Market Model for Incubators and Accelerators
by Darren Oemcke, Geoff Thomas and Ron van Buuren
This continues our previous article on segmenting accelerators and incubators, by looking at elements of their marketplace structures.
Elements of Entrepreneurial Ecosystems
The World Economic Forum (Entrepreneurial Ecosystems Around the Globe and Early-Stage Company Growth Dynamics, 2014) identified 8 pillars of entrepreneurial ecosystems, shown in Figure 1, in descending order of importance to entrepreneurs: Human Capital/Workforce; Accessible Markets; Funding & Finance; Support Systems/Mentors; Government and Regulatory Framework; Education and Training, Cultural Support; and Major Universities as Catalysts.
In Australia and New Zealand, the survey for the WEF (2014) report found that the ready availability of all the pillars[1] was modest compared to countries like the US, Switzerland and the UK, but comparable to Europe as a whole[2]. Figure 2 shows the Australian and New Zealand Data for the importance and availability of ecosystem elements.
Accelerators and Incubators in the SA Ecosystem
Based on these findings, in the South Australian context with a developing entrepreneurial ecosystem, what is the value of incubators and accelerators?
Entrepreneurs in Australia and New Zealand per se do not view incubators and accelerators as either important or in short supply. But what is important is that they provide an entry point to the other elements of the ecosystem. Unlike say Silicon Valley, Australia and New Zealand do not have an inherent culture of entrepreneurship, making providing an entry point into entrepreneurship critical. Figure 3 shows a model of incubators including those elements of the ecosystem that entrepreneurs view as ‘most important’ and where gaps are highest.
We believe that incubators and accelerators are critical in the current stage of the development of the local ecosystem and their relationship to the rest of the elements of the ecosystem identified as most important in the WEF study are shown in Figure 1.
Incubators and accelerators as local innovation marketplaces
Figure 3 shows a model of incubators and accelerators as a market platform with a surrounding ecosystem, with some elements of the broader innovation ecosystem appropriated into the immediate orbit of the incubator or accelerator.
Markets exist to provide liquidity, that is, providing sufficient buyers and sellers so that trading can occur. Examples of markets are a bazaar, a stock exchange, eBay or a Westfield shopping centre. In each of these there are multiple buyers and sellers collecting at a place to transact. The place, or market ‘platform’ may be owned by one of the buyers or sellers or may be owned by a separate entity altogether. The platform (either physical or virtual) is critical to the functioning of the market, and without it the market does not exist.
The market platform created by an incubator or accelerator is characterised by the owners or others creating a physical and/or virtual space and selling and/or renting services and infrastructure to entrepreneurs. These services may include space, training, mentoring, investment, and access to investors.
In Figure 3, we have represented the incubator/accelerator market as a platform plus elements of the broader entrepreneurial ecosystem that need to be included in the operation of the market and the external elements that are most sought after by entrepreneurs in Australia and New Zealand.
To succeed, the market must be effective for all players, which will depend on how effectively the platform owners manage the platform. The key outcomes being delivered by the key players are shown with arrows and the key linkages shown with lines.
In the case of commercial incubators, platform owners are looking for some form of return from the eventual business success of entrepreneurs, typically in the form of equity or convertible debt in the entrepreneurs companies as well as seed funding from investors. For non-commercial incubators the platform owners are seeking support from sponsorship, funding or patronage that supports particular classes of entrepreneurs which is built on their capability to support entrepreneurial company growth.
The entrepreneur’s needs are more complex focussed around human capital/workforce, accessible markets and funding & finance as the three top global priorities of entrepreneurs. In Australia they are also specifically seeking an environment that is positive for entrepreneurs (where the highest gaps exist between what is sought and what can be found as shown in Figure 2).
Entrepreneurs will expect the platform to be able to facilitate, if not provide some or even much of that outcome whilst they are involved in the platform.
Mentors are characterised in Figure 1 as seeking relationships with entrepreneurs and being selected from a range of specific talent pools. In commercial incubators the assumption is that these relationships will typically be commercial relationships as all other players are engaged in commerce via the platform. In non-commercial platforms there may be more mixed motives and complex relationship needs, such as a desire to ‘give back’.
The seed and early stage investors are represented as needing deal flow. The better the deals the better potential the relationships have.
