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Small business incubators in the
USA: a historical review and
preliminary research findings
Jeffrey M. Shepard
Small business
incubators
213
Xavier University, Cincinnati, Ohio, USA
Abstract
Purpose – The aim of this study was to discuss the historical evolution of business incubators
from 1959 to the present. Three cohort periods were defined: 1959-1979, 1980-1999 and 2000-2012.
The business characteristics of corporate mission, plans and strategies, leadership/management, staff
competence and expertise, facilities and resources and technology were described for each generation.
Design/methodology/approach – The approach of this research was to gain an understanding of
potential best practices and study what has been characteristically significant in small business
incubators over the past 50 years.
Findings – The historical study findings indicate that the basic premise of business incubators
remained unchanged across time. The idea of nurturing a new and fledgling business until it can
manage on its own, much like an incubator does for premature and newborn babies, still provides the
impetus for business incubators today. However, business characteristics have evolved and grown
more sophisticated over the years in response to situational and contextual forces. Certain
characteristics have been retained, while others have undergone change.
Research limitations/implications – In light of the discussion in this research, it is clear that
comprehensive and systematic historical review from literature on small business incubators reveals
that past incubators have provided many lessons for future models. The model has evolved dramatically
but questions still revolve around the current state, and what is essential for future models.
Practical implications – Although various models have been developed to explain the trajectories
of such growth, it is clear that access to a network of business and financial forms of support, patented
knowledge creation, and inter-firm partnerships are crucial.
Originality/value – The value of this research is it defines three periods in small business incubator
history in the USA defining what are consistent best practices for success. In addition, this research
concerning small business incubators serves as a clear comprehensive and systematic historical
review from literature revealing that past incubators have provided many lessons for future models.
Keywords Entrepreneurship, Small business creation, Small business incubators
Paper type Research paper
Introduction
This study discussed the historical evolution of business incubators from 1959 to the
present. Three cohort periods were defined:
(1) 1959-1979;
(2) 1980-1999; and
(3) 2000-2012.
The business characteristics of corporate mission, plans and strategies,
leadership/management, staff competence and expertise, facilities and resources and
technology were described for each generation.
Journal of Knowledge-based
Innovation in China
Vol. 5 No. 3, 2013
pp. 213-233
q Emerald Group Publishing Limited
1756-1418
DOI 10.1108/JKIC-07-2013-0013
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The historical study findings indicate that the basic premise of business incubators
remained unchanged across time. The idea of nurturing a new and fledgling business
until it can manage on its own, much like an incubator does for premature and
newborn babies, still provides the impetus for business incubators today. However,
business characteristics have evolved and grown more sophisticated over the years in
response to situational and contextual forces. Certain characteristics have been
retained, while others have undergone change.
Additionally, the study surveyed 54 incubator managers in the USA to provide a
profile of business incubators and business incubatees today. This profile attempted to
delineate and capture relevant factors in modern business incubation.
General findings from both the historical review and the survey indicate that while
the mission, personnel, facilities/resources and technology has become more cultivated
and refined, human interaction and learning has been rated as of paramount
importance. In other words, even with increased technological advancement and
innovation, this has not replaced the interactive learning process between incubators
and incubatees.
Entrepreneurship and innovation need nurturing. Businesses, like children, are
more likely to thrive when given due care at their earliest stages of development. White
and McLaughlin (2006) stated that one can think of a business incubator as having a
function similar to that of a premature infant incubator. While an infant’s incubator
helps a premature child become strong enough to survive on its own, a business
incubator makes a fledgling company strong enough to survive beyond the first few
years. Although an influential study in 1979 demonstrated that SMEs in the USA
created the majority of jobs in the economy, 85 percent of new SMEs failed within their
first five years of operation. Hence, incubators came to be seen as a means by which
SMEs could be helped to succeed (Birch, 1979; Lalkaka, 2002). Business incubators
offer shared administrative services, management support, linkages to capital funding
sources, and an environment conducive to small business cooperation and growth.
Haugen (1990) estimated that the survival rates of incubated SMEs may be as much as
85 percent – a direct reversal of the overall trends.
Former executive director of the National Business Incubation Association (NBIA)
(USA), Dinah Adkins (Cofield, 2011), held that business incubation is simultaneously a
practice and concept that defines the mutual habitation and growth of
entrepreneurship by providing technical and financial assistance at the conception
and early stages of a business. This modern definition developed from the needs and
track records of SMEs over the years. Tracing the history of business incubators can
contribute to our understanding of how they encouraged and facilitated innovative
processes among SMEs amidst varying political and economic circumstances.
Historical circumstances varied for different generations of business incubators.
Three specific generations of business incubators located within the USA were
identified for this study: the first generation of business incubator history occurred
from 1959 to 1979; the second occurred from 1980 to 1999; and the third generation
began in 2000-2012. In each of these generations, the essential business-incubator
characteristics of mission, personnel, facilities/resources and technology are discussed.
These time periods were chosen because they provided a logical demarcation in
terms of historical events that have affected business, processes and systems. The first
generation occurred after the harrowing war years, when the world had recovered
and was experiencing resurgence in thinking and innovation. The second generation
was the colorful and eclectic era, which saw history and business straddling between
the “hippy” period and the emergence of new technologies. The current generation
rests squarely in the technology era, with globalization and connectivity happening at
an unprecedented scale.
Results for this historical analysis of business incubators for each of the three
generations begin with an overview of the historical context of the economy at that
time and of business incubators in general. This overview is followed by a description
of business incubator characteristics that influenced the thinking, infrastructure, and
operations of business incubators.
