Comparative study technology incubators in Quebec and abroad
5. Comparative Analysis
This section compares the various elements of the incubators' business models with their performance indicators, in order to identify the relationship between the various incubation practices and the performance of the incubators and their clients. The analysis is done using the following dimensions of the business model: general characteristics, team and network, selection process, services offered, coaching, allocation of effort and financial structure.
Incubators in Quebec are identified by letters ("a" to "h"), and incubators outside Quebec are identified by numbers ("1" to "9").
5.1 Analysis of Incubators' Performance
As noted earlier, the four broad criteria used to describe the performance of incubators inside and outside Quebec are the cost of incubation, the productivity of the incubators, and the survival rate and performance of the client enterprises. Table 5.1 sets out the comparative analysis of the incubators' performance according to those four criteria.
This table ranks the incubators studied in decreasing order by performance from left to right. The incubators on the left are therefore considered to have better performance. As well, the table shows that there are no incubators in the top third for all criteria, but there are clearly several incubators, in particular the top four, that are ahead of the pack.
Two incubators in Quebec rank among the top five, while two are among the bottom five. There are four incubators in Quebec in the top half.
5.2 Analysis of General Characteristics
The "general characteristics" dimension of the incubators' business models is defined here by four criteria: the date on which the incubator was founded, type of facility, economic sectors and operating budget.
For the date on which the incubators were founded, they are classified as founded before (A) or after (N) the technology bubble burst in 2000. For type of facility, the incubators are classified as physical (P) or having a virtual component, including purely virtual and mixed (V).
Economic sectors are divided into two categories. The first covers generalist incubators whose clients operate in a wide range of sectors, the main ones being biosciences, ICT and industrial technologies (G). The second covers incubators that specialize in biosciences (often in the medical field) (B).
The incubators' budgets are classified as "high" (dark) if the budget is much higher (about 35%) than the average budget of all the incubators ($1,245,000), "low" (white) if it is lower (about 35%) than the average budget, and "average" (pale) if it falls between the two other categories.
First, as may be expected, the older incubators seem to do better than the younger ones. However, it may be that this trend is a consequence of the absence of data that could be used to evaluate the results of the young incubators properly.
Second, incubators that offer enterprise consulting services both to their tenants and to outside clients, and so have virtual or mixed facilities, are likely to perform better than physical incubators. In the latter category, the best incubators show average performance.
Generalist incubators do better, overall, than incubators specializing in biosciences.
It is not clear whether a higher budget might help to produce better results. However, the incubators with lower performance generally have lower budgets.
5.3 Analysis of Team and Network
The team was analysed using the categories defined earlier: composition, training of team members and predominant experience. The evaluation of the network was based on the extent to which it includes all potential categories of partners.
Team composition is divided into three categories: "complete" (dark), "intermediate" (pale) and "minimal" (white). The categories are defined by a combination of two indicators. The first is the presence of various functions within the team: management, business consultant and specialized consultant. An incubator that has members who cover all those functions is considered to have a more complete team, while the team composition is minimal if it has only one function. The second indicator is the number of members. A larger team is considered to be more complete, and a smaller team less complete.
Team training is divided into two categories. The first consists of teams with training considered to be complete (C), that is, it covers enterprise administration and/or economics and finance as well as sciences. The second consists of teams whose members are essentially trained in enterprise administration (A).
The three categories for the team experience criterion are enterprise (A), finance (in particular risk capital institutions) (F) and more complete experience that combines both those categories but also covers the public sector and technology commercialization (C).
A network is considered to be very wide (dark) when it includes virtually all categories of the potential partners listed in table 2.4 (11 partners or more), average (pale) if it includes from 8 to 10 partners, and limited (white) if it includes only 7 or fewer.
Table 5.3 sets out the comparative analysis for each incubator of the various criteria that characterize the incubators' team and network.
No significant trend seems to be apparent in terms of team composition, other than the fact that the best incubators almost all have complete or intermediate teams.
A team with varying and complementary training seems to produce better results than a team that specializes in enterprise administration.
A team whose predominant experience is in enterprise, whether in young or established firms, is associated with the best incubators. Completeness of experience does not seem to be a factor in the incubators' success.
There is no apparent trend in terms of the impact of the extent of the enterprise network, as determined by the number of categories of partners it includes. This is undoubtedly because, apart from the various categories, the quality and appropriateness of the partners are what count, and these are elements that it is very difficult to evaluate.
