Report from Europe: Incubators hatch small successes
A startup doesn't need a high profile to be a success. Growing employees and financials are a better measurement, and that's exactly the aim of the hundreds of business incubators that have popped up around Central and Eastern Europe.
In Lodz, Poland, for example, the High Technology Accelerator of the University of Lodz holds 16 companies, mostly in the IT and communications sector. The incubator is part of the University of Lodz, which has some of Poland's top chemistry and physics faculties, says Jacek Bauer, project manager.
It's too soon to count success – the Lodz incubator is only three years old – but so far the incubator's official links with the University of Texas at Austin have been paying off.
Doskomp, a Polish e-learning company in the incubator, signed an agreement with Austin Logistics to develop software for its product training, for example. Another startup involved with nanotechnology is in financial talks with a US company, Bauer says.
"We help startups find partners, as well as help with technology transfers," Bauer says, adding that Poland has roughly 30 incubators.
Incubators used to be dominant in the US and Western Europe. They're catching on in Central and Eastern Europe (CEE) as they prove to be valuable development catalysts in a region still transitioning from former communist rule.
Help once outside the incubator
A startup's culture runs in direct opposition to Soviet rule, which crushed individual initiative. Most regional entrepreneurs didn't grow up in a free market economy and don't fully grasp the concept of a strict business plan, raising funding, or market tools and strategies, sources say.
"This is our role, to prepare them to work on the market once they are outside the incubator," Bauer says.
Even a subsidized office with an Internet connection and shared kitchen and copy machine can go a long way for a startup in CEE, where such infrastructure can be cost-prohibitive for an entrepreneur, says Ioan Piturescu, executive manager of CITAf, an incubator in Bucharest, Romania, with 53 startups in residence.
The most successful incubators also offer free help in finding funding possibilities, as well as business training and consulting services.
A key challenge for Czech startups is sorting out the country's complex legal and tax laws, says Zdenek Molcar, project manager at the Business Incubator and Technology Center (BIC) in Pilsen, Czech Republic. BIC offers incubator companies free consulting in these areas. Currently the incubator has 20 companies, though some are involved only in R&D.
One resident is Panasonic Europe Software Development Laboratory, a Panasonic subsidiary that creates software for digital TVs. A former resident, Diadema, now works on the local market developing specialized software for the real estate industry.
BIC has a 95% success rate. But it's relatively small, hatching only about 20 companies since it began 10 years ago. BIC measures success by how well the details in the initial business plan, such as employees and revenue targets, match reality.
"We help a startup write a plan and in the future it serves as a metric of success," Molcar says.
In Estonia, the country that produced the Skype technical team, the Tehnopol incubator in Tallinn has had a 90% success rate since it began five years ago, says Jaanus Kangur, Tehnopol's manager.
Success is measured by the number of exited companies that are expanding or performing better than the previous year. "Not just surviving companies," Kangur says.
Sources of funding
On the money side, incubators often connect startups and funding sources. Many entrepreneurs apply for funding through European Union structural funds with free assistance from the incubator. The Lodz incubator helps startups prepare for meetings with Polish and international venture capital firms.
VC firms view incubators as useful in supporting tech startups. "The concept of bringing people together with innovative technologies and getting them ready to a stage where a VC would be interested has proven to be very valuable to us," says Frank Boehnke, a partner at Wellington Partners, Munich, Germany.
But even if a company has exited an incubator boasting a high success rate, the experience doesn't play a role in funding decisions. "Management team experience is the more fundamental yardstick," Boehnke says.
Europe's business incubators are usually funded by a mixture of private, university, state and EU money.
The EU invested 10.5 billion euro ($14.3 billion) in research, technological development and innovation from 2000 to 2006. Authorities see business incubators as key contributors to job and wealth creation in a given region.
Europe has roughly 1,000 business incubators that create some 40,000 new jobs each year by hatching companies, according to a 2002 business incubator study by the European Commission's Enterprise & Industry Directorate General.
In addition, small- and medium-size companies that had gone through an incubator clearly demonstrated a higher survival rate than the wider SME community, according to the report.