Comparative study technology incubators in Quebec and abroad

6. Evaluation questions

This chapter sets out the answers to the evaluation questions that have not been addressed in the previous chapters. The questions are divided into the five topics not yet discussed: funding of incubators, competition, relevance and results, evaluation of Inno-centre and trends in incubation.

6.1 Funding of Incubators

6.1.1 What rate of self-funding should be the goal for incubators funded by the Agency and for incubators comparable to Inno-centre in Canada and abroad?

Self-funding plays different roles, depending on the standpoint taken. From the standpoint of government funders, it allows for the funding that has to be granted to incubators to be reduced and acts as a performance incentive. From the standpoint of the incubators, self-funding allows them to reduce their dependence on often uncertain public funding. From both standpoints, a high rate of self-funding by incubators is desirable.

However, there are several factors that make too high a rate of self-funding undesirable, if not impossible. First, startup enterprises operate with limited resources, and this restricts their ability to pay for incubators' services. An alternative is to use a risky payment model that postpones payment for services until funding is received or sales made. In Quebec, the scarcity of startup capital is a significant brake on the ability of this payment method to generate revenue. Incubators' need to arrange self-funding can also divert their efforts from their primary mission or mean that they make short-term compromises that have a negative effect on their long-term performance (e.g. admitting a candidate with lower potential in order to pay the rent).

All of these factors combined mean that a minimum of self-funding is preferable, but it should not be excessive. The lowest rate in Quebec is about 20%, which seems appropriate as a bottom limit. The maximum rate required in Quebec, where enterprise startup is difficult, should not exceed 50%. However, in better circumstances, excellent results can be achieved with about a 60% self-funding rate.

On the other hand, as noted earlier (section 5.8), there is no relationship between incubators' performance and self-funding levels.

The example of France is worthy of mention in respect of self-funding. Many French incubators have no obligation to self-fund and are entirely subsidized by government contributions. Those incubators do not charge their clients fees, but give them a refundable advance that has to be used to pay for outside expertise. Although there is no self-funding, those incubators achieved higher than average performance. However, that situation is possible only where governments make a long-term commitment to enterprise startup and incubator managers take an enterprise-oriented rather than bureaucratic approach.

6.1.2 Should the rate of self-funding vary for different types of incubators?

Incubators that use secure payment methods, which means a large proportion of physical or mixed incubators, are more likely to show a high level of self-funding.

There is nothing else in this study to suggest that self-funding should vary depending on type of incubator.

6.1.3 What measures could be taken to improve incubators' self-funding?

Providing incubators with even a modest startup capital fund could improve their self-funding. First, funding of this type would improve startup enterprises' ability to pay. Second, it would enable incubators to acquire an equity share in the enterprises, and this could be profitable in the longer or shorter term. Third, it would likely improve the enterprises' performance and thus increase returns where risky payment methods are used.

Another measure might be to give tax credits for payments for incubation services. This would increase the enterprises' ability to pay and enable incubators to charge higher fees.

6.1.4 Are there alternative ways to obtain the results the Agency aims to achieve at lower cost?

The findings of this study do not identify alternative direct ways of achieving the Agency's desired results at lower cost. However, there may be indirect ways.

All of the stakeholders surveyed are of the opinion that the primary obstacle to technology enterprise startup in Quebec is the glaring lack of startup capital. This particular situation means that the cost-effectiveness of investing money in incubating enterprises is reduced because the development of new enterprises is hindered by the lack of capital.

In the circumstances, incentives for making startup capital available may be an excellent way of ensuring that the effort put into incubation produces better results.

This could be done in several ways. One would be for the Agency to use its political or financial weight to help create new startup capital funds. This could be done in collaboration with other government players. It would also provide incubators with mini-startup funds. While this measure could be expensive in the short term, it is likely to pay dividends in the long term.

6.1.5 What type of business model would be most likely to optimize the return on the Agency's investment?

The results of this study indicate that 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 could share space with other players involved in commercializing innovation (which could also increase revenue);
an incubator with a budget that is sufficient both to keep a complete team on staff, with a high level of expertise and diverse training and experience, and to constantly improve the services it offers;
an incubator with a formal, structured selection process based on criteria that relate to projects' potential for success;
an incubator that allocates a significant proportion of its budget to salaries;
an incubator that offers services that adapt and respond to its clients needs but are not necessarily exhaustive, and that can call on outside expertise to supplement its services where needed;
an incubator that offers balanced coaching that combines structure, a systematic approach, flexibility and adaptability;
an incubator that has a startup capital fund;
an incubator that allocates a significant proportion of its effort to the selection process and coaching.

It is important to note, however, that these characteristics in no way guarantee good performance. They may all be associated with lower results. As well, different business models may also produce worthwhile returns.

6.2 Competition

6.2.1 Are incubators funded by the Agency in competition among themselves or with the research application development corporations, or do their activities complement one another?

There are two ways in which the incubators funded by the Agency are in competition. There is little competition for clients, and it generally has no negative effects. Competition for public funds is potentially more problematic and can be expected to increase.

