Executive Summary

Introduction

The Canada Economic Development Agency retained Tecsult to conduct a benchmarking study comparing Inno-centre, the other incubators funded by the Agency and other technology incubators in Canada and abroad. The objective of the study is to position and evaluate enterprise incubators in Quebec and internationally, with priority given to Inno-centre, based on three dimensions: relevance, outcomes and effectiveness. It also aims to identify best practices and expand knowledge about technology incubators as a vector for stimulating innovation and for economic development.

Methodology

Tecsult employed a methodology based on telephone interviews with managers of technology incubators. Managers of a total of eight incubators in Quebec and nine Canadian and international incubators were questioned about the basic characteristics of their incubators, the services they offered, their markets and clients, their operating methods, their financial structure and quantitative results, and about issues and trends in incubation.

The interview findings, supplemented by a document analysis and Internet-based survey of the incubators' clients, were then analysed under the following four headings:

• a descriptive analysis of the incubators' business models;
  
   
• a descriptive analysis of the incubators' performance;
  
   
• a comparative analysis of the business models and performance of the various incubators;
  
   
• a complementary analysis in order to answer various specific evaluation questions.

The main findings of that analysis are set out below.

Incubators' Business models

Ten dimensions of the business models of the incubators surveyed were examined. The principal findings are summarized in the table below.

Dimensions	Principal Findings
General Characteristics	Primary mission of the incubators: to start up innovative technology enterprises; Development of niches: Internationally: often in a specific economic sector; In Quebec: often in a specific region; Status: mostly NPO, a few institutional; Type of facility: often mixed (physical and virtual); Average age: 10 years (the oldest are 20 or more years old and the most recent are less than three years old); Client enterprise types: primarily bioscience, information and communications technology (ICT) and industrial technology.
Team and Network	Business coaching: provided by business consultants or management team members, with the support of specialized consultants and contractors; In Quebec: more business consultants and contractors; Internationally: more business consultants; Member training: mainly in sciences or enterprise administration; Experience: mainly in private enterprise, both with young firms and with established firms; Enterprise networks: developed and composed of funding, research, government and enterprise communities.
Selection Process and Criteria	Preselection of projects by internal team, final decision made by selection committee; Internationally: more formal selection process (selection committee, due diligence); Principal selection criteria: potential of the technology and quality of the team.
Services Offered	Services offered consist of, in order of importance: management consulting; financial consulting; referrals for outside services; production consulting (in Quebec only); marketing consulting; HR and legal affairs consulting. Internationally: more training offered, public relations and client solicitation services offered.
Coaching	Coaching provided by a certified consultant for each project; Internationally: greater tendency to offer expert advice on request but for a specific period of time; Few advisory committees established to support projects; Internationally: greater tendency to offer startup financing; Methods for finding funding: using enterprise networks and developing and implementing specific strategies; In Quebec: more ongoing help with finding funding; Internationally: use of fundraising specialists.
Follow-up of Graduates	A large majority of incubators follow-up on graduates; In Quebec: statistics compiled regarding economic performance of firms; Internationally: informal follow-up with graduates through regular meetings and offering ad hoc services.
Business development	Most commonly used method of finding clients: referrals by partners and contacts; In Quebec: more prospecting and direct marketing to potential clients, participating in networking events and organizing information events or tools; Internationally: more advertising in local or regional media.
Client Sources	Main sources of clients: universities and independent entrepreneurs; Over 70% of projects incubated come from these sources.
Allocation of Efforts	Most efforts devoted to: business coaching, including help with finding funding; In Quebec: more weight placed on finding funding for enterprises; Internationally: business coaching in general is more predominant.
Financial	Salaries and benefits: first expense item; In Quebec: accounts for more than half of expenses;
Structure	Internationally: accounts for one third of expenses; Government: principal funder for incubators, particularly in federal or supra-federal states (European Union); Self-financing: slightly less than one third of incubators' revenue; Main remuneration mechanisms: 1 - rent, 2 - professional fees and other fees for services payable when services used, 3 - professional fees and other fees for services payable if success is achieved, and 4 - sale of shares; Most used remuneration mechanisms: rent and fees payable when services used.

Performance of Incubators

The incubators' performance was evaluated on the basis of their results and their clients' results.

Incubators' results – The international incubators were larger, on average, than in Quebec, in terms of both their operating budgets ($1.43M vs. $1.25M) and the number of projects in incubation (32 vs. 20). The Quebec incubators evaluate more projects (74) than the international incubators (64), but both categories of incubators accept the same number per year (11). As well, they produce the same number of graduates (seven per year).

Firms' results – The results for the incubators' clients were determined based on their five-year survival rate from when the incubation started, the number of jobs in the firms, their total sales, the proportion of firms that obtained funding and the amounts obtained. The average five-year survival rate was 57% in Quebec and 62% internationally. In addition, each international incubator generated more jobs, on average, and obtained more funding from the incubated firms and graduates.