Table 1 simplifies the various platform participants’ motives/returns from involvement in the platform. We have characterised platform owner motives as ‘social’, ‘industry-development’ or ‘commercial’. Each of these creates different market and behaviour dynamics.
Social incubators and accelerators
In social incubators, platform success is measured by development of activities that address specific areas of disadvantage or areas of opportunity to create socially targeted businesses. To succeed the platform needs to attract investors that largely non-profit driven investors with a likely bias towards donors and sponsors and low expectations of commercial returns.
Mentors will typically be driven by social motives such as ‘giving back’ or a desire to see development in the local community. The risk is being able to attract mentors with the requisite business skills and being able to turn away people who want to mentor, but lack the business skills necessary. There is also risk in that mentors with strong business skills may not be able to translate that advice to a business for which profit is not a motive.
Participants (entrepreneurs) will be driven by both social motives as well as a need to be able to create a business that will support them and the social good they are trying to create in the long-term.
To achieve this the platform must be owned by organisations with purely social motives like local councils, community organisations and religious organisations. There must be high financial transparency and independent governance.
Industry development incubators and accelerators
Platform success of industry development incubators/accelerators is measured by local employment outcomes and local business growth; and/or by local growth in targeted industry sectors; and/or global success of local businesses.
To succeed, the platform owners need to attract a range of investors with a mix of motives, making these potentially difficult. Donors and sponsors are needed to establish the ventures and parties with an interest in particular outcomes may provide untied support. Additionally, some of these platforms will need Angel and VC investors to support businesses with global and fast growth potential, in order maximise outcomes.
Attracting mentors means providing support for a very wide range of motives, including social motives like ‘giving-back’ and being engaged in an industry, but potentially also more financial motives like being reimbursed or being in a position to provide services to attendees. Managing the motives of mentors and creating the right mentor culture is difficult and a point at which many of these platforms perform poorly, as they do not effectively account for mentors as market participants (treating them as part of the platform) with needs that the platform can meet in various ways.
Investors that are attracted to the higher-growing companies in these platforms/markets may include small investors and side-car funds as well as VC’s. However, not all opportunities for investment are equal in these platforms, so investor introduction and management should be effectively curated.
Commercial incubators and accelerators
Commercial incubators are the purest play. The platform owners are there to create profit via shares and options as a service swap and/or fees. Their key target market is investors so that the companies can grow and hence the incubator can realise a return for its shareholding on exit.
As a result, the entrepreneur market is well addressed — the platform will attract the highest potential companies, accelerate them the fastest and facilitate investment from appropriate investors. Investors can access high opportunity companies that have chosen the incubator for these attributes.
Mentor motives in commercial incubators are more likely to be commercial (networking and opportunities) and are poorly dealt with if they are seen as being part of the platform, rather than as part of the market that the platform is enabling.
Creating success
Creating success means balancing a number of complex interactions. Failing on one of the key relationships can be critical for the viability of the platform or the success of it dependent businesses.
A key potential weakness is taking the overall ecosystem for granted, particularly mentors and investors.
Mentors
Mentors need to be actively managed as part of the market, not part of the platform. When owners view mentors as part of the platform, their needs and motives are not effectively addressed, rather subsumed into the needs and objectives of the platform owners. In small markets where mentor pools are small, the ongoing engagement of mentors is critical and the need to expand mentor networks is pressing.
In a small ecosystem, quality mentors risk becoming ‘tapped-out’. They usually need to run their own businesses, and lead their own lives. A shallow pool of mentors will shrink as mentors are forced to focus on opportunities to build their own businesses. Without effective planning, the pool will not grow to include many successful entrepreneurs, who are very busy with their businesses, to become engaged.
One idea being used is that the platform provides space for some mentors, offering reduced cost of office space, in exchange for support for the entrepreneurs and higher opportunity to effectively engage, define a benefit and align mentors with the platform. Another is deliberately creating linkages with or relationships with multiple mentors. Adelaide has a large number of consultants — generally mature and well connected businesspeople, who choose consulting for lifestyle reasons, or due to the lack of corporate positions in Adelaide with whom closer connections would provide access to their networks and their potential early-stage investment.
