University Business Incubators - Viable funding and income strategies

University Business Incubators: Viable funding and income strategies and limitations Startup Income :University Business Incubators:: :Viable funding and income strategies. :Final Combined Report: Course: Master of Business Administration Module: Management Research Project (BB7584) Supervisor: Dr Yannis Pierrakis Report by Philip Lindsay (K1738825) Word Count: 10,896 0

University Business Incubators: Viable funding and income strategies Executive Summary Business incubators have been described as a global phenomenon and have become increasingly popular. Many universities in the UK now lay claim to operating an incubator in one form or another. These business support functions seek to assist startups into becoming high growth ‘gazelle’ companies. Financial support provided by incubators and accelerators is estimated to be worth £33 million of investment into startups per year (Centre of Entrepreneurs, 2018). When reviewing the function of the business incubators within the universities, it became clear that there was not a standardised model for viable funding or income for the business incubators. This means that incubators would remain a space for startups but with little or no external support. They then required investment by the university and there could be a risk of a reliance on public or university funding. The fundamental question this report seeks to answer is how universities can successfully fund university business incubators (UBIs) and find new viable revenue streams in the financially challenging environment that universities currently find themselves in. By reviewing empirical evidence alongside secondary research, and stakeholder theory and resource-based view (RBV), it has been established that there is a need for up-to-date primary research to answer this questions. The report provides a dataset in the form of a survey completed by 39 individual UK business incubator managers focusing on the funding and income methods currently in use or being considered. The data has been analysed and shows positive correlations between UBIs and university funding. This can be considered as an overreliance on one funding method. Whilst common for early stage UBIs, this report advises caution for growth stage and mature UBIs because of the overreliance and restrictions the funding imposes. The report will conclude with a set of recommendations for UBI managers when seeking to diversify revenue streams. The data collected has been summarised and developed into a roadmap for incubator managers. It is an exciting time for innovation and entrepreneurs in the UK. By building knowledge and research in this area it can be used to inform and shape the way we support startups. Research, such is this report, will allow the UK to build businesses which can grow from micro-enterprises to unicorn startups. 1

University Business Incubators: Viable funding and income strategies Contents Executive Summary ............................................................................................................................ 1 i Figures............................................................................................................................................... 3 ii Abbreviations................................................................................................................................... 4 iii. Definitions...................................................................................................................................... 4 Chapter 1 - Problem Formulation ................................................................................................. 6 1.1.1 Introduction............................................................................................................................... 6 1.1.2 Topic and Problem..................................................................................................................... 8 1.1.3 Incubator Target Market ........................................................................................................... 9 1.2.1 Formative Research & Knowledge Gap ...................................................................................10 1.3.1 Problem Formulation Summary ..............................................................................................11 Chapter 2 - Literature Review ..................................................................................................... 13 2.1.1 Literature Review Outline........................................................................................................14 2.2.1 Academic Theories and Frameworks.......................................................................................16 2.2.2 Research Reports by Public & Economic Development Agencies ...........................................19 2.2.3 Analysis of Profit Sharing Agreement Research ......................................................................20 2.2.4 How Guides and Toolkits for Incubator Managers Can Impact UBIs ......................................21 2.3.1 Case Study - Oxford Startup Incubator Funding Models .........................................................28 2.4.1 Incubator Success Factors .......................................................................................................29 2.5.1 Summary of Literature Review ................................................................................................33 Chapter 3 - Research Methodology............................................................................................. 37 3.1.1 Proposed Research Methodology ...........................................................................................38 3.1.2 Data Collection ........................................................................................................................39 3.1.3 Measuring Success Factors and Research Limitations ............................................................40 3.1.4 Primary Research.....................................................................................................................40 3.1.5 Questionnaire Pre Testing .......................................................................................................42 3.1.6 Questionnaire – Data and Information Collection ..................................................................42 Chapter 4 - Findings ................................................................................................................... 44 4.1.1 Data Analysis............................................................................................................................45 4.1.2 Qualitative Data Analysis.........................................................................................................49 Chapter 5 - Discussion ................................................................................................................ 52 5.1.1 Key Discussion Points ..............................................................................................................53 Chapter 6 - Conclusions.............................................................................................................. 54 6.1.1 Conclusion.........................................................................................................................55 6.1.2 Recommendations ............................................................................................................56 6.1.3 Incubator ‘Revenue Roadmap’ Framework ......................................................................59 6.1.4 Next Steps................................................................................................................................60 References............................................................................................................................. 61 2

