Business incubation process: the case of three start-ups in The Hive incubator. Francesco Petrucci. Roberta Bocconcelli

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1 Business incubation process: the case of three start-ups in The Hive incubator Abstract Francesco Petrucci * Roberta Bocconcelli ** Present article aims at dealing with new business development in business incubation. An IMP perspective is adopted to focus on the role incubator/incubatee relationship plays in the process. We argue that the IMP perspective offers several insight that can enrich research on business incubators as well as new business development, and conceptual development in the field. The paper is based on in-depth empirical studies of the incubation process concerning one incubator and three innovative start-up operating in the agri-food sector. Keywords: business incubator, incubation process, start-up, business relationships 1. Introduction Understanding the role of business incubators (BIs) in new business development has become one of the main topic of debate for management scholars, managers and policymakers, as demonstrated by the quantity of studies, and researches dedicated to the subject (Peters et al., 2004; Hackett & Dilts, 2004; Tavoletti, 2013). However, overwhelming empirical researches clearly suggest that, despite some successful cases and public policies supporting BIs (Lewis 2010; NBIA, 2011), there is little systematic evidence of BIs efficacy in supporting entrepreneurship and new venturing (Phan et al., 2005; Tamasy, 2007; Knopp, 2007; Tavoletti, 2013). In this respect we argue that IMP perspective can offer a valuable contribution to the understanding of business incubation process by emphasizing the relational and emergent nature of the various aspects of business development. In this work, we are interested at investigating the incubation process involving three young start-ups and their business incubator, thus adopting the perspective of the incubatees with reference to the actual relationships development process that takes place in incubation. We aim at addressing the following two questions: - How do business relationships develop in incubation? - How does internal and external networking affect business development and in which direction? * DESP-Dipartimento di Economia, Società, Politica, Università di Urbino, francesco.petrucci@uniurb.it ** DESP-Dipartimento di Economia, Società, Politica, Università di Urbino, roberta.bocconcelli@uniurb.it 1

2 In particular, research questions are investigated in the empirical case of The Hive a private business incubator strategically located in the city of Ancona (Marche, Italy). Our study explore the incubation process of three incubatees operating in the agri-food sector. Preliminary results suggest that the incubatee perspective on the incubator varies along different variables and that the incubation process is a complex matter of combining both internal and external networking that influences business development. The paper is structured as follows: in section 2 we introduce the theoretical background of the research emphasizing the role of IMP approach in relation to our research questions. In section 3 we briefly introduce the research objective and methodology. Section 4 addresses the case analysis. Section 5 draws some final remarks and outlines the limitation of the research and the future research direction. 2. Theoretical background 2.1 Business Incubators and business development Business incubators are enterprises that facilitate the development of successful entrepreneurial companies by providing entrepreneurs with an array of targeted resources and services such as office space, shared resource, business support, and access to network (Bergek and Norrman, 2008). Given the strategic role played by small technological and innovative companies in the current context of global competition, it is only natural that business incubation is emerged as a central tool of economic development in economic policy and management practice especially during the past two decades. Despite this growing interest, there is plenty of researches claiming that BIs are failing in meeting policy and managers expectations providing a very modest contribution to the development of new ventures and entrepreneurship (Tavoletti, 2013). Various statistics reveal that while the positive contribution of BIs is registered, with specific reference to the number of successful companies and jobs created (Knopp, 2007), about more than 50% of incubated businesses fail within the first year of operation and that few new business survive more than a handful of years (NBIA, 2011). The more precise statistics tend also to be laden with various methodological problems about the systematic monitoring and evaluation of BIs performance and effectiveness. Owing to the increasing attention and the high failure rate, managers and scholars show considerable interest in discovering a recipe for successful business incubation. Research literature on incubators/incubation phenomenon is relatively recent - about 20 years in a more consistent form - but it is growing at an amazing rate. Hackett and Dilts (2004) developed the most comprehensive literature review on business incubators and incubation. According to the authors five primary lines of enquiry can be discerned. The first are the studies dealing with the incubator development research, aiming at providing incubator/incubation definitions, taxonomies and policy description. The second stream of research can be labeled incubator configuration studies. It addresses attention to incubator s support 2