Generation 1: 1959-1979
Historical context
Immediately following the Second World War, the USA economy was on the verge of
returning to the pre-war Great Depression. Two million men in various branches of the
military were due to be decommissioned and suddenly become unemployed, or return
to jobs that displaced others into the ranks of unemployed (Adkins, 2002).
After the war, the focus of agriculture in the economy of the USA reduced. In its place
there formed a service economy with a large, educated labor force to supply it and
consume from. In the USA, ideas behind what would become business incubators can
easily be traced to Thomas Edison’s “inventions factory” and Frederick Terman’s
business mentoring for Stanford University graduate students, notably including Hewlett
and Packard of latter day computer fame (Lalkaka, 2002). First appearing formally in the
USA in the middle of the twentieth century, business incubators have since grown rapidly
across the USA and around the world (Brandt, 1991; Bruton, 1998; Hansen, 2000; Haugen,
1990). The first business incubator was founded by Joseph Mancuso in, 1958. He founded
the Batavia Industrial center in New York at a large unused factory (NBIA, 2009). Before
1980, there were fewer than 100 business incubators in the USA (Lalkaka, 2002).
According to Haugen (1990), the first incubators were established in the East and the
Midwest due to the industrial heritage of this so-called “Rust Belt” of the USA. In the
post-industrial era, business incubators were an economic development method aimed at
reclaiming derelict buildings and reducing the unemployment created by
suburbanization and the concomitant exit of large industries from city centers. In this
context, the mission of business incubators started to take shape.
Business incubator characteristics
Mission. Suffering the privations of a decade of the depression and five more years of
war, adult Americans had lost the experience of having and spending money, if indeed
they had it before. The cultural break from “normalcy” was profound (Pursell, 2007).
In many ways, the late 1940 and 1950s saw the beginning of a vibrant, centralized
society and economy even though the changes occurred at different rates in different
cities and regions (Cohen, 1996; Bartels, 2008).
In 1953 the US Small Business Administration (SBA) was created specifically to aid
small business entrepreneurs to start and grow their businesses. The SBA was charged
with:
.
the responsibility of assisting, aiding, counseling, and protecting the interests of
small businesses; and
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.
to ensure that small businesses would have access to a share of government
contracts and be given an opportunity to buy surplus government property on
sale (Adkins, 2002).
Though the first business incubator of record was a private family venture in 1958 to
aid the region in which it was located (Adkins, 2002), it was universities that nurtured
the nurturers, so to speak (Klein, 2012; Strahan, 2008). In the USA, business incubators
generally came to have a partnership with a government body (federal, state, or local)
and a university (Strahan, 2008). Through an amendment Act of 1958 that amended the
initial 1953 act, the SBA was converted into a permanent agency after an initial
provisional period. This decision helped form the mission of business incubators.
Universities took center-stage, acting as the breeding areas for development over
the next two decades (Smilor and Gill, 1986). The business incubator’s mission was to
improve economic conditions by assisting SMEs develop viable business practices
through consulting, education, and training.
Personnel. According to Willing’s (1982) discussion on the beginnings of SBA’s
management assistance programs, there were three reasons that contributed to SBA
implementing volunteer training programs for small businesses. First, there was need to
move the resources of the agency from counseling and instead utilize them for business
loans. This however, was despite the fact that many business arguably failed due to poor
management and not from the lack of credit. Second, the establishment of the volunteer
scheme served to minimize the number of specialists in the areas of procurement and
agency management. Third, the reason that contributed to the creation of volunteer
counseling services for small entrepreneurships was the huge demand for management
assistance, a need which the SBA could not meet adequately. In 1954, barely a year after
its inception, the SBA received pleas for assistance at an average of 5,000 per month
(SBA, 1954). According to SBA data, there were 4,000 business owners who attended
training sessions conducted by the agency annually by 1957. Although the number rose
to 16,000 by 1959, SBA staff contended that these figures were underreported (Brudney
and Gazley, 2002).
Facilities/resources. The first cohort of business incubators provided rental space at
low cost and provided training in management skills to business people (Barrow, 2001;
Lalkaka and Bishop, 1996). Generally, the first cohort of business incubators was
offering dilapidated buildings at cheap rent and not much more (Bhabra-Remedios and
Cornelius, 2003).
The intention was ostensibly to put together commonly used resources (such as
secretarial studies, office space, and telephones) and source for and bring in
business advisors comprising of retired entrepreneurs. In 1980, only about a dozen
incubators existed in the USA. These were mainly located in the Northeast which in the
previous decade had been seriously affected by plant closures (NBIA, 2006). To keep the
companies’ costs low, business incubators provided office space that nobody else wanted
together with a few basic support services (Geiger, 2004).
Technology. Technology in the form of hardware commonly used by business
incubators included copy machines, adding machines, telephones, and eventually faxes
machines which could be shared. Technology in this period was not the focus of
businesses as it would be in the next two generations of incubators. This being the case,
sharing the technology that they used was more of a cost savings mechanism.
Generation 2: 1980-1999
Historical context
A Washington Post (2011) retrospective on unemployment showed the economy of the
USA entered into a recession in the early 1980s that led to double-digit unemployment
rates. Unemployment hit a high of 10.8 percent under Reagan (The Washington Post,
2011). During the early 1980s, when unemployment was increasing in traditional
sectors, policy makers decided to start using business incubators as economic
development tools, as well as tools to help revitalize regions that were devastated by the
unemployment rampage of the period (Lewis, 2001). Some people began to see the value
of creating and expanding new business ventures in order to sustain local economies
while more business incubators were established by communities to offer support to
these new businesses. By the mid-1980s, the SBA strongly pushed for the promotion of
incubator development by holding a number of conferences regionally in order to
disseminate information and create awareness on the concept of business incubation.