Secondary indicators – Because the incubators' gross performance may be a function of their size, a series of secondary indicators was established. Two size indicators were used: operating budget and number of projects in incubation; as well, various ratios were calculated using the primary indicators. As in the previous exercise, the weighted results for the international incubators were higher, in general, than for the Quebec incubators. However, the Quebec incubators surpassed the international incubators on certain indicators, including indicators for firms graduated (cost per job, jobs per graduate).

Comparative Analysis

The objective of the comparative analysis was to determine the characteristics of the business models of incubators posting the best performances. The main conclusions from that comparison are as follows.

• No single characteristic of the incubators' business models guaranteed good performance. All characteristics may be associated with lesser results. It therefore seems that the balance found in the model is the important factor.
  
   
• Mixed or virtual incubators and generalist incubators (all economic sectors) seem to do better than the others.
  
   
• If the budget is too small this may hinder the incubators' performance.
  
   
• The teams that produce the best results have varied and complementary training, including training in sciences and enterprise administration, and their members are drawn primarily from the business world.
  
   
• A more formal and structured selection process that includes, but is not limited to, criteria based on projects' potential for success enhances incubators' performance, regardless of admission rate. As well, incubators that allocate more effort to selecting candidates do better.
  
   
• The services offered do not need to be exhaustive to produce good results. However, offering more financial services is a factor in success.
  
   
• The type of coaching that produces the best performance is balanced coaching combining structure, systematization, flexibility and adaptability. The degree to which coaching is internalized does not affect performance. However, allocating more effort to coaching may improve the incubators' performance.
  
   
• An incubator that has startup funding available is more likely to do well than an incubator that does not.
  
   
• There is no direct relationship between incubators' self-funding rate and their performance. On the other hand, incubators with higher self-funding rates more often have a secure payment method.

Responses to Other Evaluation Questions

Funding of Incubators

The combination of several factors means that a minimum of self-funding is preferable (incubators are independent and have incentive to perform), but it should not be excessive (risk of effort being diverted). In addition, there seems to be no relationship between incubators' performance and their level of self-funding. However, the example of France should be mentioned. Many French incubators that have no obligation to self-fund achieve higher than average performance. That situation, however, can be achieved only where governments make a long-term commitment to enterprise startup.

Incubators that have a secure payment method, largely physical or mixed incubators, are more likely to show a high level of self-funding.

There could be various ways of achieving the outcomes sought by the Agency at lower cost. Given that the scarcity of startup funds in Quebec is the main obstacle to starting up technology enterprises, incentives for making startup capital available might be an excellent way to ensure that the efforts devoted to incubation produce better outcomes. This could be done by creating new startup capital funds or providing incubators with mini-startup funds.

Based on the findings of this study, the following elements are characteristic of the business model most likely to optimize return on the Agency's investment:

• a generalist and potentially mixed incubator that might share space with other players involved in commercializing innovation (which might also lead to higher revenues);
  
   
• an incubator with a budget that is sufficient to enable it both to have a complete team in place, with high-level expertise and a range of training and experience, and to constantly improve the services it offers;
  
   
• an incubator with a formal, structured selection process based on criteria relating to the projects' potential for success;
  
   
• an incubator offering a strategic but not necessarily exhaustive list of services, that can call on outside expertise to supplement the list when needed;
  
   
• an incubator with a balanced approach to coaching, combining structure, systematization, flexibility and adaptability;
  
   
• an incubator with access to a startup capital fund;
  
   
• an incubator that devotes more than average effort to the selection process and coaching.

Competition

There are two types of competition between the incubators funded by the Agency. Competition for clients is weak and generally has no negative effects. Competition for public funds is potentially more problematic and is expected to increase. There is no direct competition between the incubators funded by the Agency and the research application development corporations, with the two groups acting more as partners than competitors.

Relevance and Outcomes

Both in Quebec and internationally, managers believe that the extent to which an incubator will be interested in an incubated firm is primarily a function of the basic components of its business model, that is, the team and network, the services offered and coaching method.

The services and coaching offered by the incubators reflect the clients' needs.

In the opinion of both the incubator managers and their clients, it seems that a majority of the projects that have been incubated in Quebec would otherwise not have got off the ground. Internationally, the proportion that would not have started up is lower, probably because of the greater availability of startup capital.

The results achieved vary by the firms' economic sectors. Projects in sectors regarded as less promising, or calling for more research and development, are more difficult to bring to fruition.

Relationship between the Incubators' Results and the Agency's PAA

It should be noted, first, that with the exception of one project, all the projects were approved under the old programming. Two thirds of the projects, however, were converted to the new programming. Obviously the results the incubators aimed to achieve varied widely from project to project, but complied with the PAA. They were divided into five program sub-activities, and eight sub-sub-activities. The projects that were not converted involved projects completed before the new programming came into effect.

The only project approved since the new programming falls under sub-sub-activity 2.1.1.2 – Strategic Enterprise Management; two other projects in the process of applying for approval fall under 2.1.2.1 – Enterprise Pre-startup and Startup.

When the next incubation projects are improved, an important question would be whether all projects should be aiming for the same results. All incubators would then be monitoring the same indicators. The result would be that it would be easier for the Agency to get a comprehensive measurement of the impact of its activities in respect of using incubation for enterprise startup. Sub-activity 2.1.2.1 – Innovative Enterprise Pre-startup and Startup seems to be the sub-sub-activity with the desired outcome most connected with the incubators' activities.