There is no direct competition among incubators funded by the Agency and the research application development corporations, and in fact the two groups work as partners.

6.2.1.1 Competition among incubators

It appears that incubators in Quebec do compete with one another. First, there are numerous overlaps between the economic sectors in which they operate (see section 3.1). Second, their clients largely come from the same three sources: the universities, public research centres and independent entrepreneurs (see section 3.8). Third, although there are significant differences, the incubators offer the same services overall (see section 3.4). Incubators in Quebec therefore seem to target the same clientele.

As well, all incubators in Quebec say themselves that they have to deal with competition in the course of their activities. Table 6.1 sets out the sources of that competition.

Table 6.1 - Sources of competition faced by incubators in Quebec Final Report

Table 6.1 - Sources of competition faced by incubators in Quebec Final Report
Source of competition	Number of incubators affected (n = 8)
Other incubators	6
Institutional actors	5
Investors	2
Research application development corporations	1
Professional firms	1

Institutional players are generally entrepreneurship or business development consultants working for the economic development arms of various levels of government or of universities. Their potential clientele is composed of all new entrepreneurs within their jurisdictions, whether in the field of technology or otherwise. Investors are the active "angels": entrepreneurs who have done well and are now investing in new enterprises, to which they offer enterprise advice, drawing on their own experience.

In addition, when questioned about the impact of this competition, five Quebec managers say that at least some of it has little or no effect. As well, one incubator believes that it is faced with competition that has a positive impact, because it stimulates performance and vigilance.

Three incubators say that they are facing competition that has a negative impact on their activities. Of them, one incubator faces competition from a network of angels from outside the province, one believes that institutional university players may have the effect of delaying the arrival of projects at incubators, and the third believes that the services offered by another incubator in Quebec result in duplication that leads to negative competition.

A quarter of incubators in Quebec believe that the competition they face has risen significantly in recent years. One incubator says that the decline in startup funding for enterprises means that institutional players are becoming increasingly serious competitors for incubators, because they have access to resources that the incubators do not have. The second incubator believes that the increase in the number of incubators is causing an increase in competition for public funding, leading to a dilution of efforts that can only have negative effects.

However, the opinion of the managers who were questioned is that this competition does not have a major impact. This is because, overall, the various incubators develop their own niches, whether geographic (local clientele), sectoral (specializing in one economic sector) or economic (market objectives and payment models do not attract the same clients).

In fact, it seems that there are excellent opportunities for partnerships among incubators n the province. The fact that five of the eight incubators in Quebec include other incubators in their networks (see section 3.2) supports that assertion. However, the rising competition among incubators for public funds mentioned by one manager is an issue that should be explored. That competition could increase, since the political context in recent years has meant that budgets have been rationalized and income and other taxes have been cut. As well, in terms of government funding, incubators are in competition not only with one another, but also with other economic development and business development organizations and programs.

6.2.1.2 Competition with the research application development corporations

The mission of the research application development corporations, which were created in the early part of the decade, is to commercialize academic research, focusing primarily on new technologies. The services they offer essentially consist of expert advice and assistance in the following fields:

identifying research fields with strong commercial potential;
identifying promising technologies;
evaluating technical/scientific and technical/commercial potential;
managing intellectual property;
planning and developing commercialization strategies;
providing support for researchers during the commercialization process;
preparing and negotiating commercial agreements or partnerships;
managing royalties under agreements or commercial partnerships.

As is set out in the business plans of all the corporations, this can be done in two ways: by granting licences (technology transfer) or by starting up enterprises to exploit the technologies developed. At the outset, the business plans of the research application development corporations provided that about 67% of the projects would be commercialized via licences, amounting to two licences per enterprise startup. A decision by the research application development corporations to opt for creating enterprises rather than granting licences to commercialize a technology is guided by the same criteria the incubators use to accept projects (innovative technology with strong potential, quality of the team, possibility of obtaining funding, etc.).

In reality, analysis of 1,514 potential projects by the four research application development corporations from 2000 to 2005 resulted in the commercialization of 311 technologies and the granting of 81 patents. During the same period, 45 licences were granted and 44 enterprises started up, approximately three quarters of which were still in existence in 2006. The Licences/Startups ratio varies from one corporation to another. For one, it is 0:1, for two, it is 1:1 and for the other it is 2:1. The first, which does enterprise startups only, has its own startup fund, and this allows it to be more active in this regard.

This means that, in theory, the research application development corporations may be a source of some competition for the incubators, for three reasons. First, the universities are an important source of projects for incubators. Second, the research application development corporations consider starting up innovative enterprises to be one of the principal ways of commercializing academic research. Third, the corporations offer some services that overlap services provided by incubators.