It is not surprising that there was a large increment in the number of business incubators
rising from a low of 12 to 400 (Allen and McCluskey, 1990). In the wake of corporate
retrenchment, Allen and McCluskey (1990) explained that small businesses assumed a
prominent role in job creation, investment opportunity and innovation. In so doing, they
became the unexpected backbone of the future USA economy.
In 1982, the US Congress implemented the Small Business Innovation Research
(SBIR) Program (Public Law 97-219) designed to assist small business and enabled
high-technology small businesses to provide critical technologies and expertise to meet
the research and development (R&D) needs of the government (Strahan, 2008).
These second generation business incubators were already providing more
developed services than the first generation, including marketing training and access
to various financial resources (Lalkaka and Bishop, 1996). In the 1980s, research parks
were a relatively new phenomenon. According to Geiger (2004, p. 205), the goal of
university research parks was for faculty in the sciences and engineering to develop
technology through expanded research relationships with industry.
According to a survey conducted by The NBIA in 1998, second generation business
incubators were generally successful.
Technology incubators became popular in the late 1980s. They not only assisted
client firms in research and development (R&D) and technology transfer through
various means, but also helped reduce risk and enhanced the possibility of success. They
fostered the growth of many companies involved in emerging technologies such as
software, medical and bio-technologies, robotics, and instrumentation (Lee et al., 2000).
Business incubator characteristics
Mission. In the second generation of business incubators, entrepreneurship and
innovation became important objectives of state, regional, and federal governments.
Key elements related to high-tech companies include expertise and involvement in
helping incubatees with their goals, marketing, R&D, finance, human resources,
physical services, and law services (Lee et al., 2000). Creating long-term, sustainable jobs
was the original focus of these new incubators. There are several key advantages that a
business gains via the incubator approach.
First, there is business synergy as all sections of a business must be on the same page
in order to make it viable to exit the incubator and enter the “outside world”.
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Second, there is cost savings to be gained for a business in the incubator program
through the services it receives. This includes specialized services such as
administrative services, as well as the ability to gain networking opportunities and
the access to venture capital.
Third, a business can find out about the best practices being used in the industry
since the business gains the assistance it needs to establish a solid footing in the industry
before it graduates from the incubator. Fourth, a business in an incubator program gains
the advantage of goal setting before it graduates from the incubator program. This helps
the neophyte business to target all its resources on the goal it wants to achieve before it
leaves the incubation program, which makes it more likely that it will survive and thrive
in the long-term, as the 80 percent success ratio of all businesses in incubator programs
shows (Doescher, 1988). A successful economic development strategy for many
businesses was to utilize business incubation. According to Doescher (1988), businesses
that are housed in business incubators have an 80 percent survival rate, whereas those
businesses that are begun outside of incubators have only a 20 percent survival rate.
Forrest (1990) suggested that among small technology-based firms (STBFs),
strategic alliances with other firms play a crucial role in growth and success. STBFs
are often characterized as having scientists and/or engineers with excellent innovative
potential but little business acumen. As a result, STBFs struggled to properly market
their products and generate a profit. Given this, STBFs’ competitive advantage
stemmed from their ability to develop innovative products and processes by which to
sustain technological leadership of the field. Forrest claimed that the central means by
which this is most often achieved is through the creation of strategic alliances with
other STBFs, for whom such strategies become a long-term business plan.
Another notion applicable to carrying out the mission of second generation business
incubator was the “interorganizational learning dilemma”. Larson et al. (1998) saw the
learning dilemma faced by firms during the learning process as one that occurs when one
partner exploits another partner in order to maliciously pursue individual business
interests. The authors further warned that technology has increased the virtualness of
organizational resourcing and operations leading to the situation where there is increasing
risk associated with inter-organization learning. Many firms could no longer afford to
ignore the risks involved. They suggested that organizations involved in entrepreneurial
activities collaborate and compromise in ways that maximize transparency and receptivity.
Personnel. Business incubators in this period came to hire administrators who were
part of the program; they provided expertise in an institutional context rather than resting
solely on the voluntary efforts of SCORE. Further, when congress created the US SBA in
1953, part of the authorized activities to fulfill its objectives included offering assistance in
procurement, advocacy, and managerial assistance (SBA, 1977). In fulfilling this task, the
SBA in 1975 formalized the volunteer efforts of dozens of retired executives by forming
SCORE as a non-profit organization in connection with the SBA.
Furthermore, attention was paid to the effectiveness and efficiency of business
incubator managers. Markley and McNamara (1994) emphasized important skill set for
the incubator managers include:
.
the ability to attract the right tenants;
.
the ability to assist the tenants as their businesses develop; and
.
the ability to enforce an appropriate set of operational rules for the facility.
Another important skill pertains to the ability to assist small businesses with
entrepreneurial thinking and business development. The incubator manager
himself/herself must be an entrepreneur.
Facilities/resources. Hernandez-Gantes et al. (1995) conducted a survey among
entrepreneurs and incubator managers in 74 business incubators across the USA. They
found that the majority of entrepreneurs suggested that they were attracted to business
incubators because of the affordable business space and clerical support they offered,
giving them the ability to focus on building their companies.
Markley and McNamara (1994) discussed how networked incubators that encourage
and facilitate the networking between tenants benefit the tenants and the facility itself.
The networking can take a formal or informal form. Common formal methods would
include educational sessions or organized training where tenants come together to
discuss similar problems they face. Common informal methods would include tenants
occupying a common space while doing another activity, such as collecting mail or
messages from the receptionist and discussing their difficulties and challenges in a more
informal setting. Tenants can share technical advice and business experiences with each
other and make valuable business contacts that can benefit their individual businesses,
and support each other as they attempt to build successful firms.
