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Mixed-use Incubator Handbook:A Start-up Guide for Incubator Developers
Mixed-use Incubator Handbook:A Start-up Guide for Incubator DevelopersAugust, 2009This report has been prepared byMark Davies, BusyInternetwww.infodev.org
The findings, interpretations and conclusions expressed herein are entirely those of theauthor(s) and do not necessarily reflect the view of infoDev, the Donors of infoDev, theInternational Bank for Reconstruction and Development/The World Bank and its affiliatedorganizations, the Board of Executive Directors of the World Bank or the governments theyrepresent. The World Bank cannot guarantee the accuracy of the data included in this work.The boundaries, colors, denominations, and other information shown on any map in this workdo not imply on the part of the World Bank any judgement of the legal status of any territoryor the endorsement or acceptance of such boundaries.The material in this publication is copyrighted. Copying or transmitting portions of this workmay be a violation of applicable law. The World Bank encourages dissemination of its workand normally will promptly grant permission for use. For permission to copy or reprint anypart of this work, please contact info@infodev.org.This report was commissioned by the Information for Development Program (infoDev) and theWorld Bank Group, and prepared by Mark Davies (BusyInternet).3
ContentsIntroduction to IncubationWhy Business Incubation?What Challenges do SMEs face?Understanding the modelsIncubator ExamplesUnderstand your MarketCustomize Your ModelWrite the Business PlanKey ConsiderationsDesign SmartIncubatePartners & InvestorsFinancials NeededRollout Schedule567810111415162123252628This handbook is designed to help you think through the issues involved in establishing anincubator. This first edition will be revised and expanded over time as we determine the targetaudience and information required.Feel free to use this information as you see fit under an Attribution-Non-Commercial-NoDerivative Works 3.0 United States License.4
1. Introduction to IncubationBusiness incubation formally began in the US in the 1960s, and later developed in the UK and Europethrough various related forms (eg. Innovation centres, technopoles/science parks). It is recognized as away of meeting a variety of economic and socio-economic policy needs which can include: Employment and wealth creationSupport for small firms with high growth potentialTransfer of technologyPromoting innovationEnhancing links between universities, research institutionsand the business communityIndustry cluster developmentAssessment of a company’s risk profileIn general, an incubator is a physical location that provides a defined set of services to individuals orsmall companies. This may include specific types of office space, flexible lease terms, access totechnology, financing, and technical assistance (such as marketing, legal, finance, HR, and otherbusiness development services). By locating similar or complementary entities in proximity to eachother, the incubator may also play a critical role in promoting knowledge transfer, both formally andinformally.Recently in developing countries, and under the guidance and promotion of infoDev, incubation hasbecome an interesting approach to accelerate the development of technologies, industries andbusiness skills. However, it should be noted that the needs of these communities can often beradically different to a more mature corporate environment where education, business training, andpublic institutional support may be a completely different context to Europe and the United States.This document is aimed at the context of developing countries, and is intended to be a useful tool foranyone considering setting up an incubator. These are the key questions that should be consideredand what we hope to introduce in this booklet: Why business incubation?What challenges do SMEs face?What are the models of incubation?What should I consider for my market?How do I determine the feasibility of such a concept?What are the steps required to get up and running?5
2. Why Business Incubation?Understanding the role that SME’s play in the national economy and providing them withadequate office space doesn’t explain the value proposition of this initiative, or what makes itso unique. Young companies are particularly vulnerable in their early/start-up years, andparticularly in Africa where there is a higher percentage of inexperienced workers startingbusinesses. A lack of exposure to the formal sector’s mature corporate governance (due to awidespread lack of employment opportunities) means that there are a significantly higherpercentage of students or inexperienced entrepreneurs trying their luck at starting companies.ICT start-ups tend to attract technology professionals with little business experience. Further,the start-up environment can be significantly more hostile in a developing economy, whereservices remain