THE BUREAUCRATIC CREATION OF ENTREPRENEURS: A CASE OF THE
UNIVERSITY RELATED INCUBATOR
Branko BUČAR, University of Ljubljana, Faculty of Economics
Address all correspondence to:
Branko Bučar
University of Ljubljana, Faculty of Economics
Kardeljeva ploščad 17, 1000 Ljubljana, Slovenia
Email: branko.bucar@uni-lj.si
Abstract:
This paper provides an ethnographic account of the conflict of taking credit
between groups of Venture Growth1, Inc. (VGI - incubator) staff and entrepreneurs,
where VGI seeks to increase its power through community recognition and control of
resources and entrepreneurs try to run their companies independently but rely on VGI for
space, counseling, contacts and services. Charles Perrow’s (1986) concept of goal
displacement and Alvin W. Gouldner’s (1960) concept of reciprocity are combined to
understand the conflicting, yet symbiotic relationship between the two groups. Exchanges
between VGI staff and entrepreneurs are governed by the norm of reciprocity. These
exchanges promote a number of subgoals that are different from the official goals of the
VGI incubator.
BIROKRATSKO USTVARJANJE PODJETNIKOV: PRIMER UNIVERZITETNEGA
INKUBATORJA
Povzetek:
Pričujoči članek predstavlja etnografsko študijo konflikta jemanja zaslug med
skupino zaposlenih v inkubatorju Venture Growth, Inc. (VGI) in skupino podjetnikov, ki
ustanavlja podjetja v inkubatorju. VGI povečuje svojo moč in vpliv z graditvijo svojega
imena znotraj skupnosti in nadzorom nad sredstvi, medtem ko podjetniki poizkušajo
samostojno graditi svoja podjetja, pri čemer uporabljajo prostor, stike ter svetovalne in
druge storitve inkubatorja. Koncept recipročnosti (Gouldner, 1960) in koncept
nadomeščanja ciljev (Perrow, 1986) sta združena za razumevanje kofliktnega, vendar
simbiotskega odnosa med obema skupinama. Izmenjave med zaposlenimi v inkubatorju
in podjetniki potekajo pod normo recipročnosti. Te izmenjave spodbujajo številne
sekundarne cilje, ki so drugačni od uradnih ciljev inkubatorja.
INTRODUCTION
The nurturing of entrepreneurs by an incubator is a complex process that involves
a conflicting interaction of individuals with different motivations. This paper explores a
specific case of one incubator’s relationship with its entrepreneurs. VGI was established
1
Names of individuals and organizations have been modified to preserve the anonymity of participants in
the study.
2
as a facility that offers a broad range of services to emerging companies and has a clearly
identifiable organizational structure enhanced by the office arrangement (offices for top
officials vs. cubicles for other employees).
VGI mainly relies on governmental grants and private donations for its existence
and therefore must write frequent and extensive reports to maintain its financing. For this
reason VGI needs to collect extensive data from incubator companies. In opposition to
this objective, entrepreneurs try to maintain their independence and hide the details about
their operations. Entrepreneurs fear the disclosure of sensitive data because of their
vulnerability to competitor's attacks. These opposing objectives are one source of the
conflict.
Another source of the conflict is that the incubator companies do not get as much
from VGI as they expect. They perceive a lack of quality advice, a lack of networking,
and a lack of financial sources from VGI. This situation is driven by the 'on-the-edge'
activities of incubator companies that require very specialized knowledge and represent
high risk investments for external partners.
The incubator companies are reluctant to participate in the schemes and rituals
that represent VGI’s official goals. As a result unofficial goals become more important
for VGI, such as community recognition (e.g., events/awards), extracurricular activities
(e.g., golfing), and benefits (e.g., free education at a university). Official rules (e.g.,
regular reporting, length of stay limits in the incubator) are also used to promote the
unofficial goals - goal displacement. Over time this goal displacement fosters more
bureaucratic rules to maintain the normal functioning of the organization.
3
This organization is an established structure with roles, habits and routines,
whereas entrepreneurs embody the destruction of previously existing structures. The
conflict that arises from these disparate structures is maintained at a sustainable level by a
form of integration called reciprocity. The relationship between the incubator and its
entrepreneurs is maintained since each receives something in exchange for their
participation in the arrangement. The entrepreneur companies receive low cost space and
services, while VGI receives increased visibility (e.g., the best incubator award),
increased access to resources and consequently increased power. Based on these
exchanged benefits, reciprocity replaces authority as a governing mechanism in the
organization.
CONCEPTUAL FRAMEWORK
Weber viewed the rational-legal authority system with its bureaucratic
organizational form as technically the most efficient system possible. “Precision, speed,
unambiguity, knowledge of files, continuity, discretion, unity, subordination, reduction of
friction and of material and personal costs-these are raised to the optimum point in the
strictly bureaucratic administration…” (Weber, 1958, p.214). Bureaucracies represent
the final stage in depersonalization and a clear separation is made between personal and
business affairs.
Selznick (1948), however, pointed out that “individuals have a propensity to resist
depersonalization, to spill over the boundaries of their segmentary roles, to participate as
wholes” (Selznick, 1948, p. 26). The needs of individuals do not permit a single-minded
4
attention to the stated goals of an organization. Selznick recognized informal structures
and conflicting interests of subgroups within bureaucracies with continuing modification
of formal goals of organization. “Ties of sentiment and self-interest are evolved as
unacknowledged but effective mechanisms of adjustment of individuals and sub-groups
to the conditions of life within the organization. These ties represent a cementing of
relationships which sustains the formal authority in day-to-day operations and widens
opportunities for effective communication” (Selznick, 1948).
