National Business Incubation Association; Your source for knowledge and networks in business incubation

Meeting challenges around the world

by Kathy Cammarata

June 2002

Last December, NBIA invited member incubator managers from outside the United States to answer a series of questions about some widespread challenges of business incubation. These challenges ranged from monitoring client and incubator results to helping clients access capital. Our hope was that by writing an article based on their collective insights and experiences, we could offer our readers some innovative solutions as well as a glimpse into the many shades of business incubation around the world.

A number of incubator managers graciously responded to our questions, providing a variety of perspectives. Their responses reflect the unique cultures, economies and locations of our members. So read on to learn how your colleagues around the globe are meeting a variety of incubation challenges.

Challenge 1: Cultural barriers to entrepreneurship

We all know incubators have the potential to change their communities for the better. But business incubation is still a relatively new concept around the world, and convincing communities of its value can be a source of frustration. This situation is further complicated when cultural attitudes conflict with the basic principles of entrepreneurship.

Japanese culture, for instance, is largely unsupportive of entrepreneurship. Entrepreneurs often are considered eccentric in Japan, where social prestige is associated with employment in large corporations. Japanese education is geared primarily to preparing students for employment in large organizations and does little to encourage creativity or individualism. Moreover, the country's tax system and regulatory structure tend to discourage entrepreneurship. Its high rates of taxation on capital gains and stock options penalize entrepreneurial success. According to the 2001 Global Entrepreneurship Monitor, Japan is second-to-last among the world's leading economies in entrepreneurial activity, and it ranks low in the amount of informal investment in start-ups.

Recognizing that a greater emphasis on entrepreneurship is necessary for Japan's long-term economic health, the Japanese government has removed some of the regulatory barriers to starting businesses, and more changes may be on the way. According to a recent column in the Canadian National Post, Japanese Prime Minister Junichiro Koizumi is trying to shift his policy toward smaller government and toward increased entrepreneurship. He is expected to propose a series of measures, including lower marginal tax rates for the wealthy and cuts in corporate taxes. To offset the tax reductions, he may also propose targeted cuts in government expenditures. In addition, Koizumi is overseeing elementary and junior high school reform to foster a new generation of entrepreneurs by emphasizing creativity and independence in the classroom.

While these reforms would be major steps toward a more Western-style economy, cultural attitudes in Japan won't change overnight. "The nail that sticks out will get a pounding," says Toshihiro Kose, director of research at the Japan External Trade Organization (JETRO) Chicago. "This is a Japanese proverb that describes Japanese behaviors very well." He explains that many potential Japanese entrepreneurs with innovative technologies and ideas have tried to break through the old business customs and behavior. "Unfortunately, the majority of Japanese working in the established business and government sectors has crushed their entrepreneurial spirits."

How can JETRO change these traditional attitudes? Kose says "seeing is believing." In other words, a proven incubation success story would go a long way in convincing the Japanese of the value of entrepreneurship. In view of that, JETRO is conducting the Tiger Gate Project, an initiative that offers various forms of support to high-tech Japanese start-ups. One aspect of the project, the Venture Incubation in the USA program, provides incubation services and support to high-tech Japanese companies that relocate to JETRO sites in the United States. These sites include the International Business Incubator in San Jose, Calif.; the Austin Technology Incubator in Texas; and the Technology Innovation Center in Evanston, Ill.

New to the Tiger Gate Project this year will be an incubation manager-training program for Japanese in the United States to give participants the knowledge and confidence necessary to nurture new businesses in Japan. Kose also would like to create a virtual incubation community between the United States and Japan to encourage collaboration between the two countries.

But these projects are only the beginning of what Kose sees as a long-term effort to encourage entrepreneurship in Japan. "My efforts have just started and taken only one step," he says. "However, where there is a will, there is a way."

Challenge 2: Connecting with unlikely entrepreneurs

Implementing effective marketing plans and client recruitment programs is a given, no matter where your incubator is located. But some NBIA members face the additional challenge of marketing entrepreneurship and incubation to people who might not consider themselves potential entrepreneurs.

In the small city of Volkhov, Russia, the Alliance of American and Russian Women established a business incubator in 1995 to support the development of small businesses in the Volkhov region, particularly those led by women. At the time, the city's economy was extremely depressed. Many businesses were shut down or simply not paying salaries, no new jobs were being created, and trading had sprung up in the streets. Despite the fact that women represented 80 percent of the unemployed, no support was available to help them shape their economic futures.