inadequate, inaccessible or expensive. In a report quoted by the US SmallBusiness Administration, the data shows that, across sectors, 66 percent of newestablishments in the US were still in existence 2 years after their birth, and 44 percent werestill in existence 4 years after1. Other analysts claim failure rates as high as 60 percent in thefirst five years and some anecdotal evidence in South Africa would even suggest it may reachup to 80%.Although these rates remain controversial, it’s broadly accepted that incubation programmescan increase survival rates dramatically when programmes are well-run and start-ups pay forservices: "Our experience has shown a success rate of 75-81 percent for companiesparticipating in our incubation programmes" says Jill Sawyers, of The Innovation Hub inSouth Africa. Similar results are found at the Bandwidth Barn in Cape Town (started in 2000)with a tenant success rate of 65%: “In the past five years, of the 142 businesses that havepassed through our doors, 111 of them are still in operation. This overall success rate isastonishing considering that most companies come to the Barn with little more than a laptopand a dream," (Odette Potter, general manager of the UUNET Bandwidth Barn). In additionto the provision of physical space, clearly there are critical interventions that can be made byincubator programs that significantly help these individuals, such as management coaching,mentors, help in preparing effective business plans, administrative services, technical support,business networking, advice on intellectual property, and help in finding sources of financing.It is clear that the critical success factors for these incubators include: volume of companies co-located is important as it leads to natural clustering &collaborationentrepreneurs will learn more from each other, and other businesses, than‘consultants’combining start-ups with mature companies in same building encouragescollaborationdiversified models (incubation office rentals) keep programs sustainable andindependentnot being 100% publicly funded keeps incubator focused on tenants and servicesprovidedstrict entry criteria (focused on innovation & implementation) can ensure highsuccess rates1Survival & Longevity in the Business Employment Dynamics Database" Amy E. Knaup, MonthlyLabor Review, (May05)6
investors/entrepreneurs seeking to make new equity investments can be leveraged asmentorsbusinesses seeking future clients can provide discounted professional servicesa strong manager who monitors both mentors and companies is keyuse managers who have entrepreneurial experience and can ‘relate’incubation programs can remain lean and cost effective with few employees (2)ensuring tenants pay for services screens out those that are not somewhatcommercializedincubators create a climate of collaboration & networking from the start3. What Challenges do SMEs face?Small and Medium sized businesses across Africa face many and varied challenges to theirgrowth and operations. Incubation projects are designed to address the following challenges,which are particularly acute for ICT enterprises: Appropriate office spaceAppropriate support servicesProfessional networkingAppropriate office spacePoor electrical & water: SMEs need first and foremost an appropriate infrastructure in abuilding. This consists of dependable and redundant power supply, appropriate electricalinstallation, power conditioning for sensitive equipment, and water. This is rarely available inthe cheaper office rentals that most start-ups and small enterprises can afford.Expensive Internet: ICT SMEs need good and low cost connectivity to the internetbackbone; preferably a fibre optic connection that has less interference or latency than awireless/satellite link. Most SMEs need to arrange their own wireless or DSL data linkswhich prove to be less reliable and more expensive than if they could pool resources anddemand and push for wholesale pricing on bulk connectivity options.Inflexible lease terms: leases can often be paid as much as three years in advance and do notprovide flexibility in terms of changing the terms of the lease, or expanding or contractinginto additional space as the company grows or contracts.Individual Resources: companies generally have to provide their own resources, likegenerators, receptionists, security, kitchens, water tanks, internet connections as they cannotrely on other building tenants for maintaining shared resources. An ICT SME is going to bemuch more vulnerable to downtime than other SMEs – it’s like a factory, no power, noincome. ICT service industries supporting global customers need a 99% uptime. Buildingyour own infrastructure and environment in an older building is expensive to setup, andexpensive to maintain.Unattractive locations: SMEs will often locate in the cheapest real estate available and thiscan project a negative image to potential customers – often taking a garage or floor of ahouse, or locating in a crowded market area. Image is important for an aspiring SME trying7