Organizational behavior develops from the interaction between the individual and
formal organization (Argyris, 1957, p. 175). Argyris’ (1957) analysis of the basic
properties of human beings and formal organization led him to the conclusion that “there
is an inherent incongruency between the self-actualization of the two” (p. 175).
Bureaucratic impersonality can be undermined, however, if relations in the organization
are based on reciprocity.
RECIPROCITY
The first author that discovered the connection between reciprocative behavior on
the interpersonal level, on the one hand, and given symmetrical groupings, on the other,
was the anthropologist Richard Thurnwald, in 1915, in an empirical study of the marriage
system of the Bánaro of New Guinea. Until Gouldner (1960) however, the concept of
5
reciprocity was tacitly involved but neglected by any formal theory2. Gouldner developed
his conceptualization of reciprocity on Malinowski’s earlier seminal contribution3. For
Malinowski, reciprocity is a mutually gratifying pattern of exchanging goods and
services, where equivalency of exchanges is very important. According to Gouldner
(1960), Malinowski implied that “people believe that (a) in the long run the mutual
exchange of goods and services will balance out; (b) if people do not aid those who
helped them certain penalties will be imposed upon them; or (c) those whom they have
helped can be expected to help them; or (d) some or all of these”.
Gouldner criticized Malinowski for the lack of explication of the value element in
his writings about the principle of reciprocity. He maintained that there is another
element, beyond reciprocity as a pattern of exchange and beyond folk beliefs about
reciprocity as a fact of life, reciprocity as “a generalized moral norm, which defines
certain actions and obligations as repayments for benefits received”. Gouldner claimed
that “there are certain duties that people owe one another, not as human beings, or as
fellow members of a group, or even as occupants of social statuses within the group but,
rather, because of their prior actions” (Gouldner, 1960, p. 171). We owe other people
because of what they have previously done for us.
2
Gouldner developed the construct of reciprocity on the fundaments of the functional theory. Functional
theory focuses on already established, on-going systems, and on the mechanisms by which an established
social system is enabled to maintain itself.
3
Bronislaw Malinowski, Crime and Custom in Savage Society, London: Paul, Trench, Trubner, 1932; in
Gouldner (1960).
6
A norm of reciprocity makes three demands: (1) people should help those who
have helped them, (2) people should not injure those who have helped them, and (3) if
people want to be helped by others they must help them. Gouldner pointed out that
reciprocity processes “mobilize egoistic motivations and channel them into the
maintenance of the social system” (Gouldner, 1960, p. 173).
Gouldner also indicated the disruptive potentialities of power differences. Given
significant power differences, egoistic motivations may seek to get benefits without
returning them. The norm of reciprocity, however, generates motives for returning
benefits even when power differences might invite exploitation, because “emergence of
exploitative relations would undermine the social system and the very power
arrangements which had made exploitation possible” (Gouldner, 1960, p. 174).
Two other attributes of reciprocity have to be examined: time period and
comparative indeterminacy. There is a certain amount of ambiguity as regard to the time
period when there is an obligation still to be performed and, over time, “generates
uncertainty about who is in whose debt” (Gouldner, 1960, p. 175). Additionally,
reciprocity does not require highly specific and uniform performances from people whose
behavior it regulates. This indeterminacy enables the norm of reciprocity to perform
some of its most important system-stabilizing functions: it can be applied to countless
transactions that otherwise might not be regulated by specific status obligations.
Polanyi (1957), in his paper The Economy as Instituted Process, developed a
similar notion of reciprocity following the tradition of Malinowski. Malinowski predicted
that socially relevant reciprocation would regularly be found to rest on symmetrical forms
7
of basic social organization. Polanyi suggested that the economy acquires unity and
stability through a combination of a very few patterns which he called forms of
integration. Empirically, he was able to distinguish three main forms: reciprocity,
redistribution and exchange. Polanyi defined “reciprocity as movements between
correlative points of symmetrical groupings; redistribution as appropriational movements
toward a center and out of it again; exchange as here to vice-versa movements taking
place as between ‘hands’ under a market system” (Polanyi, 1957, p. 35). There are two
attributions of reciprocity that are unique to Polanyi: symmetrical groupings and
complementariness of reciprocity with other integration forms. To Polanyi, a group
which deliberately undertook to organize its relationship on a reciprocative foundation
has to split up into sub-groups where the corresponding members of each group can
identify one another as such. The power of reciprocity as a form of integration gains
greatly through its capacity of employing both redistribution and exchange as subordinate
methods.
The problem with these conceptualizations of reciprocity is that they assume
cooperative behavior and solidarity among actors. I argue that these reciprocal
relationships are rather characterized by the conflict and instability. Obligations for
repayment of benefits received mobilize egoistic motivations, which are not the basis of
social system maintenance as Gouldner argued, but rather the core of its instability. The
partners in the reciprocal relationship focus on the fairness of the exchange and they put a
lot of effort to settle any inequalities in a short period of time. Egoistic motivations
generate low levels of trust, which tends to suggest rapid turnover in exchange partners.
8
The key to understanding the relationship between reciprocity and goal
displacement is in the notion that “reciprocities processes mobilize egoistic motivations”
(Gouldner, 1960, p. 173). Egoistic motivations operate on the individual level, whereas
official goals are set on the organizational level. The conflict between the individual and
system was explored by Argyris (1957). To the extent that the requirements of the
individual and of the formal organization are not congruent, the individual will tend to
feel frustration, conflict and feelings of failure. “The individuals may adapt by leaving,
working their way up the ladder, distorting their world through defense mechanisms,
becoming apathetic and uninterested, reducing production, gold-bricking, creating
informal groups to counteract the cause of the conflict” (Argyris, 1957, p. 119). There are
instances in the organizational life, however, where individuals are able to further their
personal interest using formal organization. Charles Perrow (1986) conceptualized this
phenomenon as a goal displacement.