University Business Incubators: Viable funding and income strategies Appendix ............................................................................................................................... 66 Appendix 1 - University affiliation of incubatees ........................................................................................ 66 Appendix 2 - BEIS Comparison of Business Incubator types and their common features .......................... 66 Appendix 3 - The UBI Global World Rankings of University Business Incubators 2018 .............................. 67 Appendix 4 - Intellectual property: Spin-off activities by HE provider 2016/17 ......................................... 67 Appendix 5 - iCat Research Log ................................................................................................................... 68 Appendix 6 - Business Incubator Survey - MBA Management Research Project - Survey Flow ................. 69 Appendix 7 - Survey email........................................................................................................................... 72 Appendix 8 - Balanced Scorecard for Economic Development Incubators (BSEDI) .................................... 73 Appendix 9 - Survey Respondants Data ...................................................................................................... 74 Appendix 10 - Proportion of the overall annual income by revenue stream.............................................. 76 Appendix 11 - Revenue by type of incubator and age - UBIs...................................................................... 77 Appendix 12 - Revenue by type of incubator and age - BIs ........................................................................ 78 Appendix 13 - Correlation between incubator type and revenue streams................................................. 78 i Figures Figure 1 - Map of incubator and accelerator density (per 1000 new businesses) in the UK .................................. 8 Figure 2 - Income from business and community interactions ............................................................................ 11 Figure 3 - Unique characteristics of organizations that engage in startup assistance ......................................... 16 Figure 4 - Private Business Incubator Internal and External Stakeholders ........................................................... 18 Figure 5 - University Business Incubator Internal and External Stakeholders ...................................................... 18 Figure 6 - Average Incubator Revenue by category [US]………………………. ............................................................ 22 Figure 7 - SMEDI-Strategy Map for not-for-profit Economic Development Incubators ....................................... 23 Figure 8 - Common UBI funding and income strategies. ...................................................................................... 24 Figure 9 - Oxford Startup Incubator startup incubation modes ........................................................................... 29 Figure 10 - A Priori Model of Incubator Success Factors ...................................................................................... 30 Figure 11 - Business Model Canvas of UBIs and Private Incubators ............................................................ 32 Figure 12 - Common Business Incubator income and funding streams ............................................................... 35 Figure 13 - The Research Onion............................................................................................................................ 38 Figure 14 - Methodology of Study ........................................................................................................................ 41 Figure 15 - Incubator survey dataset responses................................................................................................... 43 Figure 16 - Location of Incubators (Numbers do not correspond to respondents numbers) .............................. 45 Figure 17 - Type of incubator or innovation model survey responses ................................................................. 46 Figure 18 - Maximum duration a startup remain in the incubator....................................................................... 46 Figure 19 - Capacity of incubators ........................................................................................................................ 47 Figure 20 - Proportion of the overall annual expenditure is covered by the revenue streams (%) ..................... 47 Figure 21 - Correlation between incubator type and funding streams ................................................................ 48 Figure 22 - Number of incubators how have applied for public or government funds ........................................ 49 Figure 23 - Operational schematic of university business incubators .................................................................. 53 3

University Business Incubators: Viable funding and income strategies ii Abbreviations BEIS - Department of Business, Energy & NGO - Non-Governmental Organisations Industrial Strategy RBV - Resourced-Based View BI - Business Incubator RDA - Regional Development Agency (defunct) BSEDI - Balanced Scorecard for Economic R&D - Research and Development Development Incubators RED - Research England Development Brexit - UK withdrawal from the European Union RI - Research Insitute CABS - Chartered Association of Business Schools SME - Small or Medium Sized Enterprise CFE - Centre of Entrepreneurs SMEDI - Strategy Map for Economic Development ERDF - European Regional Development Fund Incubators EU - European Union STEM - Science, Technology, Engineering and GEM - Global Entrepreneurship Monitor Mathematics HEI - Higher Education Institution SWOT - Strengths, Weaknesses, Opportunities, HEIF - Higher Education Innovation Fund Threats HESA - Higher Education Statistics Agency UBI - University Business Incubator iCat - Kingston University's library online library UEZ - University Enterprise Zones catalogue UKBI - UK Business Incubation (defunct) InBIA - International Business Innovation UKSPA - UK Science Park Association Association USP - Unique Selling Point IP - Intellectual Property USTI - University-Sponsored Technology IPO - Initial Public Offering Incubator LEP - Local Enterprise Partnerships UTTO - University Technology Transfer Office NBIA - National Business Incubation Association VC - Venture Capital NESTA - National Endowment for Science VMV - Vision, Mission, Vision Technology and the Arts Key words: business incubator, university business incubator, startups, public funding, income, revenue, equity, UBI. 4