Technology. During this period technological advances facilitated the efficiency of
incubators. While the majority of machines used in the first generation such as
photocopiers and telephones still existed, they were faster and more efficient. For
instance, photocopiers became smaller and faster while telephones were increasingly
automated and could handle a greater number of calls simultaneously. The overall
effect was increase of operating efficiency of incubators and the degree of networking
involved. This generation saw the rise and rise of computing power and speeds. The
personal computer became increasingly common thanks to firms such as IBM at the
beginning of the 1980s. By the end of the 1990s, computers had already revolutionized
information technology through the increased power of personal computers and
through the World Wide Web that was still growing at exponential rates. The overall
effect was to usher in the third generation of business incubators through the
revolution of communications technology marked by increased networking among
tenants and industry professionals.
Generation 3: 2000-2012
Historical context
As of October 2006, there were more than 1,400 incubators in the USA, 20 percent of
which were sponsored by academic institutions (Knopp, 2007). Research parks are
relatively new initiatives in higher education. By the end of the 1980s, 80 percent of
university-related research parks were less than ten years old. Between 1990 and 1996,
five new research parks opened each year (Geiger, 2004). We are now in the third
generation of business incubators, which provide a broader range of business support
services including access to venture capital, networking, and consultancy (EC, 2002;
Lalkaka and Bishop, 1996).
By 2006, more than 90 percent of business incubators were not-for-profit entities that
attended to clients from diverse industries. In this regard, clients from the technology
industry formed the largest group where more than 37 percent of business incubators
were created to attend to the needs of this industry. Regarding location,
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about 44, 31 and 16 percent of business incubators were drawn from urban, rural, and
suburban communities, respectively. The incubator as a force in business – ebusiness –
has arrived. This is largely due to the availability of present-day technology and
increased globalization via the internet. According to the NBIA (2013), the prevalent
types of business incubators in the USA are incubators for mixed-use comprising
54 percent and technology-based incubators forming 39 percent. These two constitute
93 percent of all incubators in the USA. Furthermore, modern incubation services offer a
rich blend of services to successfully assist start-up businesses. This include assistance in
product design and development, manufacturing, human resource, and financial
management. Another notable difference has been the use of business incubation beyond
the traditional technology and mixed-use incubators to a larger variety of specialized
industries such as woodworking, environmental technology and ceramics (NBIA, 2013).
Characteristics of business incubators
Mission. Business incubators began providing professional business services in the
second generation of business incubators but it has been in the third generation of
business incubators that these services became an integral component (Lalkaka and
Abetti, 1999; Lalkaka and Bishop, 1996). Some professional business services provided
in business incubators include business plans, development support (Peña, 2004),
counseling, coaching and mentoring (Chan and Lau, 2005; EC, 2002), and training
(Aerts et al., 2007; Barrow, 2001). Business incubators also directly or indirectly provided
venture capital to the business (Bollingtoft and Ulhoi, 2005; Sofouli and Vonortas, 2007).
Virtual business support has recently emerged alongside the use of web-based
technologies to give business incubators another service they can provide to new
businesses (Carayannis and von Zedtwitz, 2005; Durão et al., 2005; Nowak and
Grantham, 2000).
Third generation business incubators provide access to networks of professional
contacts. In fact, some authors define business incubators as “networks of individuals
and organizations” (Hackett and Dilts, 2004, p. 61). Some empirical studies have shown
that the networking among and between tenants and with graduates is crucial to both
the successes of the individuals and of the companies in the incubator (Aernoudt, 2004;
Grimaldi and Grandi, 2005). Business incubators help to facilitate linkages between
tenants and the most appropriate networks for them to build their social capital
(Bollingtoft and Ulhoi, 2005; Tötterman and Sten, 2005). Increasing social capital is vital
for incubated companies within and without the technology sector (Vohora et al., 2004).
Industry/university (I/U) partnerships for university-based incubator strategies can
particularly help technology-based ventures. According to Santoro and Betts (2002),
I/U partnerships offer powerful alternatives to inter-firm collaborations especially
successful organizations that frequently engage in the highly competitive environment
witnessed today. Through I/Us, firms are helped to generate knowledge and new
technologies that they could never succeed in doing alone. One example that shows
how I/U partnerships can benefit both the industry and the university is the
partnership between Googlee and Stanford University. When Google Inc. was just an
idea, Stanford took the risk of investing in it. That risk is definitely paid off for
Stanford now as Google’s revenues reached $180 million in 2004 (Grimes, 2004).
Personnel. Although this is not a direct formula for creating successful incubators
and or developing the companies within them, the collection of companies in incubators
does provide unstructured collaboration of people that are in similar situations. It is
this collaboration that helps form a perspective of encouragement, networking, and
information collection and sharing. This incubator environment encourages these
activities by creating potential for success.
A typical organizational format in the third generation of business incubators
includes the executive and advisory boards, a CEO (or operations manager), and
various support staff. Sources of selections for positions in the board can come from the
government, educational institutions, private citizens, and private organizations
among others (Zablocki, 2007).
The CEO or manager of the third generation business incubator has the following
major roles:
.
selection of tenant(s);
.
overseeing planning and policy implementation;
.
overseeing marketing activities;
.
staff recruitment; and
.
incubator operations management (Zablocki, 2007).
The manager works with several constituent groups that represent the people who provide
the funding (the sponsors) and the users. The advisory board members are selected by the
manager and through them the manager is able to create and sustain networks that provide
information and policies to these constituent groups (Zablocki, 2007).
