the equation, as is finding people to fill the mentoring roles, although McDonald was quietly surprised at how willing New Zealand professionals are to be involved. "We've received a huge amount of support from business leaders around New Zealand - it's been really impressive just how readily they give their time to help these new companies."

Although Unitec has yet to put out a request for companies to be involved, it seems help will be ready and waiting when it does.

Do they work?

But do incubators actually work? Well, that's a more problematic question. If you're asking are they profitable, then the answer's largely no. According to Doig, more than 90% of US incubators are non-profit, academic or church initiatives. Some 51% are started by local governments to stimulate new business.

As public service initiatives are they successful? Probably. Figures from the NBIA show for $US1 of public money put in, the incubator returned $US4.96 in local jobs and taxes. As job-creation schemes they are three to six times cheaper to run than any other government-funded projects.

Most importantly, though, do they produce successful businesses? The NBIA produces screeds of up-beat statistics on this (see www.nbai.com). On the basis of the largest-ever survey on US incubators in 1987, it claims 19,000 companies and 245,000 jobs have been created through incubators (though it doesn't say since when). It also says the average company grew 400% in revenue while in the incubator; 87% of entrants successfully completing the incubation programme are still in business.

Incubators "form the best value of economic development based on low-cost programmes and high return on investment", it concludes. As for star companies, the NBAI includes in its incubator trophy chest:

  • MindSpring Enterprises, one of America's largest ISPs (revenue $US114 million, 2000 employees in 1999), started life in 1994 in the Advanced Technology Development centre, an Atlanta incubator, and within two years it was publicly listed;

  • Peapod.com, the one-time online grocery star was born in 1989 in the Technology Innovation Centre in Illinois, graduating in 1995. At its peak the store employed 475 full-timers and had sales of $US69 million, but, like many Net stocks, it's now struggling to survive; and

  • ComputerAid, a $US100 million revenue software company entered a university incubator in Pennsylvania in 1983, with just two employees and a business plan.

And have you ever heard of Gatorade? According to Wired magazine, the fruity fluid-replacement drink came out of a University of Florida development programme in 1966 and currently earns its manufacturer $US1.3 billion annually. The incubator gets a healthy cut of that. Not bad, eh?

Is it a rort?

Yes, it's all impressive, but hardly a Mircosoft. Critics wonder whether incubators create the right conditions for really significant businesses to survive. For a start, says UniServices' Kernohan, incubators are often set up for the wrong reasons. "For instance, I have visited the so-called successful incubators of Israel, and it seemed to me that they are effectively job-creation schemes for their 200 or 300 unemployed Russian Jewish scientists. And claims that 40% to 50% of Israel incubator graduates are successful are largely false because the criterion for success is that that graduate has to have raised more than $US50,000 in his or her first year. I don't know anyone in the technology sector who'd regard that as success."

Another sceptic is John Cunningham of venture-capital company Caltech Capital Partners. His concerns? "I just wonder whether incubators create the right environment for business. Most in

New Zealand are being established by educational or government institutions, and that's great, but universities don't have the gut-

busting culture that's required to make business work."

Then there's the worry that the "build it and they will come" model is really just a rort for institutions to simply build, well, bigger institutions. For example, the bulk of the money being spent on incubators in North Shore City, Dunedin and Auckland's Unitec is on buildings - a fatal mistake, say venture capitalists.

If incubators do work, it's not because of how much money they receive or the buildings they inhabit, says Kernohan. "The two I've seen working really well are the ones attached to the University of California and the University of Utah. Neither follow the bricks and mortar model." The first is a virtual incubator with 20 companies selected from around the world to participate. The second was the brainchild of US entrepreneur Wayne Brown. Shortly after he died in a plane crash the incubator was shut down. "That's because incubator success depends entirely on the quality of the management, not on the buildings, not on the level of funding. You want rented, flexible space so you can expand and contract. From what I've seen in New Zealand so far, I don't believe we have the right management."

Time will tell.

Meanwhile, even Cunningham and Kernohan will be getting involved in the incubators to help make them work. "It's better than nothing and, frankly, New Zealand needs to try everything it can right now."

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