Critical Conditions to Establish Efficient Incubation Cycle in Latvia Dr.Chem. Valdis Avotins Acting Director of Engineering Research Centre of "Ventspils International Radioastronomy Centre" of the Ventspils University College Inzenieru Street 101a, Ventspils, LV – 3600, Latvia; E-mail:
[email protected]
M.Soc.Sc. Viesturs Zeps Head or Project Development Division of Investment Project Department of Investment and Development Agency of Latvia. Perses street 2, Riga, LV – 1442, Latvia E-mail:
[email protected] Abstract: Within the last two decades business incubators (BI) have become an important entrepreneurship policy tool in Central and Eastern Europe and in Latvia in particular. Usually business incubation is a process of nurturing and developing new business ideas into an expanding and sustainable company.
Incubation culture is often misperceived to serve only a social function, thus resulting in domination of process orientation over expected results for publicly funded BIs. Lack of political will towards preincubation and pre-seed funding hinders the whole incubation cycle. The Paper introduces the concept of pre-incubation and explores the existing routes to support innovative business ideas within incubation cycle. It approaches incubation policy, analyses existing models and services according to growth cycle of company, examines efficiency and identifies critical factors for efficient incubation system in Latvia. Special attitude is paid to incubation stages and regional incubation program.
Keywords: business incubators; pre-incubation; technology incubator; business services; entrepreneurship education; incubation cycle
Introduction Majority of EU countries are facing failures in their innovation systems repeatedly: too few new business ideas coming from universities, research and industry fail to mature into sustainable high growth start-ups and into companies afterwards. There exist a paradox: societal attitudes towards entrepreneurship are positive, support to idea holders and necessary know how formally are available and actors may obtain driving environment and required services. However, still only few come to take a risk and real action to start a business.
The essence of answer to the question what kind of environment, facilities and services of early business development need to be set up and offered is: entrepreneurship centres, business incubators and technology centres. In reality it is only a part of the answer. To be successful and sustainable the early stage business development critically requires more specific format and content of support and it should be available to wouldbe entrepreneur even before the incubation services. Creation of new innovative companies has been set as one of key priorities in Latvia’s innovation policy framework. According to the National Development Plan 2007 – 20131 and National Reference Framework Document 2007 – 2013 2 Latvia has an evolutionary strategy to triple financial resources to support innovative entrepreneurship. However, too little has been achieved until 2009 and increasing economic downturn has even more worsened the state of planned support to new innovative companies in Latvia. 3 The poor incubation performance so far requires assessment of existing early stage support initiatives and outcomes of local and national business incubation programmes, identifying its weaknesses and bottlenecks and introducing systematic approach in creation of new innovative companies, education and research, support services. Understanding of aforementioned will help boosting new high-growth innovative companies and guiding them to become sustainable. Aim of this report is to introduce the concept of pre-incubation and explore the existing routes to support new innovative business ideas within development of balanced incubation system in Latvia.