GOAL DISPLACEMENT
Selznick pointed out the prevalence and positive and negative effects of group
conflict within organizations4. Perrow (1986) speculated that internal conflict in
organizations evolved around the question of conflict over goals. “Since organizations are
established to do something, to perform work directed to some end, all organizations
have goals – some implied, some explicit” (Perrow, 1970, p. 133).
4
Selznick, Philip. 1949. TVA and the Grass Roots. Berkley and Los Angeles: Uni. of California Press.
9
Perrow (1986) challenged a number of assumptions about goals in organizations
in previous theoretical approaches. One assumption was that organizations are oriented
toward a specific goal. He observed that the goals pursued by organizations are multiple,
and that they are generally in conflict. The pursuit of multiple goals forces firms to
develop organizational mechanisms to deal with conflict. Perrow also disagreed with the
assumption that managers can fully establish the preference ordering of goals. Instead, he
maintained that “goals should be viewed as emerging from a bargaining process among
groups” and that even “some conflicting goals can be met” (Perrow, 1986, p. 134).
Perrow (1961) discussed two major categories of goals, official and operative.
“Official goals are the general purposes of the organization as put forth in the charter,
annual reports, public statements… Operative goals designate the ends sought through
the actual operating policies of the organization; they tell us what the organization
actually is trying to do, regardless of what the official goals say are the aims” (Perrow,
1961, p. 855). Operative goals may be justified on the basis of an official goal, or they
may be irrelevant to, or subvert official goals. When operative goals are means to an
official goal, Perrow talks about the official operative goals. Unofficial operative goals,
on the other hand, are tied more directly to group interests and they may not necessarily
be connected to official goals. Various unofficial goals may be achieved at the expense of
official ones, or, in some cases, in conjunction with them.
The goals most relevant to understanding organizational behavior are not the
official goals, but those that are embedded in major operating policies. “The operative
goals will be shaped by the dominant group, reflecting the imperatives of the particular
task area that is most critical, their own background characteristics (distinctive
10
perspectives based upon their training, career lines, and areas of competence) and the
unofficial uses to which they put the organization for their own needs” (Perrow, 1961, p.
857). Perrow identifies four tasks that every organization must accomplish: (1) secure the
inputs; (2) secure acceptance (legitimacy); (3) marshal the necessary skills; (4) coordinate
internal and external relations. The group that is best equipped to accomplish the critical
task will dominate in the organization and the dominant group will be able to manipulate
the organization to further their own interests. Perrow defines goal displacement as a
situation in which formal rules are used by organizational members to further their own
interests in opposition to official goals.
Identifying a company’s goals is important to understanding bureaucratization
because goals affect organizational structure. Managers can adopt various mechanisms
for resolution of conflict (resulting from the plurality of goals) such as standard
procedures and operational rules. The qualitative nature of the goals also affects
organizational structure: having basic research as an output goal suggests establishing
less formal structures, while a product goal such as ease of replication facilitates the
establishment of bureaucratic structures in an organization (Perrow, 1986).
LITERATURE REVIEW
Attewell & Gerstein
In their study “Government Policy and Local Practice”, Attewell and Gerstein
(1979) explained the failures of government policy on methadone treatment for heroin
11
addiction. They used a concept of goal displacement to understand the practices of local
agencies, which were administering the directives of federal agencies. The cases of
several methadone clinics showed why governmental agencies’ policies often acquired
considerable power even though they were not backed by law. The FDA had no legal
power to control the practice of methadone, but has asserted its jurisdiction by
categorizing methadone as an “Investigational New Drug”, despite the fact that in 1970s
methadone was used in U.S. and abroad for more than two decades. The FDA defined the
protocol for methadone programs, which also “provided criteria for evaluating a program:
numbers of drug-free graduates, changes in arrest record etc. State and local agencies
took these as standards by which to assess a program’s requests for licensing and
refunding” (Attewell & Gerstein, 1979, p. 315).
This dependence on the external financing shifted the foci of methadone clinics
from therapeutic aims per se and toward an increasing concern with the self-presentation
in order to look good to funding and regulatory agencies. Waiting lists were adopted as
one indicator of the need for a program and the need for more money. Characteristics of
addicts in treatment were widely publicized and a program’s statistics were compared
with others in order to show its efficiency. A reality construction or presentation of self
(Goffman, 1959) became the primary goal and the means to preservation of the
organization.
Additionally, methadone programs had to manipulate their public image in order
to hold off external criticism. For example, a California Board of Pharmacy inspector
complained in the local press of one program: “It is a failure to the agencies monitoring
it, to the agencies administering it, to the patients using it, and to the tax-payers”
12
(Attewell & Gerstein, 1979, p. 316). The main complaints were that measures of success
of the program were not defined. A technique that was developed by Vincent Dole and
Marie Nyswander in 1964 called for indefinite daily dose of methadone defining the
addiction as a chronic disease. This notion was progressively modified by the FDA,
which invoked the ideal of a drug-free addict as measure of success.
The experience of main actors, clients and staff in methadone programs, is
described as one of grown adults in a high school setting. “Everyone knows the rules,
virtually everyone present dislikes the rules, but everyone’s behavior is rule-governed,
even if only in grudging ritualistic compliance” (Attewell & Gerstein, 1979, p. 318). The
staff members’ normal situation was one of profound role conflict. Most of the
counselors were ex-addicts because peer counseling provided role models for clients, job
prospects for ex-addicts, and inexpensive labor for programs. This was in a direct conflict
with demands for counselors to enforce punitive sanctions. The conflict was
organizational since counselors as therapists were expected to establish supportive
relationships with clients but due to the increasing concern with the external environment
were increasingly required to be disciplinarians.