3 arrangement, facilities, budgets, organizational charts, geographical location and institutional links. The emergence of this studies indicates the evolution of incubator/ incubation science from an initial exploratory, fragmented understanding of the phenomenon to an increasingly holistic, systemic perspective. This is useful because it suggests how different resources of, and activities within, the incubator are applied to facilitate the transformation of a business proposal into a viable business. In the third line we find studies concerning incubatee development. While a huge literature on all new venture development exists within the domain of entrepreneurship research, understanding how incubatees operate within the incubator is an underdeveloped field of research. Nonetheless, key findings from this area focus on the fact that incubatees suffer the same shortcomings as their non-incubatee counterparts. More importantly many scholars highlight the potential for incubators to generate dynamic feedback to incubatees, providing incubatees with a heightened strategic insight towards their activity sets, monitoring business planning and introducing control systems during the early stages of incubatee development. Another important stream of research is concerned with the analysis of various variables of incubator/incubation in terms of success and economic outcomes. The last notable line of research accounts for theoretical approaches about incubator/ incubation revealing that a proper theory of business incubation is basically nonexistent and theoretical contribution to that purpose are generally assessed limited and sketchy. The review clearly show how business incubation research has produced a large and heterogenous body of knowledge without providing an exhaustive and comprehensive theory of effective business incubation (Hackett and Dilts, 2004; Hackett and Dilts, 2008; Phan et al., 2005; Knopp, 2007; Tavoletti, 2013). Hackett and Dilts (2004) suggest that this is a consequence of the strict focus researchers devoted to the description of incubator facilities, overcoming to investigate pivotal elements such as incubatees, incubation outcomes and the incubation process itself. This attitude has generated a series of methodological, theoretical, and empirical limitations. As a result, incubator/incubation research embraces several topics and approaches that coexist but are not always consistent in explaining effective business incubation (Hackett and Dilts, 2004, Bergek and Norrman, 2008; Tavoletti, 2012). Academic debate suggests that if business incubation is to be understood, researchers need to shift their attention from dealing with incubator facilities as the unit of analysis to examining dynamics involved with the incubation processes in order to explain how and why incubation is effective in developing new business. Focusing on the process of incubation rather than on the incubator facility and its configuration will draw attention to the underlying causes of new venture development in an incubator/incubation environment. Looking at the incubator/ incubation research within an IMP perspective, the impression is that the initial focus has been on representing business incubation as a systematic method of providing business assistance to firms in the early stage of their development. Beyond this common baseline assumptions prior research have built on methodological, theoretical, and empirical heterogeneity mostly adopting an incubator-centric perspective centered on facilities assuming an important role in the process (Hansen et al., 2000; Peters et. al., 2004; Bergek and Normann, 2008). 3