Facilities/resources. Starting as a place for inexpensive workspace, incubators have
grown much in complexity in the past 50 years. Many business incubators provide office
space, though some show different approaches such as “hot-desking”, a type of business
set-up where space is shared via each work station having its own computer and each
worker logging into a virtual desktop (Barrow, 2001). The set-up is to take advantage of
office space as much as possible to maximize the output and the capabilities of the
newly-formed and growing business. This is why reception, secretarial, meeting rooms,
conference rooms, and car parking are services that are often provided in the office space
given to those companies beginning in business incubators (Aerts et al., 2007; EC, 2002;
McAdam and McAdam, 2008). Third generation business incubators provide access to
networks of professional contacts. In fact, some authors actually define business
incubators as “networks of individuals and organizations” (Hackett and Dilts, 2004).
Some empirical studies have shown that the networking among tenants and between
tenants and graduates is crucial to both the successes of the individuals and of the
companies in the incubator (Aernoudt, 2004; Grimaldi and Grandi, 2005). Business
incubators help to facilitate linkage between tenants and the most appropriate networks
for them to build their social capital (Bollingtoft and Ulhoi, 2005; Totterman and
Sten, 2005). Increasing social capital is vital for incubated companies within and without
the technology sector (Vohora et al., 2004).
Incubators are funded in many ways and have a series of funding sources.
Incubator sponsoring organizations have come from public, private, and the
not-for-profit sectors. These include governmental urban and regional development
authorities, for-profit organizations such as the US-based Hotbank, CMGI, internet
capital group, and Idealab! Others are not-for-profit organizations such as chambers of
commerce and university research departments. Although the source of funding tends
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not to affect the kinds of services that incubators provide, some important differences
do exist in terms of what kinds of SMEs may receive support, and how SMEs may
develop in general. For example, in the USA, a number of business incubators have
been established only to support firms growing from minority communities or other
economically and socially disadvantaged groups. Others exist solely for high-tech
firms, while still others make space for light manufacturing and artisan firms.
Universities have used incubators to market product and service inventions, thus
securing important revenue streams through the management and ownership of
intellectual property.
Technology. The kinds of technology available have changed just as rapidly and the
sense of what is necessary has increased as well. For example, an incubator based in
Pennsylvania offers diverse range of services ranging from switchboard services, voice
mailbox, clerical services, and electronic mailbox to furniture rental, sports ticket
purchasing, and providing conference room rental services (Lalkaka, 2006).
According to Brandt (2000):
As with traditional incubators, internet versions provide dot-com start-ups with office space,
business information and advice, financial assistance (either directly or by connecting them
to potential sources of seed money), and management, accounting, and other infrastructure
services.
According to internet incubators, these kinds of assistance can provide entrepreneurs
with essential tools to accelerate their all-important “speed to market” in the fast-paced
internet economy.
In addition, this period has welcomed the likes of social media as a means for small
companies located within an incubator to establish a larger presence in the marketplace.
Social media such as Twitter and Facebook have enabled companies to communicate in
real-time with their clients and share information ranging from product releases to key
personal additions. Incubators will continue to watch these advancements and look for
ways to provide additional solutions to their members. Looking forward, we will only
see technology become more important in incubator development as it continues to
evolve (Gale, 2012).
Research findings and implications
To further provide a picture of business incubators and the clientele they serve in its
modern-day incarnation, survey answers of 54 business incubator managers were
analyzed. Data collected from the survey could be open to different interpretations
given that many questions on the survey were open-ended in format. My interpretation
is in accordance with my background as an academic and practicing entrepreneur. The
“temperature taking” or exploratory nature of the questions included on this survey
provided but a general overview of what might be happening among today’s business
incubators. Given this generality and the low response rate among incubator
managers, the findings and corresponding conclusions drawn about this portion of
the study are limited and may not be generalized to all business incubators across the
nation. Nevertheless, the profile that emerged from data collected provides a good place
to begin to envision what is occurring in these incubators with regard to who they are
serving, how they carry out their work as incubators, and values important to building
incubators.
The profile that follows begins with a background on clients served by business
manager respondents. This is followed by a description of the process of “incubating”,
that centers on services provided, facilities and resources needed, and the impact
technology has had on how small business and incubators carry out their work.
Clients served
The two most commonly cited “pre-incubation occupations” of clients served by
manager respondents were “small business owner”, followed by “student”. These two
occupations comprised about two-thirds of clients served. Other clients served included
non-business clients and non-students, each of which represented less than 15 percent of
the responses. Being a small business owner as a “pre-incubation occupation” suggests
these clients had prior experiences in business practices and may be involved in the
incubator process due to a new or innovative business endeavor. My experiences as an
incubator manager and as an entrepreneurial small business owner has helped
me understand the importance of being involved in an incubator when significant
changes in business mission and productivity occur; innovation requires new,
innovative business practices. As a seasoned entrepreneur with almost 20 years in small
business ownership, I understood what was attractive to start-ups about an incubator.
Getting expenses managed along with the collaborative environment helps the
entrepreneur focus on what is important in the process of small business growth.
Creating new mindsets
Managers who responded to the survey identified new mindsets they center on as they
work with clients in developing their entrepreneurial business. One mindset centers on
comprehending the issues or details involved in developing and growing a business.
There are concrete details involved in running a business that managers saw as vital to
the training and education of their clients. For some clients, what is needed is a “reality
check” that moves clients from being overly confident toward an understanding of not
only how to build a new product and run a business, but of the “real” challenges one
might face in the process. This requires attention not only to details but to big picture
views of their business and how it might be situated in today’s markets. Managers hope
that clients become conscious and pro-active in meeting these challenges, rather than
being reactive in ways that can possibly damage relationships and diminish progress.