In addition to offering professional consultation, the Volkhov International Business Incubator (VBI) needed to help women overcome the fear and insecurity of starting businesses, which is particularly relevant in a country with virtually no recent history of private entrepreneurship.

The incubator responded to that charge, in part, with a Women's Business Support Program. The course is open to women in the region who are interested in entrepreneurship but don't necessarily have businesses ready for incubation. The group meets once a week for 10 weeks. "[It] gives women an opportunity to explore their fears, their business dreams and ideas, and provides basic information about starting and running a profitable business," says Ida Schmertz, VBI founder and chairwoman of its board of trustees.

The Women's Business Support Program has helped build a spirit of entrepreneurship in the region. Graduates of the support program have formed an alumnae organization that meets regularly at the incubator, and some attend other incubator courses on more advanced financial and management skills. In the past four years, the incubator has conducted seven Women's Business Support Program sessions with a total of 62 participants. The result? Twenty-one businesses and 48 jobs created and sustained.

Similar problems challenge the first incubator in Malta, an island nation south of Sicily with a population of about 390,000. The types of people likely to consider entrepreneurship in many other countries are often reluctant candidates in Malta, says Ray Muscat, operations manager of the Kordin Business Incubation Centre. For instance, Maltese university students traditionally are geared to seek employment after graduation, not to start businesses. Beyond that, the country's demand for engineering and information technology graduates is greater than its supply, creating a disincentive for these graduates to seek entrepreneurship as a career.

To encourage students to pursue entrepreneurship, the Kordin incubator is creating partnerships with student bodies to market the incubator program on campuses. It's also sponsoring student business plan competitions, awarding scholarships for postgraduate courses to the authors of the best three business plans or financial and technical assistance to help students address weaknesses in their plans. This program is made possible by the incubator's parent organization, the Institute for the Promotion of Small Enterprises, a joint venture between the Malta Chamber of Commerce, the Malta Federation of Industry and the government of Malta.

On the other end of the work-experience spectrum, longtime professionals in Malta find it difficult to make the transition from stable employment to entrepreneurship because they feel the risks are too great. The transition becomes even more difficult when these experienced professionals have families to support, Muscat says.

To help reduce the risk, the incubator offers seed money to some of these potential clients. "In such cases, we try to work with the employers of such persons to allow [them] to go on sabbatical leave to 'try out' their venture for a definite period of time," Muscat says. "If the idea fails, then these persons would be able to return to their employment." To make this work, the incubator targets only employers willing to spin out projects. This is potentially a win-win situation, as the employers will either gain a new profit center or retain a valuable employee.

Challenge 3: Attracting business assistance services to remote areas

When we asked our international member incubators if helping their clients access capital is a challenge, we didn't intend to ask a stupid question. "Of course it is!" responded one member. We're all too aware of the difficulties new ventures face in accessing capital. What we wanted to find out was how our members meet this challenge. As we suspected, some have come up with innovative and effective ideas for helping their clients acquire the funding needed to get their businesses up and running.

For instance, the Northwestern Ontario Technology Centre in Thunder Bay, Ontario, has been particularly diligent in its pursuit of investment capital sources. The incubator serves a region about the size of France that has a small, dispersed population. (Thunder Bay is the largest community in the region, with a population of 125,000.) "No venture capital firm is located or active in our region," says Judy Sander, the center's business advisor/manager. The nearest large Canadian city with an active capital market is Toronto, which is a 15-hour drive, and the Minneapolis-St. Paul market is an eight-hour drive. "This geographic isolation makes venture capitalists reluctant to invest in distant early-stage companies," she says.

To compound these access-to-capital challenges, the Tech Centre focuses on technology-driven businesses, and the local angel investor network has minimal experience with technology opportunities. "Most of our angels have made their money in the resource, construction or transportation industries," Sander says. "Angels tend to invest in industries they are comfortable with and understand."

In an effort to get out-of-town venture capitalists and local angels interested in clients, the incubator developed Growing the Northwest, an evening designed to show off selected incubator client companies to investors. The Tech Centre hosted the event last June, inviting two venture capital firms (one from Toronto and one from Minneapolis) as well as potential local angel investors. Three technology-based client companies made brief presentations. "Our objective was to expose both the venture capitalists and the angel investors to the kind of projects being developed, and to begin to build relationships," she says. "The evening was informal, allowing those interested to discuss possibilities and exchange information."

