From their humble origins in 1959 in New York, business incubators are now estimated to number over 5 000 globally. Charles Mancuso created the first incubator when he rented space in his Batavia Industrial Centre to start-up companies, often guiding them through the growth process of their businesses. Today, business incubators come in many shapes and sizes,with a wide range of purposes and offerings.
Most incubators share the common purpose of nurturing young companies, helping them survive and grow during their vulnerable start-up phase. An important element in the definition is the supportive environment designed to ‘hatch’ businesses. An incubator would belittle more than a ‘hotel’, however, if it didn’t also provide a set of relevant support activities and services to dramatically enhance the success rate of early stage ventures.
How Do They Work?
Many have remarked that no two incubator sare alike. This is certainly true in South Africa’s emerging incubator sector.
One class of incubator falls within a not-for-profit category. These are often linked to governmental initiatives and higher education institutions where the primary purpose relates to local economic and entrepreneurship development. A leading example of this type of incubator is the Innovation Hub’s Maxum Business Incubator, lead by Dr Jill Sawers, which offers early-stage entrepreneurs in knowledge-intensive sectors,such as ICT, bio sciences, electronics, and advanced manufacturing and materials, a residential programme in a ‘vibey’ community environment. Another category is for-profit incubators that often invest time and resources into later-stage ventures.
Allon Raiz, founder of Raizcorp, has demonstrated how a differentiated incubator model, described as a “prosperator”, offers its “partner companies” a longer-term relationship with a guaranteed increase in profitability. The main components of an incubator model include selection, infrastructure, business support, mediation, and graduation.As Sawers suggests in her definition of an incubator, it must have “…entry and exit criteria, and a definite process, including services and activities, that produces sustainable entities.”
The first decision is who to accept. This says a lot about the type of business incubator an entrepreneur might be dealing with. The main criteria incubators apply include the management experience and technical skills of the entrepreneur(s), financial projections and market potential of the venture, and the personal drive and character of the entrepreneur(s).
Raiz views this step as paramount and has evolved “…one of the most rigorous screening processes in the world”, including three interviews, audits, tests and due diligence to ensure that only true entrepreneurial go-getters gain entry. Raizcorp’s one-in-twenty acceptance ratio is evidence that only those who can “…articulate why they have an economic right to exist” gain access to their “high touch” offering.
Most incubator selection strategies fall within four distinct areas, depending on whether they believe in survival-of-the-fittest or picking winners, and on whether their criteria favour compelling ideas or inspirational entrepreneurs. A survival-of-the-fittest selection philosophy sees the incubator take on a large number of firms and relies on market forces to decide the winners from losers.
The picking winners approach sees incubators attempting to identify a few potentially successful firms at this very early stage. The choice of criteria favouring either the idea or the entrepreneur raises the question of whether the incubator would rather select an “A Grade”entrepreneur with a “B Grade” idea/venture or a “B Grade” entrepreneur with an“A Grade” idea/venture.
Walter Penfold, Founder and Director of the recently launched Gumption Business Incubator, believes strongly in an “A Grade”entrepreneur – someone with strong “problem solving skills” and a high level ofwhat he terms “entrepreneurial intelligence”. In Raizcorp’s model, untested ideas with no existing revenues are not welcome, and business plans are canned at the door.
The infrastructure component of an incubator normally includes very affordable physical working spaces, with relevant technology and equipment. Sawer’s Maxum offers over 1 500m2 of high quality innovation space that enables their tenants to get going immediately. Raizcorp’s Measurement of Value Add (MOVA) Intranet provides unique management infrastructure to track progress and quickly identify areas for immediate intervention by the mentor team.
Business incubators exist to dramatically increase new venture success rates, and support often includes training, advice and services. Well-subscribed training often focuses on business planning and sales, as well as broader entrepreneurial, management and leadership sessions. Raizcorp is receiving academic accreditation for its practical curriculum,while Maxum taps into the experience of seasoned business mentors to guide its start-up companies. Training can be complemented by trusted advice and coaching on business development, marketing and finance topics.
Business services offered may include basic accounting and legal services, market research and advertising, and fundraising assistance – freeing up the tenant entrepreneurs to focus on their business plans and value propositions. Gumption’s comprehensive list of business support offerings provides assistance for almost any need. Some incubators differ in their preferred model of business support – in terms of who initiates the support (incubator or entrepreneur) and how the support is provided (ad hoc or intensive).Entrepreneurs should thus consider whether a ‘menu of services or a set programme of support would better suit their needs.
Tales abound of Silicon Valley entrepreneurs meeting possible investors, complementary entrepreneurs or technical experts in Palo Alto coffee shops. Business incubators play an important mediating role, linking inexperienced entrepreneurs to elements of the broader innovation system,including investor, technology, and knowledge networks. Maxum’s relationship with Adams and Adams, a leading patenting attorney firm, for example, offers tenants a certain amount of free patenting, trademark, and copyright advice that would be out of reach to an entrepreneur not linked to Maxum’s programme.
