Incubation: Whose job is it, anyway?

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This is the sixth article in a continuing series that examines the state of the ecosystem necessary to successfully bring technology to market. Based on dozens of interviews with entrepreneurs, venture capitalists, angel investors, business leaders, academics, tech-transfer experts and policy makers, this series looks at what is working and what can be improved in the go-to-market ecosystem in the United States, Canada and Britain. We invite your feedback.

By Francis Moran and Leo Valiquette

“Government doesn’t start companies,” Iain Klugman, CEO of Communitech, told us a little while back. “Individuals do.”

Nonetheless, government does have an important role to play in the value chain of bringing technology to market. This is particularly true at the regional and municipal level, where local economic development agencies attempt to attract anchor employers and/or support the growth of home-grown technology ventures with programs and incentives funded by the local tax base and higher levels of government. (We will explore the broader role of government in a future post.)

These efforts, however, raise a few fundamental questions:

  • What has proven to be the most effective way for an economic development agency to support a strong and sustainable technology sector in its region?
  • Is it possible for an organization funded by the public purse and influenced by the bureaucratic culture of government to keep its finger on the pulse of a dynamic, even volatile, technology market?
  • How does a startup ensure a local economic development agency is capable of providing the timely and relevant support it needs to validate its market opportunity, secure sources of funding and achieve market penetration?

(Please share your thoughts on any of these points. This is a subject area far larger than the confines of this modest post.)

Import vs. domestic

As Denzil Doyle explores in his book, Making Technology Happen, there are two general approaches to building a local technology hub:

  • A grow-your-own strategy, in which the emphasis is on creating and growing local companies; and
  • An importation strategy, in which the emphasis is on attracting branch plants and branch offices of existing companies that are headquartered elsewhere.

Doyle argues that the importation approach seldom works. The people who make the decision to locate a facility in a specific municipality make these decisions based on factors that cannot be influenced by the kind of salesmanship practiced by most economic development agencies. He cites several examples in the U.S. where large technology companies made their location decisions based on the level of entrepreneurial activity and supporting infrastructure available in the winning community, rather than the efforts of economic development officers to woo them.

In other words, it was communities with the entrepreneurial savvy and robust ecosystem to support a grow-your-own strategy that attracted the most interest.

However, moving ahead with either, or a combination of both, of these strategies, is not the end of the discussion. Far from it. As we explored in the previous post, Silicon Valley is arguably the hotbed of innovation that startups must tap into in today’s recession weary global economy to obtain what they need to bring technology to market.

Too much bread, too little peanut butter?

It is hardly practical, or desirable, for most startups to pull up stakes and relocate to California, despite the preference among many Valley VCs that their portfolio companies do so. What these startups require is help finding the resources crucial to their success that lie beyond their own backyard. But many organizations involved in startup incubation at the local level are not in a position to provide this.

“Often, the peanut butter gets spread too thin,” said Chris Albinson, managing partner of Panorama Capital and co-founder of the C100. “Too many smaller organizations don’t have truly world-class people running the show who understand what it is to be competitive on a global stage. If an incubator is 18 months behind what is going on in Silicon Valley, its companies are not going to succeed. It’s just spinning its wheels.”

Instead, he applauds the best-of-breed models that have emerged in Canada, such as Extreme Venture Partners in Toronto and Bootup Labs in Vancouver. [Update: Bootup Labs closed its accelerator fund late last year, a few months after our interview with Albinson.] Both organizations are staffed by strategic advisors, drawn from the business and investment communities, who can provide startups with the hands on mentorship that will help them get ahead.

“These guys are plugged in, aggressive and credible,” Albinson said. “They really add value to the companies they work with.”

Nicole Glaros believes that government, no matter how good its intentions, should remain on the sidelines and focus instead on providing a supportive framework. At the regional level, two key ways to help is through tax breaks and by providing real estate at a low cost.

Glaros is a general manager for Tech Stars, a mentorship-driven seed stage investment organization that runs programs in Boston, Boulder, New York City and Seattle.

“The good thing about the entrepreneur community is that it is quick and nimble and can make things happen,” Glaros told us in an interview last year. But when government takes too direct a hand, the bureaucratic and administrative burden that invariably builds can end up more of a hindrance than a help.

Pointers from Pittsburgh

But that is not to say that a government-funded effort is doomed as a matter of course. One example of government policy at work that helps savvy entrepreneurs do what they do best without getting in the way is Innovation Works and its seed acceleration program, AlphaLab.