1. The emergence of Pre-incubator Since its beginning in the middle of 20th century, the concept of business incubators has evolved continuously and has been adapted in many countries, reflecting very specific economic, institutional, regional and technological conditions. The comparatively low performance of business incubators and low outflow of new innovative technological companies required to study early stage of business cycle more carefully. As a result, the pre-incubation activities – raising the entrepreneurial attitudes and behaviour, changing entrepreneurial mindset in educational process, reshaping enterprise education, and further on, creating up specialised support facilities, has obtained increasing role. In most EU member states a major failing of the innovation system is that inventions generated at universities and public research institutes are too rarely commercialised by the creation of new, innovative companies. The core of the concept to meet this bottleneck is a university-associated facility, the pre-incubator, which is a new device for managing the spin-off process. The innovative feature of the pre-incubator is a specific management, legal and service structure that allows academic researchers to test the feasibility of their business ideas before they take the risk of setting up a company. The legal entity of the pre-incubator forms an umbrella under which potential entrepreneurs, guided and controlled by the management staff, can test their products on the market, thus gaining valuable business experience. This experience, in addition to continuous training and coaching, is expected to increase the sustainability of the future company. 4 Continuously these obstacles fostered the establishment of the first European business pre-incubator at the University of Bielefeld in 1997. 5 Since that, pre-incubation 1
See more detailed information in www.nap.lv/en See more detailed information in www.fm.gov.lv/en 3 Zeps V., Avotins V. Concepts of technology and business incubators, their Relevance to Latvian economic development. Ventspils University College, Ventspils University College, Ventspils, 2008, pp.221-230. 4 Wirsing B.; Traude A.; Steffens J.; Sheen M.; Löffler B.; De Lapparent D.; Broadfoot C.; AlonsoGonzalez J.-L. Becoming an entrepreneur for a trial period: the pre-incubation experience. The International Journal of Entrepreneurship and Innovation, Volume 3, Number 4, 1 November 2002 , pp. 265 5 Rajaniemi L., Niinikoski E.R., Kokko E. Pre-incubation in Higher Education. Examples of preincubation and some critical conditions to be taken into account in order to establish pre-incubation activities. EKIE project, Interreg IIIC, Oulu University, 2005, 203 p. 2
activities have spread rapidly, in the 21st century entrepreneurial centres and preincubators have increased by number in the higher education institutions (HEI). 1 For example, in Finland most significant development of pre-incubators (Pre-BI) counts for period after 2002, totally 18 incubators were located into HEI premises and in many cases pre-incubators were established as a part of BI, and principally integrated due to their special role as catalysers of spin-offs from HEIs. 2 Pre-incubation is only a part of a wider incubation cycle.
1.1. Characteristics of Pre-Incubator Concept of the pre-incubation has not yet been deeply researched; therefore it might be too early to give well-balanced definition. Pre-incubators are designed to address asymmetry of information, approaches and way of action between academics and entrepreneurs, especially: “missing personal skills as well as unawareness of the value of their intellectual property”. 3 The definition given by Dickson 4 was developed by Rajaniemi 5 as “a risk-reduced environment where entrepreneurial ideas are pre-filtered for market viability thus helping to avoid greater costs and failures of setting up a new company in the further phases of business development”. The pre-incubator usually provides both internal and external learning venues where students and idea authors develop a new venture plan within a protective environment before committing to the risk of running a business. 6 In 21st century pre-incubation concept has slightly diversified understanding of preincubation as a learning and business plan development promoting environment, where participants can improve their skills and their own business idea and getting needed support to do this. Pre-BI takes care on business idea risk. Test of markets for intended products and services during the pre-incubation time allow for nascent entrepreneurs to test the feasibility of their actual business idea before establishing new company. This is also helping for Pre-BI to select more successful business ideas for further development. 7 The average pre-incubation time is 3-6 month; however it could be prolonged to one year depending on assistance required. It is important to fix beginning and ending of support period. Pre-incubation usually starts with a contract and ends when period is over or earlier if new company is established. Availability of physical space is an advantage for Pre-BI (but not a pre-condition) to collect a critical mass of nascent entrepreneurs and combine individual work with network and joint training activities. As pre-incubators do not need to limit clients according to available space per tenant, they are able to keep with low fixed expenditures. There are examples of completely virtual services and this is rather question of learning process quality and need of face-to-face advice. Selection procedures usually are more formal than strict: critical is idea’s commercialisation potential. Stuff of Pre-BI usually has defined selection criteria evaluating feasibility of idea and the readiness of Pre-BI to pre-incubate the idea. Selection panel is formed from stakeholders and field experts. 8 Unlike the BIs, Pre-BI do
