The ART OF INCUBATION

The self-effacing demeanour of Professor Nitin Nohria almost belies impressive credentials. But a few minutes into the conversation, this academic and consulting veteran--at 40--Nohria is the Richard P. Chapman professor of business administration and the chairman of the Organisational Behaviour area at Harvard Business School--begins to show his true mettle. And expectedly so. A Ph.D in management from Massachusetts Institute of Technology and a B.Tech in chemical engineering from Indian Institute of Technology (Mumbai), Nohria has authored six books, including his latest 'The Arc of Ambition', and serves on the boards of several firms. At the moment, his consuming interest remains incubation management, on which he has recently co-authored a pioneering study, along with colleagues Morten T. Hansen and Jeffrey A. Berger. He has also incorporated an incubator in India--Net Holdings--of which he is the co-founder and chairman. Recently in India to flag-off his first incubatee--a B2B exchange on water--Nohria spoke to BT's Paroma Roy Chowdhury, on one of his consuming passions, incubation management being one, and the other being contemporary Indian art--which admittedly--often leaves his bank-balance severely dented. Excerpts from the chat:

Q. On the incubator phenomenon:

A. Incubators are 'topic du jour' in the Net space. But as such, they are not new. The establishment of organisations to nurture new ventures dates back to the 1950s, when non-profit agencies began setting up incubators to spur commercial development. What is different today is: first, the intensity and speed of incubator activity and, second, its focus. The vast majority of Net incubators are for-profit enterprises that concentrate on the development of for-profit ventures. Although the effectiveness and worth of these incubators remain open to debate, they represent a new organisational model of wealth and value creation.

Q. On trends in the incubator marketplace:

Despite heightened media, investor and entrepreneur interest, and success of incubators--like idealab!, ICG, and Softbank--the incubator marketplace remains largely unmapped. Through our report, we have tried to partially plug this knowledge gap and identify some trends in this fragmented and embryonic industry. Based on extensive research, we identified 356 for-profit incubators that have been announced and conducted interviews with a representative sample of 169. Between January, 1999, and May, 2000, there has been an exponential growth in their numbers, and close to 58 per cent of them are start-ups--new companies dedicated solely to providing incubation services--while incubators run by venture capitalist (VC) firms represent only 31 per cent of those surveyed. This successfully busts the myth that incubator trend has occurred for the advantage of VCs trying to leverage their portfolio. A small percentage (5 per cent) are run by holding companies and similar number, by established corporations. And predictably, 66 per cent of the world's incubators are located in North America and 19 per cent in Europe.

(Click here for Incubator Glossary)

Q. On incubator business models:

Six variables characterise existing incubator business models: business focus, location, idea generation, investment stage, investment time horizon, and equity stakes and fees. Most incubators do not focus on a specific industry or technology; rather they cover a large part of the economy. In our survey of 169 incubators, the vast majority (92 per cent) reported that they concentrated on Net companies and 46 per cent said that they concentrated on a particular sector such as B2B, infrastructure, telecom, or B2C. Only 20 per cent had a specific industry focus while only 12 per cent concentrated on a particular technology.

Location of incubators is largely city-centric with most having one specific physical location. Source of ideas is mainly external with active recruitment from outside entrepreneurs, though a small minority fund their internally developed ideas. The stage of investment typically has three phases: the idea phase, the scaling phase, and the IPO phase. Incubators traditionally aim at funding at the idea stage, where the incubatees need assistance for even the most basic facilities. About 70 per cent of the companies surveyed focused on funding at the early stages.

The time horizon is typically a mix of 'Built to Hold' and 'Built to Flip'. But in my experience, which is endorsed by the survey figures, the bulk of incubators are creators of short-term wealth. We found that as much as 44 per cent incubators invest to liquidate. But those who hold, intend to maintain their stakes in their companies even after turn profitable by IPO or acquisition, with the aim of creating a large portfolio of successful companies.

From an entrepreneur's perspective, one of the drawbacks of incubation is the equity stake that must be parted with, in lieu of services, coaching, and networking. The average equity stake taken by incubators was around 35 per cent according to our survey, and we found that very few of the incubators operate on a fee structure, with equity being the core revenue stream for most.

Q. On incubator services:

Nearly all incubators offer a range of common services that include physical space, infotech infrastructure, access to public relations, accounting, legal, recruiting and marketing assistance. Coaching and mentoring are core competencies and funding is common. In our survey, 84 per cent offer space to the incubatees and 86 per cent provide seed capital while 97 per cent offer coaching and mentoring services. Close to 90 per cent offer administrative and professional services, and at a later stage, offer opportunities to generate economies of scale with tools like group-buying programmes. But herein lies the catch. As it is no exaggeration to say that basic administrative and professional services have become commodities in the incubator world. To succeed, incubators will have to differentiate themselves along other critical service dimensions.

Q. On the future of incubators:

The incubator model remains unproven. Only 36 per cent of the incubators surveyed have produced graduates, and only 46 per cent have incubatees that have successfully obtained outside financing. Next six to nine months is a critical period, when 70 per cent of the incubators worldwide--who commenced operations last year--are scheduled to graduate their first class of start-ups.

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