Will ever Italy be an Innovation cradle again?

How Italian Startup Incubators, from an actual failure, could be a good leverage to lift Italian’s innovative entrepreneurship.

Photo by Andrew Peloso on Unsplash | Italian Startup Incubator
The article has the objective to tickle and provoke innovators and incubators player to make them meditate about what’s wrong with the actual italian startup scene, whos fault is and how to make Italy shine again (i know it is a long article but as a startup scene player i would like to give my contribute to make italy better again)

It is composed by 7parts:

  1. The Italian Startup Scene
  2. Italian Incubator’s Dilema: why are we still stucked into the puddle?
  3. The international market: the transition from incubator to the hybrid model
  4. What has changed with the hybrid model?
  5. What should Italian Incubator do to succede?
  6. Incubator’s Revenue Model
  7. Conclusions

Intro: the Italian Startup Scene

Lately, I have read an article about Startup Incubators in Italy, which has made me think a lot about the opportunities Italy is both losing and unable to create around innovation also because incubators are not able to either identify them BM or create real value for them customers.

Since 2012 Italy is the first country in the world to have created its own laws around “Start-up innovative” and incubators (the operative laws “decreto incubatori” is running since February 21 st 2013). It was willing to create a unique list of quality “innovative companies” and a new “instrument” to manage innovation and public investments around early stage innovative projects and to help out startups in a country that has never had a great official R&D spending.

…there’s statistical evidence that Italy is lagging far behind other European countries in terms of business origination and fundraising.

2012’s milestone has just scored a huge “bubble” around the startup ecosystem; no great results since then other than a big confusion into the community:

  • the best-skilled minds are fleeing away/emigrating from Italy
  • Italian’s investor money is being invested in other international venture that could “secure” them innovation investments
  • we have created a mismatched between the international “startup” concept and the Italian start-up definition (start-up innovative):
  • startup fashion — everyone is a startupper, you have just to be on the list (the list is filled out of thousands of low-quality projects)
  • startup mentor — people who do not know which one is the difference between a company and a startup are distributing free and paid advice
  • professional investors are unable to invest money on good opportunities — they are starting to invest Italian money on international ventures
  • early stage startup are pushed to build Business Plan

Studying the phenomenon and going back into the startup “history”, we can affirm that Italy is facing the dot-com era bubble, 20 years later, when in the States every law and accounting firm decided they were going to become incubators; they all insanely failed to execute.

https://commons.wikimedia.org/wiki/File:The_bus_is_stuck_in_the_old_snow..._-_panoramio.jpg

Italian Incubator’s Dilemma: why are we still stuck into the puddle?

The bubble’s era example represents perfectly Italian’s incubator picture nowadays:

  • Incubators are opened up all over the places (to be called incubators — to be on the government’s list — they just need to have a space of 500 m sq at least);
  • none of them have a profitable business model;
  • people running the incubators are not able to differentiate companies from startups;
  • just a few of them care about the local network;
  • just a few of them guide the startup through the journey;
  • mentor’s network is majorly unexisting — mentoring relationship is most of all a consulting arrangement — no mentor training developed
  • incubator’s objective is measured just by financed money and not by:
    — number of tests run by startups;
    — number of P/M fit;
    — level of customer likeness and value proposition’s profitability; 
    — number of scaling startup with a validated BM,…
  • none of them cares about expanding Business Angels’ knowledge around startup — risk management, risk reduction techniques, deal evaluation and management,…

This means that Italy’s Incubators are still running around a pole, waiting for Italian’s state money to accelerate them ride toward the fortune.

You should not prioritize startup capital as your primary reason for applying, as a good incubator can typically offer many more resources other than money.

The international market: the transition from incubator to the hybrid model

The idea for early-stage companies to share facilities in a business incubator became popular in the states in the late 1970s.

Incubators are boxes which receive rents and fees from tenant firms, in exchange for:

  1. office space;
  2. administrative support services;
  3. introductions to financiers;
  4. connections to legal, technology transfer, and accounting consultants.