In practice, however, this competition does not seem to be significant. On the contrary, it seems that the research application development corporations serve as excellent partners for the incubators. For example, five of the eight incubators include research application development corporations in their enterprise networks (see section 3.2), and the corporations sometimes refer enterprise projects to them; only one incubator considers the research application development corporations to be a potential source (although not significant) of competition. As well, there are or have been agreements between some incubators and research application development corporations so that the incubators take over starting up enterprises for the corporations. The reason for this is that the research application development corporations offer services that enable them to play a role that seems to be further upstream in the technology commercialization process than that of the incubators.

It is important to note, however, that nearly all of the research application development corporations have a right of first refusal in technologies that result from research in the affiliated universities. There is thus a virtual monopoly situation in terms of commercializing academic research. It may be that in this context, incubator managers do not consider the research application development corporations to be competitors because the Corporations have captive markets and the incubators have to go through them to get projects from the universities. If that monopoly did not exist, the incubators could probably compete with the research application development corporations.

6.3 Relevance and Results

6.3.1 In what way do the incubators funded by the Agency and incubators comparable to Innocentre in Canada and abroad provide incentives?

Both inside and outside Quebec, managers believe that the incentive nature of their incubators derives primarily from the basic elements of their business models: the team and network, the services offered and the coaching method.

That conclusion is drawn from table 6.2, which breaks down what the managers questioned identified as the incentives offered by their incubators.

Table 6.2 - Incentives offered by incubators

Table 6.2 - Incentives offered by incubators
Incentives	Incubators in Quebec (n = 8)	Incubators outside Quebec (n = 9)
Expertise and experience of team	7	4
Services offered	5	4
Network	4	2
Reputation and results	4	2
Coaching philosophy and method	3	4
Location, proximity	3	2
Quality of infrastructure and equipment	3	1
International dimension	2	2
Adaptability	2	1
Low cost	2	1
Funding methods	1	3
Only niche occupant	1	2
ISO Certification	0	1

6.3.2 Does the coaching offered by the various types of incubators reflect the needs of the target market?

Overall, the services and coaching offered by the incubators examined reflect their clients' needs.

Some information, mainly obtained at interview, has to be combined in order to answer this question.

First, we note that the services and coaching offered by some incubators inside and outside Quebec have changed significantly in recent years. A large majority of the incubators surveyed have changed the coaching services they offer and say they did this at least in part to improve and meet their clients' needs better.

Second, as noted in section 4.3, the average acceptance rate for Quebec incubators is low, at 23%, with a high of 53% and a low of 9%. For incubators outside Quebec, the average acceptance rate is 35%, and the rate ranges between 50% and 9%, suggesting there is high demand for incubation services both inside and outside Quebec.

Third, the average occupation rate for Quebec incubators for the last five years (2003 to 2007) is high, at 81%. It is 88% for incubators outside Quebec.

Fourth, when questioned about the proportion of their clients that would have started out without incubation, managers of Quebec incubators estimated 25%, on average, and managers of incubators outside Quebec estimated 65%. However, nearly all managers interviewed said that the project startups would have taken longer and been more difficult without incubation and that a higher proportion of them would not have survived in the medium and long terms.

These results can be compared to the results of client surveys done in the evaluations of three Quebec incubators by the Quebec Department of Economic Development, Innovation and Export Trade ( MDEIE). Those evaluations showed that a large majority of clients (over 80%) believe that the services offered by the incubators reflect their needs moderately well or completely. The responses to the client survey in this study show the same trend.

6.3.3 Would the enterprises created have been started up without their assistance?

When the managers of incubators inside and outside Quebec were questioned about the proportion of their clients that would have started up without the incubation they provided, they estimated that one quarter to two thirds of their clients, respectively, would have started up without incubation. More clients of incubators outside Quebec also thought that their projects would have started up without incubation than was the case for clients of Quebec incubators.

The difference between opinions inside and outside Quebec can probably be explained by the present difficult climate for technology startups in Quebec, where the scarcity of startup capital seems to make it extremely difficult to start up a technology enterprise successfully without specialized professional assistance.

In addition, nearly all of the managers interviewed said that starting up the projects would have taken longer and been more difficult without incubation and a larger proportion of them would not have survived in the medium and long terms.

6.3.4 Are different results achieved by incubated enterprises in different economic sectors?

Results are in fact different in different economic sectors. Projects in sectors regarded as of less current interest or calling for more research and development are more difficult to put into operation.

First, the analysis set out in section 5.2 shows that generalist incubators operating in some or all sectors of technological innovation achieve better results than incubators specializing in biosciences.

Second, two thirds of the incubators surveyed said that the results achieved are different, depending on the incubated projects' economic sectors. The sectors identified as most difficult are biosciences, aerospace and, sometimes, software and telecommunications. The sectors identified as easiest are medical instrumentation, nutraceuticals and information and communications technologies.

In fact, there are two reasons why results are different in different economic sectors. First, the commercialization cycle for the technologies and the revenue models are different from one sector to another. For instance, a technology that calls for a great deal of research and development, requires numerous government approvals in order to be commercialized, or has a higher inherent risk in its window of opportunity, will take longer to commercialize and will produce lower results. This is one explanation for why biosciences are associated with lower performance.

