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Inside the black box of business incubation: Study B—scale assessment, model refinement, and incubation outcomes

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Abstract

Due to a lack of valid and reliable scales, few studies have sought to describe and measure the business incubation process. After rigorously developing and pre-testing scales intended to measure the incubation process (Study A), we collected data from 53 incubators operating in the US in order to (a) systematically examine the incubation process, and (b) validate the scales. Accordingly, this study offers (1) new, validated scales for measuring the process of incubating new ventures, (2) empirically-based refinements to a theoretical model of the incubation process, and (3) data on business incubation outcomes that are very useful for incubator planning and benchmarking purposes.

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Notes

  1. Extremely unimportant, unimportant, mildly unimportant, neutral, mildly important, important, extremely important.

  2. Strongly disagree, disagree, mildly disagree, neutral, mildly agree, agree, strongly agree.

  3. Extremely bad, bad, mildly bad, neutral, mildly good, good, extremely good.

  4. These experts had (a) industry experience related to operating business incubators, and/or (b) experience conducting research on business incubators. Demographically, these experts included three women and nine men; all were American citizens. Four were incubator managers, four were scholars, and four were “pracademics” (i.e., they had ties to both academia and work related to facilitating new venture development). These experts have theoretical and empirical understandings of the research topic and in a broad sense are representative of the sample of respondents targeted for the field study.

  5. The Q-sort scale development technique was pioneered in by Stephenson (1935). It employs a Delphic approach, relying upon experts to manually sort and load the items from the initial item pool onto the dimensions they are intended to measure. The Q-sort technique is used in this research to reduce subjectivity in the initial development of the measurement items as well as to develop better initial content validity.

  6. The first author also took great pains to ensure that participants knew that he was present merely to answer any questions that they might have.

  7. By way of comparison, a recent study (Peters et al. 2004) estimated 600 incubators to be operating in the US.

  8. We offer our thanks to Prof. Sarfraz Mian who offered this advice at the USASBE conference in Dallas, Texas, in January 2004. See (Bearse 1998) for more on this topic.

  9. The incubator population targeted for the pilot study breaks down as follows: 50% mixed-use, 33% high-tech, 8% bio-tech and 8% empowerment. See Fig. 2 for a comparison of our entire sample with the sample of a recent NBIA study. Incubation industry stakeholders frequently describe their incubators in terms of the types of clients that they incubate, and this convention was observed while sampling incubators for this study. For example, Sherman identifies three categories in this tenant-based taxonomy: mixed-use, [high-]technology, and empowerment (Sherman 1999) Briefly, mixed-use incubators incubate any type of tenant; high-technology incubators incubate technology-based firms; and empowerment incubators incubate firms established by members of socio-economically disadvantaged groups. While Sherman did not address the taxonomical category of bio-technology incubators in his study, it is evident by the separate tracks given to high-tech and bio-tech incubators, respectively, at the NBIA annual conference for the past few years that these two categories are perceived to be distinct by the incubator managers themselves.

  10. To compute the survival statistic for this sample, the total number of P&G, G&P2P, and MC outcomes were divided by all outcomes. See Table 3 for data and definitions of each outcome category.

  11. Level of Incubator Development classifications were originally developed by Allen (1988). In the start-up stage, the primary concern of the business incubator manager is achieving full occupancy in order to reduce overhead costs. Weak, rent-paying companies meeting only a modicum of selection criteria may be allowed to enter the business incubator despite being a bad fit for incubation. In the business development stage, demand for space within the business incubator is greater than supply, and selection criteria can be applied with greater rigor. In the Mature stage, the business incubator has integrated itself with the community to a high degree, attracting resources, community support and significantly more demand for space in the incubator than supply.

  12. By way of comparison, the NBIA’s latest statistics (http://www.nbia.org accessed 02/01/05) indicate that 44% of business incubators draw their clients from urban areas, 31% from rural areas and 16% from suburban areas. The NBIA study does not report on incubators that draw incubatees on a regional basis. Discussions with incubators identifying themselves as drawing incubatees on a regional basis suggested their tendency to expand their market searches beyond their local area was due an insufficient number of desirable potential incubatees close to home or to the fact that they are the only incubator in the region and are attempting to service regional demand for their services. Differences between the sample and the NBIA sample may reflect the fact that the author physically visited most of the participants, whereas the NBIA study involved a self-administered online-survey without visits.

  13. The median square footage of the incubators in the sample may be a testament to the educational power of the NBIA which, for years, has been emphasizing at conferences, in print and online that the minimum number of square feet for an incubator to break even through rental income is 30,000 ft2.