As a result of Growing the Northwest, one client has received local angel investment and is working with one of the venture capital firms. "We hope that as the community and the venture capital market gain experience, the road to accessing capital will be easier for those that follow," she says.

The incubator staff are planning a follow-up to Growing the Northwest, but the center's efforts to link clients to sources of capital are not limited to an annual event. "We have hosted individual venture capitalists and angels with specific client companies over the past 12 months," Sander says. "This has resulted in further development of the angel investor market in our community – a very positive result as this is paving the way for the future!"

The Genesis Centre, a technology incubator in St. John's, Newfoundland, also has seen positive results from an innovative idea – in this case, a mentorship program. Newfoundland, a Canadian province with a population of less than 600,000, has a long history of out-migration. For generations, Newfoundlanders have been forced to leave the province to find work. However, most who leave keep strong attachments to the area, probably for several reasons, explains Keelin O'Leary, Genesis Centre manager. "Most of the province is an island, contributing to the very strong identity of its inhabitants. Its culture is very pronounced, [and] family ties and roots are strong and deep."

By tapping into the successes (and loyalties) of Newfoundland's expatriates, the center has turned the challenge of out-migration into a strength. Since 1997, it has recruited mentors for its clients from the ranks of Newfoundlanders who have successfully started or managed technology-based businesses outside the province. In addition to native Newfoundlanders, it calls upon others with long-term attachments to the area, including those married to Newfoundlanders and graduates of the local university.

Through this specially designed mentor program, Genesis Centre clients receive guidance from mentors who have "been there, done that," without having to leave the province. For the most part, these mentors are based in North America's large business centers or in relevant industry centers, so they are able to provide incubator clients valuable contacts in the industries they're trying to break into as well as industry-specific guidance.

How do the incubator clients make contact with their mentors? Technology is key. The center's videoconferencing facility, along with e-mail and telephones, link local clients with expatriate mentors. The mentors typically return frequently to the province so they are able to attend company meetings without additional expense. A benefit to utilizing mentors from outside the province is that it reduces potential competition between mentors and clients.

Recruiting expatriates for the mentor program isn't as difficult as you might think. Their emotional attachment to their home makes them willing volunteers, O'Leary says. They are motivated by the desire to help others benefit from their successes, as well as to give something back to their community. "The biggest challenge in recruiting was getting through the protective 'wall' that typically surrounds top executives to speak to them in the first place!" she says. "To overcome this challenge, we now use, where possible, personal networks to reach these people initially."

Although the mentor program is one of the most effective elements of the Genesis Centre program, it costs the least. The main costs are for video- and teleconferences, which run between US$50 and US$100 per meeting, for a total annual cost of about US$8,500. Because of the minimal cost, the mentor program will be financed out of general revenues for the foreseeable future, O'Leary says.

One of the many benefits of the mentor program is the confidence clients gain from being associated with and receiving advice from highly successful businesspeople, she says.

Challenge 4: Monitoring success

One of the most misunderstood (and neglected) of NBIA's industry best practices is ongoing incubator and client evaluation. This is a discouraging fact, because to be successful, incubation programs must have a clear idea of where they're headed and how well they're meeting their goals.

Incubator management frequently stumbles in tracking client information. "I have had incubator managers tell me that their clients would not share company financial statements on a regular basis," says Dinah Adkins, NBIA president and CEO. "If so, my question is, 'Why are we working with these companies?' In the end, how will we know that we provided assistance that helped them grow? Do we take it on faith? Will our sponsors, stakeholders or investors take it on faith? I don't think so."

In order to refine an incubation program's offerings – and to offer clients more than just a piece of real estate – management must determine whether it's offering the value promised by identifying and tracking incubator and client evaluation criteria.

Twinning, a for-profit incubator in Amsterdam, handles the challenge of evaluating client progress by building a monitoring process into its program. This process includes weekly discussions with client company managers and formal documentation of client results.

Clients new to the incubator sign an agreement stating that they must report on specific aspects of their businesses, including financial health, product development, marketing and management. Incubator staff register the information on a monitoring sheet, which they update monthly. This sheet includes target and achievement dates for milestones set in the company's agreement; the number and roles of personnel; monthly budget/income statements; and a list of major issues that the company needs to address. Clients also must specify which of their employees will address each issue and when. Investment managers meet weekly with clients to discuss their progress in these areas.

