November 2010

"The crises of our time, it becomes increasingly clear, are the necessary impetus for the revolution now under way. And once we understand nature's transformative powers, we see that it is our powerful ally, not a force to feared our subdued."

Thomas Kuhn

Abstract

The only constant in the world these days seems to be the accelerating rate of change. This article explores, what are in the author’s opinion, the driving forces of change; the decline of the TV industrial complex, business model migration, and the emergence of the knowledge economy. The changes in the way we live and work are having a very profound impact on how businesses start and grow. The paradigm and policy of the industrial era will not pave the way to success in a knowledge-based economy. The knowledge economy requires a significant paradigm shift in the way we structure incubators to successfully nurture and grow knowledge-based businesses.

Introduction

The “TV Industrial Complex” is a term coined by marketing genius Seth Godin. It describes the global economy being driven by industry, leveraging sales, marketing, production, and all aspects of the economy with television as the medium to the mass market. Thus, the TV Industrial Complex was an economy largely based on demand creation through television, with order fulfilment based on manufacturing. This model became adopted in the early 1950s and reigned supreme until the turn of the millennium. However, the rapid adoption of the Internet as the preferred medium of choice for consumers and business has eclipsed television.

With the TV Industrial Complex in an accelerating decline, the economy has begun to shift rapidly. The infrastructure of the industrial complex is relatively straightforward. It consists of factories, buildings, equipment, and machinery to produce products, goods, and services. Road, rail, and air are used to transport goods to market. People are secondary, acting as operators, caretakers, and attendants to the machinery of the industrial complex. The infrastructure is tangible, physical, and lends itself well to cost-based accounting that banks and governments can comprehend.

In contrast, knowledge infrastructure is not well understood by banks or government. Knowledge infrastructure is relatively new, virtual, intangible, and primarily intellectual. Knowledge can be neither touched nor photographed, which makes it far more difficult for policy makers to assess properly. Knowledge resides in the minds of the creative and is shared virtually. The output of the knowledge economy is content, collaboration, and community. The next phase of knowledge evolution is where the ability to store, convey and present knowledge will be the most valuable asset. The way companies connect with consumers and businesses has significantly changed.

Business Model Migration

Perhaps the second and most pervasive change afoot in the world today is business model migration. Business models are changing, flattening, and becoming leaner and more efficient. The change is analogous to the changes in the software industry. The Internet allows small businesses to compete on equal grounds with large enterprises, and in many instances small businesses are at an advantage. The TV Industrial complex was well suited to marketing to a standard distribution or the technology adoption lifecycle. The knowledge economy, however, has an entirely different distribution of customers.

The customer distribution in the knowledge economy is essentially what Chris Anderson described in his book The Long Tail. The X axis is selection and the Y axis is number of opportunities in that particular bin. The dispersion is highly concentrated close to the intersection of X and Y axis and then rapidly rolls off to form an infinite number of shallow bins along the X axis. Each of these shallow bins is a marketing opportunity for a small knowledge-based company.

Figure 1. Customer Distribution in the Knowledge Economy

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Based on a public domain image by Hay Kranen.

With the advent of open source software, the way products were developed and organized changed radically. The traditional proprietary software model is one based on hierarchy, with a top-down approach to development. It is a “waterfall model,” where requirements trickle down the organization. The open source model is a much flatter and more distributed network-based model. The changes in software development were a leading indicator of the changes that are now affecting the corporate business model.

If the old hierarchical, or industrial approach, is the “waterfall model,” then we propose that the new, distributed, flatter, network-based approach should be considered an “oasis model.” The oasis model is incredibly flat and efficient, with little or no hierarchy. The model can be visualized as pools of resources scattered about the desert, each with their own innate skills and abilities. When a task or project requires different skills, the appropriate oasis pools co-join to complete the work. When the task or project is complete, the pools break apart again, ready to reform with other latent skill pools as required. It is a very flat, highly efficient, and focused array of resource pools.