  14. SPMA3 was selected for removal because during the course of the pilot testing several respondents felt that it was ambiguous and requested clarification. During the field tests it became apparent through conversations with the incubator managers that high-tech incubator managers viewed the question in terms of technical expertise related to the innovation the incubatee was attempting to commercialize while mixed-use incubator managers viewed the item as measuring the office IT skills of the incubatee. Since the item appeared to measure different things to different incubator managers it was removed.

  15. A star is expected to eventually have relative high market share and high growth rates. They represent the kind of ventures that venture capitalists hope that their portfolio companies will become.

  16. Hugh Sherman is a noted scholar of business incubation.

  17. Some incubator managers reported that they physically join the incubatee’s management teams when needed, while others reported a hands-off approach. Incubator managers tending toward the latter camp would not see much of a need to heed the incubator manager’s advice and may have responded accordingly.

  18. The composition of the resource utilization scale is, in hindsight, not surprising: one of the pre-test experts suggested that only high quality resources that are available would be used.

  19. We offer our thanks to an anonymous reviewer for pointing this out.

  20. Historically, the literature has suggested that the first three outcome states are indicative of incubation success and the last two outcome states are indicative of failure (Hackett and Dilts 2004b). However, following a real options reasoning, we specify outcome states A, B, and D as successes, and outcome states C and E as failures (Hackett and Dilts 2004a).

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Acknowledgements

This research was funded in part by the Ewing Marion Kauffman Foundation. The contents of this publication are solely the responsibility of the authors. This research was funded in part by a dissertation enhancement grant from the Graduate Faculty Council at Vanderbilt University. The contents of this publication are solely the responsibility of the authors. We would like to express our appreciation to the members of the Academy of Management Annual Conference in Atlanta (2006) who attended our presentation of an earlier version of this paper; their supportive comments, advice, and feedback helped us to greatly improve this paper. We would also like to thank several anonymous reviewers who have provided extensive feedback enabling us to significantly improve this paper.

Author information

Authors and Affiliations

  1. LeBow College of Business – Department of Management, Drexel University, 101 N. 33rd St., Academic Bldg. Room #318, Philadelphia, PA, 19104, USA

    Sean M. Hackett

  2. Owen Graduate School of Management, Vanderbilt University, 401 21st Avenue S., Nashville, TN, 37203, USA

    David M. Dilts

Authors
  1. Sean M. Hackett
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Corresponding author

Correspondence to Sean M. Hackett.

Appendices

Appendix A: Item analysis

Table AI Final retained items: selection performance items
Full size table
Table AII Final retained items: monitoring and business assistance intensity items
Full size table
Table AIII Final retained items: resource munificence items
Full size table

Appendix B. Survey instrument

Construct

Dimensions of the construct /hypothesis:

Items/references

Selection performance (independent variable)Definition:

Selection performance refers to the degree to which the incubator behaves like an ‘ideal type’ venture capitalist when selecting emerging organizations (options) for monitoring and business assistance and resource infusion.

Selection based on managerial characteristics H2a: Business incubation performance is positively related to selection performance, as measured by an incubator’s propensity to select an applicant for incubation based on the applicant’s managerial characteristics.

1. The prior work experience of the start-up company’s management team in the field they plan to enter (Hall & Hofer, 1993).

2. The prior management experience of the start-up company’s management team (Hall & Hofer, 1993).

3. The technical expertise of the start-up company’s management team.

4. The prior entrepreneurial experience of the start-up company’s management team (Hall & Hofer, 1993).

Directions:

Please answer the questions below keeping in mind the companies that have applied for admission to your incubator over the past five years.

Selection based on market characteristics H2b: Business incubation performance is positively related to selection performance, as measured by an incubator’s propensity to select an applicant for incubation based on the applicant’s targeted market characteristics.

1. The long-term growth potential of the market the start-up company plans to enter (Hall & Hofer, 1993; MacMillan, Siegel, & Narasimha, 1985).

2. The size of the target market that the start-up company plans to enter (Tyebjee & Bruno, 1984).

3. Whether customers within the target market are accessible to the start-up company (Tyebjee & Bruno, 1984).

4. The potential for the start-up company to create new markets.

Question stem:

Historically, when we decided whether to admit an applicant (i.e., a start-up company) to our incubator, we rated the following factors as...

Selection based on product characteristics H2c: Business incubation performance is positively related to selection performance, as measured by an incubator’s propensity to select an incubatee for incubation based on the applicant’s product characteristics.