to establish its credibility, especially one that has just a few employees and is seeking to getservice contracts from larger corporations.Appropriate support servicesMost SMEs are launched by aspiring entrepreneurs who have had no previous experience,possibly even little exposure to a mature corporate environment. The enterprises are notplanned appropriately, markets are not assessed, products not commercialized, marketing notadequate or imaginative, and good corporate governance frequently lacking. There is a crisisacross Africa due to the nature of a tight labour market and few good opportunities foremployment for the annual graduating students where they can watch and learn best practices.Business Plan competitions encourage individuals, understandably but regrettably, to embarkon their own projects. They have little access to financial products and services, little trainingin project management and scheduling, and are unaware of basic business practices likefeasibility studies. Worse still, they are unaware of the people, networks and supportprograms that do exist that could be of assistance.Appropriate Professional NetworkingKey to the development of an entrepreneur is their exposure to other professionals. This canbe in the form of good employment opportunities that reinforce best practices in businessmanagement. But it is frequently a mentoring relationship that exists between anaccomplished professional and a bright, ambitious younger person; sharing ideas, techniques,visions, or criticisms. These relationships can frequently develop into funding opportunities,business contracts, or even employment. Whereas this form of industry networking andlobbying is well developed in Europe and the United States, it appears inadequate in Africa,and can be possibly linked to the size of some markets and thus increased competition, rivalryand mistrust.4. Understanding the modelsUnderstanding incubators you must understand the startup cycle of a ncubationexpansionmaturityThe cycles of business can be directly related to the types of interventions that SMEdevelopers can participate in. For purposes of clarity, we have defined three types ofinterventions:GerminateThis is the very earliest stage of intervention, where you areIdeas8
Preincubationhelping an individual with an idea. Some incubators canafford this kind of activity where they can access publicsupport or private risk capital. This is often required in hightech innovation industries and with incubators closelyattached to Universities. Sometimes this innovation comesout of need, rather than opportunity, and is very risky.ExpensiveRiskypublicIncubateincubationThis is where an idea has graduated to a plan, with a team,and operations have begun. Incubators can help refine theplan, build the team, provide resources and invest in thecompany. This is also a relatively early intervention, beforethe company is profitable. Companies are often not able topay for services, and assistance is general. Also known as‘acceleration’ this focuses on more mature start-ups(Companies can pay for services, and need edHostPostincubationThis is where a profitable company merely seeks a particulartype of facility. No intervention is required by an incubator,but we include it here as we feel many incubators act ashosts to some companies, for some period of time, and thisrelationship with mature companies can be a crucial strategyto assist with and subsidize their other cubateeGerminateRiskyExpensive9
Most incubators are not single-purpose. They may provide assistance to very early stagecompanies (germination) as well as mature companies (tenancies). This mixed use model isparticularly appropriate where a diversified revenue model is required. To some they perhapsare serving only as a landlord, and to others they are deeply involved providing financial andbusiness development support. The key is to build a model for yourself that allows you to stayflexible both in terms of what type of incubation you provide, and to what kind of companiesyou incubate.This flexibility will allow companies within your organization to move from one stage ofevolution to another, while remaining a ‘customer’ of the incubator. It also allows you torespond to the market and adapt to the demand that you recognize. This flexibility is often notassociated with classical types of incubation, but is driven by the context of the developingeconomies in which this handbook is focused. An incubator should build flexibility in fromthe start and be able to act as a landlord to some tenants, while as agerminator/incubator/accelerator to others. A fluid approach can be crucial to survival.5. Incubator ExamplesSome examples of incubators and how they are classified:As one of the world’s best-known innovation centres, MIT might not beconsidered a classic incubator for businesses, but it is a germinator,enabling young people to develop new technologies that could becomebusiness