Incubator managers are about building confidence and wisdom in decision-making
and in taking risks. The majority of incubator managers observed that their incubatees
were willing to take risks for this is what entrepreneurial requires. Risk is a part and
parcel of any business. Having the propensity for risk-taking was crucial, as not all
risks are equal. Successful business decision-making involves being able to correctly
gauge risks to their outcomes. Several managers stressed the importance of helping
clients become both reasonable and responsible in taking risks.
Adaptability is another mindset incubator managers stressed as being important to
running a successful small business in today’s world. Being adaptive means paying close
attention to what is happening in one’s business in the other related business endeavors.
I have witnessed many changes in businesses over the years and see change today is
happening at a fast pace, especially as new technologies continue to evolve and the markets
are increasingly global in nature. I have learned that what was good yesterday may not be
good for today or tomorrow. A majority of the managers viewed their clients “high”
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in adaptability. Further, managers who saw their clients as being highly adaptive in their
thinking also tended to see them having a higher propensity toward risk-taking. The
survey question regarding the adaptive nature of incubatees has provided a perspective on
how an incubator client might build a sustainable business in the dynamic and fluid
business landscape. Related to risk-taking and adaptability is the mindset of overcoming
challenges. Managers identified the willingness and ability to overcome challenges and to
have the perseverance to do so as critical to entrepreneurial small business success.
Profile of the incubation process
Mission. The vast majority of managers who responded to the survey indicated they
had a mission which was clearly stated and used for strategic planning for the
incubator. Although the specifics of mission statements were not a focus for this study,
having a mission statement that is considered to guide decision-making for the
incubators is an important general characteristics of business incubators for it informs
direction and processes for how the incubator work is to be carried out. Of interest to
this study was how managers spent their time working with clients.
Services provided. Incubator managers indicated that they spend much of their time
providing what I called “direct services” to clients. Direct services mentioned by
managers included “mentoring”, “training”, “counseling”, helping, and “working with”
clients. The direct services mentioned by managers suggest a hands-on approach on how
they serve clients. A point of focus mentioned by managers for providing such direct
services to clients is to help them with problem situations and working with them on
client specific challenges, strategic planning, and marketing plans and efforts, investor
relations, investor “pitches”, and creating “mindsets or new ways of thinking about how
they might best manage their business”. The majority of respondents reported that the
advisory role played by incubators in the incubation process is “very important”, again
showing the importance of the services that business incubators provide to their clients.
Managers also spoke of what I called indirect services, that is, services that were not
necessarily “hands-on” in nature, but were important to the education and training of
entrepreneurial small businesses. The indirect services included networking activities,
establishing partnerships, locating resources, managing and searching for strategic
relationships with external parties, identifying economic partners, facilitating
meetings with potential advisors, investors, and mentors. All of these indirect
services were considered by managers to assure the success of their clients.
Operational management also was a service managers addressed in the survey as
being important to clients having a successful incubator experience. Operational
management mentioned by managers included activities such as managing facilities,
the building, and property. Further, it entailed day-to-day management activities that
can enhance the services provided to the incubators’ clients.
Staffing. Managers perceived their staff was highly qualified to both manage and
run the incubators and to provide clients necessary services. Nearly, all of the
managers rated their staff as being “highly” or “very” qualified to engage and assist
clients. Managers of smaller-scale incubator operations, with 15 or fewer clients rated
their staff to be “highly” qualified; whereas, managers of larger-scale incubators tended
to rate their staff as “very” qualified.
Facilities. The incubation process was a combination of providing both services and
facilities for clients. Space was considered to be important to managers to carry out their
work with small businesses since the space and corresponding resources can provide a
climate for learning and growing. I have found that space needs to be convenient for
clients and include amenities needed to learn and grow. This includes all amenities
needed for running any business in today’s world as well as additional lab space for new
product development. Managers indicated that “internet connectivity”, a good “office
location”, “phone system” and “administrative support” were basic amenities for
incubator clients.
Technology. It is undeniable that advancement in computing technology and the
internet have changed how we communicate nowadays. From high-powered
computers to mobile devices such as Smartphones and Notebooks, these pieces of
technological advancement have all contributed in making the way we interact more
efficient. As business is actually a process of interaction between a provider of goods or
services to a buyer, it is safe to say that the more effective the communication channel
is, the more successful the interaction will be. As such, the survey took into account
how technology factors into the success of a business start-up.
Although the questions asked were broad-based, the answers provided seemed to
indicate that technology’s main role in contributing to the success of business start-ups
was by providing the incubatees with better and more efficient means of
communication. Technology has provided us with new communication tools that
were non-existent two decades ago. Today, video streaming technology and the increase
of internet bandwidth have virtually brought video conferencing ability right to the
doorsteps of every networked computer. The survey looked into the aspect of virtual
incubation to see if it had increased in importance compared to the traditional model of
incubation.
To get a sense of the importance and the potential of virtual incubation, respondents
were asked to rate the importance of co-location in the incubation process. The majority
of managers considered co-location as being very important. This means that gathering
business incubatees in the actual physical setting of a business incubator was deemed
beneficial because of the direct and indirect services that can be immediately availed of.
The chance of learning from the business incubator environment seemed to outweigh
the benefits of cost reduction that were the touted as the main advantage of virtual
incubators. Thus, while some managers consider virtual incubation as an option for
businesses unable to transfer to a physical incubator, this will not replace the
traditional ones. Rather, the virtual component will remain an adjunct service and
technology that will aid all types of incubators.
Summary of historical review
The summary of the main highlights of this research can be appropriately done on a
comparative basis by discussing several aspects mentioned earlier, namely the
mission, personnel, resources and technology concerning the first, second and third
generations discussed.