Leading business incubators also play a mediating role between the many independent entrepreneurs. Gumption’s Penfold sees his role as a “matchmaker” between entrepreneurs he works with,encouraging “cross-pollination” of ideas and business development strategies.Leading incubators also open doors for entrepreneurs, providing opportunities for meeting and doing business with large companies. Several of the companies in Maxum have formed partnerships with large companies/organisations that have“taken them to the market”, says Sawers.
If the environment and support is so appealing in an incubator, why leave? For some entrepreneurs who have reached sustained profitability there is a desire to create their own space. For some incubators, exiting as a viable business is the successful outcome of the process. For Raizcorp, exiting is not the norm, as the idea is to create continued value from a long-term relationship. This raises the sometimes thorny issue of equity or profit share versus a fee-based approach. Although some entrepreneurs may find it appealing to offer future dividends instead of current limited cash as payment,not everyone welcomes this practice.
The debate is partly an ethical one, withs ome warning of the opportunity for favouritism – with fee-paying tenants possibly feeling that incubator management would be more committed to those in which they have an equity stake. Raizcorp’s deal is a demanding one; 33,3% (20%of net profit) of your equity plus token fees for monthly service packages –for a guarantee of increased profitability and a model that works for many.Maxum’s deal is more “rent” based, with a royalty fee of 2% of annual turnover for the equivalent period that the entrepreneur was a tenant. Figures from Europe support the emphasis on fee-based models, with only 24% of incubators possessing shares in tenant firms and 17% receiving dividend or royalty income from tenants.
How to Choose an Incubator
For most incubators, their choice of entrepreneur determines the success of their process. For entrepreneurs, their choice of incubator may be even more important. Given the discussion so far, the following questions may guide entrepreneurs in knocking on the right doors:
- What is the purpose of the incubator? How is this aligned to the entrepreneur’s objectives and needs?
- What selection criteria and process does the incubator employ? What kind of fellow-tenants might this criteria and process result in?
- Are the entrepreneur’s most-needed services catered for at the right price?
- How is the incubator connected to the people, resources and networks most desired by the entrepreneur?
- What financial deal is the incubator offering or demanding?
- Will co-branding with the incubator strengthen the brand of the new venture?
For more information, contact: Gumption Business Incubator on +27 861 00 2030, www.gotgumption.co.za; Maxum Business Incubator on +27 12 844 0000, www.maxum.co.za and Raizcorp on +27 11 566 2000, www.raizcorp.co.za
Put On Your Wellies: It’s Time To Wade Into Risk
Entrepreneurs aren’t all leaping into the unknown like lemmings off a cliff, but they do need to consider it…
You’ve had a great idea. You’ve looked into its development. You’ve recognised that it has potential beyond just what Auntie Mabel and Mike From The Grocer think. And you’ve clearly nailed a pain point that can make money. Now it is time to take the risk of running with it.
Every big idea comes with risk. You can’t step out into the world of entrepreneurial thinking and business development without it. Your idea may fail. It will also be time consuming, demanding, hungry for money, and hard work. It is unrealistic to expect that your project will leap out into the world and be an unmitigated success.
It is also unrealistic to assume that it isn’t worth taking this risk.
There are steps that you can follow to ensure that your risk is managed so you aren’t blindly leaping off that cliff…
Step 01: Do your research
No, canvassing your neighbours, friends and family is not doing research. You need to know that your idea will appeal to a broad market and that it will have significant legs. This may sound like daft advice, but you would be surprised how many people think an idea will take off just because Susan in Accounting said so.
Step 02: Understand the costs
Projects are hungry for money and investment. Realistically work out your budgets and how much it will cost to take your project off the ground and then stick to it.
A calculated risk is a far better bet than one that shoots from the hip and hopes for the best. You can also use this as an opportunity to draw a clear line under where you will stop investing and end the project. If it keeps eating money and isn’t getting anywhere with results you need to be able to walk away.
Step 03: Know when to walk away
As mentioned before, this can be defined by a line you’ve drawn in the proverbial sand (and budget) but no matter where you draw this line, you have to stick to it. Often, when time, money and energy have been poured into a project it can be incredibly hard to walk away.
You think ‘but I have put so much into this, just one more’ and then it gets to a point where the ‘just one more’ has taken you so far down the line that walking away feels impossible. Leave. Learn the lessons. Apply them to your next project.
Mind The Gap
The entrepreneur’s guide to finding the gaps and building the right solutions.
Innovation may very well be the key to business success but finding the gap into which your innovative thinking can fit is often a lot harder than people realise. Some may be struck by inspiration in the shower, others by that moment of blinding insight in a meeting, however, for most people finding that big idea isn’t that simple. They want to be an entrepreneur and start their own high-growth business, but they need some ideas on how to find that big idea.