opportunities. It is very early-stage germination activities,closely linked to research and innovation and located close to Harvardand Yale Universities in the United States.germinatorA classic example of a US-style dot-com incubator, IdeaLab turns ideasinto businesses through a direct, deep and extensive intervention andbusiness development cycle. Huge capital is required to run an incubatorof this nature, and companies incubated provide a return on investmentby going public or being sold. This exit strategy is not available in manydeveloping countries and thus such capital intensive programs can belimited.germinatorThe Bandwidth Barn provides business support and infrastructure tosmall and medium sized ICT businesses in the Western Cape, SouthAfrica. It’s a mixed use incubator with some start-ups and some maturetenants.Mixed UseacceleratorBusyInternet is also a mixed-use incubator that has acted as incubator,accelerator, landlord to a variety of different clients over the past sevenyears. Profitable and popular, Busy is best known for its flexibility as amodel, and for the public services that it offers to complement the SMEservices it hosts. Busy has pioneered the ‘broad & shallow’ approach.Mixed useincubatorA global network of fully equipped offices and meeting rooms providesbusinesses of all sizes and stages with exactly the space they need tosucceed. But Regus has no integrated social program to help SME’s or torequire existing tenants to provide support or networking to others.Landlord10
6. Understand your MarketOf course, setting up an incubator is 1% about what you want, and 99% about what’s right forthe market. So you need to think carefully about the kind of environment you are working in.Here are some key areas to consider: Real EstateThe simplest and often most important issue to consider is what the real estate marketlooks like for SMEs. If there are many spaces available, at low cost, with goodservices like electricity and internet connectivity, then your facility will be competingdirectly with the rest of the market. You need to understand this aspect of theenvironment because a most incubators live or die by incorporating some aspect oflandlord Real Estate rentals that has little to do with ‘traditional’ incubation. Anchortenants can serve to protect your revenue stream in the event that government fundingor donor support is not forthcoming for other riskier and expensive types ofincubation. So if you can determine that there is market demand among SMEs forgood office space, with a decent profile and address, and can provide excellent andaffordable services like telephone, electricity and internet, and then you have a verystrong foundation, or guarantee, that your investors will appreciate. In other words, ifall else fails, your business could revert to being a simple landlord/real-estate play, andthis can serve as the foundation for investment. In many developing countries it is verydifficult for new businesses to find locations that fit the ‘profile’ or image of theirtarget market. It may be difficult to find buildings that are wired with voice or data.And it may be difficult to find places where they can easily access other types ofcompanies and services. So having a very good idea of what the current market is likefor a start-up is critical to guaranteeing the profitability of your enterprise. We willlook later at how you can determine this.Questions to be answered: How much office space exists? What is the nature of thatoffice space? What seems to be lacking? What are the current occupancy rates? Whatare the average charges for an office? What services are generally provided? Whatdoes a cross section of SMEs say they are lacking? What are they willing to pay? CultureUnderstanding the culture of innovation in your community is also critical as thatserves as an important metric both in terms of how you may determine market demandfor the kinds of services you will be offering, and also will help you design the leveland nature of services that you are considering. In many developed economies, thereare established cultures of entrepreneurship, role models, success stories that serve toprepare and educate the broader population. If that is different where you are, then youneed to consider building into your program a way to change attitudes and seedcultural changes. Changing awareness in the broader community by providing publicprograms about opportunities and sharing ideas about new technologies and basicentrepreneurship skills can shape the model you develop: focus on going broad andshallow in your incubation activities because there is a market opportunity (andchallenge) within your community. It’s also important to understand the difference ofentrepreneurship out of necessity versus entrepreneurship out of opportunity. A goodunderstanding of your community will also enable you to add related services thatcould subsidize some other incubation activities. if the community aspires to11