1. The uniqueness of the product (Tyebjee & Bruno, 1984).

2. Whether the product has patent protection (Tyebjee & Bruno, 1984).

3. Whether the product has a technological edge (Tyebjee & Bruno, 1984).

4. Whether the product has relative advantage over competitor’s products. Barney, 1991).

5. The rareness of the product the start-up company is proposing to introduce to the market (Barney, 1991).

6. The inimitability of the product the start-up company is proposing to introduce to the market (Barney, 1991).

7. The substitutability of the product the start-up company is proposing to sell (Barney, 1991; MacMillan et al., 1985).

8. Whether the product demonstrates defendable competitive position (Hall & Hofer, 1993).

Likert-type scaled responses :

1. Extremely Unimportant

2. Unimportant

3. Mildly Unimportant

4. Neutral

5. Mildly Important

6. Important

7. Extremely Important

Selection based on financial characteristics H2d: Business incubation performance is positively related to selection performance, as measured by an incubator’s propensity to select an incubatee for incubation based on the applicant’s financial characteristics.

1. Whether the profit potential of the start-up company is high.

2. Whether the start-up company has a strong likelihood of achieving financial break-even in a short period of time.

3. Whether the start-up company has the potential to attract investment participation from venture capitalists.

4. Whether the start-up company has multiple, harvestable exit (i.e., cash-out) options.

Monitoring & business assistance intensity (independent variable)

Definition:

Monitoring & business assistance intensity refers to the degree to which the incubator observes and assists incubatees with the development of their ventures, including helping them to learn from low-cost failures and containing the cost of potential terminal failure.

Directions/question stem:

Please indicate to what extent you agree with the following statements by selecting the most appropriate indicator.

Likert-type scaled responses:

1. Strongly disagree

2. Disagree

3. Mildly disagree

4. Neutral

5. Mildly agree

6. Agree

7. Strongly agree

Degree of time intensity with which the Incubator monitors and assists the incubatees H3a: Business incubator performance is positively related to the time intensity of monitoring and business assistance efforts, as measured by the percentage of working time that the incubator manager monitors and assists the incubatees.

1. I spend ______% of my working time monitoring and assisting incubatees (NBIA).

2. Our incubator manager devotes sufficient time to assisting incubatees (NBIA).

3. The incubator manager and incubatees in our incubator spend sufficient time interacting (NBIA).

4. Interactions among the incubator manager and incubatees in our incubator reduce the likelihood of the incubatees’ making expensive business mistakes.

5. Our incubator manager devotes sufficient time to working directly with incubatees (NBIA).

 

Degree of comprehensiveness & quality with which the Incubator assists the incubatees H3b: Business incubator performance is positively related to intensity of monitoring and business assistance efforts, as measured by perceived level of comprehensiveness and quality of the assistance efforts.

1. Fellow incubatees teach each other strategies for achieving business success (Rice, 2002).

2. Our incubator excels at providing strategi planning assistance to our incubatees (NBIA; Fry, 1987).

3. Our incubator excels at providing business feasibility analysis assistance to our incubatees (Ansoff, 1965; Chrisman, 1989).

4. Our incubator excels at providing administrative-related assistance and services (Ansoff, 1965; Chrisman, 1989).

5. Our incubator excels at providing production-related advice to our incubatees (Ansoff, 1965; Chrisman, 1989).

6. Our incubator excels at providing operations-related advice to our incubatees (Ansoff, 1965; Chrisman, 1989).

7. Our incubator regularly validates the quality of potential new strategic service providers (NBIA).

8. Our incubator ensures the quality of its services by regularly reviewing them (Kaplan & Norton, 1992).

9. Our incubator manager actively seeks ways to continuously improve the level of customer service satisfaction inside the incubator (Kaplan & Norton, 1992).

Resource munificence (independent variable)

Definition:

Resource munificence refers to incubator resource availability, quality and utilization.

Resource availability directions/question stem:

Please rate the ability of your incubator to make the following different resources available to incubatees by choosing the most appropriate answer.

Likert-type scaled responses:

1. Extremely bad

2. Bad

3. Mildly bad

4. Neutral

5. Mildly good

6. Good

7. Extremely good

Degree of resource availability H4a: Business incubator performance is positively related to resource munificence, as measured by perceived level of resource availability.

1. Our ability to provide incubatees with access to administrative support services (Allen & Rahman, 1985; Mian, 1996; Smilor, 1987; Temali & Campbell, 1984).

2. Our ability to provide incubatees with access to managerial expertise (Sherman & Chappell, 1998).

3. Our ability to provide incubatees with access to sources of capital (i.e., introductions to banks, venture capitalists and angels).

4. Our ability to provide incubatees with access to lawyers (Brooks, 1986; Hansen et al., 2000; Smilor, 1987a).

5. Our ability to provide incubatees with access to accountants (Brooks, 1986; Hansen et al., 2000; Smilor, 1987a).

6. Our ability to provide incubatees with access to consultants (Brooks, 1986; Hansen et al., 2000; Smilor, 1987a).

7. Our ability to provide incubatees with access to marketing specialists (Brooks, 1986; Hansen et al., 2000; Smilor, 1987a).