Lucas Wildervanck, Twinning director of corporate development and support, says that the incubator's portfolio companies do not object to providing financial information. "They know that we [keep] the information strictly confidential," he says. "Besides this, we cannot assess plans if we do not know the figures."

Challenge 5: Job creation on a large scale

Sometimes countries face the daunting task of creating jobs for a large group of people – whether due to downsizing, the outmoding of a particular industry or even military reform, as is the case in Bulgaria, where tens of thousands of officers will be discharged from the army in the next two years. In response, a Bulgarian nonprofit organization is developing an incubation program to help discharged army officers start their own businesses.

A similar effort produced significant results in Israel, which experienced a massive influx of immigrants from the former Soviet Union in the early 1990s. Thousands of these immigrants were trained scientists that Israel's academic institutions and industry were unable to absorb. At the same time, the Israeli government was beginning to recognize that innovation and technology would be critical to the country's economic future.

To address both of these issues, Israel established its Technological Incubator Program under the Office of the Chief Scientist of the Ministry of Industry and Trade, with a mission "to promote the development of innovative technology ideas of individual entrepreneurs and set up new businesses for their commercialization." The program started in 1991 with seven technology incubators; today there are 24 serving all parts of the country. The network was established for individual entrepreneurs, not for existing companies; a new small company is formed around each approved proposal.

Each incubator is an autonomous nonprofit corporation, which the government supports as long as it complies with government rules and regulations, such as maintaining a certain level of deal flow each year and providing periodic reports on the incubator and client companies, says Lesley Anne Rubenstein, managing director of the Initiative Center of the Negev (Mayn) in Beer-Sheva, Israel. As do other Israeli incubators, the center receives US$150,000 in annual support for operating expenses from the Office of the Chief Scientist.

The incubator network was able to reach the new immigrants via the Jewish Agency for Israel and other government offices and institutions, Rubenstein says. All immigrant-related groups and government-related employment agencies connected new immigrants with the incubators. Other organizations evaluated whether ideas should go to an incubator or straight to industry for commercialization. Whether a new immigrant had a business idea or wanted to find work, he or she could look within the incubator network.

By 1996 the incubators were seeing considerable success. Half of their 200 client businesses were based on ideas brought by new immigrants, and about 70 percent of the 800 professionals employed in these client projects also were new immigrants, according to a report from Israel's Ministry of Industry and Trade. While the incubators provided business training and guidance, they also provided an unexpected benefit: Immigrants' communication skills – in English and in Hebrew – improved tremendously. And in cases where businesses were unsuccessful, the majority of employees found jobs in their respective fields – thanks in part to the training the incubators provided. Finding work for these new immigrants is no longer an issue for Israel, Rubenstein says.

Despite our best efforts, this article by no means represents NBIA's entire membership outside of the United States – we received too few responses to accomplish this goal. So let us know how your nation is making incubation work. We plan to write subsequent articles based on the information we receive. E-mail your creative solutions to news@nbia.org.

What are the most significant challenges you face?

We posed this question in a 2001 survey of NBIA's members from outside the United States. Following is a sample of their responses, which shows that despite the vast cross-section of cultures involved in business incubation, its challenges are universal.

  • "To develop an incubator program which will prove successful both now and after my organization is no longer sponsoring incubators."
  • "The most significant [challenges] are people and value propositions. If these two are right, then money, etc., will follow."
  • "Balancing university and business interests."
  • "To sustain a deal flow of the right type of clients. In fact, we are working on the development of attractions policies, particularly to be targeted to employed persons."
  • "Balancing need for profit in a weak economy with government desire for economic development. To be able to keep both for-profit participants and government at the table and committed for the long term."
  • "Setting up the services offered by the incubator. Training staff in a short time is next to impossible because incubation is all but unknown in Greece and Cyprus."
  • "Explaining to investors the long-term aspects of business incubation projects. Trying to get government to understand those aspects as well as understand that incubation, while long term, needs fast decision making."
  • "Keeping up with ever-changing needs of clients."
  • "Funding!!

Keywords: economic development, entrepreneurial pool, international incubation, policy, mentoring program, woman-owned business

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