Investors
Investors need deal flow and in small markets there are limited pools of investors. A key opportunity is the active management of local pools so that they are providing mentors, otherwise actively engaged and being able to influence entrepreneurs (and even entrepreneur selection) to be more investible. Where there is not active communication between entrepreneurs and local investors, all miss out on local growth opportunities.
Deliberate and early engagement with capital is critical. Linkages between HNI programs in accounting firms, local Angel investors and deliberate investment attraction are vital to achieve growth. Local incubators and accelerators need to develop a joint investment attraction program, selling the whole of the ecosystem, rather than trying to run individual programs, and “owning” the investor. We will attract more and better investors by providing better quality deal flow. That can best be achieved by combining all opportunities, and making them accessible (usually through some form of filtering or triage) to all investors.
Conclusion
In a small ecosystem like Adelaide, incubators and accelerators need to be efficient in order to deliver successful start-ups. Leaving it solely to the “invisble hand” of the ecosystem to deliver outcomes, as it does in Silicon Valley, Berlin, New York, or Austin is not a viable approach in an emerging ecosystem like Adelaide.
Elements of effective design include: Genuine care in setting up mentor programs; A very deliberate approach to identifying and creating relationships with capital providers; Very deliberate exploitation of the scarce experienced people and resources that can help early-stage companies get going; and Creating an environment which looks to address the major unmet needs of entrepreneurs.
The environment needs to include: Tolerance of risk and failure; Role models (where mentors have a significant responsibility); A positive environment for entrepreneurs; As well as the usually stated needs of finance and advice.
It is critical to build proper connections with mentors such as: Facilitating long-term connections between the businesses and the mentors (e.g. through joint mentor/incubator facilities); Clear pathways and connection opportunities to commercial opportunities to help businesses grow; Providing successful role models; Clearly outlined and facilitated sweat equity options; Direct investment options; or Deliberately creating effective opportunities for mentors to build their personal networks and share opportunities with each other.
Mentor pools need to include potential investors, successful entrepreneurs, specialised consultants and subject matter experts who can provide growth services or early-stage management talent, and potential supply chain partners and early customers.
The authors are all members of mentor pools, develop and fund start-ups and work with investors on building businesses and don’t want this to read as a complaint or a criticism — it isn’t. We are concerned that as the numbers of initiatives in South Australia grow that the overall energy will be spread thin; so effective strategic engagement is needed to maximise the benefit to the state. The key purpose of an innovation ecosystem is to build businesses.
Reference:
World Economic Forum (2014) Entrepreneurial Ecosystems Around the Globe and Early-Stage Company Growth Dynamics
Dr Darren Oemcke is a partner in Hydra Consulting, a growth and execution consultancy based in South Australia. He advises on strategy, product development, implementing growth, project execution and business coaching. He has a passion for integrating customer voices into business. He is a mentor in the Innovyz 9-month and NVI Venture Dorm programs, delivers innovation programs for the NVI/Fox Business School collaboration and the Flinders Business School and is a member of SA BioAngels. He also informally (possibly secretly) mentors businesses and staff in other incubator programs.
Geoff Thomas is the Principal of Axant Corporate Advisory, which provides advice on mergers and acquisitions, business sales and capital raising for start-up and growth companies. He has been a director of listed, venture capital backed and private companies. He is a mentor in the Innovyz 9-month and NVI Venture Dorm programs and is a member of the SA Angels. Axant and other businesses related to Geoff have, or had, business dealings with all three local Universities and their commercialisation arms. He gives advice freely to anyone who will listen.
Ron van Buuren is Managing Director of Hydra Consulting. He provides advice on strategy, business development, commercialisation, manufacturing improvement, business establishment, understanding value chains and large implementation projects. He has an excellent track-record in establishing successful new businesses as founding GM/MD and in business development in fast growth businesses. He is a mentor in the NVI Venture Dorm and Flinders Enterprise Consulting programs.
[1] “Which pillars of the entrepreneurial ecosystem are readily available in your region? Select only those with significant viability.”
[2]Selected countries and continents in descending order of availability were: US-Silicon Valley/Bay Area (86%), Rest of US (71%), North America (77%), UK (67%), Switzerland (63%), Europe (58%), Singapore (56%), Ireland (55%), Australia (53%), Spain (50%), Pakistan (46%), Mexico (45%), India (37%)