Second, performance in different economic sectors changes as tastes change. When a sector is seen as promising, it attracts more funds, and this increases the chances that enterprises that operate in the sector will succeed.

6.3.5 Are the results achieved by the incubators funded by the Agency in line with its Program Activity Architecture (PAA)?

The data relating to nine incubators (rather than eight as for the rest of the study), the history of projects funded by the Agency, most going back to 1999, are used in answering this question.

It must be noted, first, that with the exception of one project, all projects were approved under the old programming, a large majority of them under IDEA-SME (43%) or RSI (49%). Two thirds of the projects, however, converted to the new programming. The projects that were not covered involved projects completed before the new programming came into effect

A detailed analysis of the projects, as set out in table 6.3, shows that more than two thirds of the projects that converted to the new programming consisted of funding the incubators' regular activities or general operating expenses, while a little less than a third of the projects provided funding for the incubators' one-time activities, such as capital acquisitions or carrying out plans or studies. The data in the table also show that the incubators' intended results varied widely from one project to another, but were in conformity with the PAA. We note, however, that a majority of the projects that involved funding the incubators' regular activities, 75% of them, related to program sub-activity 2.1.2.1 - Enterprise Pre-startup and Startup or program sub-activity 2.1.1.4 - Innovation Management.

The only project approved under the new programming came under sub-sub-activity 2.1.1.2 - Strategic Management of Enterprises, and two other projects in the process of applying for approval fell under 2.1.2.1 - Pre-startup and Startup of Innovative Enterprises.

Table 6.3 - Distribution of incubation projects across the PAA Final Report

Table 6.3 - Distribution of incubation projects across the PAA Final Report
Program sub-sub-activity		Number of projects involving activities
Program sub-sub-activity		regular	one-time
1.1	Community Futures
1.1.2	Community Development
1.1.2.2	Creation and development of SMEs SMEs are created SMEs are developed and consolidated	1	0
2.1	Competitiveness of SMEs
2.1.1	Optimization of enterprise performance
2.1.1.2	Strategic management of enterprises¹ Entrepreneurs have tools to improve decision-making regarding the future of their enterprise	1	2
2.1.1.3	Market development o Enterprises are committed to a process of improving their market development capabilities Enterprises have better market development capabilities o Enterprises have a supply of effective services to improve their market development capabilities	2	1
2.1.1.4	Management of innovation Innovative enterprises are committed to improving their R&D and innovation management capabilities Innovative enterprises step up or commercialize their internal R&D and innovation of products and procedures Enterprises have a supply of effective services to step up or commercialize internal R&D and innovation activities	6	2
2.1.2	Strategic enterprises
2.1.2.1	Pre-startup and startup of innovative enterprises Innovative enterprises are established	18	6
2.2	Growth of sectors and regions
2.2.1	Focuses for competition
2.2.1.1	Networking and clusters Enterprises and other organizations within a sector or a region form networks and share and implement a development plan Enterprises participate in network activities or clusters that allow them to be part of sectoral or regional supply chains	2	3
2.2.1.2	Applied research Applied research conducted with enterprises is intensified Research outcomes are transferable to industry	1	0
2.2.2	International promotion of regions
2.2.2.1	Investment opportunities Plans for the promotion of location factors are developed in cooperation with partners in Quebec and Canada	1	0
TOTAL		32	14

¹ Includes the one project approved under the new programming that came into effect on April 1, 2007.

6.4 Evaluation of Inno-centre

6.4.1 How does Inno-centre's business model compare with the business models of comparable incubators in Canada and outside Canada?

The following elements were identified in the comparison of Inno-centre's business model with the business models of the other incubators.

First, Inno-centre's activities and business model are broader than in the case of a majority of the incubators. It has one of the largest operating budgets, one of the most complete teams and offers among the most exhaustive services of all the incubators. As well, its selection process is more rigorous and the coaching provided is more formal, structured and intensive. The broader scope is certainly related to the high degree to which Inno-centre's coaching is offered internally.
Inno-centre has a number of characteristics found among the other incubators. Its mission is typical, its team and network include most of the possible components, the services it offers cover the main services provided, and its business development methods are similar to those of the other incubators.
However, Inno-centre is different in that it is one of the virtual incubators in the sample. That characteristic means that business coaching is central to the services it offers, as the effort allocated to that service reflect.
Another significant difference is the fact that Inno-centre's payment method is essentially risky. However, that characteristic does not seem to influence performance.

The following is a more detailed analysis of how the various dimensions of Inno-centre's business model compare with those of the other incubators studied.

6.4.1.1 Basic characteristics

Inno-centre's mission is to promote the startup and success of innovative technology enterprises; it is specific to Quebec. Its mission is comparable to the standard mission of the incubators examined.
Like all incubators in Quebec and most of the incubators outside Quebec, Inno-centre is an NPO.
Inno-centre differs from the other incubators in that its facilities are purely virtual, a characteristic shared by only one other incubator in Quebec.
It was founded in 1987, which makes it the oldest incubator.
It is a generalist incubator that operates in the three main sectors: biosciences, ICT and industrial technologies.
Inno-centre has a very large annual operating budget.