8. Our ability to provide access to local university contacts {Brooks, 1986; Hansen et al., 2000; Smilor, 1987a). Our incubatees frequently give business advice to each other (Rice, 2002).

Resource quality directions/ question stem:

Please indicate to what extent you agree with the following statements by selecting the most appropriate indicator

Likert-type scaled responses:

1. Strongly disagree

2. Disagree

3. Mildly disagree

4. Neutral

5. Mildly agree

6. Agree

7. Strongly agree

Resource quality H4b: Business incubator performance is positively related to resource munificence, as measured by perceived level of resource quality.

1. Our incubator offers lease agreements that are flexible enough to meet the changing space needs of our incubatees (Allen & McCluskey, 1990; Allen & Weinberg, 1988; Sherman & Chappell, 1998).

2. Our incubatees’ reputation is enhanced because of their association with our incubator (Chrisman, Bauerschmidt, & Hofer, 2001).

3. Our incubator environment is pleasant and nurturing.

4. Our incubator is a nurturing place.

5. Our incubator excels at presenting business-related information to incubatees in a way that is easy for them to understand (Autio & Kloftsen, 1998; Campbell, 1989; Rice, 2002; Scheirer, 1985).

6. The sources of capital (i.e., banks, venture capitalists, and angels) to which we introduce our incubatees are also sources of “smart capital.”

7. Upon graduation, our graduate incubatees often express gratitude for the “valuable assistance” they received while they were in the incubator.

Resource utilization directions/ question stem:

Please indicate to what extent you agree with the following statements by selecting the most appropriate indicator

Likert-type scaled responses :

1. Strongly disagree

2. Disagree

3. Mildly disagree

4. Neutral

5. Mildly agree

6. Agree

7. Strongly agree

Resource utilization H4c: Business incubator performance is positively related to resource munificence, as measured by perceived level of incubatee resource utilization

1. Our incubatees make full use of the administrative services that are offered by our incubator.

2. Our incubatees utilize advice obtained from the incubator manager.

3. Our incubatees utilize the knowledge obtained by fellow incubatees.

4. Our incubatees learn to utilize knowledge from other incubatees.

5. Our incubatees act upon the advice they receive from the incubator manager.

6. Our incubatees act upon the advice they receive from fellow incubatees.

7. When we introduce an incubatee to one of our incubator’s network contacts, the incubatee maximizes the opportunity present in the introduction

2.1 Business incubation performance (dependent variable)

2.2 Definition:

Business incubation performance is measured in categorical terms of incubatee growth and financial performance at the time of incubator exit. Operationally, there are five different mutually exclusive incubatee outcome states Footnote 20 at the completion of the incubation process (i.e., when the incubatee exits the incubator):

  1. 1.

    The incubatee is surviving and growing profitably.

  2. 2.

    The incubatee is surviving and growing and is on a path toward profitability.

  3. 3.

    The incubatee is surviving but is not growing and is not profitable or is only marginally profitable.

  4. 4.

    Incubatee operations were terminated while still in the incubator, but losses were minimized.

  5. 5.

    Incubatee operations were terminated while still in the incubator, and the losses were large.

2.3 Directions/question stem:

For the 5 years period 1999–2003, in the boxes below please indicate the total number of categorical outcome states for all incubatees that exited your incubator.

 

A. The incubatee was surviving and growing profitably at time of incubator exit

B. The incubatee was surviving and growing and on a path toward profitability at time of incubator exit

C. The incubatee is surviving but is not growing and is not profitable or is only marginally profitable at time of incubator exit

D. Incubatee operations were terminated while still in the incubator, but losses were minimized at time of incubator exit

E. Incubatee operations were terminated while still in the incubator, and the losses were large at time of incubator exit

Total no. of categorical outcomes for 1999–2003 incubatee exits

     

(Description)

(Count 1999–2003)

(Count 1999–2003)

(Count 1999–2003)

(Count 1999–2003)

(Count 1999–2003)

2.4 Directions/question stem:

For the 5 years period 1999–2003, in the boxes below please indicate the total aggregate revenues for all incubatees in your incubator.

 

A. 2003

B. 2002

C. 2001

D. 2000

E. 1999

Total revenues

 

 

 

 

0

(Description)

     
  1. Control variables
  2. Size of incubator (m2) (square feet conversion formula)
  3. Level of development of incubator: concept—start-up—development—mature
  4. Location of incubatee draw: urban, suburban, rural, national, and international

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Hackett, S.M., Dilts, D.M. Inside the black box of business incubation: Study B—scale assessment, model refinement, and incubation outcomes. J Technol Transfer 33, 439–471 (2008). https://doi.org/10.1007/s10961-007-9056-9

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