4 2.2 The perspective of the incubatee" and the IMP contribution In order to provide clarifications about theoretical knowledge on incubator/ incubation phenomenon, we intend to draw from the IMP interactional model (Hakansson, 1989; Hakansson and Snehota,1995; Hakansson et al., 2009) to explain phenomena associated with new business development in business network for our understanding of the incubation process. The IMP tradition places a strong emphasis on the importance of relationships and interactions as the foundation upon which business networks develop. Thus the idea of interaction (Ford and Hakansson, 2006) may provide a deeper insight about dynamics governing the incubation process leading towards meaningful theories of business incubation beyond simple lists of critical success factor. At the same time an analysis of the scope and depth of the incubation process offers to the IMP researchers the potential to better tell a story of how to face the challenge to understand dynamics and processes underlying new business development in business networks. Moreover such stories are of increasing value in a contemporary environment where incubators act as crucial actors in supporting new business creation and innovation. Also recent researches exploring the evolution of BIs value proposition place networking at the core of the service portfolio of the last generation of business incubators (Bruneel et al., 2012). Network exploitation by BIs provides tenants with preferential access to potential customers, suppliers, technology partners and investors (Hansen et al., 2000; Scillitoe and Chakrabarti, 2010). Hansen and colleagues (2000) posit that networking is the most important factor in successful BI programs, and empirical evidence suggests that access to networks is critical for BIs tenants companies development (McAdam and McAdam, 2008). Present paper aims at emphasizing new business development involved in business incubation drawing on the IMP research, to shed light into incubation process by examining how the development of business relationships, within the incubation environment, determine incubation dynamics and contribute to understand which forces drive business development. The study aims at analyzing how incubatees impact incubation dynamics and how institutionalized internal and external networking between incubator, incubatess and external actors, affects the development of singles incubatees. Hence the starting point for this paper is the assertion that too little explicit attention has been paid to the implications of the business interactions and networks perspective for incubator/incubation phenomenon. Thus referring to the incubation process as an interactional achievement main focus is placed on the interplay between actors, activities and resources within networks affecting incubation processes to explore how all these entities finally engage in incubation. Consequently we argue that interactions in incubation network not only influence the shape and nature of incubation process but also are crucial to predict and explain incubation outcomes. Indeed the scope of the article is to graft the IMP research tradition on the research field of incubator/incubation and explore possible areas in which IMP can contribute to conceptualizing this large phenomenon of interest. 4

5 3. Research objectives and methodology This paper aims at investigating how IMP research on new business formation can contribute to incubator/incubation research, especially focusing research lens on business interactions and their centrality in the process of developing new business (Ford and Hakansson; 2006; Hakansson et al., 2009). In particular the study focuses on the incubation process that takes place between three young start-up and their business incubator. We aim at addressing the following two questions: How do business relationships develop in incubation? How does internal and external networking affect business development and in which direction? The research employs a multiple-case study approach in order to obtain a rich understanding of how the incubator/incubatee interaction evolves into a more complex process of networking, and how it affects incubatees business network. The qualitative approach adopted results particularly appropriate given the explanatory nature of this study and is in line with recommendations for research on relational aspects of company behavior (Eisenhardt, 1989; Yin, 1994). Indeed, it allows us to capture the influences of a multiplicity of interrelated actors and how business relationships and networks develop over time (Eisenhardt, 1989). It also allows us to deal with the exploratory and descriptive nature of prior research. Thus three case studies of incubated start-ups have been developed within the case of The Hive a private business incubator located in Ancona (Italy). The Hive was selected according to its geographical position and its stage of development as incubator. The first contact, in fact, occurred within the Career Day of the University of Urbino. In that occasion The Hive proved to be one the most interesting and dynamic incubation enterprise operating in the Marche region. Studying The Hive we decided to develop three case studies of incubated start-ups, in order to provide for a more comprehensive analysis of the incubation environment and to capture deeply the variety of the relational and emergent aspects of the process of incubation. These start-up have been selected according to the following criteria: selecting start-up belonging to the same business sector; selecting start-up located in the same geographic area of the incubator (with reference to the Marche region); selecting start-up with a strong innovative profile, thus gaining a dynamic business plan and a lot of potential for development. The selecting phase aimed at reducing the heterogeneity of businesses we found inside the incubator to make cases more comparable, and to highlight possible similarities and patterns in incubation. At the same time the geographical proximity between incubatees and incubator allow us to select those cases characterized by more direct interactions between entrepreneurs and incubator. Ultimately, we aimed at selecting innovative business profiles, with good potential for development, in order to focus on those start-ups engaging more dynamically in incubation which have higher survival rate to overcome the incubation phase. Thus the selected incubatees have been three young and innovative start-up belonging to the agri-food sector of the 5