Regarding the mission of the first generation business incubators in the USA, the
main point brought out is that the main challenge at the time was to set-up the kind of
business environment that would take advantage of the rapidly emerging service
industry. There were many opportunities at the time but these were not evident to
many people. Perhaps, the establishment of the USA SBA helped to act as a centralized
focal point for what would eventually be the creation of successful business incubators
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that would follow afterwards. This was through the provision of the assistance which
start-ups desperately needed in the areas of professional advice and linkage to
government departments and contracts. An important point of note at this time is the
important role played by universities in nurturing young businesses and entrepreneurs.
The main highlight of the mission for the second generation was that entrepreneurship
and innovation became important goals of state and regional governments as
technological innovations increased. Incubatees received help in issues such as
marketing, research and development, and law services. Further, long-term job creation
became an important goal for the incubators.
The mission of business incubators during the third generation expanded further.
Provision of professional services expanded markedly in comparison to the second
generation. These professional services include formulation of business plans,
coaching and mentoring and training. Financial innovations also expanded through
venture capitalism. Further, advanced technology has enabled virtual business
support. For instance, the internet has facilitated inter-incubator services on a global
scale. Therefore, the expectations of the modern incubator have gone beyond those of
merely providing office space.
Regarding resources/facilities, the main hallmark of the business incubators during
the first generation was the provision of low-cost space and some management training
to business people. The offices were situated in run-down buildings which attracted
cheap rent without additional amenities. Support to small start-ups was minimal since
the main concentration was on established businesses. Further, small-scale
entrepreneurship was not predominantly taught in business schools.
Regarding resources in the second generation, offering of relatively cheap space was
important. However, the aspect of networking among incubators increased. For
instance, tenants of a space would organize to have common training where they would
share their experiences. Informally, they would collect mail for one another among
other communal activities. Indeed, the main feature difference from the first generation
was that networked incubators could form partnerships with other start-up teams and
facilitate the flow of information or knowledge across firms. The second generation
nurtured the view of the economy existing as a networked economy.
The third generation saw increased complexity of incubators compared to the first
two generations. The ideal workspace is still a cheap and large space but cheap spaces
are increasingly hard to locate. Therefore, incubators have had to become innovative in
the quest to maximize diminishing workspace available. One way this has happened is
“hot-desking”. This is a type of business set-up where space is shared with each work
station having its own computer and each worker logging into a virtual desktop so that
little space is utilized by maximizing output. Further, tenants share many overhead costs
such as conference rooms, internet connection, receptionist services, and laboratory
services among others. Another notable difference is the degree of networking of
professional contacts. As discussed in the main essay, the success of incubators lies in
the degree of networking among tenants and among other professionals in the wider
sphere.
Technology during the first generation was much less advanced compared to the
preceding two generations. This consisted of adding machines, telephones, fax machines
and photocopiers which could be shared. Other facilities such as laboratories were also
shared. However, technology was not of significant focus during this generation.
Technology during the second generation was marked by the use of the same
machines as the first generation but the machines were now smaller, faster and utilized
less energy. The main feature however, is the growth of the personal computer and the
World Wide Web. These brought about significant differences in the operations of
second generation incubators compared to the first generation especially with regard to
business networking. Further, innovations in information technology paved way for
the emergence of the third generation of business incubators.
Technology during the third generation is characterized with the increasing
manner in which it is possible to communicate with contacts across different ends of the
world in real time. In addition, social media tools such as Twitter and Facebook have
become important components of communication where businesses can communicate
with their customers all over the world in real-time. Furthermore, it is now easy to
establish virtual communities where customers, peers, and professionals can meet and
exchange ideas regarding a particular product or service. It is important to note that
technological innovations are still emanating from inventors and developers alike.
In light of the discussion in this chapter, it is clear that comprehensive and
systematic historical review from literature on small business incubators reveals that
past incubators have provided many lessons for future models. The model has evolved
dramatically but questions still revolve around the current state, and what is essential
for future models. Although various models have been developed to explain the
trajectories of such growth, it is clear that access to a network of business and financial
forms of support, patented knowledge creation, and inter-firm partnerships are crucial.
Conclusion
This study has achieved its objective – to create an exhaustive profile of business
incubators by considering various aspects concerning the operations of the incubators
through the three cohort periods mentioned.
To achieve the objective, it was necessary, through a literature review, to trace the
development of business incubators in the United States through three cohort periods
or generations defined as first generation incubators (1959-1979); second generation
(1980-1999); and third generation (2000-2012). Further, an open-ended survey filled by
incubator managers to investigate incubator characteristics and to make a profile of
business incubators in the USA was conducted. With the literature review providing
the necessary background, the survey findings helped to develop an overall picture of
the profile of business incubators in the USA.
From the literature survey, it is evident that during the first generation, the business
incubator’s mission was to improve economic conditions by assisting SMEs to develop
viable business practices through consulting, education, and training. The second
generation incubator’s mission was to foster entrepreneurships, innovation, and to create
long-term and sustainable jobs by improving incubates skills in the areas of marketing
R&D, finance, human resources, physical services, and law services. Third generation
incubators offer services such as assistance in the writing of business plans, development
support, counseling, coaching and mentoring, training, provision of venture capital for
businesses, and to provide access to networks of professional contacts.
Regarding survey findings, investigations were conducted along the lines of:
.
background of clients served, that is, the actual clients served and the creation of
new mindsets; and
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.
profile of business incubators which included the aspects of mission, services,
staffing, facilities, and technology.