When they are affiliated with a university incubators offer:

  • intellectual property support;
  • knowledge transfer from faculty members to firms that are commercializing the university’s intellectual property;
Most of these are nonprofits, set up by a university to commercialize new technologies, or a municipality to foster business development for the local economy. A few are still trying to make a profitable business out of nurturing startups, but it’s a challenge to make money when your customer startups don’t have many resources to give.

Since Incubators are not-profitable businesses and Accelerators are too much of weak teams at the first business opportunity, it has been created a new term (for us it is a mixed sense word) “INCULATOR” that would describe the hybrid model exposed by Susan Cohen in 2013

The Hybrid concept has born to create a “profitable” process to shelter vulnerable nascent businesses, allowing them to become stronger before becoming independent.

What has changed with the hybrid model’s adoption?

Theoric Incubator model (cheap real estate, coworking spaces, with furniture, phone, internet connection, discounted legal services, accounting, or other kinds of commodity services) has failed all over in the world wide since it doesn’t build valuation or business value.

With the Hybrid approach incubators have become more than a real estate entity: Incubators are either physical or virtual, providing business counseling and management assistance to their “client firms” (startups).

Incubator’s objective now is to find the best matches between really early stage skilled teams and the “soil for growth” (sponsor’s money, people and local community); since the goal, they are focusing on a specific market so to be able to guide the startups, within their capacity, to the next level offering value-added business services as:

  • promoting the startup culture movement
    — Steve Blank: “A startup is a temporary organization in search of a scalable, repeatable and profitable business model”;
    Dave McClure: “a “startup” is a company that is confused about 1) what its product is, 2) who its customers are, and 3) how to make money. As soon as it figures out all 3 things, it ceases to be a startup and then becomes a real business. Except for most times, that doesn’t happen”;
    — … “a temporary group of people building an innovative product that customers love, with a great profitable business model”;
  • facilitating Product/Market fit facilitating mentorship and customer connection with whom is willing to pay for an innovative product or a service that addresses a pain/opportunity;
  • promoting Customer and Agile Development, since it is the only proofed way for startups to quickly iterate and test their hypotheses about their business model;
  • offering a network: When startup is facing a technologist lacking business skills, it is critical that the incubator assists them in finding the right skills necessary to manage the need;
  • Build and Managing a visible and tangible mentor’s network (being careful to manage it in the best way since mentoring is the strongest and weakest link to the success);
  • Supporting investors to understand how to invest in startups (startup valuation, investment model, risk reduction model,...).

What should italian Incubator do to succede and change them faith?

Here follows a partial list of activities and approach Italian Startup Incubator should have to start a new and also profitable journey:

  1. Create a new incubator’s vision — straight incubators are unprofitable, they all need to switch toward the hybrid systems, which can be a great opportunity for the Italian Startup Scene, since there is an ashame need of cultural support;
  2. Develop Comprehension — what do they need to do to help good heterogeneous teams to reach the startup goals into the startup journey?
  3. Understanding that:
    Innovation isn’t a controllable process and answers do not exist in the building (startup Validation’s needs);
    Business plan doesn’t exist for early stage startups since during Problem-Solution and Product-Market fit there are not enough information but only to be tested hypotesis that in a BP could make collaps the paper castel;
    Community around incubator must be alive if not success will not be reachable;
     — Cap Table needs to be kept clean and that huge stakes of equity (in Italy incubators are able to ask easily up to 30–35%) can kill the startup;
  4. Promote Community of founders: where they can help each other (not just a dysfunctional WhatsApp group, Facebook page, bulletin board, …) (difficult and time-consuming program but pays back) avoiding worries about the “unionize” and the complaints (if the incubator works, you have not to worry about it).
  5. Mentoring network to facilitate:
    — startups into the validation process
    — networking and reducing separation between the startup and the market
    — mentor-startup matching to work with the specific startup. 
    — promote a startup mentoring process, to promote how to support startup leveraging personal skills and connections
  6. Create an internal set of rules to:
    — manage mentor’s choice avoiding “all the mentor panel will help all the startups” or people dishing out advice or proclaiming verdicts or are unable to listen;
    — manage a KPI system;
    — support match making between startups and mentors avoiding superficial or short-lived relationships;
    — C
    omplete the feedback loop. Incubators should keep the mentoring relationship on track;
    — Ensure a central authority where it commands the respect of all constituents: founders, mentors, partners,… and it acts as facilitator of processes than an operating participant;
  7. Build and manage the local Community — nurturing local community with events, classroom/lectures,… enables people to be on top of the fashion process and make them become key players for startup’s future (tests, investiments, mentors, opportunity development, startup scouting…).