6 Marche region. Their profiles provide different stage of development and business configuration: Quinoa Marche, Synbiofood, and Foodissey. The data collection includes primary data in the form of interviews and secondary data such as information on the companies found on the internet and in other public sources. We carried out 4 in-depth semi-structured interviews, 1 with the incubator manager responsible for the development of the three selected start-up and 3 with the entrepreneurs of the three start-ups. The purposes of the interviews are firstly to analyze the resources combined by actors and the outcome of their interaction in incubation, and secondly to describe how internal and external networking shapes the process (and towards which direction), to understand how it impacts incubatees development and their business networks. Moreover the key role of business incubators, in supporting and coordinating configurations of actors, resource and activities in networks, is taken into account to explore how to generate beneficial business incubation outcomes, and also to address managerial implication. The interviews focused on the incubation phase of start-ups and the interactions developed within. In order to capture the incubation process, the interviews were semi-structured and revolved around a few central themes: (1) the formation of the business idea and the first phase of development; (2) how and why the company (or the entrepreneur) meets and enters the incubator; (3) interactions with the incubator management; (4) internal and external networking and how it impacts incubation process; (5) how the company asses incubator performance and how foresees the development of the incubation process over the next year. All the interviews were recorded, and complementary notes were taken during the interviews. The notes enabled us to move back and forth between the topics and to clarify details and contextual elements. After the interviews the recordings were transcribed, providing a full and punctual account of everything that was said. The analyzed cases reveal differences in scope, structures, and stage of development. Nevertheless we emphasize relational dynamics taking place in incubation between incubator and incubatees, the role incubator has played in addressing business interactions towards internal and external actors, and how this interaction impacted incubatees development. 4. Case analysis The mission of The Hive is to develop promising and innovative business ideas, into thriving and sustainable companies. The incubator was launched in 2013 thanks to the Greenvale Venture Europe Ltd (GVVE) a private equity fund and venture capital that operate all over the world supporting SMEs and start-ups sustainable development and growth. Also it is supported by SIDA group, a business consulting agency located in Ancona from 1985, that represents the primary source of business and managerial expertise for The Hive. Thanks to this partnership The Hive also links to a wider network of external private and public actors that represent potential partners for incubation. Currently 32 start-ups result to be incubated by The Hive. Quinoa Marche and Synbiofood entered The Hive, in Both companies resulted to be winner of the Business Idea Award contest (BIA), a business plan competition organized by The Hive to select and promote business ideas and small 6

7 ventures. The competition greatly facilitated the start-ups entry for the incubation period. Quinoa Marche comes from an academic research project concerning the study of cereals and pseudo-cereals of interest for the food and beverage industry. The start-up focuses on the cultivation and commercialization of quinoa and the development of quinoa-based products. Thanks to the entrepreneur s network the start-up takes advantage of several academic partnerships with which it performs an intense activity of research and development. Despite the very early stage of its development the start-up shows a great potential for growth in the future. Similarly Synbiofood is based on an idea the interviewed entrepreneur developed thanks to his previous business experiences, and his personal connection with Synbiotech an academic spin-off of the university of Camerino, that works in the field of probiotic research. Synbiofood is responsible for the development and commercialization of probiotic food. Furthermore, according to its mission for fast, healthy and good food the company is developing an innovative franchising strategy to renew the concept of fast-food in the world of food retailing. Currently the first retail store, named Synbiofood café, was launched in 2013 in the city of Civitanova (Marche, Italy). Both companies are going through a period of incubation into The Hive to develop their marketing strategies. Otherwise Foodissey had a direct contact with The Hive, before to enter in incubation. The start-up is based on an idea the entrepreneurs developed thanks to its personal expertise and experience in the food sector. Foodissey aims at developing a co-branding project for high-quality food productions, namely to associate together different high-quality products under the Foodissey brand. Particularly the business idea relies on the need of high quality small businesses to implement effective internationalization strategies. Foodissey aims at creating business conditions under which promoting internationalization for small businesses operating in the food sector. The start-up is not yet fully structured. 4.1 The process of incubation The Hive primary intervention was direct to strengthen ventures financial resources encouraging and supporting start-ups in applying for available public funds directed to regional business development. With special regard to Quinoa Marche and Synbiofood, the incubator has played a pivotal role in facilitating start-ups access to funding process, engaging with different public and private actors. The Hive, in fact, has provided for making funds available in the short term by negotiating bridge-loans with private banks to secure working capital until the round of funding goes through. The Hive is also fostering synergies with Startzai a young incubated start-up based on the implementation of an equity-crowfunding on-line platform. Synbiofood has shown interest in this respect although the evolution of the project is dependent on the stage of development of Starzai. The Hive is also able to provide incubatees with opportunities towards business angels and venture capitals. Actually, the intervention of these external actors are related to specific strategies of incubation that tend to reduce the entrepreneur perception of control on the company process of development, at least at this stage. In this respect Quinoa Marche has refused to 7