Clients, on the other hand, experienced a high degree of arbitrariness in terms of
urinalysis requirements and punitive detoxification. Addicts did not know what day they
would be called for a urine analysis. For some heroin could be detected even two days
after the use and for others not even if they shot heroin hours before testing. Additionally,
there were problems with the technique of urinalysis: even when urines were split into
two portions for separate urinalysis, the results rarely agreed. Therefore, addicts did not
regard urinalysis as an objective system of surveillance, but rather as “a form of
13
unpredictable Russian Roulette” (Attewell & Gerstein, 1979, p. 321). Similar were
addicts’ views of punitive detoxification. The clients were first verbally warned and after
that were obliged to sign the contract that more positive tests would result in
detoxification. The discretionary power of staff to put someone on detoxification led to a
widespread belief by clients that staff member manipulated the urine samples to protect
friends, earn bribes, or hurt enemies.
Authors offer only limited explanation on why a goal displacement is a central
concept for explaining the failure of federal policy in methadone programs. They argue
that none of the typical organizational compliance mechanisms (coercive, remunerative,
and normative compliance) could be used in the staff-addicts relationship.
Instead,
Attenberg & Gerstein maintain that loss of face to some addicts was the only remaining
lever for obtaining compliance. The friendships between staff and addicts produced
respect and feelings of personal obligation. This type of commitment was only possible
through particularistic behavior such as special treatment, making exceptions to rules,
doing more than the standard minimum. However, the insistence on increasing formal
rationality to look good for funding agencies undermined the discretionary powers of
counselors and particularistic basis of clinical compliance. “As programs attempted to
respond to outside agencies by strictly enforcing federal and state regulations they
simultaneously became the agents of their own therapeutic demise” (Attewell & Gerstein,
1979, p. 324).
14
Demerath & Thiessen
In “On Spitting against the Wind: Organizational Precariousness and American
Irreligion” (1966) Demerath and Thiessen analyzed small-town Wisconsin free-thought
movement and dilemmas that arose out of its irreligion. They explored organizational
goals alongside with social status, leadership, commitment, and recruitment to inform
adaptation to dissidence and precariousness of the Sauk City Freie Gemeinde movement.
They viewed the free-thought movement as a deviant organization, which lacks any
crystallized doctrine, has no sharply defined organizational goals, no natural population
from which to recruit, and no values which would be consistent with the normative
mainstream.
Unattainable or unrealistic goals are associated with the precarious nature of the
freethinker’s movement. Values tend to be relativistic and goals are rarely specified,
because of their high regard for individual autonomy. Some quotations from the
interviews with the movement members are illustrative of the amorphous conception of
the Freie Gemeinde’s purpose:
“Well, I think we are looking for something we can believe in.
We are a group of seekers rather than a body of believers. We think that through
advancement of science the truth will change. We are prepared to accept this, and we can
change our beliefs very easily, because if it follows the truth, then we believe we are right
in changing it in contrast to other religions.”
15
Authors juxtaposed conventional religious groups and freethinker’s movement in
terms of characteristics of their goals. Churches have long suffered from goal
displacement since salvation is not a clear-cut or easily achieved goal. Means such as
recruitment often replaced goals such as salvation. Similarly, the Freie Gemeinde has
witnessed the “means-ends inversion”. Many interviewed freethinkers admitted that their
participation was motivated more by social reasons than anything else. “The combination
of ‘mighty fine food’ and German ‘egg coffee’ has supplanted the reformist zeal of
overturning the churches and emancipating their parishioners” (Demerath and Thiessen,
1966, p. 685).
Yan
In his book “The Flow of Gifts”, Yan offered an ethnographic account of the
system of gift exchange and the patterns of interpersonal relations in a north China
village. Inspired by the Gouldner’s essay on the norm of reciprocity, Yan discovered four
operating rules of gift exchange among village residents. These rules provided means of
understanding the complexity, flexibility, and contextuality of interpersonal relations.
The first rule is that “a good person always interacts with others in a reciprocal
way”. Yan quotes a passage from the Confucian classic Book of Rites that describes the
obligation of giving, receiving, and returning gifts in the long run:
“In the highest antiquity they prized good; in the time next to this, giving and
repaying was the thing attended to. And what the rules of propriety value is reciprocity. If
16
I give a gift and nothing comes in return, that is contrary to propriety; if the thing come
to me, and I give nothing in return, that is also contrary to propriety” (p. 124).
The second rule of gift exchange is that “the offer of a gift should not break the
existing hierarchical system of social status in either kinship or social terms”. This rule
goes even so far that an unsuitable gift may be offensive to the recipient and other
donors.
The third rule is one of “making gifts in accordance with previous interactions”.
Based on close daily interactions, or some help offered in the past, villagers may chose to
create a new gift-giving relationship by increasing the value of the gift of one villager or
by presenting the gift for a situation in which they were not necessarily required to do so.
The fourth rule concerns “the proper manner of returning the gifts”, where
villagers agree that a respectable man should avoid the appearance of gift exchanges as
payoffs. The most common way to do this is to increase somewhat the value of the
returned gift.