1
Ibid, p. 4 Ibid. p.17 3 University start-up of international entrepreneurs, 2005. Retrieved 06.06.2009 from www.usine.uni-bonn.de 4 Dickson A. Pre-incubation and the New Zealand business incubation industry, 2004, p.15. Quoted from Rajaniemi L. et al. p.11 5 Rajaniemi L. et al. p.4 6 Dilts, J.,C., Hauser, W.,J., Lewison, D., LeHere, M. E-Venture: Setting up shop online: creating a student e-business pre-incubator experience. In Journal for Advancement of Marketing Education – Volume 11, Winter 2007, pp.3 7 Rajaniemi L. et al. pp.12.-13. 8 Broadfoot C., Sheen M. A guide to pre-incubator best practice. Manual describing the best practice scheme which is transferable to any region. University of Strathclyde. Available in www.usine.uni-bonn.de 2
not have strong exit rules in place, participants are likely to be transferred to the BI if such opportunity exist.1 Pre-BIs offer services during the period of pre-company development. This is individual work by local stuff, usually free-of-charge e.g. Venture Cup, Seed Forum and Connect nationwide practices, or for nominal cost, including evaluation of business idea, assistance to develop business plan, assistance in setting right contacts, testing markets, office facilities, training and providing access to valuable networks. 2 Specialised and more expensive coaching, financial counselling and mentoring services are externalised. Networking services are popular to help to nascent entrepreneurs with market knowledge and barriers and strategic contacts. 3 Pre-BI need appropriate intellectual (personnel with adequate skills to administrate and service ideas), physical (office and infrastructure) and financial (regular external financial donations to cover administration and external service costs) resources. Financial sources for Pre-BIs vary and therefore whole business model differs from BI, where grants are given only to cover special services to tenant companies. Pre-BIs mainly are embedded in larger organisations as they are not self-sustainable and need rich host organisation, which may usually be HEIs, thus they are usually oriented towards commercialisation of the available research. Majority of Pre-BIs are multi-area preincubators as they offer basic business services attracting specialised expertise from outside. Recently new Pre-BIs are usually created in technology centres and incubators as a pre-stage for whole business incubation cycle. In such model BI shares with Pre-BI facilities, expertise, personnel, finance, networks and services. Finally this results in more productive way of servicing idea holders. 4 The model of Pre-BI in rural areas is less clear clear and less efficient due to lack of critical mass of innovative ideas. Pre-BI requires good linkages with entrepreneurship education, usually in HEIs or life-long learning centres and to BIs.
1.2. Pre–incubator as a part of entrepreneurship education
1
Dilts, J.,C., Hauser, W.,J., Lewison, D., LeHere, M. E-Venture: Setting up shop online: creating a student e-business pre-incubator experience. In Journal for Advancement of Marketing Education – Volume 11, Winter 2007, pp.8 2 University start-up of international entrepreneurs, 2005. Retrieved 06.06.2009 from www.usine.uni-bonn.de 3 Rajaniemi L. et al. p.83. 4 Rajaniemi L. et al. p.88
Comprehensive school as a rule decreases entrepreneurship spirit of individual; as a result perceptions and attitudes are negative to become an entrepreneur. The role of business incubator is to re-train, to reposition attitudes and change mindset and behaviour. Entrepreneurship education has growing importance in educating new entrepreneurs, increasing their entrepreneurial spirit, skills and values. As a result, new study programs on entrepreneurship are designed and introduced, content of all courses are extended by adding entrepreneurial additives or case studies. Entrepreneurship education can be better understood through its aims and objectives: • To promote external entrepreneurship, setting up and managing companies; • Strengthening the entrepreneurship, entrepreneurial way of action; • Supporting the enterprising behaviour, skills and perceptions of the individuals. These aims are more explained in figure 1. The process of entrepreneurship education might be split into three stages. First, usually in the format of basic studies entrepreneurship study courses help to improve students’ understanding about commercial activity and increase their overall level of entrepreneurial skills.1 However, such offer is insufficient, as the life requires practical entrepreneurial capabilities. General and theoretical information about entrepreneurship offered to students in the first stage do not allow students to act as an entrepreneur. Therefore in the second stage students pass through training processes, with the help of entrepreneurship: enterprise games, practice enterprises, simulation enterprises. Not all students necessarily later will become entrepreneurs, but definitely it can be offered to all selected students motivated in developing their own entrepreneurial skills. In the third stage students are trained to obtain practical knowledge to start company. Here offer is more specified towards encouraged starters, nascent entrepreneurs or even start-up founders who aim to practice entrepreneurship in controlled circumstances. They have strong motivation to establish their own company during study process and are interested to continue development in incubator. This stage usually is performed in operating pre-incubators.