8 exploit this opportunity reputing the engagement not suitable for its strategies. Currently The Hive is trying to direct Quinoa Marche towards more effective resources generating intense interactions in the network. The Hive provides financial facilities supporting the development of targeted business plans oriented at analyzing and developing tailored solutions and strategies for its incubatees. Each start-ups collaborate actively with a business developer that is responsible for monitoring how activities perform and resources combine at different stages of incubation. In this respect external managerial resources are also combined in the processes. Synbiofood is interacting with an external manager hailing from the agri-food sector. In this case expertise and knowledge resources are provided to support the start-up in empowering and implementing its franchising strategy. Drawing on the personal network of this external manager Synbiofood is also developing interactions to identify opportunities, potential customers and new commercial partners. For what is concerning Foodissey, when decided to locate his start-up in The Hive, the entrepreneur was committed in developing the idea stage into an effective start-up. The incubation engagement was considered through a various set of factors and goals. Firstly the entrepreneur aimed at providing the emergent network of Foodissey, with an organizational structure and fulfill the lack of personal management knowledge and skills before attaining the launching phase. At the same time the incubation was expected to foster the development of the stage idea without significantly increasing the risk associated with the project. In this context the need for knowledge and organizational resources were primary requests for the entrepreneur. Foodissey has been supported by a business developer in drawing up a targeted business plan. In this process the entrepreneur, have not met the expected solutions to its requests, and decided to terminate the incubation phase of Foodissey. 5. Conclusion The research is in a preliminary stage and further development is needed in order to better understand incubation process of the companies under investigation. The study presents in fact apparent limitations with reference to the number of interview performed in each of the company and in the incubator, the particular sector under investigation, the limited time range under investigation. Despite these limitations the case shows that the issue under investigation is interesting in order to capture how the adopted IMP perspective on interaction may lead to radically change the view of the incubator/incubation phenomenon as a market in which incubation can be considered as a linear and discrete process and in which the performed activities can be understood as generalities or in isolation from each other. The empirical analysis emphasizes how business interactions performs and develops in incubation. Focusing on actors, activities and resources involved in the process we tried to offer a picture of the multifaceted and complex process of incubation of The Hive. This interactional focus allow us to understand how incubation process develop as a network-like structure of business relationships where different resources are combined, interdependent activities are linked, and actors 8