6.4.1.2 Team and network

Inno-centre's team is categorized as complete, in that it has more than one member of management plus a business consultant and a specialized consultant, and uses the expertise of outside consultants. In fact, Inno-centre has one of the most exhaustive teams of all incubators in the study.
The members of the Inno-centre team have training in sciences and business administration, which is typical of a majority of incubators.
The members of the Inno-centre team have experience in private enterprise and in the finance and risk capital field, the latter experience setting it apart from the rest of the sample studied.
Inno-centre's network is very broad.

6.4.1.3 Selection process and criteria

Inno-centre's selection process falls into the "high" third in terms of rigour. It includes formal and informal pre-selection, appointment of a selection committee, due diligence and ultimate decision by the committee.
Its selection criteria focus on the projects' potential for success, with priority given to the quality of the team and potential of the innovative technology. This is also the case for a majority of incubators.
Its acceptance rate is very low, as compared to the average for the incubators.

6.4.1.4 Services offered

Because of its virtual facilities, the services offered by Inno-centre cover all forms of business advice but do not include auxiliary services.
In terms of business advice, it offers 15 services, higher than the average number of services offered by incubators inside and outside Quebec.
In general, the services offered by Inno-centre are consistent with the services most commonly offered by the incubators studied. Its principal services (major importance) are:
- management: strategic advice, preparation of diagnosis and business plan, participation in management and training the management team;
- marketing: development of business relationships and strategic alliances;
- finance: preparation of financial plan and finding funding, and equity share participation;
- human resources and legal affairs: legal advice and intellectual property advice;
- referrals to outside services.
With the exception of referrals to outside services, the categories of advice services to which Innocentre assigns most importance are, in order, management, finance, human resources and legal affairs, marketing and production. That ranking is relatively representative of all incubators, both inside and outside Quebec.

6.4.1.5 Coaching

Inno-centre's business coaching is characterized by the following elements: designation of a consultant, supplementary expertise on request, complete services offered in house, creation of an advisory committee, regular coaching, although intensity varies as projects progress, fixed time period. The coaching is therefore "high" in terms of rigour, with a high level of internal services.

On average, Inno-centre devotes 5.5 hours per week to coaching for each project; this is lower than the average for Quebec, but higher than the average outside Quebec (three incubators in Quebec and six incubators outside Quebec were able to provide this information).
The strategies emphasized by Inno-centre for finding funding are using its network, referrals and contacts, preparing and implementing a funding strategy for the enterprise, ongoing assistance and assistance with preparing a business plan and presentation. Inno-centre therefore uses the strategies that are most common among other incubators, particularly in Quebec. We would also note that in addition to equity participation in enterprises, Inno-centre participates in the initial funding rounds.
Inno-centre provides a "high" level of assistance for enterprises in finding funding.
Inno-centre has no startup fund.

6.4.1.6 Follow-up with graduates

Inno-centre follows up with graduates through equity participation in the projects incubated.

6.4.1.7 Business development

The business development methods that Inno-centre focuses on are referrals by partners, prospecting and canvassing, participating in networking events and organizing events and training. In this regard, it is typical of incubators in Quebec and, to a lesser extent, outside Quebec.

6.4.1.8 Source of clients

Inno-centre's clients are mainly independent entrepreneurs.

6.4.1.9 Allocation of effort

Inno-centre devotes a significantly higher level of effort than average to the selection process.
Inno-centre devotes a significantly higher level of effort than average to business coaching.
The effort it allocates to finding funding for its clients is comparable to the average.
The effort it allocates to business development and administrative support and related services is significantly lower than the average.

6.4.1.10 Financial structure

The relative weight of salaries and benefits and of administrative expenses for Inno-centre corresponds to the average for incubators in Quebec, while professional fees are more comparable in weight to the case for incubators outside Quebec. Otherwise, depreciation and other expenses are well below the average because of its virtual facilities.
The relative weight of public contributions in Inno-centre's revenue is similar to the average for the incubators, but provincial contributions account for the largest share, followed by federal contributions. Inno-centre also has a slightly higher level of self-funding than average.
Inno-centre is somewhere unusual among the incubators surveyed in that its payment model is almost entirely risky. Its main source of revenue for services is professional and other fees for service payable if success is achieved, plus sales of equity shares.

6.4.2 How do the results achieved by Inno-centre, as a world-class incubator, compare with comparable incubators?

Tables 6.5 and 6.6 compare Inno-centre's results with the results of incubators inside and outside Quebec for the various primary and secondary indicators. The comparison shows whether Inno-centre's results are higher () or lower () than the average results for the other incubators.