Figure 1. Typical ways to develop entrepreneurship in education2
1
Ibid. p.10 Table modified by Authors, Source: Rajaniemi L. et al. p.9 synthesised with Simo Saurio, Best Practices of Pre-Incubation in Higher Education, National Business Incubation Association, presentation at the 18th International Conference on Business Incubation, The Power of Supporting Entrepreneurs, April 25-28, 2004 Atlanta, Georgia, see also www.finpin.com
2
These three stages of entrepreneurial education create the needed for nascent entrepreneur set of skills, spirit and knowledge. The practical component might not be transferred and aims of second and third stages achieved if the quality of the first stage would be neglected. Therefore, the entrepreneurship education should be approached as the integral part of pre-incubation process. In the same time, studies in pre-incubator may account academic credits after completion of activities. 1 During this transitional phase students have access to facilities, technical resources, and a network of people. While most academic programs focus primarily on graduate students, the focus here is on undergraduates. 2
1.3. Pre-incubation in the business incubation system The route from pre-incubation to traditional business incubation is made easier by offering tailored services to would-be entrepreneurs, locating further on in BI facilities. Pre-BI should be promoted as a one integral component of a rather long new business development process. The strategic approach of a Pre-BI is how more efficiently link preincubator to other new company support mechanisms already existing in the region (market or – are available). Pre-BI should have its mission and goals and this may differ depending on region, aims of entrepreneurship education and environment and set linkages in incubation system. Pre-incubator could be perceived rather a stage than a facility, meaning that certain services are offered in the early state of the development of a business idea. 3 Another important and a more concrete difference comparing to incubator relates to funding. Pre-incubators or their ‘clients’ do not receive incubation or investment support as established enterprises as those in regular incubator do. 4 Modern term “Business Incubation” is defined as actively creating a nurturing, instructive, and supportive environment for selected ambitious businesses in the early stages of development and emphasizes the need for selection and graduation policies. 5 Usually it is a process helping businesses to survive and thrive, while an “incubator” is the environment, either virtual or real, where incubation takes place. The uniqueness of business incubator is integrated services in one place, which complement each other. There exist other policy measures that can contribute to innovative company promotion, like support to new product development, personnel training, support to exhibitions and trade fairs etc. However they can solve one separated component when start-up need all of them and in a specific way. In a broader sense there is a lot of common between incubation and wide counselling, training and mentoring services. This creates bases for virtual incubation 6. Incubators cater for start-up companies, helping them to survive and grow during the start-up period when they are most vulnerable. Incubators provide hands-on management assistance, access to financing and managed exposure to critical business or technical support services. 7 In the 1990s, a “new economy incubation” trend emerged to develop business incubators around specific industrial and technological clusters with high value added with aim to mobilize ICT and provide a convergence of support, towards creating 1
State-of-Art of Enterprise Education in Europe. Results from ENTREDU Project, 2002. Edited by Hytti U. Written jointly with Kuopusjarvi P., Vento-Vierikko I., Schneeberger A., Stamfl C., O’Gorman C., Hulaas H., Cotton J. and Hermann K. Publication of Entredu Project, Leonardo da Vinci programme of the EC, Turku Finland. 2 Dilts, J.,C., Hauser, W.,J., Lewison, D., LeHere, M. E-Venture: Setting up shop online: creating a student e-business pre-incubator experience. In Journal for Advancement of Marketing Education – Volume 11, Winter 2007, pp.7 3 Saurio 2003, p.15-16. 4 Ahola, S., Honkanen, V., Entrepreneurship education in finnish polytechnics. University of Turku, Finland, 2004, pp.19 5 UK Business Incubation, http://www.ukbi.co.uk/ 6 Erikson, T. Training programmes as incubators. Journal of European Industrial Training. Nr.1 (2003), 36-40.p. 7 Zeps V., Avotins V. Concepts of technology and Business incubators, their Relevance to Latvian economic development. Ventspils University College, Ventspils, 2008, pp.221-230.