Much the same way that software migrated from waterfall to oasis, the leading organizations in the knowledge-based economy are adapting their business models. Business model migration is in the early adopter phase, with perhaps Google being one of the first to adopt the oasis business model. Google uses something called Googlets to spin off design teams into self-contained oasis pools. Other evidence of this new model can be found in such things as the co-working movement, the entrepreneurial generation, and the decline of large enterprise.

The transition from waterfall to oasis has been in process for over a decade; however, the rate of change is accelerating dramatically in the recession. Those quick to adapt will survive and even thrive, but those that cling to outdated industrial business models are likely doomed to mediocrity and extinction.

Emergence of the Knowledge Economy

The key attribute of the knowledge economy is the virtualization of labour. Intellectual production is captured in documents, training, videos, and content rather than a physical good or product. Teams can collaborate over great distances with communications-enabled applications that allow them to effectively interact. The requirements of a 9 to 5 work day or physical proximity are starting to evaporate. Independents, freelancers, and startups are leveraging communications and the oasis model to compete on a global level. The way we work and learn is changing dramatically.

The 2008 Legatum Prosperity Index Report described an interesting paradox: “Thus, the inability of countries which were knowledge leaders, such as Sweden, to prosper in the global economy was so striking that it was referred to as the ‘Swedish Paradox’. However, it was not just Sweden that exhibited surprising low growth rates and rising unemployment, while at the same time have high rates of investment in research, human capital and culture.” The Swedish Paradox equally applies to Canada, perhaps to an even greater extent. According to the Conference Board of Canada, among member countries of the Organization for Economic Co-operation and Development (OECD), Canada spent more than any other country on innovation in the public sector in 2006. However, Canada also ranked fifth in performance and fourteenth in output. In terms of input versus output, this leaves Canada ranked near the bottom.

The policy framework, government programs, and incentives that supported the industrial era are ill suited to the knowledge era. While it is possible for the government to stimulate the production of physical goods and labour, creativity and knowledge creation require a significant paradigm shift.

Incubation Success Characteristics

Incubation success characteristics vary depending on the nature of the tenant companies and the desired industry sector. The incubation cultural success matrix, shown in Figure 2, illustrates the relationship between public or private organizations and intensification (people or research). This is an important distinction because success of the tenant companies closely follows the culture of the incubating organization. Aligning the structure of the incubator with the culture of the tenant companies is an extremely important consideration in ensuring success, which is measured by graduating tenants. For the remainder of this article, the discussion will centre around people-intensive and privately owned incubators focused on technology innovation.

Figure 2. The Incubation Cultural Success Matrix

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Corporations large and small share a similar sentiment with respect to the people in their business: they are a corporation’s most valuable asset or its greatest liability. A progressive incubation model is one focused on the people and culture of the organizations that they are incubating. In his book, Good to Great, Jim Collins describes the characteristics of great companies and identifies two key success factors of great companies that are directly related to people:

  1. Get the right people on the bus. This has to happen before the “what” decisions are taken. That can change if you have the right people, but the wrong people will certainly make the enterprise fail.

  2. A culture of self-discipline is critical. It creates an environment where people work within a defined system, and yet, because the confines of the system are known, gives them more freedom to act within that system.

In a knowledge economy, the greatest single asset that a company has is its people. A successful incubation program will devote considerable time and effort to facilitating and fostering intellectual and personal growth of the incubated companies’ people. This is the incubator’s primary mandate. The strongest determinant in successfully graduating companies is aligning the incubators culture with that of the tenant companies.

A key success factor in a technology innovation incubator is that the facility, program, and all aspects of incubation should be self sustaining. If the incubator is self sustaining, then it mirrors the goals and objectives of its tenant companies. While government at all levels has a role to play in the incubation process, an incubator that has an ongoing reliance on subsidies from government can have detrimental effects on the program, culture, and results. The process of continually applying for government funding requires time and effort to prepare, which detracts from the incubator’s mission, vision, and values, which are facilitating jobs, improving the probability of success, and improving the growth rate of tenant companies. A self-sustaining facility focuses resources on providing value to clients and stakeholders.

