Ask the experts: business incubator directors explain what works

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May 26, 2005 — Getting innovative technology from university labs into the marketplace is a challenge across the globe. Many research institutions have improved their chances by turning to incubators. Small Times’ Candace Stuart spoke with Peter Binks, chief executive of Nanotechnology Victoria Ltd. (Nanovic), Kees Eijkel, technical commercial director of the MESA+ Institute at the University of Twente, Tom Hockaday, executive director of Isis Innovation Ltd., and Joel Wiggins, director of the Austin Technology Incubator.

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What types of assistance do you provide to commercialize research in your region? Why?

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BINKS: Nanotechnology Victoria aims to fill the gap between laboratory concept or innovation and a prototype product ready for trial by commercial firms. We do that in many ways: funds to produce a prototype, such as trialing incorporation of nanotubes in a company’s material to demonstrate enhanced properties; market analysis support; and project management support, in which we provide a manager for manufacture and evaluation of samples of the desired material or product.

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EIJKEL: We see three elements as central in the commercialization of research: good research, good entrepreneurs and places/occasions where they can meet. We are one of the leading micro/nano institutes in Europe, focusing on multidisciplinary fields and driven toward application. We actively engage with national and international networks — for example, MinacNed in the Netherlands and MANCEF (Micro and Nanotechnology Commercialization Education Foundation) — very intensively, and with our local school for business management and management of technology, and we make sure these people meet. Not in formal meetings, but on a day-to-day unstructured basis.

HOCKADAY: Isis Innovation Ltd. employs 36 people to help researchers from the University of Oxford commercialize their research through licensing, consulting and creating spinout companies. In each of the last few years we have filed approximately 50 new patent applications and signed up 70 new license and consulting deals. We have helped set up 42 new spinout companies based on research at the university. We help researchers understand the framework for setting up a successful technology business, build the team to take the company forward and attract cash investors.

WIGGINS: The Austin Technology Incubator works with very early stage technology companies to help them accomplish their business objectives. Our job is to help reduce the risk inherent in early stage ventures in order to increase their opportunities for success.

We believe startups need believable and achievable strategies to attract funding, validate markets, acquire reference customers, build their technical and business teams and keep their infrastructure costs low.

Thus, we provide five sets of services for our companies: access to customers and market validation; access to capital sources, including government, angel and venture capital networks; access to management and technical talent; regular mentoring sessions, quarterly business checkups, and in-house consulting by ATI staff; and executive suite infrastructure at sublease pricing.

How do you decide who and what to support?

BINKS: We back the best and most compelling customer solution first of all, followed by the best team. We do not necessarily back the best technology, particularly if it cannot be translated into something a customer must have. We also believe there are many great technologies and nice customer opportunities that frankly are in the wrong hands — the team won’t make it happen.

EIJKEL: Drive and intuition of the team is crucial. They may be young, inexperienced scientists but still you can sense whether they are bringing value to the table.

HOCKADAY: We look at a really wide range of factors. The challenge with the more objective factors (market size, IP position) is that the technologies are by definition very early stage so that the answers to the questions you would normally expect are nearly impossible to pin down. This increases the importance of the more subjective factors, not least of which is desire of the researchers to engage in the commercialization process. The university invests substantially in our patent budget and so protecting the inventions in the early stages of the patent process is within our reach; this provides the time to listen and assess the market’s response to the technologies.

WIGGINS: We prefer experienced entrepreneurs who solve a significant customer pain with promising technology, a sensible go-to-market strategy, and a reasonable business model. We use a three-step selection process.

In stage one, we screen out. We ask for a company’s business plan and conduct an internal review to see whether the company exhibits enough strength to merit a face-to-face meeting. If any of our team members wants to go forward, we proceed to stage two.

In stage two, we screen in. We meet with the company’s principals to listen to their pitch, discuss their business opportunity and strategy, and assess their viability. We often involve outside functional and domain experts in this process. If all of our team members decide to go forward, we proceed to stage three.

In stage three, we validate before an external panel of experts who meet with the company to determine the company’s future prospects. The panel provides us additional feedback as to their assessment of the company’s viability.

Do the companies or teams that you work with typically rely on government support to survive, or private money? Why?