growth-potential, tech-based ventures. 1 If the traditional incubators serve as regional job development tool providing “space and dial” functions and motivating people to involve in business, the new form concentrates only on new high-growth technology based companies that involve high risk and at the same time expectations of high return thus they are usually operated by venture capital funds. Between the “traditional” regional development model and “new economy” incubators, there is an array of other types such as Business & Innovation Centres (BICs), technology centres, and innovation centres that all share basic incubator characteristics. After the exit from the Pre-Bi new business idea should be stable enough to enter the incubator as newly established company. According to the initial evaluation of the idea, the development stage of the product (service or good) as well as the location where owner resides new entrepreneur would try to continue the incubation process within larger premises supplemented with more targeted and hands-on support provided by business incubator operators. In a previous paper authors have analysed two models of business incubators that are relevant to Latvia. 2 A traditional business incubator - an organization that focuses to new job creation and systematizes the process of creating successful new enterprises by providing them with a comprehensive and integrated range of services, which can include: incubator space, which might be available rental or virtual, basic business services, including secretarial support and shared office equipment, “hands-on” business counselling and access to specialised assistance, access to BI inner or external networks. New economy incubators are usually funded by venture capital companies or set up by large multidisciplinary consultancies that are able to offer a complete range of technological, advisory and other business support services to their clients. Large multinationals have also been keen to capitalise on their expertise in the e-economy by offering advisory expertise to new high-tech start-ups within a virtual incubator model. The strategic objectives and way of operation of “new economy” incubators differ fundamentally from their “traditional” equivalents. Figure 2. Key elements of the system of business incubation
Most incubators choose not to maintain their own investment fund, serving instead as a broker that introduces its portfolio ventures to external sources of capital via wider network of financiers. Hybrid form with well integrated and tailored services represent business accelerator.
1 2
OECD, Technology Incubators: Nurturing Small Firms, 1997, pp.13 Zeps V., Avotins V. p.223.
The system of business incubation from the entrants’ viewpoint is reflected in Figure 2. Pre-incubation stage gives the tenants the opportunity to develop their ideas in an environment with other like-minded, budding entrepreneurs. Incubation itself includes more stages of the business development, where the resources at the initial stage are more oriented to test the idea (proof of concept) and to find first customer, while at a later stage (closer to exit) companies are forced to grow and become sustainable for competition in the market. The Pre-BI acts as a beacon, which clearly identifies specialist start-up advice and support on offer by the host organization, and can signpost to appropriate governmental and non-governmental organizations in the region that support enterprise activity. 1 The system of business incubation is usually supplemented by various additional support tools such as grants for small businesses, pre-seed tools, business plan competitions on regional and national levels etc. The most important is the coordination and mutual interaction between the elements of the system.