technology, and positively associates with high-tech, then offering cinemas,restaurants, and other entertainment options around your core business will be asignificant business opportunity. IndustryWhat are the key industries and activities that are already established in youreconomy? How may you play an active role in meeting the demands of thoseindustries? What is the competitive advantage that your economy may present to theincreasingly global economy? This is also critical in understanding so that theincubator can fit into an already existing economy. If tourism is the mainstay, thenconsider shaping the incubator as a retail outlet for tourism start-ups. If trade andagriculture, then consider the location. If high-tech then consider the equipment andresources offered at the centre so that SMEs can take advantage of group access tootherwise inaccessible capital equipment. Understanding the local industries andprofiling them are critical to understanding how your facility may serve a community.Whatever industries are targeted by your initiative, these should be profiled: howmany companies exist? What percentage could possibly seek services from you? howis it projected to grow over time? Industry-specific incubators are particularlyvulnerable, and so if you want a software incubator, or an agri-business incubator, youmust understand those industries well as you prepare your business plan. PolicyWhat is the policy framework in which you are considering to operate? What role doesgovernment or other public institutions aspire to play in the development of SMEs?What real action or policy has emerged from these aspirations and what can yourealistically expect from the public sector in terms of advocacy or financial support forthe work that you wish to undertake? A good understanding of what realistically canbe expected from the public sector will also help you shape your model, and determinehow far you may go in expecting public subsidies to support some of your more noncommercial activities at the centre. EconomyOverall, how has the economy performed in the last few years? Is the country growingor contracting? What kind of projections can you make to determine the growth ofSMEs to meet demand overtime? Looking at GDP, inflation, and getting some othermetrics and understanding of the market is key to be able to approach investors andsay that there will be a continuing and growing SME sector that you are going toservice. Stagnant economies, or contracting ones, should be a warning sign that youcannot predict growth in this area, and thus your model must be tailored with that inmind.12
Here’s a checklist of what you need to know:Real EstateCulturePolicyIndustryEconomy# of Office spacesOccupancy RatesQuality of OfficesServices offeredMarket DemandCurrent ratesShop ratesFuture ProjectionsPlanned NewbuildPopular AttitudesSuccess StoriesEducation PolicySocial ChangeGovernmentResults to DateFuture PredictionsStandard of ServicesPublic FocusReal CommitmentDemonstrable resultsKey IndustriesTarget IndustriesInitial SurveysProjected GrowthKnownConstraintsRequirementsGDP GrowthratesTrendsDays to startupDoingBusinessDestinationrankOut of this survey of the market, you would be able to understand what kinds of companieswould be attracted to your product, how many there are, what they may pay, what kind ofproduct you should be offering, what blend of services, and whether or not the governmentand overall economy can be counted on to participate and support your initiative. In the end,you need to rely on your head to do the thinking, but you need to follow your heart in terms ofhow appropriate the idea is to serve your community, and how well the community willreceive and support it. You have to be an entrepreneur to open an incubator, and you need torun it as a business. Incubators that are run as charities will not be driven by their customersand cannot relate to their needs.Market surveys and counts can look at ICT related businesses and categorize themaccordingly. Simple overviews that take into consideration the age, rank and size ofcompanies in a particular sector and can make sensible predictions for the future will giveyour incubator a good chance to refine its focus and tailor its product offering.AgeRankSizeRankAgeSizeless knownknown ll business/micro-enterprisebusiness/medium enterprisebig business/big enterpriseles than 4 yearsfrom 4 – 6 yearsmore than 6 years1-5 employees6-29 employees30 employees and above13