These rules are similar to Gouldner’s notion of reciprocity where self-interested
individuals engage in dyadic, transaction type relationships. The principle of reciprocity
plays an important role in the Chinese system of gift exchange. The reciprocal
relationships are instrumental in the maintenance of the social system. Yan observed
several incidents of conflict in gift exchange behavior, but he explained them as cases of
‘breaking the rules’. Such is the case of the conflict between cook Zhao and Lin, the
deputy party secretary in the town government. Lin failed to attend wedding of Zhao’s
son or to make a return gift, even though Zhao cooked twice for Lin in ritual situations
17
hosted by political cadre. The occasion led to deterioration of their relations and finally to
the open confrontation between Zhao and Lin after which Zhao received a return gift
from Lin via a middleman. Yan then continued to show that in hierarchical contexts gifts
are given unilaterally and that “recipients remain socially superior even though they fail
to return the gifts” (p. 214).
Von Reden
In her work “The Commodification of Symbols: Reciprocity and its Perversions
in Menander” (1998), Von Reden defined reciprocity as “a local concept of order, peace,
and social cohesion”. She argued that the confrontation of reciprocity and commodity
exchange in Menander’s plays was “a metaphorical confrontation of order and disorder,
civic community and its corrosion” (p. 255). Menander represents civic symbols like
marriage, friendship, and sacrifice as objects, which have a price and are transacted
arbitrarily. Menander’s commodification of symbols suggests that “commodity exchange
was regarded as the moral opposite of civic exchange”.
Author utilizes Gouldner’s principle of reciprocity to explain the differences
between relationship of reciprocity to social cohesion and of commodity exchange to
social cohesion. While reciprocity is characterized by the indeterminacy of both timing
and value of the return, making it an element of social cohesion, the commodity exchange
sets an end to this indeterminacy. The most important feature in commodity exchange is
the exchangeability of objects. However, not every object can turn into a commodity,
especially some exchanges that “symbolize a society’s most important relationships” (p.
18
259). Menander insisted that everything in his society is purchasable and von Reden
provided several examples from his plays: the costs of prostitutes are compared to the
value of marriage, and the costs of a cook to the value of sacrifice.
SITE DESCRIPTION
Venture Growth Inc. (VGI) was established in 1983 as one of the state sponsored
programs for turnaround of the economically troubled mid-western City. VGI performs
several activities, which can be grouped into four categories: technology transfer,
building public awareness, entrepreneurial education and client assistance. Technology
transfer is facilitated through three incubators for high-tech and biotech companies: High
Technology Incubator (HTI), Biotechnology Incubator (BI) and Growth Incubator for
Technology (GIT). A number of events, like investor conference, the business school
award for excellence in management, the business school Hall of Fame, and a magazine
were initiated to increase awareness of small businesses in the community as well as
VGI’s efforts in this area. Entrepreneurial education is an always-changing activity, but
obviously doesn’t meet the needs of early-stage entrepreneurs. They rarely participate in
courses or seminars and are quite critical about their content. Similarly, the client
assistance does not meet expectations of ‘incubator entrepreneurs’. VGI provides help in
development of business plans, offers solutions to business problems, refers to sources of
capital, provides opportunities for networking, and arranges for technical assistance.
Main critiques by tenant companies are that VGI staff lacks technical knowledge needed
19
to assist high-tech companies and that they do not give enough time to accommodate
needs of early-stage companies.
There are two distinctive groups of actors in the field site: VGI staff and
entrepreneurs of tenant companies. VGI staff forms clearly determinable organizational
structure, even though some people refuse to talk about hierarchy and talk about flat
organization where “everybody does everything”. The hierarchical organizational
structure is easily observable through office arrangement: offices for top officials vs.
cubicles for other employees. Entrepreneurs, on the other hand, expressed many times
(verbally and through their actions) that independence, flexibility and openness are
important to them. Their dissatisfaction with VGI was mainly focused on the lack of
communication, competence and ‘real’ networking. Additionally, there is a board of
directors representing the funding sources and community. The primary function of the
board is to define goals that should be achieved through the organization.
The main funding sources reflect the non-profit nature of VGI. Federal and state
grants represent the largest single sources of financing and account for one quarter of
total revenues. Additionally, money from governmental institutions is an important
source for large remodeling investments into VGI building5, and a cheap lending source
5
Creation of space for Biotechnology Incubator was a big renovation project, which was financed by many
institutions and carried out by the University. Federal grant of $2 million came from Economic
Development Administration and these funds were matched by $1.5 million from University (which later
on increased to $1.8 million); $300,000 was a contribution from the City and $200,000 was a favorable
loan from a local development initiative. University received a federal grant in August 1995; construction
started a year later and was finished in April 1997.
20
for tenant companies6. VGI also receives grants from several foundations and donations
from the well-known business school and others. VGI revenues mainly consist of fees for
courses, events, advertisers, and account for forty percent of total support and revenues.
The largest expense category is salaries and related costs, followed by the expenses for
facility. The University is owner and landlord of the facility. The space for incubator
comes from the University’s commitment to the State, where the Universtity promised
that it would make available 40,000 square feet of space for VGI’s incubator activities.
INTERPRETATION
Control of resources and information
In the previous section I have given a short description of VGI, whereas in this
and the following sections I will try to explain the nature of the relationship between VGI
and entrepreneurs of tenant companies. An incubator is an organization, where traditional
governance mechanisms may apply only to a limited extent. Even though VGI assumes
the controlling position in the incubator, it has to deal with a number of organizations,
whose primary motivation is independence. VGI is able to maintain a managing role in
the incubator primarily through control of financial resources. It has access to those who
make donations and has a control over the systems for fund raising. Through financial
control, they are able to impose the rules on the entrepreneurs; rules like entrance criteria,
rules of conduct, the tenancy, and graduation terms.