As well as being sustainable, an incubation program should be lean, which means it focuses on delivering value to clients and stakeholders. If value is provided, then there are always opportunities to monetize in a productive and equitable fashion. Monetizing delivered value is referred to as value-based funding. The best incubator structure for delivering value-based funding is a for-profit structure. This ensures that the paradigm and culture of the incubator are in sync with the client tenants and that the focus of the incubator is on delivering value and results.

The traditional public incubator model relies on justification-based funding. This model carries a heavy administrative burden and tends to inspire more bureaucratic culture that is often out of sync with the private and for-profit businesses that they incubate. Thus, there is a tendency to justify funding the proposal rather than monetize the generated value.

Jed Emerson from the Generation Foundation and Generation Investment Management describes the “blended value proposition,” which focuses on advancing frameworks for assessing and tracking the value generated by social and cultural capital. He writes: “The ultimate impact of these factors is the creation of a capital market where investment decisions are often driven by function of “politics, perception and persuasion,” which come together to lock nonprofit leaders and those who fund them within what one observer has gone so far as to label “a dance of deceit.”

Incubation Model

In response to the shift to the knowledge-based economy and the success characteristics of incubation programs, an incubation model should have three key stakeholders: i) the startups (knowledge-based companies), ii) the facility, and iii) the investors (Figure 3). (The incubator would exist in a far larger ecosystem in the regional economy; however, from the perspective of the key stakeholders, they are a group of three.) There would be an incubation agreement drawn up between the stakeholders, but the key element holding the stakeholders together is the success of the tenant company. Success is determined as profitability, funding, or acquisition. All of these success outcomes create wealth and value for the local economy.

Figure 3. Incubator Business Arrangement Concept

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The incubation facility provides two primary functions: value-derived services to the startup and risk mitigation for the investor. The facility is the physical space, offices, meeting rooms, and all amenities related to housing tenant companies. The facility should be bright, creative, and help to inspire the innovation process. The intent is that the facility should be self funding and rely on the contributions of those using the space to ensure that value is generated.

An incubation program designed to improve the probability of success and increase the rate of growth of the startup is the next level of service. There are both informal and formal elements to the incubation program. The informal aspects happen organically with facilitation from the staff that manage the facility. There is a real benefit to having smart people in the same physical space and a natural outcome is that, by osmosis, good things are going to happen. If you add in the appropriate facilitation by staff, you can help to encourage the informal knowledge transfer. The second element of the incubation program is a more formalized program to help transfer knowledge. This is a structured program with subject matter experts, trainers, and technology domain expertise. The structured incubation program is a topic in and of itself and needs to be tailored to the specific technology and market verticals that the tenant clients are targeting.

Another important ingredient is facilitation by incubator staff, which needs to traverse both the formal and informal aspects of the incubation programming. Community requires constant attention and facilitation to be maintained and encouraged. An important aspect of any people-based incubation program is the fostering of co-learning, co-entrepreneuring, and trust. To be successful, the incubator must maintain a high-trust environment.

Finally, the incubation model requires investment. The purpose of the investment is monetary gain, however, it is also much more than that. The intent of the model is to create long-term, sustainable jobs that create wealth and value for the local economy. This can be described as ethical capitalism. This is patient money that is willing to wait 5 to 7 years for a return on investment, has a desire to help the local community, and is very likely actively involved in the incubation process.

Conclusion

To successfully facilitate the growth of knowledge based businesses it is extremely important that the incubator be culturally aligned with the tenant companies. The model of incubation needs to be structured in such a way that the interests of the three key stakeholders (startups, investors, and facility) are aligned and incented toward sustainably growing the startup. The incubator itself must be lean, sustainable, based on value-derived funding, and culturally consistent with the tenant companies. The key success factor in incubating knowledge-based businesses will likely be adapting the policy paradigm to fit the knowledge-based need.

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