7. Customize Your ModelOnce you understand the market, you can then proceed to formulate a picture and model ofwhat will be appropriate. In general, you should consider your incubator as a real-estate play,with the ability to survive as a landlord only. Then if that strategy is successful, you can thenwork out how to subsidize more incubator-like activities. This foundation allows you to besustainable on your own terms in markets where public support or external financing cannotalways be relied on.If you can identify that there is a market opportunity and match it to a specific group ofindustries (high tech or service oriented) then you can develop a product that is differentiatedin the marketplace and can be easily understood in the media. If you can associate an industrylike software, or tourism, or agriculture, then that focus may enable you to attract furthercollaboration and investment from focused public institutions or universities.In the event that a university, government or other donor is willing to provide you withsubstantial and guaranteed funding over a period of time, then you can consider more‘germination’ like activities where you are taking aspiring entrepreneurs on board (those whoare really just starting up with an idea, but are not operational). This is particularly relevantwith high-tech companies and truly innovative industries. Locating close to that institutionwill be critical in this regard.Without much public or strong institutional support, you move to the other end of thespectrum and create an accelerator model, where you focus on companies that are already ableto pay for the services that you offer, and perhaps blend this with retail shopping services inthe building that are directly related to the sector you are seeking to serve.As stated before, all incubators will have a blended approach which allows them to stayflexible, and give them some independence over the program they seek to run. In some casesyou may state that x percentage of the building is focused on full-fee paying tenants, and theyare leveraged to subsidize the rentals and services offered in your incubation program. It’scritical that you find this blended approach and build flexibility into your model.14
8. Write the Business PlanWriting a business plan will systematically record and layout all the assumptions that youhave made by looking at the market opportunity and the demand from your target market. Inessence, it is both a feasibility study, and a roadmap to move forwards and attract investment.It will be an overall presentation of what you plan to do, what kind of competition may existin the marketplace, who will be part of your team, which partners you’ve identified, andwhere you will locate the business. It will also indicate a five year financial plan and proposedinvestment structure. Here’s an outline of what your business plan should include:Non Disclosure InformationContentsExecutive SummaryBusiness OverviewSummary of Financial InformationSummary of Proposed TermsBusiness Opportunity & HighlightsBackground InformationThe PlanInvestment HighlightsInvestment ConsiderationsIndustry OverviewMarket IndicatorsMarket segmentationTarget market segment strategyParticipantsSector AnalysisCompetitionBarriers to entryBusiness Description & StrategyCompany LocationBuilding DescriptionProducts & ServicesIncubator ProgramCompetitive ComparisonMarketing strategyStrategic AlliancesManagement SummaryOrganization ChartTeam DescriptionsFinancial ProjectionsKey Financial AssumptionsIncome StatementBalance Sheet & Cash FlowAppendix DocumentsRollout ScheduleSite DetailsConstruction QuotationsMeeting Room RatesPotential TenantsOrganizational ChartSalary EstimatesOffice SurveyTarget Industry SurveyProject AdvertisementLease ProposalStatistics & IndicatorsMacro Economic IndicatorsTarget Industry StatisticsDoing Business IndicatorsNetwork & Systems Installation15
9. Key ConsiderationsExecutive SummaryBusiness Overview This is a brief introduction to the reader to the proposedinitiative. It should cover the mission, strategy and marketopportunity in broad terms so that in one page, a potentialpartner or investor can understand what you are trying to do,and how you are going to accomplish it. It should cover thebackground information about SME development, the case forbusiness incubation (and an explanation of what incubation is)and the services that you will offer at your centre.Summary of Financial Information This summary will indicate the amount required, theinvestment, the rate of return, expenses, revenues, growth rate,the projected EBITDA and EBITDA margins, cashflow andannual rental yield.Summary of Proposed Terms This is a one page summary that outlines the purpose of thefunds, the proposed investment amount, the split betweenequity and debt, the board representation, the shareholdingstructure, and investor rights.Business Opportunity &HighlightsBackground Information This outlines the challenge faced by small businesses, and themarket demand/opportunity that exists. It may outline the stateof office space and how easy or difficult it is to acquire, and itmay outline what other types of business development servicesare lacking or inaccessible in the market.
Understanding incubators you must understand the startup cycle of a business. The cycles of business can be directly related to the types of interventions that SME developers can participate in. For purposes of clarity, we have defined three types of interventions: Germinate This is the very earliest st