University Business Incubators: Viable funding and income strategies iii. Definitions Due to the nature of categorising, key concepts or terms can be subject to interpretation. The definitions below describe the terms used in the report: Startups accepting equity rather than a fee based model A startup is a generally considered to be a newly of income for a fixed term. emerged business venture that seeks to develop The previous view of accelerators as 'feeder a successful business model and capture a share programmes' for incubators is no longer the case. of the market. Often the objective is to issue In the last 10 years, a new wave of popularity for stock, raise money from investors and to exit by Accelerators has be seen. What sets Accelerators acquisition or in an initial public offering (IPO). apart from BIs is an open (yet highly selective) This differs from entrepreneurship due to the application process, a provision of pre-seed startup’s desire to have a high growth company investment (for equity), a focus on teams rather and to scale up the business from more than one than a single entrepreneur, intensive and person. (Rose, 2016) batch/cohort lead (Miller and Bound, 2011). Business Incubator (BI) Corporate Accelerators Whilst a clear definition of a BI is difficult, the key A trend for corporate funded accelerators is objective is to nurture and grow startup growing rapidly. Accelerators are increasingly companies. Incubators can differ, from offering less reliant on public funding, often financed startups, rent-a-desk space in an office, to full instead by corporates. Venture capital (VC) funds support including access to networks of now account for a small proportion of investors, seminars and specific advice. It is Accelerators. important to note that the objectives of publicly funded incubators [and accelerators] are likely to University Technology Transfer Office (UTTO) differ from those of corporately funded UTTOs are common in many UK Universities and programmes. For example, while public funding have a focus on intellectual property (IP) and typically comes with the goal of local economic emphasis on licensing technologies and development, corporate funding is often aimed commercialisation licensing strategies can also at tackling a specific problem, or building an be used to help spin-outs. Markman et al. stated ecosystem around a core technology (Miller and that UTTOs function as technology Bound, 2011). intermediaries and “success of business incubators and technology parks in university University Business Incubator (UBI) settings is often determined by how well UBIs follow a similar concept to BIs but have technology is transferred from the labs to their some key differences. Currently most UBIs are startup firms” (2005). majority public funded projects. One of the differences between UBI and a traditional BI is Spin-outs that UBIs tend to focus on incubating current Spin-outs are business or enterprise education students, graduate entrepreneurs and alumni. projects based on Universities allowing IP to be Whilst many are open to non-students data (CFE, commercialized, but with startups linked to the 2017) suggests this offer is not often taken up, university in a profit making venture. They are with on 9% being external entrepreneurs often found in universities with a strong (Appendix 1). UBI must also share the university’s reputation for research in Science, Technology, core values and are not driven solely by making a Engineering & Mathematics (STEM) areas of profit. research and supported by a technology transfer office (CFE, 2017). Universities with UBIs are able Accelerators to ‘spin-out’ their ventures into these facilities. Commonly considered to be the 2nd stage of a startup’s journey after incubation. Whilst it is See Appendix 2: BEIS’ Comparison of Business widely agreed that there is an overlap between Incubator types and their common features for BIs and Accelerators, the latter can often be more information. differentiated by having pre-seed funding and 4

University Business Incubators: Viable funding and income strategies Chapter 1 - Problem Formulation 6