Incubator’s Revenue Model

How can an Incubator become profitable?

Incubators may build them own value proposition on 4 different pillars:

Incubator’s revenue model — background picture by
  • Incubation:
    — Equity Investment
    is the equity stake taken out from the startups that join their portfolio in a range which can be around 5–10%;
    Service Fees is the price for services offered to the startup, including business operations, such as marketing/PR or business development, engineering, including helping early stage startups build their prototype, or even industry specific services like testing services. Some they will also provide corporate secretarial services or part-time CFOs;
     — Program Fees (Funding) is the cost of incubation that will be charged to the startup when they get a funding;
  • Funding: as soon as startups get funding, they will be paying services to the incubator Fundraising fees;
  • Open Innovation support programs where an incubator can be a great partner to manage
     — idea generation tasks,
    — startup scouting and evaluation/filtering,
    — innovation process framing,
    — Program & Events Fees: when there is a demand into the market and no one can cover it, you can propose a fee for cultural activities for mentors, startups and investors;
  • Ecosystem Building: it is when the incubator develops innovation programs, marketing and promotions activities for Open Innovation Support service’s customer and other company’s innovation practice activities. As you can see from the picture the ecosystem building activities are the basis of our system, since Startup Culture’s promotion is the basis for successfull startups to live (easier interaction, connection, talks, fundraising,…). The startup cultural promotion should involve also Government’s support toward incubators (real equipped incubators with tangible running networks of startupper, mentors and investors) with money, to enable these key players to promote the opportunities aroud Startup and Innovation toward key players into the startup world.

Conclusions

Italian Incubators need to switch them vision, change them old and awkward management teams (remember: “startups are not companies and answers do not lie into the building”) and models, start understanding what’s going on outside of the Alps, start cooperating with international groups, study and then, overall, beginning to understanding and promoting what is for real a STARTUP!

The MAIN benchmarks incubators should use to understand their success are related to the number of:

  • Validated Value proposition;
  • Customer’s references gained by each startup;
  • Minimum Viable Product developed;
  • Number of scaleup with a Validated Business Models;
  • Ecosystem’s education and cultural improvement around the startup world;
  • Number of high value people into the network (usual visitors);

Since startup are not Companies which execute, but but temporany groups of people who test hypotesis, Incubators have to avoide using financing and financial metrics (ROI, RONA, ROE) as its success metric, since right now them main customers (inexperienced entrepreneurs) are just pushed to run into uneeded financing round that will make failure easier. → funding as a success metric is just a vanity metrics.

Where funding is appropriate and relevant, helping entrepreneurs connect with angel investors and venture capitalists is an important service.

To close the paper i would say to the Incubator’s managers and staff:

  1. incubators need to separate business from finance since they are not a bridge to capital but a link to business success;
  2. all the players into the ecosystem should spend sometime reflecting where this blind ride is driving us;
  3. understanding who are/is the only (few) players who right now are able to succede into this “Startup Journey” and understand how to steer the wheel to follow the same designed path;ecosystem building is the most insane, time spending and stressfull activity you MUST execute to help out your self and Italian’s future. It will help you with everything, from brand reputation, receiving sponsorships to embracing a great deal flow — right now, old style incubators, receive a really low quantity and quality deals, this is a shame since the Italian startups are trying to escape from Italy toward international incubators and accelerators (in 2016 Italy has been country no.3 for application in techstars EU accelerator programs, but project’s quality was a shame) — .
If you are deliberately trying to create a future that feels safe, you will willfully ignore the future that is likely — Seth Godin

Thanks for reading the entire article! I’d really appreciate it if you would comment, recommend and share this post so other people can find it. 
Feel free to reach me out at any time to go deeper on this and other startup’s issues! Enzo

update:

Comment by Matteo Masserdotti
We should start assuming that there is not an Italian way for startups, the only way is to adopt best practices. Every piece of the ecosystem might be encouraged to do that.