5.4 Analysis of Selection Process
Four criteria were used to compare the incubators' selection processes: the rigour of the process, the selection criteria used, the admission rate and the source of the projects admitted.
The rigour of the process is defined using several axes that express the degree of formality or informality of the process. The factors considered to be part of rigorous processes are formal preselection, due diligence, evaluation of candidates' entrepreneurial potential (psychometric tests, mandatory training), presence of a selection committee; highly structured process, and ultimate decision by a higher authority (e.g. the board of directors). A selection process that incorporates a higher number of these elements is considered to be more rigorous (dark).
Selection criteria can be divided into three categories. The first includes criteria that relate to the projects' potential for success (R), such as potential of the technology and quality of the team. The second includes criteria that reflect material constraints that the incubator must take into consideration (C), and includes regional or sectoral constraints, the candidates' financial resources and constraints associated with containment levels. The third category is a combination of the other two, in that it combines success-related criteria and constraint-related criteria (M). An incubator is categorized based on how its main selection criteria, considered in order of importance, correspond to the categories.
Admission rate is calculated by dividing the number of projects selected for incubation by the number of candidates evaluated. An incubator has a "high" selection rate (admits a large proportion of candidates) (dark) if the rate is considerably higher than the average selection rate for all incubators, which is 28%. The rate is "average" (pale) if it falls around that average, and "low" (white) if it is considerably lower.
For the criterion relating to the source of incubated projects, incubators can be categorized based on the main source of their clients: private sector (E), public sector (U) or a combination of both (M). The main source of an incubator's clients is considered to be the private sector if at least 65% of the clients come from private enterprise or are independent entrepreneurs. It is considered to be public if 65% or more of the incubator's clients come from universities, public research centres or other institutions. If neither is the case, the source is mixed.
Table 5.4 sets out the evaluation of the criteria associated with the selection process and compares it to the incubators' results.
In general, the incubators that show the best performance have more rigorous selection processes. However, some incubators with very rigorous processes have random results, and one incubator with a relatively non-rigorous process ranks in the middle of the group.
Incubators whose selection criteria relate primarily to material constraints (sector, region, financial resources, containment, etc.) seem to fare worse than the others, in general. On the other hand, the performance of incubators that incorporate criteria relating to both the projects' potential for success and material constraints seems to be comparable to incubators whose selection criteria are based purely on success.
Some data are missing for the admission rate, but contrary to what logic would suggest, incubators that admit a larger proportion of candidates do not have worse results; the contrary is true. However, it is possible that this surprising trend is a result of the manner in which the various managers define a candidate. In some cases, it may refer to all projects that approach the incubator, while in others it is only projects that make a formal application after an initial informal evaluation is done. This is only a hypothesis that would merit further exploration.
The source of incubated enterprises does not seem to have a major impact on the incubators' performance, other than that those whose clientele comes mainly from public sources have average results.
5.5 Analysis of Services Offered
The services offered were analysed using the five categories of business services defined earlier: management, marketing, production, finance and human resources and legal affairs.
All types of services were assessed in the same way, based on the number of services offered by incubators in each category and the importance they assign to each service. The level of services offered by an incubator in a category of service will be "high" (dark) if it offers a majority of the services in that category and places high importance on them. It will be "medium" (pale) if it offers a more limited number of services and/or the services offered are of less importance. The level of services offered will be "low" (white) if few or no services are offered and the importance assigned to them is low.
Table 5.5 sets out the comparative analysis of the criteria associated with the "services offered" dimension of the incubators' business model.
No clear trend emerges from the comparative analysis of the services offered by incubators. In addition, it seems that a higher level of services in marketing and human resources and legal affairs is not necessary in order to achieve good results. On the other hand, five of the six best incubators offer a "high" level of services in finance, and this suggests that this category of services may play a key and distinct role in the incubators' performance.
5.6 Analysis of Coaching
Four criteria are used to characterize the coaching provided by the various incubators. The first is the extent to which coaching is formalized; the second is the level to which it is done internally; the third is the level of assistance offered for finding funding; and the fourth is whether or not startup funding is available within the incubator.
The extent to which the coaching is formalized refers to how formal and structured the method of offering services is. This criterion was evaluated based on several elements. Coaching that includes the following elements is considered to be more formal: a personalized coaching plan, designation of a consultant, creation of an advisory committee, fixed, regular and frequent meetings, organization of the coaching into phases with defined criteria or objectives, and a rigid timeframe for coaching. Incubators with opposite elements are considered to have more flexible (less formal) coaching: meetings and advice on request, little follow-up of incubated enterprises, variable timeframe for coaching.