2. Analysis of Latvian business incubation system The rationale for publicly funded (full or partly) business incubators - as with other types of subsidised assistance to SMEs - lies ultimately in addressing market failures, i.e. gaps and deficiencies in the support structure available to smaller enterprises (lack of affordable, divisible work space, facilities, services, of access to finance, information and other resources, etc). These market failures arise from the relatively high costs and risks of providing services to new SMEs compared to mature enterprises and the unwillingness of the private sector to assume these costs and risks often giving modest returns. Other incubator models do not, however, have market failure as their rationale. Incubation, not only in the US, but also in Europe, often serves also as an important catalyser for the commercialisation of research and technology and provides a “laboratory” of sorts to promote entrepreneurship. 2
2.1. Business incubation in Latvia The serious state policy to start Business incubation policy measure was launched at the beginning of 2007 by the Ministry of Economics of Latvia. The previous several initiatives to support business incubators were isolated, short term focused and usually stopped without continuation (PHARE, budget funds etc.). Thus, incubation culture in Latvia is still in the early stage of development. The support from the Ministry of Economics contributed to the emergence and development of 11 business incubators. This first national program to develop business incubation was lacking overall understanding of incubator as a business entity, but was in line with local consultants’ lobby for additional subsidy program, and as a result, did not set clear requirements and goals to be reached by the operator. Following this, the established incubators started to operate with their own general understanding of incubation as over-subsidised. The analysis of the incubators already in market shows that they do not consider themselves as business projects thus being fully dependent on the public funding, being not targeted to take care on income side, self-sustainability and long-term operation. The risk is high that the invested resources in majority of existing BIs will be ‘wasted’ without any further funds. The second ongoing funding scheme elaborated by the Investment and Development Agency of Latvia (LIAA) intends to provide necessary funding to BIs until the end of the 2014. The scheme is intended to serve as a regional development tool rather than foster growth of knowledge intensive companies. Having almost non-existent outflow of high-growth new company deal flow, limited lobby from regions and influence to municipal elections the another more advanced alternative, so called 1
Davison, H. Bridging the gap: harnessing graduate enterprise through pre-incubator support. Northern Economic Review 32, Northumbria University, 2002, pp146 2 Rustam Lalkaka. Best Practices in Business Incubation: Lessons (yet to be) Learnt. Paper presented to Belgian Presidency's international conference on business centres, Brussels, November 2001.
Technology or “New Type” incubator program (also elaborated under the support from DG Enterprise and Industry) was cancelled, regional aspect became the core component not to cancel the funding for the program within overall budgetary reductions in today’s economic downturn that confuses other integral parts of innovation system. Major characteristics of the new support program to BIs are: • Procurement of incubation services from 9 Business incubator operators that are located in the regions of Latvia (outside Riga city and Riga district). • Procurement of incubation services from one business incubator operators that is located in Riga city and provides services to companies that represent creative industries. • One operator is obliged to provide traditional services to a number of companies in at least 2 cities at the same time providing virtual incubation to those tenants that are not located in the urban areas. • To avoid artificial competition and to increase the concentration of the competence within the operators, only one operator will be able to settle in the particular city. • The minimal size of the sustainable incubator is required to be at least 2000 m2, while it is also required to strive for higher occupancy rates to achieve economies of scale. The total available amount for the operating incubator is 2 MLVL for 5 years. The performance of the incubators will directly influence the amount of the fee they will receive for services provided. The program will be generally monitored on the quarterly basis while in-depth examination will be carried out in the 3rd year of operation and before the submission of the final reports.
2.2. Pre-incubation initiatives in Latvia Core idea of the pre-incubation is to provide early support for spin-offs and start-ups of knowledge intensive enterprises. It can be done by raising the entrepreneurial spirit, organizing enterprise education and building up support facilities, pre-incubators, as a pre-stage for business incubators. Pre-incubation has a crucial role in filling the gaps in the existing innovation systems. The LIAA has developed integrated support measure from three complementary elements promoting entrepreneurship: Students Training Course „Become an Entrepreneur in 5 days!”, The National Competition on Innovative Business Ideas „Cup of Ideas” and Pre-seed support tool. 1. The goal of Students business training course „Become an Entrepreneur in 5 days!” is to form teams from university students with various educational backgrounds (basically – combination of business and science) and during 5 working days prepare their ideas to be further developed. The method allows students to test themselves whether they may or may not become successful entrepreneurs. The activity has been implemented since 2006.1 The result of this activity is created student companies, which have developed basic concept of business idea and are ready to continue the implementation of it as registered business entity. 2. The goal of The National Competition on Innovative Business Ideas „Cup of Ideas” is to encourage the society to start their own business and to promote an economic growth in Latvia. It is done through giving the knowledge and skills to authors of innovative ideas for further development of business plans. The activity is implemented since 2007. The expected result of this activity is number of registered companies, which start to implement business plan designed during the competition. Within 6 month of the project period, the participants receive services of training and short-term mentoring as well as an opportunity to receive start-up capital. 3. The goal of the Pre-seed support tool is to ensure an opportunity for owners (individual authors or companies) of innovative ideas to apply for funding (up to 5000
See more detailed analysis in publication: Zeps, V., Avotiņš,V., Smid, S. New Strategies for Entrepreneurship and Small and Medium Size Enterprise Development, Ventspils University College, Ventspils, 2008, pp.240-248.