6
For example, Biotechnology Incubator received a large loan under favorable conditions from State
21
VGI itself, on the other hand, is quite independent and without constraints from
inside or outside of the organization. The president of VGI reports to the board of
trustees, which is active primarily through its Incubator Committee. This committee
meets on a quarterly basis to discuss strategic questions of incubator’s operations. VGI
makes an effort to diminish the role of the board of trustees. Caricatures of board
members on the way to VGI offices are grotesque representations of individual’s
distinctive features with intent to ridicule the authority that they symbolize. Increasingly,
VGI has been able to find alternative funding sources beyond the range of the current
board thus reducing board’s power. Additionally, VGI seems to be efficient in controlling
the information flows among the actors in the organization7. Due to their limited role in
the incubator, members of the board rely on VGI’s quarterly reports for the information
about tenant companies. Under such conditions “trustees are likely to find that their legal
power becomes nominal” (Perrow, 1961, p. 858).
External control from state or federal departments is at best unthorough. VGI
reports about its incubator activities to State Department of Development (SDOD)
through quarterly status reports. Copies of the report summary are also sent to the State
Committee, which supervises operations of similar incubators statewide, and to
governor’s advisor for technology. These institutions do not have standards by which
Department of Development, which was used for cheap ‘construction’ loans for tenant companies.
7
I observed an occasion where one of the VGI directors misled the Incubator Committee. The debate was
about a tenant that was in the incubator for over 6 years, even though VGI has an explicit rule that the
maximum tenancy is 4 years. Incubator’s director explained that the company was graduating in few
months, but consequent interview with the entrepreneur revealed that the company was only moving from
High Technology Incubator to Biotechnology Incubator. There are no representatives of the tenant
companies attending the committee meetings.
22
they could evaluate work of different incubators. As the HTI director described: “SDOD
does not differentiate among incubators and it doesn’t matter if incubator xyz did much
better than incubator abc, funding would still be the same”.
Thus there is sufficient means for power by VGI and sufficient interest in power.
Entrepreneurs, on the other hand, can undermine this power by simply choosing not to
enter or remain in the incubator. One of the entrepreneurs in Biotechnology Incubator
claimed that “the only thing that VGI is helpful for them is space, which is somewhat
oriented to more technical companies”, however “it is not hard to find space somewhere
else”.
Making favors
The precariousness of the relationship between VGI and entrepreneurs raises the
question about the forces, which ensure minimum of consensus among these two groups.
As discussed earlier, the three forms of integration are reciprocity, exchange and
redistribution. To a certain extent the relationship between VGI and tenant companies can
be seen as exchange relationship, since VGI sells some of the services and rents the space
to entrepreneurs. However, most of the services for incubator companies are free or
subsidized. For example, business consulting services and the majority of office services
are free of charge. Rent is 25 percent below the comparable market prices for the same
area. These privileges are attractive enough for entrepreneurs to seek admission to the
incubator.
23
The process of initiation of entrepreneurs into the organization sets the basis for
reciprocal relationship between VGI staff and entrepreneurs. Although entrance criteria,
like high-technology/biotechnology orientation, high growth potential, and incorporation
in State, are predetermined, there is still a great deal of arbitrariness in this process. It is
at VGI’s discretion, which companies will it allow to enter the incubator (usually one out
of ten companies that apply). Sometimes these companies are admitted even if they do
not match the entrance criteria. Melanie, a corporate history writer, admits that “her
connections with the University helped her to get into the VGI even though her business
is not high-tech or biotech”. Additionally, VGI allows some companies to make
modifications to facility. For example, Stanheath was able to break the wall to get a
connection between their offices. Special cases aside, cheap rental space and free services
are benefits for which many companies are grateful and feel that they are “very lucky to
be in”.
The norm of reciprocity generates motives for returning benefits over time and,
according to Gouldner, maintains the social system through egoistic motivations.
Entrepreneurs return favors in various ways. They frequently act as guest speakers at
VGI’s seminars and courses. More importantly, entrepreneurs willingly (and sometimes
unwillingly) participate in promotional activities organized by VGI, which are intended
to advertise young companies, but also to justify and recognize VGI’s role in the
‘incubation’ process. There are several ways in which VGI promotes itself and tenant
companies. The quarterly Magazine features incubator success stories with a broad reach
among local business community. VGI organizes and places its name on the awards
endorsing regional fastest growing firms. In its quarterly report to SDOD and State’s
24
governor, VGI provides significant tenant news (mostly success stories). It also includes
news about the companies that have graduated from incubator years ago8. Through these
and other activities VGI builds its own reputation on the achievements of other
companies regardless of its contribution to the success of these companies. Entrepreneurs
receive low cost space and services, while VGI receives increased visibility, increased
access to resources and consequently increased power.
A characteristic not previously observed or discussed by the theorists of
reciprocity in multi-group arrangements is that each group will observe and evaluate
relationships among all other groups in the social system. This is even truer when these
entities are supposed to have qualitatively similar reciprocal relationship with another
entity. VGI claims that it will provide support to all tenant companies, but several
entrepreneurs complained that they didn’t receive the assistance that other companies did
because “there is nothing to brag about” their companies or because their “business is not
exactly in line with VGI’s preferences”. Although this observation does not oppose the
quid pro quo nature of the relations in the incubator, it counters Gouldner’s assumption of
system stabilizing function of time period and comparative indeterminacy under the norm
of reciprocity. Instead, as I will discuss in the following section, reciprocal relationships
are characterized by the conflict and instability.