Table 6.4 - Comparison of primary indicators of results for Inno-centre and other incubators

Table 6.4 - Comparison of primary indicators of results for Inno-centre and other incubators
Primary indicator	Inno-centre vs incubators in Quebec	Inno-centre vs incubators outside Quebec
Incubateur
Operating budget
Number of projects evaluated per year
Number of projects accepted per year
Number of projects in incubation
Number of graduates per year
Five-year survival rate of enterprises
Enterprises in incubation
Total number of jobs
Total sales	N.D.	N.D.
Percentage of enterprises that obtained funding
Amount of funding obtained
Enterprises graduated
Total number of jobs
Percentage of enterprises that obtained funding
Amount of funding obtained

We note first that Inno-centre has a larger operating budget and gets higher results than the average for the other incubators, particularly in terms of number of projects evaluated, number of graduates per year and survival rate of enterprises five years after the beginning of incubation. As well, the number of jobs created by the enterprises in incubation and those that graduate is higher overall than for other incubators in Quebec, but lower than for incubators outside Quebec. As compared to incubators inside and outside Quebec, a smaller proportion of enterprises get funding. The total amount of funding obtained, however, is higher than for other incubators in Quebec.

Table 6.5 - Comparison of secondary indicators of results for Inno-centre and other incubators

Table 6.5 - Comparison of secondary indicators of results for Inno-centre and other incubators
Secondary indicator	Inno-centre vs incubators in Quebec	Inno-centre vs incubators outside Quebec
Incubator
Admission rate
Cost per enterprise incubated
Cost per graduate
Graduates per enterprise incubated
Enterprises in incubation
Cost per job
Jobs per enterprise incubated
Lever effect - Sales	N.D.	N.D.
Sales per enterprise incubated	N.D.	N.D.
Lever effect - Funding
Funding per enterprise incubated
Enterprises graduated
Cost per job
Jobs per graduate
Lever effect - Funding
Funding per graduate

When Inno-centre's size is taken into account in evaluating its performance in the last five years, its results are seen to be lower than the average for the other incubators studied, both inside and outside Quebec, particularly in respect of the enterprises incubated (cost per enterprise incubated, cost per job, jobs per enterprise incubated). However, its results are higher than average in terms of the graduates it produces. The amount of funding obtained by enterprises incubated is considerably higher than the average for the other incubators, but lower for enterprises that graduate.

6.5 Trends in Incubation

6.5.1 What are the emerging trends in the incubation industry inside and outside Canada, in terms of both supply and demand for incubation services and incubation practices?

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 into the ecosystem in which innovation is commercialized.

These trends were identified by analysing the interview questions about significant changes observed in recent years in enterprise practices or the environment in which incubators operate and the trends and issues for incubation in the years to come.

6.5.1.1 Changes

Changes in terms of incubation practices were evaluated based on seven dimensions: economic sector, source of clients, services offered, coaching, finding funding, allocation of effort and financial structure.

Half of Quebec incubators and a third of incubators outside Quebec have experienced significant change in their economic sectors in recent years. In Quebec, the main changes identified are as follows:

decline in the number of ICT projects;
increase in the number of industrial technologies projects;
increase in the number of incubators operating in biosciences.

Outside Quebec, the main changes identified in terms of economic sectors are as follows:

increase in the number of projects relating to innovative services;
increase in the number of projects relating to renewable energy and the environment;
decline in the number of biosciences projects.

Half of Quebec incubators and three quarters of incubators outside Quebec have experienced significant change in the source of the clients in recent years. In Quebec, the main changes identified are as follows:

expansion of the incubators' geographic area of influence;
increase in international clientele;
decline in the role played by academic clientele, because projects are not ready (too early in the process).

Outside Quebec, the main changes identified in terms of the source of clients are as follows:

increase in the proportion of projects coming out of the universities;
increase in the proportion of projects coming from independent entrepreneurs;
increase in international clientele;

As noted under question 3.1.2, two thirds of incubators in Quebec and three quarters of incubators outside Quebec experienced significant change in the services they offer in recent years. Both inside and outside Quebec, the main changes identified are as follows:

general and ongoing development and improvement of services offered;
improvement of services in management, marketing and finance and in auxiliary and "other" services;
incorporation of an international dimension into services offered.

As noted earlier, only one third of incubators in Quebec and two thirds of incubators outside Quebec have experienced significant change in their coaching in recent years. In Quebec, the main changes identified are as follows:

decline in services offered internally, accompanied by an increase in the use of outside expertise;
more formalized approach to coaching and other services;
more flexible approach to coaching;
adoption of post-coaching evaluation of services provided by the incubator.

Outside Quebec, the main changes identified in terms of coaching are as follows:

development and improvement of coaching;
more formalized approach to coaching and other services;
more flexible approach to coaching;
restructuring of the formal phases of coaching;
increase in the use of outside expertise.

Three quarters of incubators inside and outside Quebec have experienced significant change in their strategies for finding funding for projects underway in recent years. In Quebec, the main changes identified are as follows:

increase in time and effort devoted to finding funding for their clients;
need to enter into more alliances with research centres and potential business partners (clients or suppliers) for the enterprises to reduce costs and get funding;
increase in approaches made to business networks, primarily private investors (angels);
more frequent adoption of alternative strategies (plan B) for finding funding;
increase in efforts to generate revenue in the short term;
expansion of the geographic area targeted for finding funding;
participation in creating a startup fund.