1
LVL or ~7000 EUR). The activity is implemented since 2008. The expected result of this activity is larger number of innovative ideas implemented in Latvia. Rather huge amount of funding to the pre-incubation and incubation stage for new companies is available through the promotional programs implemented by team ALTUM (structural unit of the state joint-stock company “Mortgage and Land Bank of Latvia”). The primary product of ALTUM is sub-prime loans to business projects with good survivability and development prospective, which are not financed by commercial banks due to insufficient mortgage collateral and other project risks. Moreover ALTUM implements Business start-up training, consulting and financial support program, where support is provided to persons willing to start up their own business. The programme participants initially have to take the training course, and, upon its completion, draft a business plan for starting business. The business plan is evaluated by experts, and in case of a positive decision, the program participant is granted funding for implementation of the project (loans up to 50 thsd LVL, grants to start operation of the enterprise and to cover consulting services fees). The program is co-financed by the European Social fund (ESF). As an additional initiative related to incubation should be mentioned part of the currently European Investment Fund (EIF) managed and financed from EU Structural Funds so called holding fund activity, basically a portfolio of several financial instruments, namely Seed/Start-up fund. It is envisaged that as a part of currently run tender for fund management companies EIF will select and help to set up seed and startup funds managed by the same fund management company with total funds under management up to 20 MEUR, that will serve as commercial sources of seed/start-up funding. The funds are available to already since the 1st quarter of 2010. Seed Fund with total investment 6,3M EUR is aimed to provide financing for research commercialisation. Maximum investment will not exceed 100 000 EUR for new companies (no older than 5 years) and investment decisions will be made evaluating initial concept description of new product or business idea. Start-up fund (16,2M EUR) will support new companies with aim to provide funding for product development and initial marketing in enterprises that have not yet commercially sold their goods or services and do not have profit. Maximum investment will not exceed 1MEUR; investment decisions based on individual business plan. There exist several more entities in Latvia that provide pre-incubation services: • Business Laboratory of Stockholm School of Economics in Riga (SSE Riga); • Connect Latvia with its Spring Board panels and pre-training to business idea holders to prepare for venture capital; • Seed Forum, similar to Connect Latvia, but more focused to organise international investor forums as a meeting place with less focus to pitch training; • Training and mentoring program financed by Ministry of Economics and oriented to promote women entrepreneurship “Līdere” (Leader). Figure 3. Business incubation system in Latvia, March 2010
Note: FFF – fools, friends and family, LIAA – Investment and Development Agency of Latvia, EIF – European Investment Fund, VC – venture capital, BAN – business angel network, LMG- Latvian Mortgage Bank.
