Classifying Business Incubators

This is the second part of my studies in business incubators. The first part may be found here.

To aid in the analysis of business incubators, particularly in identifying issues related to incubator evaluation and recommended practices, a classification system needs to be adopted (Albert and Gaynor 2001). Various researchers have provided different means for categorizing business incubators. Some researchers propose to classify them according to a) their primary financial sponsors (Kuratko and LaFollette 1987; Smilor 1987b; and Temali and Campbell 1984), b) the business focus of the incubator (i.e. property development or business assistance) (Brooks 1986), c) the business focus of the incubatees (Plosila and Allen 1985; Sherman 1999), or d) whether the incubatee is a spin-off or a start-up (Plosila and Allen 1985). However, because the configuration of an incubator is highly dependent on the social, cultural, and economic environments that they are in (Albert and Gaynor 2001), using existing classification systems as a predictor of a particular incubator’s success is not advisable. Nevertheless, they remain helpful in understanding the motivations and key issues behind certain incubators. This file provides a list of some types of incubators.

An interesting proposition has been made in a paper by Hansen et al. (2000) where they depict incubators as a new organizational model that has evolved from mass production firms and multidivisional companies of the 1900s. They suggest that incubators should be seen as a means of addressing corporate rigidity caused by deep bureaucracy. What is critical, according to Hansen et al. (2000), is for incubators to own “significant but minority equity stakes [that] will ensure that the incubator and the associated investors have influence—but not authority—over companies.” Viewing the incubator as an evolved multidivisional firm also allows its management to achieve a certain focus in the types of tenants that it accepts. Just as a multidivisional firm must adopt a certain focus on the types of businesses it enters, so must an incubator. By maintaining a related set of companies, the incubator is able to optimise benefits to the incubatees and thus to itself. Hansen et al. (2000) also warn that “incubators that assemble a highly diversified portfolio of companies are likely to suffer from the same problems that traditional conglomerates do. The whole will not be greater than the sum of the parts.” However, while the proposal of Hansel et al. is compelling, much work needs to be done on their agency-based theory (For more information on agency theory, see Eisenhardt 1989) since “rather than working for the success of the principal’s firm and shareholders, the incubatees work to attain their own firm’s success” (Hackett and Dilts 2004b). That is, the principal-agent dyad that is commonplace in multidivisional firms may not be present in incubators making agency-based theory difficult to implement. Furthermore, their proposal to adopt a portfolio strategy in selecting incubatees may only be applicable to certain types of incubators.

It is worth emphasizing that while classification systems are helpful in systematically analysing the business incubation industry, they do not necessarily predict an incubator’s success rate. Researchers such as Allen and McCluskey (1990) state that, considering all other things equal, there is very little variance in the outcomes of incubators across different classifications. Peters et al. (2004), however, found in their research that non-profit incubators—those that do not take equity stakes in tenant firms and rely instead on rental payments and institutional funding—had a higher success rate than for-profit ones. They reason that because non-profit incubators did not face any pressure to make a profit, they are in a much better position to select the best incubatees. On the other hand, Hackett and Dilts (2004a; 2004b) suggest that non-profit incubators have a higher chance of selecting non-performing tenant firms since their raison d’etre would turn into ensuring full occupancy rather than ensuring the success of their tenant firms. Furthermore, Hackett and Dilts (2004a) state that non-profit incubators have a tendency to “underreport incubator-incubation failures and over-report successes” to ensure continuity of public funds. Thus, the findings of incubator configuration research are still divergent and further study may be needed to reveal conclusive evidence on a classification system’s predictive ability. At this point in time, incubator taxonomies may only be used to provide insights on how an incubator may be managed and not as a predictor of their future success.

In part three, I explore the incubation process and how it may be a better predictor of incubator success.


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