Regarding the background of clients served, findings indicate that incubator managers
mainly assist incubatees who are mainly the small business owner and students
(comprising two-thirds of clients served). Other clients included non-business clients
and non-students. Further, the survey findings suggests that these clients had prior
experiences in business practices and may be involved in the incubator process due to
a new or innovative business endeavor. Concerning the creation of new mindsets, the
survey found that managers who responded to the survey identified new mindsets they
center on as they work with clients in developing their entrepreneurial business.
The first mindset concerns comprehending details involved in growing a business
where managers surveyed indicated that clients need to be realistic in their
expectations. The second mindset according to managers surveyed is that clients
require being proactive rather than reactive in facing challenges that may arise.
The second area surveyed is on the profile of business incubators. First, on incubator
mission, most managers surveyed indicated that the incubators they manage have a
mission statement. Second, on services provided by incubators, surveyed managers
indicated that they offer “direct services” to clients such as mentoring, training, and
coaching which were deemed as being very important services to incubatees. Incubators
also provide “indirect services” such as networking activities, establishing partnerships,
locating resources, managing and searching for strategic relationships with external
parties, identifying economic partners, facilitating meetings with potential advisors,
investors, and mentors. These services were pre-requisites to success of clients served.
Incubators also provide operational management such as managing facilities, the
building, property, and entailed day-to-day management activities that can enhance the
services provided to the incubators’ clients. Third, on staffing, survey findings indicate
that managers viewed their clients as highly qualified in attending to their designated
tasks. Fourth, on facilities, survey findings showed that working space was important
but in addition facilities such as lab space for new product development was vitally
important. Here, important facilities include internet connectivity, phone system, and
good office location. Fifth, on technology, findings indicate that technology played a
main role of providing better and more efficient means of communication for instance,
video conferencing. Here, findings indicate that the aspect of co-location was very
important. Whereas virtual incubation is revolutionary by virtue of advanced
communication technology (e.g. teleconferencing), actual physical setting of a business
incubator is important due to the direct and indirect services that can be immediately
availed and the chance of learning from the business incubator environment.
This appears to outweigh the benefits of cost reduction associated with virtual
incubators.
In light of the above summarization, several observations can be deduced. First,
business incubators have changed greatly in the last 50 years. However, it appears that
incubators shall continue to change and evolve as time goes due to ongoing rapid
technological changes that occur. Second, it appears that success on business incubation
relies as much as on how incubatees are mentally tuned to handle their businesses
as much as on how they are provided business and technical skills. Indeed mental
preparation might even be equally important to incubatees as is the acquisition
of technical and business skills. Third, co-location can never be completely ruled out
even as virtual incubators are embraced due to technological capabilities. It is therefore
of interest for more research needs to be conducted to determine the level to which actual
business co-location shall remain relevant relative to virtual incubation.
Whereas a good profile of business incubators has been achieved it is evident that
there is room for more research to be conducted. For instance, more needs to be known
concerning the nature of “indirect services” offered by incubators to incubatees and
how these can be improved. The study proposes that more research needs to be done in
this area.
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Appendix. Summary profile of business incubators
A preliminary profile was established based on the responses of the managers of present day
incubators. The generalizability of this initial profile was limited due to the small sample size and
the exploratory nature of this study. However, creating a picture of business incubators may help
people understand the current trends and directions and possible future applications. Below were
the relevant points gathered.
Clients
(1)
(2)
(3)
(4)
(5)
59 percent of the incubator managers surveyed are serving small businesses.
31 percent are serving students.
Larger incubators are more likely than small incubators to serve students.
89 percent of the manager see clients as being risk takers, but not adversely so.
66 percent see their clients as being able to adapt; those who are risk takers are also likely
to be seen as adaptive.
(6) Crucial traits for success include:
.
Overcoming challenges (63 percent).
.
Risk taking (44 percent).
.
Organizational and leadership skills (20 and 24 percent).
Mission
(1) 59 percent have a mission statement with 65 percent stating that it is extremely
clear.
(2) 98 percent stated that their business plan supported the mission statement.
Staffing
(1) 93 percent are qualified to operate an incubator.
(2) 94 percent are highly qualified to lead a business.
(3) These traits are desirable for business incubator personnel take on both roles in equal
measure. This is especially true of business incubator managers.
Services
(1) Advisory role rates at 61 percent in importance. This is rated to speed up the learning
process by 98 percent.
(2) Incubatees learned new skills by 49 percent when they agreed to undertake incubator
services.
(3) 38 percent held that business incubators provided an important reality check to business
situations.
Management
(1) Client services and organizational management accounts for the two main occupations of
incubator managers.
(2) For client services, a great number of incubator managers spend 70 percent of their time
in direct client services such as mentoring, advising, and counseling. The other 49 percent
is spent on indirect services such as setting up meetings, networking and the like.
(3) For organizational management, day-to-day task handling and implementation
assistance accounts for 65 percent of managerial services provided by incubator
managers.
Facilities/technology
(1) 83 percent mentioned office location as significant.
(2) Administrative services and facilities rates 65 percent while mentoring rates 59 percent.
(3) A great percentage seems to focus on current day technologies with an overwhelming
93 percent stating internet services as paramount.
(4) The resources that are worth noting are 74 percent phone systems, web hosting
24 percent, accounting 15 percent and legal 19 percent.
About the author
Jeffrey M. Shepard is part-time Faculty at Xavier University in Cincinnati, Ohio. He is also an
Adjunct Professor at St John Fisher College in Rochester, New York. In addition, he serves as
Executive Director of the National Center of Innovation and Entrepreneurship in New York. He is
currently CEO and Chairman of Medacheck LLC, a health IT company focused on health care
applications. Dr Shepard’s academic research examines past and future models of accelerators
and incubators and their relationship to entrepreneurs that reside within them.
Jeffrey M. Shepard can be contacted at: jeffreyshepard@me.com
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