Outside Quebec, the main changes identified in terms of strategies for finding funding are as follows:

increase in approaches made to business networks, primarily private investors (angels);
participation in creating a startup fund;
increase in time and effort devoted to finding funding for clients;
need to enter into more alliances with research centres and potential business partners (clients or suppliers) for the enterprises to reduce costs and get funding;
more frequent adoption of alternative strategies (plan B) for finding funding.

Only one quarter of incubators in Quebec and half of incubators outside Quebec have experienced a significant change in the way their efforts are allocated in recent years. In Quebec, the main changes identified are as follows:

increase in effort allocated to finding funding;
increase in effort allocated to coaching;
decline in effort allocated to business development.

Outside Quebec, the main changes identified in terms of the allocation of effort are increases in effort allocated to all of an incubator's activities, with the main increase relating to business development.

Seven incubators in Quebec and four incubators outside Quebec have experienced a significant change in their expenses in recent years. For all of them, those changes essentially consisted of an increase in the proportion of their total expenses represented by salaries and benefits.

Three quarters of incubators inside and outside Quebec have experienced a significant change in their revenue in recent years. In Quebec, the main changes identified are as follows:

decline in self-funding and payment for services because of the difficulty enterprises have finding funding;
increase in provincial and paragovernmental contributions;
decline in federal government contributions;
overall decline in government contributions.

Outside Quebec, the main changes identified in relation to revenue are as follows:

increase in government contributions, particularly from the European Union;
increase in regional contributions.

Incubators' payment models have not changed significantly in recent years, although there have been some changes in payment methods (amount of rent, percentage of equity participation, etc.) and in revenue generated from services (increases or decreases).

6.5.1.2 Issues and trends

The issues and trends in technology incubation identified by the managers surveyed can be broken down under four broad headings, as follows:

services offered;
globalization;
funding for enterprises;
role and relevance of enterprise incubation;
funding for incubators;
innovation commercialization ecosystem.

The issues and trends relating to incubation services offered are as follows:

There is a debate at present in the incubation community regarding the type of facility that is most appropriate: virtual or physical. However, business advice (coaching, expertise, network, etc.), which is essentially virtual, is becoming increasingly important in comparison to traditional services (rental space, bookkeeping, etc.), particularly in technology incubation.
Basic incubation services (strategic advice, assistance with finding funding) will continue to be in demand, but it is crucial that incubators be on the lookout for technological developments and market changes so they can continually improve the services offered and adjust to clients' needs.
Technology incubation needs to be professionalized. The capacities and expertise of the people involved in innovate management and business coaching have to be developed.
Technology incubators have to be open to innovation in other sectors such as services or human resources management.
It is essential to understand and study technology incubation on an ongoing basis. This is the only way that best practices can be identified and applied.

The issues and trends relating to globalization are as follows:

As a result of the globalization phenomenon, the economic environment and horizon for the young technology enterprises that are incubators' clients are global, particularly given that the enterprises are often working on projects whose scope is international. From this perspective, incubators have to develop international business networks and adapt their business culture to facilitate the establishment of startup enterprises abroad.

The issues and trends relating to funding for enterprises are as follows:

Startup capital is an essential input in creating technology enterprises. However, because startup capital is a risky investment and produces returns only in the long term (between 5 and 10 years), it is not attractive for the traditional risk capital sources and private investors, who operate on the basis of maximizing financial returns (as opposed to economic or social returns). Startup capital is therefore scarce, both inside and outside Quebec.
Because of particular circumstances, including the consolidation of financial assistance for enterprises at a more advanced stage of development (ready to commercialize), startup capital is particularly scarce in Quebec. This situation is the main impediment to the startup of technology enterprises in the province, and it means that, because the resources are not there, excellent opportunities are missed and go elsewhere (one manager in Quebec described this situation as the "valley of death"). These difficulties are a threat to renewal of Quebec's industrial base.
To mitigate this situation, it is urgent that startup capital funds be developed in Quebec. These could be "evergreen" renewable funds. In addition, given the special nature of startup capital, government action could be needed.
However, there are some indications that the situation could improve in the next few years. Risk capital has recovered from the shock of the technology bubble bursting and governments have announced the creation of funding bodies for innovation, although they have not yet been put in place.
Giving incubators startup funds, even in limited amounts, seems to be an excellent way of stimulating the creation of technology enterprises. First, they allow for rapid action by the people who are most aware of the needs. Second, funds that are allocated in this situation can be used as a lever for getting additional funding. For example, institutional funding often requires that the entrepreneur have matching amounts from other sources.
Enterprises can be funded out of startup capital managed by incubators through equity participation. However, in the circumstances, it is important that the equity share be temporary and reasonable, in that it should not be used in order to get too high a return, and should rather aim to help make the enterprise sustainable.