Innovation Works deems itself the Pittsburgh region’s largest and most active seed-stage investor. Since 1999, it has invested more than $50 million in more than 150 companies.

IW is a private non-profit corporation, which is largely funded by the Commonwealth of Pennsylvania’s Ben Franklin Technology Development Authority. Its AlphaLab is described as “a catalyst for launching and accelerating the growth of the next generation of software, web, mobile, entertainment technology, and hardware companies.” IW receives five per cent common stock in an AlphaLab company in return for a $25,000 investment, plus workspace and services. As a non-profit, any financial returns IW is re-deployed into the community.

Despite IW’s status as a non-profit and its support by a state agency, it is anything but bureaucratic.

“While our funding comes from the state, we’re not part of the state government,” said AlphaLab director Jim Jen. “All of the employees at IW come from the private sector and investment management, with experience in running companies or launching software businesses.”

So what does all this mean?

Government can play a vital role in supporting a robust and vibrant startup environment at the local level, provided it takes its lead from the business leaders who live on the cutting edge of the technology market.

The challenge for entrepreneurs is to be careful about coupling all of their cars to the wrong train, or even one train. Does the team at your local incubator or economic development agency possess the entrepreneurial expertise and insight that can only come from having “been there and done that?” Is it capable of making the linkages you need in a particular overseas market, or in Boston, or in Silicon Valley? Find out by talking to people from those places. Get connected to them through grass roots organizations such as the C100.

We have said many times (and will likely do so many times again) that a startup must connect with as many people as possible to find the right resources it needs to succeed. The key thing is to not be daunted by how far afield that search may take you. In our next installment, we will talk more about the entrepreneurial right stuff that it takes to succeed.

/// COMMENTS

15 Comments »
  • Danny Robinson

    March 09, 2011 2:18 pm

    Great article Francis and Leo.

    I’m new to government (3 months in), prior to that I was one of the founders behind Bootup Labs (which you referenced and is how I stumbled on your blog)

    Agree wholeheartedly that, as government, we need to ” takes our lead from the business leaders who live on the cutting edge of the technology market.” And that’s exactly what we’re doing.

    Thanks!

    I’m now subscribed.

  • Donna

    March 09, 2011 3:05 pm

    Wow. Chris Albinson must not be very plugged in. Did he not hear that Bootup Labs is kaput or that its vesitige, Bootup Garage, is now government funded??

    And what are the results of these two best of breed incubators? Next to bupkis in terms of company and creation.

    Only accelerators operated by the Universities with real technologies to commercilize, talented, educated researchers and students funded by government support and well-connected to experienced industry entrepreneurs have proven ability to deliver results for our economy.

    Tony Clement and other leaders should not be seduced by this rhetoric which is self-promotional, self-interested and not grounded in fact.

    Direct our scarce funding and efforts to where the real results are being created, not toward self-interested trendy experiments with no track record and no meaningful results.

  • Leo

    March 09, 2011 5:06 pm

    Danny:

    Thanks for your comments. I will be focusing more on the role of government in a future post. Considering your perspective on both the public and private sector side of the equation, perhaps I could interview you for that one.

  • Francis Moran

    March 09, 2011 5:48 pm

    Thanks for weighing in, Donna. The debate is now definitely joined.

    In Chris’s defence, however, Bootup Labs was still very much an operating entity when we interviewed him for this series many months ago. We have been working on this series for longer than I care to admit, and I have added an update.

  • Leo

    March 09, 2011 5:58 pm

    Donna: Thanks for your perspective. we in fact spoke with Chris Albinson on this topic late last summer, but the intent of his comments was to reference those organizations which in his view had a model that worked. While the founders of Boot Up Labs may have since moved on to other things, it was their record to date that he was commenting on.

    As you can see below, Danny Robinson, one of the co-founders of Boot Up Labs, has weighed in about his move to government.

    As you say, it is the connections to experienced industry entrepreneurs and the role they can play in helping to bring new technologies to market that is fundemental. The question is where and how the engagement must take place between them, the creators of technology, such as university researchers, and where and how government should step in with funding and public policy initiatives to help support the process of commercialization.

    What’s important that, regardless of how it is involved, government allows those industry entrepreneurs to take the lead without hamstringing them with process-oriented bureaucracy.

  • Donna

    March 09, 2011 7:00 pm

    Thanks for the clarification.

    Leo your comments just don’t hang together… if Bootup’s business model or practices were successful, Bootup Labs will still exist. It didn’t work, ergo its not a model that should be emulated or represented as a successful example.

    Do you guys actually know how many startups are created in each province, annually, where they come from and which organizations are responsible for creating and supporting them. [Edited.]