Here are five…
It sounds trite but networking is actually an excellent way of picking up on patterns and trends in conversation and business problems. The trick is to note them down and pay attention. Soon, you will find patterns emerging and ideas forming.
2. Look for pain
Just as networking can reveal trends in the market, so can spending time reading. The latter will also help you find common business pain points. These are the touchpoints that frustrate people, annoy business owners, affect productivity, or impact employee engagement.
Be the Panado that fixes these pains.
This is probably the most annoying of the ideas, but it is unfortunately (or fortunately) very true. Luck does play a role in helping you capture that big idea. However, luck isn’t just standing around and random people offering you opportunities. Luck is found at networking events, it is found in research and it is found in conversations with other entrepreneurs.
4. Luck needs courage
You may have found the big idea through your network, a pain point or pure blind luck, but if you don’t have the courage to take it and run with it, you will lose it to someone else.
Being bold in business is highly underrated because most people assume that everyone is bold and prepared to take big leaps into the unknown. However, not all brilliant entrepreneurs were ready to throw their family funds to the wind and leap into an idea – they were courageous enough to figure out a way of harnessing their ideas realistically.
5. Pay attention
This is probably one of the most vital ways of finding a gap in the market. Often, people are so busy that they don’t really pay attention to that niggling issue that always bothers them on a commute, or in a mall, or at a meeting. This niggling issue could very well be the next big business opportunity. Pay attention to it and find out if that issue can be solved with your innovative thinking.
5 Things To Know About Your “Toddler” Business
As you navigate this new toddler phase of your business, here are five things to bear in mind.
Ah, toddlers. Those irresistible bundles of joy bring a huge amount of energy, curiosity and fun to any family – but there’s also frustration and worry that comes with their unpredictability, as they grow and start to become more independent. If you own a business and it’s successfully past its “infancy” of the first year or so, it’s likely it will also go through a toddler stage of its lifecycle.
Pete Hammond, founder of luxury safari company SafariScapes, agrees with this. “Our business is now three and a half years old, and we’ve found that we’re not yet big enough to justify employing a large team of people to handle the day-to-day admin tasks, yet we still need to grow the business as well,” he says. “As a result, our main challenge is finding the time to step back and see the bigger picture. Kind of like when you are raising a busy toddler and you spend most of your time running after them!”
As you navigate this new toddler phase of your business, here are five things to bear in mind:
1. This too shall pass
Everything in life is temporary – and that goes for both the good and the bad. It’s as helpful to remember this when you’re facing the might of a toddler temper tantrum, as it is when you’re facing throws of uncertainty in your business. If your new(ish) venture is going through a rough patch in its first few years, it can be easy to think about giving up – but don’t. As long as you have an overall big idea that you believe can add value to your customers, keep pushing through the rough parts until you come out the other side.
2. Appreciate what this phase brings
The toddler years mean that the initial newborn joy is officially behind you. But these small humans also bring their own kinds of joy, as you watch them learn new skills, say funny things, and give affection back to you. While your two-year-old business may not hold the same exhilaration for you as it did during those first few months, there are now different things to appreciate about it: Maybe you’re expanding your product range, or employing new people who can take the workload off you.
3. Establish boundaries
Toddlers thrive on boundary and routine – and your toddler business will too. As it grows into a new phase, try and establish limits in terms of the type of clients you want to work with and the type of work you’ll do. It’s also a good idea to make a decision about the hours you’ll work and when you’ll switch off, which will help you establish a good work-life balance.
4. Take a break
Every parent with a toddler needs a break every now and then, even if that means a walk around the block (on your own!), a dinner out with friends, or even a few days away. The same is true for a demanding small business: every so often, remember to take time out to rest properly, where you switch off your laptop and completely unplug. You’ll return much more inspired and resilient to deal with the everyday uncertainty that it brings.
5. Give it space to make mistakes
While the unpredictability of a young business can be stressful and tiring, it’s also a time for trying new things without the risk of huge consequences if they don’t quite work. After all, it’s much simpler to change your USP if you’re a small business employing a few people, rather than a big company where 50 people are relying on you for their salary, or where you’ve received a huge amount of investment capital. While you may fail in some of the things you try with your business (in fact, this is almost guaranteed), see it as a toddler that’s resilient enough to pick itself up, dust its knees and keep moving forward.
During this phase of business growth it’s also essential to have the right type of medical aid cover. There are medical schemes such as Fedhealth which has a number of medical aid options and value-added benefits to ensure that your health and wellness is taken care of too. After all, the healthier you and your staff are, the more productive your business will be – during the toddler (business) stage and beyond.
While this phase can be frustrating, it’s a sign that your business is growing and adapting, rather than remaining in its infancy, and that can only be a good thing! So embrace the difficulties, learn from them, and watch as your business strides forward confidently into the next exciting phase.