9 engage with one another (Håkansson & Waluszewski, 2002; Dubois & Araujo, 2006). To this purpose the first research question asses the development of business interactions in the process of business incubation. The outlined question is functional to understand how interactions shape the business environments, determining incubation dynamics and outcomes. To provide a more comprehensive picture of the phenomenon under analysis, the research focus has been gradually shifted from the dyadic perspective, relying on the incubator/incubatee relationship, towards a networked assessment of the incubation context. Accordingly the networked perspective on incubation arise in the second research question of the study. Starting from the dyadic analysis the study reveal how start-ups build their first stage of development on the entrepreneur s network. The three start-up, strongly rely on existing networks of actors, activities and resources that shape the process of development and its dynamics. This process is not resulting from individual strategies but is the outcome of specific interaction processes. The venture s development cannot be designed, controlled or shaped by single entities. Quinoa Marche and Synbiofood, for example, connect to wider academic networks and their actors, activities and resources. This infers a structure for the business landscape composed of individually significant and interconnected interaction processes that strictly influence the way in which incubation can be performed. Thus the dyadic relationship involving incubator/incubatee is embedded in wider relational network-like structures that imply for incubator the need to deal with the pre-existing resources, activities and actors and the ways these are adapted through interactions. In this context the actions of the incubator management and its capability to discover and exploit new opportunities, is not the main determinants of the development of their incubatees. Rather, it suggests that this interactional process emphasizing interdependencies of actors, activities and resources, and the need to draw on the existing to perform any sort of business action, leads to consider the process of developing a new business as emergent and unexpected. Furthermore this entails for the incubator that considering the emergent and relational nature of new business development combining and assembling resources, activities and actors requires interfacing with respect to elements that are external to the incubation environments and are heterogenous. This dynamic is crucial to understand new business development and thus business incubation. Dyadic relationship involving incubator and incubatees can be rewrite in the light of these preliminary considerations. With respect to the second research questions empirical analysis addresses the fact that these interdependencies spread from the dyadic structure of the incubation relationship to the internal and external networking activities. Therefore as networking is considered one of the most critical process in business incubation, the above mentioned dynamics are helpfully in revising the networking concept as emphasized in incubator/incubation literature. The perspective through which networking process is assessed as an institutionalized process established and managed by the business incubators is not fitting with present results. The process to facilitate access to external networks is seen to eases incubatees in the acquisition of resource and specialized expertise, also providing learning opportunities to foster development and subsequent growth. In this respect present approach de-emphasizing the independent status and the internal resources of incubators, highlight the key role of interactions in constructing and combining resources in specific situations with 9

10 external partners. In this interaction involved actors co-evolve and co-create the physical as well as the economic context through which incubation takes place. Research evidences show that the direction of the process might lead to positive as well as negative outcomes for companies by leading them towards unproductive investments and activities. As for further research in this area, we believe that in order to increase our understanding of the process of business incubation, research should focus on business interactions as basic unit of analysis. Actually, present paper deals with general considerations about how the IMP approach to new business development provides beneficial insights on incubator/incubation research. Pursuing this line of work further research should be addressed to provide a deeper understanding of incubation process and its managerial implications. References Al-Mubaraki, H., Al-Karaghouli, W., & Busler, M. (2010). The Creation of Business Incubators in Supporting Economic Developments. In European, Mediterranean & Middle Eastern Conference on Information Systems, pp Bergek, A., & Norrman, C. (2008). Incubator best practice: a framework. Technovation, 28, Bruneel, O., Tiago, R., Bart C., & Aard, G. (2012). The Evolution of Business Incubators: Comparing demand and supply of business incubation services across different incubator generations. Technovation, 32, Dubois. A. & Arujo, L. (2006). The relationship between technical and organizational interfaces in product development. IMP journal, 1(1), Eisenhardt, K., (1989). Building theories from case study research. Academy of Management review, 14(4), Ford, D., & Håkansson, H. (2006). IMP - Some things achieved: Much more to do. European Journal of Marketing, 40(3/4), Hackett, S., & Dilts, D. (2004). A systematic review of business incubation research. Technology Transfer, 29, Hackett, S., & Dilts, D (2008) Inside the black box of business incubation: study B- scale. Håkansson H., Ford D., Gadde L.E., Snehota I., & Waluszewsky, A. (2009). Business in Networks, John Wiley & Sons, Chichester. 10

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