  • Francis Moran

    March 10, 2011 9:00 am

    Donna:

    After much consideration, I have edited your last comment on our blog to remove what I consider to be abusive language.

    I am happy to entertain your difference in opinion over the efficacy of the private incubator and accelerator model, particularly as implemented by Bootup Labs, and I accepted with grace the factual correction you made about Bootup Labs no longer being active.

    We did extensive research for this series over a lengthy period. We quoted an opinion from Albinson. You have every right to disagree with that opinion but please refrain from personal slurs in future comments.

    If you have constructive additional comments to make, particularly in answer to the question you pose about the numbers and origins of startups created in Canada, I’d be delighted to publish them.

    I tried to communicate this to you in an email but the email address you provided us was rejected by its domain.

  • ciprian patrulescu

    March 10, 2011 5:15 pm

    Pittsburgh is a model for how other cities can transform from a heavy industry economy to the new economy industries.

  • Ian

    March 12, 2011 12:28 am

    WRT government run “innovation” check out the term “Swedish Paradox”

    It will be interesting to see how IW fairs as the US government state/federal struggle with huge deficits. They are laying off fire fighters in Detroit how does that bode for less essential services like incubators. IN my humble opinion there is a non-profit incubator bubble waiting to burst in the US right now and financial pressures will cause it to burst sooner than later.

    Socialized health care seems to work reasonable well and is the sort of essential service that govenemnts are better suited to … socialism and startups … not so good a fit.

    Just my 2C.

  • Leo

    March 13, 2011 12:10 pm

    Ian:

    Thanks for your comments. If I understand the Swedish Paradox correctly, it is that a high level of investment in R&D has failed to yield a corresponding level of economic output. I think that nails a key issue that demonstrates that there is a profound difference between activities that develop a product and activities that commercialize that product to create wealth. One process gets a product ready for the market, the other process gets the product out the door and into the hands of customers. Successful startup incubation must be a balanced combination of both.

    We will be exploring in a future post this issue of public policy that focuses too much on product development and not enough on programs and initiatives that can help startups with the commercialization phase.

  • Ian

    March 13, 2011 4:20 pm

    Leo, ideally a business would be developing both product and going to market at the same time. What you describe is what I refer to as serial commercalization. Doing business and development in parallel “parallel commercalization” is much preferred.

    The sooner a business engages with customers and generates revenue the better. Bootstrapping basically forces start-ups to start customer development and monetization much faster. Something that large “innovative” bureaucracies could not possibly comprehend. Which brings me back to the Swedish Paradox …

    The City of Ottawa has already spent $1M to study an incubator. They also have a $2M budget for 2011 to further study an incubator … not do anything substantial just study. I am sure the result will be a well written and properly bound report on what the city should do with the next large chunk of funding for the project. A great illustration of the “Swedish Paradox”.

    TheCodeFactory should have 2 bootstrap graduates in 2011 that have successfully outgrown our space, we have created 2 jobs, facilitated 20ish more, had 19 students hired and over 500 organic volunteer lead grass roots events. All this at no cost to the tax payer.

    To put things into perspective the $3M the City of Ottawa will spend on incubator studies could have started about 20 TheCodeFactory’s that would be self sustaining.

  • Leo

    March 14, 2011 11:35 am

    Ian, yep, I agree wholeheartedly. These are two processes that should be ongoing at the same time and feeding each other.

    When I spoke to Mayor Watson about where and how that $2 million will be used for economic development, there was a vague assurance that it will be decided in consultation with the business community. One can only hope that the process of consultation itself doesn’t eat up a big chunk of this money, and that the money isn’t diluted among those organizations that are too focused on protecting their turf rather than working with enterprising folks such as yourself to achieve something that is truly effective on a large scale.

  • Technology news - Techvibes.com

    March 14, 2011 2:23 pm

    [...] Francis Moran and Leo Valiquette. The blog post was previously published on [...]

  • Jess

    March 30, 2011 1:33 pm

    Interesting to look at AlphaLab and hear that Pittsburgh manages not to make it overly bureaucratic — that is certainly a feat and I’d take my hat off to those government folks who are staying out of the way!

    From my very limited perspective based on working with university incubation, things go awry with incubation when the measurements defining success are set poorly [measurements defined by government funding bodies], become inflexible, and drive any genuinely good intentions into a statistics race…

  • Francis Moran

    March 30, 2011 2:10 pm

    Thanks for your perspective, Jess. I’m very much looking forward to hearing your reports from your exciting new gig at Springboard.

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