8
For example, company Chartech, Inc. was featured in the quarterly report for the period October 1,
through December 31, 1997, even though it graduated from incubator in 1990. There are several other
examples of graduates from 1995, 1996 and 1997 in the same report.
25
Conflict
Gouldner argued that the norm of reciprocity mobilizes egoistic motivations, and
channels them into the maintenance of the social system. However, I believe that these
egoistic motivations focus on the fairness of the reciprocal exchange and whenever there
are perceived inequalities, there is a potential for tension and conflict. The conflict
between VGI and entrepreneurs is latent, but still quite easily observable. There were
only few open confrontations that subjects in my study referenced to or I was able to
observe, but especially entrepreneurs were very eager to point out the deficiencies in the
incubator. One source of conflict is that incubator companies do not get as much from
VGI as they expect or as much as they are led to believe when they enter the incubator.
Specifically, entrepreneurs complained about a lack of quality advice, a lack of
networking, and a lack of financial sources from VGI. Several accounts from
entrepreneurs make the point:
“People (VGI) are nice but they do not take time to breathe with the
new entrepreneur, to really know our problems and help us with them. Lack
of business advice can be explained by the lack of hands-on experience.
There are some people in VGI that were closely involved with small
businesses but majority has worked for non-profits.” (Ruben, a GIT
entrepreneur)
“Eight months ago I could have applied for an SBA loan, but I didn’t
know about it. So I was late. I lack the time to search for such information but
the problem is that I can not get such information from VGI.” (Joe, tenant)
26
“VGI organized this short seminar on financing. On that seminar they
told me that it is very hard to get money from banks or angels, so my first
source of financing should be my rich relatives. I drove downtown to listen to
somebody telling me that I should borrow money from my aunt or grandpa.”
(Harry, former tenant)
Another, more profound, conflict is the one of taking credit for the success of
young companies. Entrepreneurs believe that they are solely responsible for the progress
of their companies. They try to maintain their independence and hide details about their
operations. Entrepreneurs fear the disclosure of sensitive data because of their
vulnerability to competitor’s attacks. VGI, on the other hand, relies on governmental
grants and private donations for its existence and therefore must write frequent and
extensive reports to maintain this financing. For this reason VGI collects detailed data
about the development and growth of incubator companies. The mandatory reporting of
information by tenant companies is included as a stipulation in the Memo of
Understanding. The information is then used for various promotional activities and
publications in which VGI praises its own role in the incubation process. Comments from
entrepreneurs are a good indication of this situation:
“VGI likes to collect information for their newsletter and different
reports. We provide them as little as possible. They want to know a little too
much, so that they can claim credit for what our company does. I don’t really
like this because it seems that VGI wants to feel that they have in a significant
way contributed to the success of our company. They think of us, the
companies, as being their children.” (Dave, an entrepreneur)
27
“If you succeed it is OK, if you fail so be it. They (VGI) should be
more active: if you fail, we fail also.” (Mukul, a tenant)
Another controversial issue in the incubator is the long-term success fee. It is
designed to bring additional revenues to the incubator, but its introduction and
implementation are frequently being disputed. The fee is initially mentioned in the
Memorandum of Understanding, which is to be signed by an entrepreneur upon moving
in the incubator. Memo only specifies a time period in which a long-term success fee
agreement should be negotiated. A closer look at the fee formula shows that a company
leaving the incubator would have to pay for the most, if not all, of the difference between
the market and incubator rent, and for supposedly free services of consulting, conference
rooms, and furniture for the whole ‘incubation’ period. VGI effectively changes ex post
the nature of its relationship with entrepreneurs from reciprocal to exchange. The fact that
companies have to negotiate to which extent the services and rent will be free of charge
increases the visibility of VGI’s ‘favor’. Entrepreneurs view that these benefits are
comparatively much smaller than what they give to VGI and therefore are very eager to
voice their dissatisfaction with the incubator personnel and services.
VGI downplays the conflict. By the words of Linda, director of High Technology
Incubator, VGI is a “benevolent landlord” and that “tenants also have to show some
effort”. Clark, a project manager in VGI, described the relationship:
“The prevailing philosophy in VGI is that companies (tenants) should
come and ask VGI personnel for help. This is supposed to help them become
independent. Some companies come and ask for help and others don’t. I don’t
28
know if this approach is good. I am not sure if tenants know what are all the
services that VGI offers.”
This stands in a stark contrast to claims in the Annual Report and other
publications where VGI is presented as a major contributor to the success of incubator
companies. Conflict is maintained at the sustainable level, because of the stipulation that
companies have to leave the incubator in 24-48 months. Even though this may be an
appropriate ‘incubation’ period, it also has a rather subtle function: it gives VGI the
power to dismiss any of the companies that would complain too much and on the other
hand, to regard any extension of tenancy as a reward to the companies that comply. The
built-in high turnover of tenant companies prevents the conflict from growing out of
proportion and helps VGI to maintain its role in the incubator.
The situation in the incubator is quite different from Gouldner’s theoretical
expectations about the norm of reciprocity and the disruptive potentialities of power
differences. Gouldner claimed that the norm of reciprocity would keep off exploitative
relations, because they would undermine the very social system that enabled them. VGI,
however, uses its power not only to get benefits without returning them, but also to take
back some of the favors it has supposedly given in the first place. By the institution of the
limited tenancy, VGI is able to keep the conflict at the sustainable level.
Entrepreneurs react either by actively seeking benefits from VGI or by avoiding
any contacts with VGI whatsoever. One example is the idea of an ‘open space’ incubator,
where VGI tries to blur the boundaries between VGI office space and offices of tenant
companies. Some entrepreneurs play along, while others introduce extreme security
29
procedures. On one occasion when I helped an VGI employee deliver memos about a
publicity event to tenant companies, I was able to observe that many of the companies
had their doors open and were generally very welcoming. This was not the case with one
of the tenant companies. Obeying the specific request of the president of the company,
we had to knock on the closed door and wait until we were admitted into their offices.