Evaluation of Inno-centre

The following factors may be seen when the Inno-centre business model is compared with the models of the other incubators.

• Inno-centre's activities and business model cover more ground than a majority of incubators. In addition, its selection process is more rigorous and coaching is more formal, structured and intensive.
  
   
• Inno-centre has a number of characteristics also found in the other incubators.
  
   
• However, Inno-centre differs in that it is one of the two virtual incubators in the sample. The effect of that characteristic is that business coaching is the clear focus of the services if offers, as reflected in the efforts devoted to it.
  
   
• Another significant difference is the fact that Inno-centre's payment method involves inherent risk. However, that characteristic does not seem to influence performance.

First, we note that Inno-centre has a larger operating budget and higher results than the average for the other incubators, particularly in terms of the number of projects evaluated, the number of graduates per year and the five-year follow-up rate for firms from the date incubation began. When Inno-centre's size is taken into account in evaluating its performance in the last five years, however, its results are lower than the average for the other incubators studied, both in Quebec and internationally, particularly in terms of the firms incubated (cost per firm incubated, cost per job, jobs per firm incubated).

Trends in Incubation

The broad emerging trends in technology incubation are as follows:

• constant improvement in services and coaching, while keeping a lookout for new technological developments and the needs they generate;
  
   
• systematization of technology incubation practices;
  
   
• globalization of incubators' networks and activities, particularly in terms of research and funding;
  
   
• the need to find solutions to the scarcity of startup capital, particularly in Quebec, which can be met, for example, by developing networks of angels and creating specialized funds, but also by government action to encourage startups;
  
   
• recognition of incubation as a sector whose activities are essential to the value chain and renewal of a society's industrial base;
  
   
• rising demand for prioritized, stable and meaningful funding for incubators, without which their operations are hobbled;
  
   
• growing incorporation of different players in the ecosystem in which innovation is commercialized.

To address the growing scarcity of risk capital, incubators used the following strategies:

• increasing the effort and time devoted to finding funding, as a result of, among other things, the need to take part in several rounds of funding generating small amounts of money rather than one round generating all the money needed;
  
   
• finding alternative funding methods;
  
   
• efforts to increase revenues of incubated firms in the short term, for example by selling expertise or services that are not directly connected with the project under development;
  
   
• not geographically limiting the effort to find funding;
  
   
• participating in or driving the creation of startup capital funds.

Findings and Recommendations

The following findings are recommendations arising out of the interviews conducted with incubator managers and the analysis set out above, but go beyond the evaluation questions.

Finding 1: It is very difficult at present to start an enterprise in Quebec, primarily because of the scarcity of startup capital. This precarious situation is an obstacle to renewing the province's industrial base.

Recommendations:

• It is essential that the governments of Quebec and Canada consider the issue of enterprise startup in general and incubation in particular, decide whether it is a priority, and if so, commit the appropriate resources to it.
  
   
• It is particularly urgent that startup capital funds be developed in Quebec, and government intervention could be required to make this happen.
  
   
• Providing incubators with startup funds, even small ones, appears to be an excellent way of stimulating the creation of technology enterprises.
  
   
• Another solution might be to provide tax credits for payments for incubation services.

Finding 2: It is not apparent to the authors of this study that the current emphasis on self-funding by incubators is justified. When it comes to self-funding, a balance is likely to come about naturally, particularly if managers of incubators are enterprise professionals who are committed to the success of their organizations.

Recommendation:

• Funders, working with managers of incubators, could reassess the weight placed on self-funding requirements in making grants to incubators.

Finding 3: As this study demonstrates, it is very difficult to compare the performance of incubators and their clients in order to identify best practices, since not all of the incubators evaluate their own and their clients' results in the same way.

Recommendation:

• There is a need to develop common indicators for measuring the performance of the incubators, to be used by all of them, so that comparisons would be easier to make. The nature of the indicators should be determined in collaboration with the incubators and their clients, to ensure that they accurately capture what is being done in the incubation field.

Finding 4: Incubators and their clients are often asked to participate in all sorts of evaluations and surveys, but some of these studies are regarded as repetitive or incomplete.

Recommendations:

• It might be wise to limit these requests to incubators and their clients, while still being careful to stay up to date on the situation in the sector. One way of doing this might be to ensure that there is better coordination among the various studies. It would be useful to identify the considerable information about best practices in technology incubation that is currently available and do a complete review of it.
  
   
• In order to understand technology incubation better and identify best practices in the field, it would also be wise to study the particular environment in which incubators operate and conduct case studies.

Finding 5: At present, there is a global trend toward integrating the various components of the technology startup and business development ecosystem. Those components are the research, entrepreneurship and funding (risk capital) communities, and government agencies.

Recommendation:

• Because the increasing integration should prove beneficial, in that it will optimize the process of commercializing innovation and reduce time lags and errors, it would be wise to encourage it. In this regard, technology incubators are in a good position to play a major role as intermediaries in the ecosystem because of their links with its various components.