Coaching is therefore categorized as "high" formalization (dark) if it is structured and formalized, thus having a high number of the elements identified above. It is categorized as "medium" formalization (pale) if it has a degree of structure but leaves room for flexibility, and "low" formalization (white) if it is mainly informal. It is important to note that formalized structure is not necessarily synonymous with high quality, and that more formal coaching does not eliminate any possibility of adjustment to the client's needs.
The level to which coaching is done internally depends on the extent to which outside expertise is used as compared to services offered internally. The level of internal services is "high" (dark) if an incubator has the express objective of offering as many services as possible through its internal team and minimizes the use of external expertise. The level of internal services is "low" (white) if the incubator offers basic services internally and makes intensive use of outside expertise. The level of internal services is "medium" (pale) where a large portion of services are offered internally, but outside expertise is called on to a considerable extent.
The level of assistance offered for finding funding is characterized as "high" (dark) where an incubator uses a large number of different strategies and is directly involved and supports the projects throughout the process. This category includes incubators that take an equity share, monitor the enterprises closely and support them through the first rounds of funding. The level of assistance is categorized as "low" (white) if the incubators use few strategies and essentially act as intermediaries between funding institutions and the enterprises. Where the assistance offered by an incubator falls between those two extremes it is characterized as "average" (pale). That category includes one incubator that offers relatively limited direct assistance to incubated enterprises but that has participated in creating startup capital funds in its region in recent years.
The last category identifies incubators that do (Y) and do not (N) have access to startup funding for their projects. We would note that this funding may come from an actual fund or from funds managed by the incubator.
Table 5.6 sets out the comparison between the incubators' results and the evaluation of the criteria describing the coaching offered.
The first observation from this table is that more formal coaching does not result in the incubators performing better. Five of the six incubators with the best results have an "average" level of formalization, while three of the six incubators with the lowest performance have a "high" level of formalized coaching. It therefore seems that a balance is desirable, with coaching that is well structured without being too rigid.
Incubators that adopt a "low" level of coaching offered internally have a higher performance potential than the others, in that none of them is among the five incubators with the lowest performance. On the other hand, "average" levels of internal coaching, or, to a lesser extent, "high" levels, have the potential to produce very good or very poor performance.
As in the case of how formalized coaching is, it does not seem that giving very active assistance and being very involved in finding funding have a significant impact on incubators' performance, although at least "average" support is offered by the best incubators. Obviously, the results associated with various strategies for assistance in finding funding are likely to vary, depending on the particular situation in the funding context where the incubator operates. A more intense strategy may be adopted in response to a difficult situation, and it may then be associated with poorer performance. This might be the case in Quebec, since a majority of the incubators that offer a "high" level of assistance are in Quebec.
Incubators with access to startup funding for the enterprises incubated seem to have a greater chance of success, but incubators with no startup funding may also have good performance ratings.
5.7 Analysis of Allocation of Efforts
This section evaluates the level of effort that incubators allocate to the selection process, coaching and assistance with finding funding.5 For all these criteria, incubators are categorized in the same way. Effort allocated to a particular criterion is categorized as "high" (dark) if the percentage of total effort allocated to it is more than 5% higher than the average for all incubators for that criterion. It is categorized as "low" (white) if it is lower than the average by more than 5%. It is categorized as "average" (pale) if it is equal to the average plus or minus 5%.
The average for all incubators for the percentage of effort allocated to the selection process is 13%, and is 36% for coaching and 12% for assistance with finding funding.
Table 5.7 sets out the comparative evaluation of the allocation of effort by the various incubators.
It is apparent that incubators with the best performance all allocate at least "average" effort to the selection process.
As well, three of the six best incubators allocate significantly more effort than average to coaching. However, as the example of incubator "a" shows, an incubator that devotes less than half its time to coaching may also perform well.
In addition, incubators that allocate more time to assistance with finding funding do not perform as well overall, although the opposite is true for incubator "a". However, it may be that this is a result of the fact that incubators in environments where it is difficult to find funding (e.g. Quebec) have to devote more effort than elsewhere if they hope to achieve equivalent results, although it is not always possible.