Several other companies were also reluctant to participate in the event that would praise
VGI’s role in the economic revival of the City. The widespread reluctance among
entrepreneurs to participate in VGI rituals evokes frustration among VGI staff and
focuses their attention to various unofficial goals.
Self-interest and community recognition
All formal organizations are shaped by forces that are tangential to the official
goals and procedures of these organizations (Selznick, 1949). Individuals resist to being
treated as means to an end, but instead participate as wholes, bringing in their special
problems and purposes. As Perrow (1986) pointed out, the group conflict revolves around
the question of conflict of goals in organizations. The official goal of VGI is to “stimulate
entrepreneurial activity and the creation and growth of early stage businesses”. In the
absence of social supervision and constraint, many other unofficial goals are being
pursued by VGI, such as community recognition (e.g., events/awards), extracurricular
activities (e.g. golfing), and fringe benefits (e.g., free education at the university).
I discussed earlier the role of frequent and extensive reports that VGI has to write.
The main purpose of these reports and publicity events is to obtain governmental grants
30
and private donations, but also to gain community recognition. As one entrepreneur
describes it: “They (VGI staff) many times have to do things to look good for their
financial supporters and that are not essential for early stage companies”. A large
number of people in VGI are involved in the preparation of reports and organization of
publicity events. Community recognition has become one of the unofficial goals of the
organization, directly feeding into the ambitions of the senior vice president for
operations, technology transfer and client assistance. On several occasions, she talked
about the development of a large technology park in the City area, where VGI would
have a leading role.
The president and both senior vice presidents received the awards for the
Entrepreneur of the Year in the past years. Many of the entrepreneurs see this as a “bad
joke”, since none of these people “has ever really started a company”. The majority of
the VGI staff only worked for non-profits or large organizations. The president had a
business career for 27 years with a big steel company, where “money went into
drainage”. He is the only one featured in the previously mentioned caricatures, where he
wears a golfers outfit and is preparing to strike a ball. There is also a stack of books in the
picture with clearly readable titles: The Golfers’ Guide to Business; BMW
Reparaturleitung; How to Manage Women in Business Vol. I.; Without Them Trying to
Manage You Vol. II. President and senior V. P. for recognition events and educational
31
programs are frequently involved in golf outings, which are officially fund raising events,
but unofficially a pleasant extracurricular activity9.
Senior V. P. for recognition events is one of the founders of VGI. His attitude
towards entrepreneurs can be sensed through jokes and quotes that are pasted on the
visitor’s table in his office. The first one is a definition of an entrepreneur from Willey’s
Dictionary (a comic strip): “a person who does everything he can think to keep from
getting a job”. The second one is a quote from Prof. Abraham Zaleznich (Harvard
Business School): “I think if we want to understand the entrepreneur, we should look at
the juvenile delinquent”. This attitude does not seem to represent the broader culture in
the organization, but rather an attitude of an individual that has become disinterested in
the formal activities of the organization. He has no contacts with entrepreneurs and is
“just a name” to many of them.
One member of the board of trustees maintained that “because salaries paid are
usually lower, a president should have the ability to manage people that could make
more money in other positions”. Instead, VGI allocated practically all the increase in the
funds available in the previous year (15 percent increase) to the increase in salaries and
related expenses. Free education at the university is the most important fringe benefit that
employees of the incubator receive quite frequently. Motivation of VGI staff centers on
their self-interest as manifested in extracurricular activities, community recognition,
material gains, and long-term gains in power.
9
I overheard a discussion between senior V. P. and one of his assistants about specific golfing in Florida
for which none of the potential financial contributors signed up. Senior V. P. said that he and the president
would still go to Florida.
32
CONCLUSION
VGI is an organization that was established to nurture and develop small
companies, but has instead become a vehicle to pursue personal goals. The displacement
of goals takes place because certain activities accrue increasing internal relevance,
instead of having a direct relationship with the ultimate goals of the organization. VGI’s
top administrators are able to pursue their self-interest, because there is no adequate
system of control in existence. The external control is limited to a general type of
supervision, which concentrates on the financial constraints. The internal control,
exercised through board of trustees, is done routinely and with little interest.
The relationship between VGI staff and entrepreneurs is governed by the norm of
reciprocity, despite some attempts from VGI to change this relationship retroactively into
exchange relationship. Previous researchers conceptualized the norm of reciprocity as “a
local concept of order and peace” (Von Reden, 1998) with “system stabilizing function”
(Gouldner, 1960), where conflict is only an instance of “breaking the rules” (Yan, 1996).
Alternatively, I argued that reciprocal relationships are characterized by the conflict and
instability. Obligations for repayment of benefits received mobilize egoistic motivations,
which turn focus of exchange partners on the fairness of exchange. Two attributes of
reciprocity (Gouldner), time period and comparative indeterminacy, do not perform their
system-stabilizing functions. Instead, partners in the reciprocal relationship put a lot of
effort to settle any inequalities in the short period of time.
33
The entrepreneur companies receive low cost space and services, while VGI
receives increased visibility and access to resources. The central conflict in their
reciprocal relationship is the one of taking credit for the success of young companies.
VGI builds its own reputation on the achievements of incubator companies, while
entrepreneurs believe that they are solely responsible for the success of their companies.
As a result, the two groups of actors avoid each other and center their motivation on the
self-interest.
34
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