Promoting hi-tech entrepreneurship through university -based technology incubatorssome thoughts coming from experience

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1 Trade and Development Board Investment, Enterprise and Development Commission Multi-year expert meeting on enterprise development policies and capacity-building in science, technology and innovation Geneva, January 2009 PAPER SUBMITTED TO THE EXPERT MEETING* Promoting hi-tech entrepreneurship through university -based technology incubatorssome thoughts coming from experience By Mr. Marco Cantamessa Department of Business management Politecnico di Torino, Italy * The views expressed are those of the author and do not necessarily reflect the views of UNCTAD.

2 Promoting hi tech entrepreneurship through university based technology incubators some thoughts coming from experience Marco Cantamessa Dipartimento di Sistemi di Produzione ed Economia dell Azienda Politecnico di Torino, Torino (Italy) and I3P (Incubatore Imprese Innovative del Politecnico) S.c.p.A. Torino (Italy) Note This brief statement has the purpose of providing some preliminary answers to questions 1 4 arising from background document TD/B/C.II/MEM.1/2, stemming from experience gained in the field of technology incubation. These statements do not therefore come from a systematic and rigorous empirical study, but from the possibly biased evidence gained in a specific setting. 0. Background University incubation in Italy and the case of I3P Italy hosts about 35 university incubators, plus a handful other incubators associated to public bodies (e.g. science parks) and just a few privately owned initiatives focusing on web 2.0 startups. I3P, the Incubator of Politecnico di Torino (the second largest Italian technical university), was founded in 1999 and is the oldest and largest of these university incubators. It is incorporated as an independent non profit making entity jointly owned by the Politecnico di Torino and a number of local public authorities. Over these years 101 companies have started the three year incubation process, and only 6 of them have closed. Combined, these companies nowadays provide employment to more than 500 staff and have a turnover of more than 25 M. On average, I3P yearly receives 150 business ideas, examines 50 business plans and 15 new companies start their incubation process. In 2008, I3P companies raised approximately 1 M in angel investing deals, and 6 M in VC funding, which indicates a promising upward trend in the profile of its tenant companies. I3P has an innovative business model, with a relatively high share of revenues (30% in 2008) deriving from fees paid by firms in exchange for services (i.e. serviced offices, consultancy and networking). These fees are a combination of fixed sums and of revenue sharing agreements based on the first two years after the end of the incubation period. The rest of revenues come from publicly funded projects supporting entrepreneurship at provincial, regional, national or EU wide level. These projects basically pay for scouting and pre incubation services (i.e. support given to entrepreneurial teams prior to incorporation). Such revenues combined cover the costs and I3P has never needed to raise further capital after startup. Moreover, I3P is developing a networked model that enables it to provide services to firms that are not physically located on its premises (virtual incubation) or which are being hosted by partner incubators located in the region or even further away. 1. What makes a good entrepreneur? It is of course difficult to provide a definition for a good entrepreneur. In I3P s experience there is a stark difference between people who are basically aiming for self employment and want to develop rather small lifestyle companies (whose business model is generally focused on services), and real entrepreneurs who have the ambition and the willingness to develop substantial firms (generally by developing products). Though the I3P incubator naturally tends to focus its efforts on the latter category, we do not downplay the importance of the former in contributing to local economic development and to creating a sound ecosystem of technology based SMEs. These are essential for supporting and nurturing the growth of the gazelle companies that will eventually emerge. We also see a significant difference between other two types of entrepreneurs. One category envisage themselves as industrialists, their companies as their future sources of income, and they do not therefore think about an exit strategy. Other ones instead strive to grow the company in view of an exit, and most of all look forward to the related capital gain. Membership to these two different categories seems to depend on both individual level factors and on the technology on which the company is based. The latter choice appears to be more common in fields such as IT and biotech, for which results are less sticky and are transferable with greater ease following an acquisition. These

3 different visions significantly affect the possibility of entering into deals with Venture Capitalists, who generally find it difficult to get along with entrepreneurs whose wish is to cling to their firms for the foreseeable future. Finally, by studying the development path of companies we have recognized coherently with a number of similar studies that size of and diversity within the entrepreneurial team are key factors in determining both the ambition level of the business plan and the capability to execute it. The quality and the degree of commitment exhibited by the entrepreneurial team is therefore becoming a key criterion in deciding on the admission of firms to the I3P incubation program, as well as their continuation at the time of the mid term review. 2. What are the policies and regulatory frameworks that have proven to be effective in stimulating the encouragement of entrepreneurs? Entrepreneurs are people who take on risks today, in exchange for a future and uncertain reward. Governments and regulators can usefully promote entrepreneurship through targeted actions or by trying to create a fertile and business friendly environment. Public authorities can also attempt to reduce risks and increase rewards, and they can also intervene in case of market failure, especially in the case of innovative products and services. However, it is also quite easy for public authorities to distort the basic evolutionary mechanism of innovation and entrepreneurship, thus ending up with a very good support to the creation of new firms, but ultimately hindering the growth of the fittest ones. By dealing with entrepreneurs and investors on a daily basis it is possible to notice that they usually have three key worries or problems: Trust in the judicial system, especially with respect to intellectual property rights and trade credit (i.e. customers compliance to agreed payment terms), with the latter being a crucial bottleneck when companies do start growing and show increasing financing needs for working capital and manpower. It is probably not by chance that countries with long and risky payment terms (including Italy) usually do not score well on international innovation rankings. The frailty of markets for innovative goods, especially when governments do not support them either through incentives to customers or through technology procurement initiatives. At least in Europe, government tends to promote innovation through grants, which basically tends to reward companies who are skilled in writing proposals, but are not necessarily the ones who can deliver results. In my opinion, demand side policies that reward results, rather than promises, can create a better system of incentives to entrepreneurs. In this regard, the innovation and entrepreneurship performance of the United States seems to show the positive effects cast by significant effort in government procurement and by what have been termed venturesome consumers (i.e. consumers willing to experiment with new technology). High levels of taxation on labor and on capital gains can substantially abate the willingness of entrepreneurs and investors to engage in and commit to new initiatives, as well as the capacity of the firm to sustain substantial growth trajectories (e.g. hiring skilled and highly paid workers and managers, retaining earnings in view of expansion, granting stock options to key personnel). Some countries, such as France, have quite successfully granted a special status to innovative startups (i.e. the so called Jeunes Entreprises Innovantes ) and to angel investments. However, one could envisage broader and automatic policies aimed at supporting the few startups that exhibit explosive growth during their period of expansion, for instance by capping taxes to a given multiple of the amount due during the previous years. Finally, business plan competitions appear to be an important means to stimulate ideas and to promote the culture of entrepreneurship. In Italy there is a nationwide contest, the Premio Nazionale dell Innovazione (National Innovation Prize) that is based on 17 region wide contests. In 2008, 657 business ideas and 340 business plans had been gathered from a population of 1900 potential entrepreneurs.