The issues and trends relating to the role and relevance of enterprise incubation are as follows:

The creation and startup of technology enterprises is, in a way, the starting point for renewing the industrial base and for the economic development of a society. Because enterprise incubation is involved in facilitating that process, it plays an important socioeconomic role.
However, public effort to support business generally focuses on assisting growth, which generates faster, tangible returns. That assistance is provided at the expense of assisting with startup (incubation), whose impacts and successes are difficult to identify. Given this situation, it is essential that public institutions take a careful look at the relevance of incubation and what priority it should be assigned. For governments, incubation must be part of a long-term approach to business development, and thus economic development.
Similarly, technology incubation players have to work to ensure that the contribution their field makes to the value chain is recognized. One thing this would help to accomplish would be to secure better support from governments.
As well, an effort must be made to raise awareness, because there are many misperceptions circulating about incubation. In particular, as the various labels applied to incubators suggest (accelerators, "catalysts", etc.), there is not always a clear definition of incubation. The reputation of the field also suffered when the technology bubble burst.
The role of an incubator is to shorten the startup process for an enterprise by identifying needs, supplying the missing resources and expertise, accelerating certain processes and minimizing the instances of error and need to start over. Incubators therefore eliminate the delays that create additional costs and thus often lead to the death of young enterprises.

The issues and trends relating to funding for incubators are as follows:

Because the creation of enterprises is a lengthy process, incubators have to have stable funding that takes a long-term perspective. Otherwise, the incubator's financial difficulties and the uncertainty that comes with them may interfere with the enterprise startup process. As well, funding for incubators must not be dependent on economic cycles, because innovation is not dependent on them and is a constant process overall.
In Quebec, primarily, funding for incubators is inadequate and undermines their ability to offer high-quality services that can be renewed and improved as needs change. For one thing, unstable and inadequate funding means that it is difficult for incubators to maintain a stable core of expertise, when that is their principal tool and most important asset. In order for incubation to be competent, it is essential that it have the necessary financial resources to attract experts in the business world, where remuneration is higher.
It is pointless to imagine that complete self-funding is possible for incubators, particularly because of the lengthy time for returns to be realized on startup capital and in enterprise startups.
The particular context in Quebec as it relates to startup capital is an impediment to incubators getting paid, particularly incubators with risky payment models, because their clients have fewer financial resources.

The issues and trends relating to the innovation commercialization ecosystem are as follows:

The five major categories of player in the commercializing of innovation are research centres and universities, entrepreneurs, funders (risk capital), governments and service suppliers, including incubators. Together, they form the ecosystem out of which technology enterprises are born. In order for enterprise startup to be as effective as possible, it is essential that those players, which ordinarily operate in isolation, have close and functional relationships.
At present, other than in research centres and universities, technology transfer seems to be a difficult process, in part because the technologies they are producing are not at a sufficiently advanced stage of development and do not correspond to market needs. The interface and links between other players and the research centres and universities, particularly risk capital and incubators, should be improved, so that promising projects get support from the time they take their first steps (this is, in part, the role currently played by the research application development corporations).
As well, there is a global trend at present toward integrating business advice and risk capital. One example of this is that incubators' activities are gradually extending into the areas of risk capital and technology transfer, where the incubators' knowledge of startup enterprises is an asset.
Because delays are very expensive, the players in the innovation commercialization ecosystem have to become integrated, with the aim of expediting their involvement.
Competition among incubators seems likely to increase, both because business coaching is popular at the moment and because the government funds devoted to them are limited. Nonetheless, there is a need to increase coordination among incubators to minimize duplication and maximize the use of resources by pooling them.

6.5.2 How have incubators comparable to Inno-centre in Canada and abroad adjusted to the increasing scarcity of risk capital?

When the technology bubble burst at the end of the year 2000, it led to a withdrawal of risk capital, particularly for enterprise startup. This made risk capital even more scarce, both inside and outside Quebec. In Quebec, however, the particular economic, political and social circumstances have meant that startup capital has been virtually nonexistent in the province since 2003.

To respond to this increasing scarcity of risk capital, incubators have used the following strategies:

Increase in the effort and time devoted to finding funding, one reason being the need to do several rounds of funding generating small amounts, rather than one round generating the amounts needed in full.
Need to adopt alternative funding methods, including approaching potential business partners (clients and suppliers) for enterprises and more approaches to networks of private investors like angels, bootstrapping,⁶ and other methods.
Effort to increase the revenue of enterprises in incubation in the short term, for example by selling expertise or services that do not relate directly to the project developed. The effect of this can be to slow down the startup process for the enterprise.
Not placing geographic limits on efforts to find funding.
Creating startup capital funds. An incubator can be the engine for this or can participate in it directly. Although this is a strategy that several incubators in Quebec are considering, it is especially difficult in the particular circumstances in respect of startup capital in Quebec.

⁶ In this context, method for funding an enterprise that minimizes the involvement of (or the need to involve) outside investors (risk capital, banks). For more details, see http://blog.guykawasaki.com/2006/01/the_art_of_boot.html