BINKS: In Australia there is private money available, but the technology providers often don’t see it. One of our criticisms of the Australian research environment is that government money is too easy to get, so it is the one and only recourse for most. We therefore find most of the teams and companies are adept at winning grants from government, and can survive for many years on such support. However, they are not as familiar with the requirements of private investors or the commercial market, and struggle to meet their needs when it comes to launching a company or designing a new investment vehicle.

EIJKEL: We see a mix here. Some of the companies use a dual strategy (services combined with product development) to create revenue in an early stage. Many of these companies have positive cash flow from very early in their existence, leading to a more revenue-based growth, sometimes supported by private money. The first phases are supported by early stage venturing firms, private and publicly owned, and business angels. Bootstrapping is another popular form of starting the company here.

There is a healthy tendency to use government support only with targeted product development and partnering. This leverages the use of such funds, and prevents a company becoming dependent on these funding sources.

HOCKADAY: We have helped set up 42 new businesses from the university in the last few years. All of these have relied on private business angel finance for their first injection of investment finance. When the businesses have been established for a year or so and developed their business models further, they frequently rely on venture capital investment for further growth. A number take advantage of government schemes, but none rely on these alone.

WIGGINS: Over the past 15 years, our companies have raised more than $720 million in external capital, the vast majority of it through angel and venture capital sources. Austin has about a dozen active VC firms and the number is growing, so private equity is available locally for the most promising startups. We do, however, have an on-site Small Business Innovation Research coach to help firms develop their government funding strategy, and our companies have won several first and second round awards.

What innovative approaches should companies or teams consider as they struggle through that lean period of prototype and product development?

BINKS: We’re not sure there are new “magic formulae” for getting through this. We like the teams to focus very hard on the basics, and take one small step at a time. We are impressed by detailed planning, consideration of alternatives and options, and an ability to consult with and listen to the other stakeholders.

EIJKEL: We like companies to be extremely market-oriented from the start. Their technology is a starting point. The biggest challenge is developing a sound business and product strategy. For that, you need to be very close to the demands of your customers, and define innovation together with them. You might influence their innovation vision in the process, to your own benefit. Developing your marketing from day one is crucial.

HOCKADAY: There is not much that is new about growing a small business. The same themes seem to recur over the years: the right team of people; enthusiasm; determination; focus; willingness to try anything, etc. Managing news flow is an area most businesses could improve on: store up good news for when you really need it (i.e. to counter some less good news) rather than gratuitous self-promotion.

WIGGINS: Lock up the IP. Match entrepreneurs to the scientists. Leverage industry partners to fund development.

What signs tell you that a company or project will succeed, or conversely, that it is doomed?

BINKS: The critical factor is the commitment of the team that is taking it to market. The team that understands clearly the market opportunity, and has weighed up the alternative strategies, and evaluated both economic and physical parameters before committing to its course, is best positioned to make it work.

We don’t mind desperation — it is a good thing to be under real market and management pressure. Almost of the same order in importance is their realistic understanding of the path to market, in particular, who will use the product, and what the existing alternatives are to the new product.

We sense imminent failure when the project team or company management get distracted, or believe that “nanotechnology” as a label confers some extra value in the market, which overrides the need for a superior product. We see danger signals when the development team can’t identify the end user of their product by company name, or don’t have a strong sense of the market numbers (potential demand volume, target market share, possible price).

EIJKEL: It’s always the power of the team and a combination of being critical, pragmatic and strategic. A team that is able to simplify processes and strategies is powerful. The team has to be aware of its mission and strategy and should be able to relate and valuate its activities on that basis. The team will need to focus on that single goal: creating a healthy and growing enterprise and positive cash flow.

HOCKADAY: Are they smiling?

WIGGINS: The scientific team and the business team must work together hand-in-glove or disaster is looming. One cannot discount the contribution of the other. Sometimes the scientists overvalue their technology and obstinately resist market valuations that are lower than they believe their technology warrants, thus short-circuiting any possible business deal.

A build-it-and-they-will-come mentality usually spells d-i-s-a-s-t-e-r. Better technology doesn’t necessarily win out. Market considerations need to influence the direction of the R, not only the D, of R&D.


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