Incubation: Whose job is it, anyway?

By Francis Moran and Leo Valiquette

“Government doesn’t start companies,” Iain Klugman, CEO of Communitech, told us a little while back. “Individuals do.”

Nonetheless, government does have an important role to play in the value chain of bringing technology to market. This is particularly true at the regional and municipal level, where local economic development agencies attempt to attract anchor employers and/or support the growth of home-grown technology ventures with programs and incentives funded by the local tax base and higher levels of government. (We will explore the broader role of government in a future post.)

These efforts, however, raise a few fundamental questions:

  • What has proven to be the most effective way for an economic development agency to support a strong and sustainable technology sector in its region?
  • Is it possible for an organization funded by the public purse and influenced by the bureaucratic culture of government to keep its finger on the pulse of a dynamic, even volatile, technology market?
  • How does a startup ensure a local economic development agency is capable of providing the timely and relevant support it needs to validate its market opportunity, secure sources of funding and achieve market penetration?

(Please share your thoughts on any of these points. This is a subject area far larger than the confines of this modest post.)

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Import vs. domestic

As Denzil Doyle explores in his book, Making Technology Happen, there are two general approaches to building a local technology hub:

  • A grow-your-own strategy, in which the emphasis is on creating and growing local companies; and
  • An importation strategy, in which the emphasis is on attracting branch plants and branch offices of existing companies that are headquartered elsewhere.

Doyle argues that the importation approach seldom works. The people who make the decision to locate a facility in a specific municipality make these decisions based on factors that cannot be influenced by the kind of salesmanship practiced by most economic development agencies. He cites several examples in the U.S. where large technology companies made their location decisions based on the level of entrepreneurial activity and supporting infrastructure available in the winning community, rather than the efforts of economic development officers to woo them.

In other words, it was communities with the entrepreneurial savvy and robust ecosystem to support a grow-your-own strategy that attracted the most interest.

However, moving ahead with either, or a combination of both, of these strategies, is not the end of the discussion. Far from it. As we explored in the previous post, Silicon Valley is arguably the hotbed of innovation that startups must tap into in today’s recession weary global economy to obtain what they need to bring technology to market.

Too much bread, too little peanut butter?

It is hardly practical, or desirable, for most startups to pull up stakes and relocate to California, despite the preference among many Valley VCs that their portfolio companies do so. What these startups require is help finding the resources crucial to their success that lie beyond their own backyard. But many organizations involved in startup incubation at the local level are not in a position to provide this.

“Often, the peanut butter gets spread too thin,” said Chris Albinson, managing partner of Panorama Capital and co-founder of the C100. “Too many smaller organizations don’t have truly world-class people running the show who understand what it is to be competitive on a global stage. If an incubator is 18 months behind what is going on in Silicon Valley, its companies are not going to succeed. It’s just spinning its wheels.”

Instead, he applauds the best-of-breed models that have emerged in Canada, such as Extreme Venture Partners in Toronto and Bootup Labs in Vancouver. [Update: Bootup Labs closed its accelerator fund late last year, a few months after our interview with Albinson.] Both organizations are staffed by strategic advisors, drawn from the business and investment communities, who can provide startups with the hands on mentorship that will help them get ahead.

“These guys are plugged in, aggressive and credible,” Albinson said. “They really add value to the companies they work with.”

Nicole Glaros believes that government, no matter how good its intentions, should remain on the sidelines and focus instead on providing a supportive framework. At the regional level, two key ways to help is through tax breaks and by providing real estate at a low cost.

Glaros is a general manager for Tech Stars, a mentorship-driven seed stage investment organization that runs programs in Boston, Boulder, New York City and Seattle.

“The good thing about the entrepreneur community is that it is quick and nimble and can make things happen,” Glaros told us in an interview last year. But when government takes too direct a hand, the bureaucratic and administrative burden that invariably builds can end up more of a hindrance than a help.

Pointers from Pittsburgh

But that is not to say that a government-funded effort is doomed as a matter of course. One example of government policy at work that helps savvy entrepreneurs do what they do best without getting in the way is Innovation Works and its seed acceleration program, AlphaLab.

Innovation Works deems itself the Pittsburgh region’s largest and most active seed-stage investor. Since 1999, it has invested more than $50 million in more than 150 companies.

IW is a private non-profit corporation, which is largely funded by the Commonwealth of Pennsylvania’s Ben Franklin Technology Development Authority. Its AlphaLab is described as “a catalyst for launching and accelerating the growth of the next generation of software, web, mobile, entertainment technology, and hardware companies.” IW receives five per cent common stock in an AlphaLab company in return for a $25,000 investment, plus workspace and services. As a non-profit, any financial returns IW is re-deployed into the community.

Despite IW’s status as a non-profit and its support by a state agency, it is anything but bureaucratic.

“While our funding comes from the state, we’re not part of the state government,” said AlphaLab director Jim Jen. “All of the employees at IW come from the private sector and investment management, with experience in running companies or launching software businesses.”

So what does all this mean?

Government can play a vital role in supporting a robust and vibrant startup environment at the local level, provided it takes its lead from the business leaders who live on the cutting edge of the technology market.

The challenge for entrepreneurs is to be careful about coupling all of their cars to the wrong train, or even one train. Does the team at your local incubator or economic development agency possess the entrepreneurial expertise and insight that can only come from having “been there and done that?” Is it capable of making the linkages you need in a particular overseas market, or in Boston, or in Silicon Valley? Find out by talking to people from those places. Get connected to them through grass roots organizations such as the C100.

We have said many times (and will likely do so many times again) that a startup must connect with as many people as possible to find the right resources it needs to succeed. The key thing is to not be daunted by how far afield that search may take you. In our next installment, we will talk more about the entrepreneurial right stuff that it takes to succeed.

This is the sixth article in a continuing series that examines the state of the ecosystem necessary to successfully bring technology to market. Based on dozens of interviews with entrepreneurs, venture capitalists, angel investors, business leaders, academics, tech-transfer experts and policy makers, this series looks at what is working and what can be improved in the go-to-market ecosystem in the United States, Canada and Britain. We invite your feedback.

Francis Moran
Francis Moran
Francis Moran is principal of Francis Moran & Associates, a consultancy that provides business-to-business technology ventures with the strategic counsel required to make their innovations successful in a highly competitive marketplace. Francis can be reached at [email protected].

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