Business incubation a powerful tool to meet economic and socio-economic policy requirements

In South Africa, business incubation could be a very powerful tool to achieve important current economic and socio-economic policy requirements, writes Anita Nel, CEO of Innovus, in the Business Day of 16 August. Read her article here.

SA needs all players working together to get business incubation right

In South Africa, business incubation could be a very powerful tool to achieve important current economic and socio-economic policy requirements, including: employment and economic growth, SMME support and development, technology transfer, innovation and creating links between universities, national research institutions and industry.

Business incubation in South Africa, however, is currently funded primarily through government programmes, like the Small Enterprise Development Agency (SEDA), with woefully little contribution from industry.

Industry seems to be willing to get involved with business incubators only to the degree that will allow them to blatantly cherry pick successes inside the incubator while pleading “not our role” when it comes to funding the incubators.

But what exactly is a business incubator and why is it important to have government and business on board?

A business incubator is generally a physical space where startup companies or entrepreneurs receive services and support that enable them to have a “soft take off” in the business arena.  These services normally include office space and infrastructure at relatively low rental with flexible terms.  Furthermore, shared services and support (for example, administrative, HR, marketing, legal, and financial), and access to a network of mentors, investors and like-minded entrepreneurs are important components to a successful incubator. Nurturing and supporting a young startup company in its early and highly vulnerable stages can significantly increase its chances of survival and growth.

The concept of business incubation had its origin already in the 1960’s in the USA before spreading to the UK and Europe where it developed further through various related forms such as innovation centres.  However, in many other parts of the world, including South Africa, the concept is still new and relatively unknown. There are around 30 local state-funded incubators, but a very small number of these focus on technology development.

How successful is business incubation? Research conducted in the USA has shown that for every $1 of estimated operating subsidy provided to an incubator, clients and graduates of the National Business Incubator Association (NBIA USA) member incubators generate approximately $30 in local tax revenue alone. NBIA members have also reported that 84 percent of incubator graduates stay in their communities. The survival rate of companies that have been incubated is also significantly higher. Historically, NBIA member incubators have reported that 87 percent of all firms that have graduated from their incubators are still in business as opposed to 44 percent of all companies. In 2005 alone, North American incubation programmes assisted more than 27 000 companies that provided employment for more than 100 000 workers and generated annual revenues of $17 billion.

The role of universities in incubation is also of crucial importance. Technology incubators, in particular, use universities as a source of technology and as a means to provide opportunities for their tenants to leverage university research in their commercialisation efforts.

In a study of the relationship of company performance and its link to academic institutions, it was found that growth companies with university ties have productivity rates almost two-thirds higher than their peers. Companies that used university resources also project 21 percent higher annual revenues, 32 percent more recent bank loans, and 23 percent more major capital investments. It is noteworthy that these companies are not necessarily university spinouts but have merely ties with universities.

It thus seems very logical that academic institutions are the ideal places to set up incubators and assist in the birth of new companies. Having a technology incubator on its doorstep also benefits a university’s group of startup companies.

Here I am now treading deeper into already slightly muddy water, as many believe that universities should not even have equity in companies, as business is not their business! However, during the last decade in the UK, both the IP Group plc and Imperial Innovations Group plc have demonstrated to the market that the concept of university technology commercialisation is both valid and investable. The IP Group plc achieved an Internal Rate of Return of 26 percent on investments in the last seven years. The group invests in technology innovations from ten UK based universities with a portfolio of more than 60 companies and targets an IRR of above 20 percent. Since 2005, Imperial Innovations Group Plc has grown the net value of its portfolio to around £62m (31/1/2010), excluding cash exits of £11.1m over this period, which enhances the value to £73.1m, over which period it has invested £42.6m.

Now these figures should be attractive for industry. If we can create the local case studies that will yield results like these and the success stories that industry can feast on inside South African incubators, industry should seriously consider joining the party early on.

In the past financial year, the government’s SEDA Technology Programme, through its 31 incubators, has created 5 305 direct, indirect and casual jobs; it has increased its support to 756 small enterprises; and assisted in increasing the turnover of the small enterprises it supports from R169-million in the previous year to R206-million.

The government is really making a wonderful difference through mostly low technology incubators.  However, it is noticeable that in some industry sectors a significant portion of the incubators’ funds are spent on training people in artisan skills rather than on mentoring, coaching and assisting in the building of sustainable enterprises. It is also notable that only two of the 31 SEDA incubators are located in the Western Cape (both are in the furniture manufacturing industry), which is a high growth area for innovation and technology in the country and where there is a great need for an incubator to support these activities.

The Silicon Cape initiative is gaining momentum which is further evidence of the development of an innovation and technology hub in the Western Cape and the need for business incubators in the area. On top of this, four universities are located within 45 mins drive from each other and are producing world-class patented technologies. Two of these universities topped the charts for PCT patent applications in South Africa in 2011.

The scene is set to firmly establish the Western Cape as an innovation and technology hub. Will industry and government come to the party and support incubation in the Western Cape to make this a reality?

  • Anita Nel is CEO of Innovus, a wholly owned technology transfer and entrepreneurship company of Stellenbosch University, and is the driving force behind a planned incubator at the University.