Mapping of measures of Latvia’s business incubation system help to assess all incubation initiatives and elements according to their performance, contribution in business cycle and need for financing. Figure 3 reflects quite many (app. 12) existing incubation measures and in the same time outlines their isolation. The fragmented and occasionally based Latvian business incubation system in pre-incubation stages is not supported by smart and well tuned pre-seed and risk finance tools thus creating wide death value for new business ideas. Traditional BI in regions with inexperienced management and poor strategy has not created strong networks or linkages with Pre-BIs to encourage sufficient deal flow of new ideas with high commercial potential. Elaborated model of incubation system gives us the advantage to identify six in total differing by specific services incubation stages. The split of business incubation in “proof of concept” and acceleration stages is important approach helping to differentiate incubation services between generating first deals and expanding into markets. This is crucial from all three, service, financing and public intervention sides helping to minimise risks involved. Each of stages requires specific knowledge, skills and way of management. At the acceleration stage, new company starts the serial production and besides the provision of some services that costs close to real market prices, incubator manager is looking for the next stage financier. Such incubation system model is applicable to medium and high growth incubatees where risk financiers can find attractive deal flows. However, simplified incubation systems cannot reach regional or national economic targets as there dominate new job creation or replacement of existing jobs with any kind of workplaces not always giving expected economic growth. The BI operators manage too small incubator space insufficient to become sustainable thus forcing actors to spend too much effort for lobbying or struggle for public donations. Frequent changes and cut-offs of public support so far create need to be involved in different projects to get financing for BI administration survival usually having quite little touch to incubation essence. As a result BIs have little interaction and common linkages and new innovative companies find BI on their own initiative to find subsidised space, infrastructure and cut their costs in early stage development instead of obtaining couching and mentoring services. Such fragmented Latvia’s incubation system simply cannot provide integrated and accelerating services to potential high growth knowledge intensive new companies with high value added growth potential. The extremely low high growth company deal flow is the price we pay for low and fragmented incubation system performance as majority of all incubators are more process (in isolation) than goal oriented. Recently designed pre-seed and start-up EIF schemes are just launched; however the question from where the sufficient deal flow for investments will arise seems to be unanswered.
Conclusions Policy makers in EU in general and local policy makers in particular put increasing attitude on the early stage business support infrastructure to become more resultoriented and more productive. The demand for pre-incubation instruments and services has received positive response and several new policy measures were implemented with a measurable success. The economic downturn in Latvia has released spirit of nascent entrepreneurs and increased demand for well functioning business incubation system. The authors believe that there still exist too fragmented approaches to incubation support measures. The entrepreneurship education measures are not built-in incubation system and they are weakly linked with pre-incubation initiatives. Although all of the pre-BI initiatives are located in the Capital city only few have regional component, however the business incubators are located in the regions of Latvia meaning that resources allocated by government would ensure more hands-on services to
lifestyle business that tend to occur in environments without strong links to Universities and centres of competence. The isolated and poorly coordinated initiatives of pre-incubation system (even alone being efficient) may confuse direct target groups - young entrepreneurs, employees in industry, on proper measures and may discourage them to involve in entrepreneurship at all. Pre-incubation, incubation and follow-up services should create a continuous system of support to emerging new knowledge businesses thus increasing the effectiveness of the whole BI system. The existing Pre-BIs initiatives demonstrate too large focus to academia, as a result having weak long term outputs and links to BIs, thus the real challenge for incubation system is political will and ability to refocus the concept around the deal flow spinning out from industry. Universities and Higher Education institutions are encouraged to work with industry in creating start-ups via different instruments however partly approach for their Third mission is still too academic and process oriented, more attached to life-long learning concept than really pushing the students into business. The BIs heavily funded from the state form the core of the incubation system, however their effectiveness clearly depend on their capacities to reorganize their inefficient operational models to sustainable ones, that partially will be enforced by new incubator support program. We may expect positive contribution to the incubation system pipeline caused by increasing support to new technological firms from European Investment Fund’s financial measures. A set of new Pre-BI initiatives for the next 5 years in a framework of fund program “Innovation culture and Entrepreneurship motivation” will encourage the state administration to create the proper Pre-BI system in Latvia. The authors hope that this paper contributes to raising awareness for the key question on how to create efficient and productive business incubation system in Latvia.
References and Notes 1. 2. 3. 4. 5. 6. 7. 8.
9.
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