A comparison of tables 5.7 and 5.8 (selection process) suggests that there is a direct relationship between the rigour of the selection process and the proportion of effort allocated to that process. However, table 5.6 suggests that there is no such relationship between the effort allocated to coaching and the degree to which coaching is formalized, or the degree to which it is provided internally.
5.8 Analysis of Financial Structure
The comparative analysis of the incubators' financial structure is based on the following four criteria: relative weight of salaries and benefits as a proportion of expenses, relative weight of professional fees as a proportion of expenses, relative weight of self-funding (payment for services and private contributions) in revenue and method of payment for services.
The weight of salaries and benefits corresponds to the percentage of expenses accounted for by this item, as is the case for professional fees. The weight of self-funding corresponds to the percentage of revenue derived from this source.
These three criteria are categorized in the same way. The relative weight of an expense or revenue item for an incubator is considered to be "high" (dark) if the percentage associated with the item for the incubator is at least 10% higher than the average for all incubators. It is categorized as having "low" weight (white) if the percentage for an incubator is more than 10% lower than the overall average. It is of "average" weight (white) if the percentage is equal to the average for the incubators plus or minus 10%.
On average, for all incubators, salaries and benefits account for 44% of expenses and professional fees account for 14%. The average for all incubators for self-funding is 31%.
The various payment methods are risky (R), secure (S) and combination (C). An incubator's payment method is risky if a majority of its self-funding, excluding private contributions, comes from fees and service charges payable if the enterprise is successful and from sales of equity shares in client enterprises. An incubator is categorized as having secure payment methods if a majority of its self-funding comes from rent, fees and service charges payable when services are used. The payment method is a combination if payment comes from a mixture of the other two methods.
The comparative analysis of the incubators' financial structure is set out in table 5.8.
For a large majority of incubators with the best performance, salaries are given more weight, in relation to other types of expenses, than for the average of the incubators studied. This could mean that the importance assigned to human resources in relation to an incubator's capital and material expenses is likely to have a greater impact on the incubators' performance. Nonetheless, there is one incubator that has good performance for which salaries have less than average weight.
Professional fees generally supplement salaries. The relative weight of professional fees has no significant impact on incubators' performance.
There is no clear direct relationship between incubators' performance and self-funding rates. However, the funders impose no self-funding obligation in the case of three incubators. While they have no payment method or show a low level of self-funding, because of minor returns on the refundable advances they give every project accepted for incubation, performance levels are very good in two cases, and still average in the other.
It seems that both risky payment methods and secure payment methods are associated with successful incubators and also with incubators that do not perform as well. Secure payment methods seem to be associated with a wider range of performance. The incubator that uses a combination of methods does not have very good results.
In addition, nearly all incubators with a significantly higher than average level of self-funding use "secure" payment methods. However, the self-funding rate produced by risky payment methods may lower, equivalent to or higher than the average.
Incubators' self-funding rates do not seem to be related to the various characteristics of their business models.
5.9 Conclusions from the Comparative Analysis
The following conclusions can be drawn from the comparative analysis of the incubators' business models and performance.
- There is no single characteristic of the incubators' business models that guarantees good performance. All characteristics may be associated with lower results. It therefore seems that what is important is balance in the model.
- Incubators that are mixed or virtual and generalist (all economic sectors) seem to do better than the others.
- A budget that is too low will have a negative effect on incubators' performance.
- The teams that produce the best results have diverse and complementary training, including in sciences and enterprise administration, and have members that come primarily from the enterprise community.
- A more formal and structured selection process that includes, but is not limited to, criteria relating to projects' potential for success will have a positive effect on incubators' performance, regardless of admission rate. At the same time, incubators that allocate more effort to selecting candidates will do better.
- The services offered need not be exhaustive to produce good results. In addition, offering more finance-related services seems to be a factor in success.
- The type of coaching that produces the best performance is balanced coaching that combines structure, a systematic approach, flexibility and adaptability. In addition, allocating more effort to coaching may improve incubators' performance.
- An incubator with access to startup funding is more likely to do well than an incubator that does not have such access.
- Incubators that devote a significant proportion of their expenses to salaries have better results.
- There is no direct relationship between incubators' self-funding rate and performance. However, incubators with higher self-funding rates often use secure payment methods.
5 The other categories considered in respect of allocation of effort (follow-up with graduates, business development and administrative support and related services) are not included in this analysis, because this study suggests that they have no direct or significant impact on incubators' performance.