4 3. What are the main support institutions needed to enable enterprises to start up and grow (e.g. clusters and technology parks, access to finance and intellectual assets)? The reply to this question focuses of the experience of the I3P incubator, for which the main lessons learned (often by trial and error) are the following. Openness. I3P does not only host university spinoffs (which make up about half of its tenants), but also startups founded by serial entrepreneurs or young professionals who spot a market opportunity and value the proximity to the university and the services provided by the incubator. This creates a fertile environment in which different experiences, personal objectives and forms of know how mix together in what appears to be a fruitful ecosystem. In reality, the distinction between university spinoffs and external startups is becoming ever more blurred, because the incubator facilitates the broadening of entrepreneurial teams, with people from industry joining spinoffs and academics joining external startups. Academic independence and thinking as a corporation. Being an independent company and not an office of the university has granted I3P independence from academic politics, which could have led to favoring specific areas of research. By hosting a variety of different technological domains it has become much easier to reach a critical mass, at the same time fostering a collaborative and nonadversarial relationship between startups. Lack of specialization of course implies that I3P does not set up common laboratories, but startup companies can easily pay for access to the facilities that are available in the Departments of the University. Independence also implies profit and loss responsibility, which limits excessive expenditure and creates an entrepreneurial spirit in the personnel of I3P. For instance, this is reflected in the policy that regulates bonuses for personnel, which are tied to fees paid by companies. Three core activities and two key success factors. In I3P s experience, a complete incubation program requires three main activities: providing a sound infrastructure (i.e. an attractive location and offices, high speed connectivity, plus additional conveniences such as easy to use accounting software), providing consultancy (e.g., market research, business planning, tax accountancy, IPR, etc.) and, most of all, networking (with potential partners, investors, managers and specialist consultants). In turn, these activities greatly benefit from learning economies and network externalities, which leads to the fact that experience and critical mass are key success factors for an incubator. In perspective, this might lead to the creation of partnerships between the larger and more established incubators and smaller regional ones, in what in the end could become a model that follows the principle of hub and spoke networks. Of course, an incubator cannot directly provide all of the services needed to support entrepreneurship, but it can greatly facilitate win win partnerships with private actors, and without having public bodies set up costly specialist entities. For instance, I3P has non exclusive partnerships with tax accountants and IP attorneys, who grant companies in the incubation process significant discounts and pay I3P a small franchise fee. In turn, these professional services firms get access to promising future clients and returns in terms of publicity. Setting up a comparable publicly funded consultancy would definitely have cost more, and led to an uncertain quality of services. Similarly, in order to increase the production level of consultants hired by I3P, these are often assisted by students of the courses of Entrepreneurship and Business Planning who come from the School of Industrial Engineering and Management of Politecnico di Torino. Finally, I3P has established preferential agreements with two major banks, who have set up special loans at favorable conditions for tenant companies, with a low spread over Euribor and no request for collateral. Aside from publicity, banks benefit from the deal because they value the due diligence process performed by I3P in admitting firms to the incubation program and from the fact that the track record of I3P companies has never shown any defaults. Of course, there might be instances where such deals are not possible and public authorities must set up these services themselves. However, we do think this should be the exception, rather than the rule.

5 4. What linkage arrangements can help promote entrepreneurship, innovation and competitiveness (e.g. public private partnerships, academia industry government linkages, large small enterprise linkages, subcontracting, foreign enterprises, supply networks)? The nature of contemporary technology and innovation makes cooperation between government, academia and industry an irrenounceable aspect of policy making. As an example, major universities such as Politecnico di Torino are changing the nature of their campuses, which nowadays tend to host schools, academic departments, applied research institutes, industrial research labs and startups at walking distance from one another, and with continual exchanges of ideas and personnel. Similarly, connections between firms of different sizes appear to be key in allowing technology to be developed and then sourced by the parties that can make the greatest economic value out of it. Geographical proximity is of course importance, and in the region of Piemonte we do see the value of living in a cluster that includes entrepreneurial startups together with larger and more established companies, together with large multinational firms. Each of these actors bears different values and risks, and their simultaneous presence in the region implies diversity, complementarity and resilience to varying economic conditions. Close cooperation between different actors is therefore very important, as is the establishment of bridging public private institutions. However, my experience suggests to spend a word of caution on these co owned entities. These can easily develop into a complex web of organizations that end up not having a clear and distinct mission and, because of their cross shareholdings, tend to not behave as demanding customers with one another, which in turn hinders their effectiveness. So, public private institutions must always be developed having a clear and demanding customer towards whom they must be held accountable.