Archive for December 2009

A few words by David Gill, Managing Director of St John's Innovation Centre Ltd:

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  Dec. 6, 2009 Lessons from Belfast

  At the risk of coming across as someone who spends too much time out of the office, let me summarise some issues arising out of the 11^th annual UK Business Incubation conference held in Belfast last week.

  First, I was impressed by the knowledge and enthusiasm of the Members of the Legislative Assembly and their officials about the importance of start-ups and the role incubators can play in fostering their growth. Northern Ireland may be a small economy taken on its own, and faced with any number of challenges, but a ‘can-do’ spirit emanated from policy makers and professional advisers alike.

  Secondly, the session at which I spoke was on funding for the incubator and its clients, and as at the Technopolicy conference in Stockholm it was reassuring to find that the other speakers and the interventions from the floor seemed to share the concerns we find here at St John’s Innovation Centre. Looking at funding for start-up and growth firms, no-one I spoke to believed that the UK/European venture capital model is anything other than broken – with the honourable exception of a few specialist firms such as MTI Ventures in Watford, who’ve stuck with the classic venture model and worked closely with academic institutions.

  So most incubatee firms have to rely on a combination of boot-strapping their own resources, grants and funds earned from consulting before persuading angels they have sufficient market traction. This might ensure the survival of the fittest in theory, but in practice I think it means that even really sound proposals with a good deal of promise take a lot longer to gain momentum than would be the case in North America.

  A long-standing controversy around Cambridge suggests that relatively few companies started here make it through to the stage where they are ‘built to last’ rather than ‘built to sell’, though there are one or two that break the mould in each generation, such as ARM and Autonomy. An absence of institutional funding must be an important part of the explanation.

  Thirdly, I wrote last week about the limited extent to which Britain supports incubation through government intervention compared with Sweden or Germany, and as expected this subject came up again. But I shan’t revisit that issue this time except to report that one speaker put a brace face on the ever-dwindling public resources in the UK by suggesting that the more incubators are forced to look to the private sector, the more they will be responsive to the current needs of their market – and they will suffer less from the tyranny of targets imposed by local councils when the incubator was built, often in very different economic circumstances. Start-up targets might have been OK in 2004 (say) but today we should be measuring survival rates instead.

  However, a fourth and final area of debate during the session was whether incubators should - as a matter of policy - seek to take equity stakes in companies they nurture. The argument runs broadly as follows: if an incubator had taken a token amount of equity in all its tenants (say in the form of options, to keep ownership issues simple) then after a dozen years it might well have built up a portfolio of 50 or 100 such options. If only one company goes on to a stock market listing, that sliver of equity might be worth a substantial six-figure sum, enough to keep the incubator funded to carry on providing services for the next generation of start-ups for several years.

  My own view, for what worth, is that such a model would only really work where the incubator and its tenants are part of a close-knit community, such as where the incubator is run by a university specifically for university start-ups. The equity options would feed into an evergreen fund and the wider public benefit would be relatively easy to see. Similar arguments apply with intensive ‘boot camp’ style incubators, such as Y-Combinator.

  But where a more ‘generalist’ incubator is concerned, taking an option is more problematic. For one thing, valuation will always be an issue where the company in question is already up and running and has had external funding from angels, say. The investors will generally prefer to inject more cash themselves to pay for services – from rent to advice – that might otherwise dilute ownership.

  The other issue is perceived independence. One definition of an entrepreneur is someone who commandeers the use of resources he does not own or control. An incubator manager does the same thing but one behalf of tenant companies, and on the whole people of whom favours are asked – investors, professional advisers, industry experts – are sympathetic to requests by incubator managers because they know the request is made in good faith and at arm’s length on behalf of early-stage firms who lack the incubator’s networks.

  If the incubator has an ownership interest in the firms on behalf of which it acts, how long will it take for such third party goodwill to evaporate?

  Furthermore, one of the skills that incubator directors have to exercise in the privacy of one-to-one interviews with clients is when to say ‘no’. Sometimes ‘no’ even extends to suggesting that the business will never fly and that the tenant should – for the sake of the founders, the employees and the investors – wind the firm down. It might be more difficult to do that if the incubator has a vested interest in the firm’s survival.

   So my thinking on incubators taking client equity is, for the moment, that it is not a good idea. But I’m biddable. As Groucho Marx said in a different context: ‘these are my principles; if you don’t like them…well, I have others.’