University Business Incubators: Viable funding and income strategies and limitations 1.1.1 Introduction UK universities are commonly large, complex and bureaucratic institutions. This is a contrast to an innovative startup or SME in an emerging sector, which needs to be fluid and agile to survive. According to Centre of Entrepreneurs’ (2017) survey, 130 out of 163 UK universities now claim to support startups with the offer of a place in a university business incubator (UBI). Nesta, (the UK’s innovation foundation) on behalf of Department of Business, Energy & Industrial Strategy (BEIS), recently identified 205 incubators, 163 accelerators, 11 pre-accelerators, and 4 virtual incubators currently active in the UK. Not only is this a large number but more than half of UK incubators have been created since 2011. All these business support functions seek to assist startups into becoming high growth ‘gazelle’ companies. It is also estimated that financial support provided by incubators and accelerators equates to an estimated £33 million of investment into startups per year (Bone, Allen, & Haley, 2017) demonstrating a core benefit to the UK economy. Incubators claim to be an alternative, and superior, way of allowing startups to create a network, increase momentum and raise capital. However, there is a current landscape of change due to a number of factors, including instability of university funding and income, Brexit considerations and economic changes. This means it is more important than ever for business incubators run by universities, to establish funding and income to continue providing opportunities for startups and regional economic development. This report investigates business incubators, specifically university business incubators (UBIs), to explore viable and stable finance strategies in a financially challenging environment. The report reviews current academic theory and literature to validate the methods of fund and income used. The report contributes academic literature by using primary research to identify best practice, new streams of revenue or income and identify if type, age or sector of incubator can have a financial impact. The report answers a key question surrounding this topic: “What are the most viable funding and income strategies for University Business Incubators and what are their limitations?” Hypotheses H1) Achieving a diversification of revenue streams will improve UBI sustainability. H2) Different funding and income streams are more effective at different stages of maturity. H3) Funding and income streams used by private business incubators (BIs) are not used full exploited by UBIs. 6

University Business Incubators: Viable funding and income strategies There is strong evidence to show that there is a need for innovation in all sectors of business to ensure the markets are competitive and economic growth is possible. This not only brings new products and services to market, but also improves regional, national and global economies. With a recent article by Professor Martin Boehm suggesting that 80% of jobs will not exist by 2025, it is more important than ever for innovators to be supported in identifying ‘the next big thing’ (Webb, 2018). Startups, and nurturing their development, is also a key factor in regional economic growth. Business incubators were first seen in the USA in the 1950’s and have grown in popularity. They are now often heavily associated with the tech sector. Incubators have been described as a global phenomenon and have become increasingly popular since the turn of the century, with an estimated 7,000 – 15,000 globally (Hassan, 2013). There have been a number of success stories that US universities can boast about, with tech giants such as Facebook, Google, Cisco, Yahoo, Instagram linked to entrepreneurs founding companies at universities. The core objectives of most business incubators is to develop young businesses by providing support such as financial and technical services and helping the startups grow. When looking at UBIs, they will often have a focus on student, graduate or alumni startups. In the current Higher Education (HE) sector the marketplace is highly competitive. As such universities are seeking a variety of ways to differentiate themselves from competitors. A relatively cost effective way of doing this is to set up a UBI, often needing only a room and a willing facilitator, and we can see a growing trend towards this in government reports. (Bone, Allen, & Haley, 2017; Miller and Bound, 2011). It is important to research this active area of innovation support, to understand how UBIs can use viable financial support to develop and have an impact on students and alumni. The UBI Global World Rankings of University Business Incubators 2018 also shows that the UK has the most successful incubator programme, known as the SETsquared Partnership, which is comprised of the University of Bath, Bristol, Exeter, Southampton and Surrey. (Full rankings can be found in Appendix 3). However, this has not been replicated by other universities to date. Many universities in the UK now lay claim to operating an incubator in one form or another. Appendix 4 shows additional Higher Education Statistics Agency (HESA) data on spin-off activities by HE providers. After an initial review if UBI literature, it became clear that there was no standardised model for funding or income for the incubators. Subsequently incubators would remain a space for startups with 7

University Business Incubators: Viable funding and income strategies little or no financial support to help growth and development. Literature also indicates a lack of easily accessible investment meaning there could be a reliance on university funding. A general overview of current research has been given in order to substantiate the gap or problem within the topic. 1.1.2 Topic and Problem In order to clearly understand the context that UBIs work in an overview of UBIs is needed. As seen in fig.1, business incubators are represented across the UK, there are areas with a higher density, such as London and the Home Counties. With such a clear demand for this service (75% of incubators surveyed by CFE in 2017 were full to capacity) and a large socioeconomic impact, it is a topic which merits investigation. ` Source: Business Incubators and Accelerators. The National Picture (2017) Figure 1 - Map of incubator and accelerator density (per 1000 new businesses) in the UK A fundamental question to analyse is how universities can successfully fund UBIs and find new viable revenue streams in this financially challenging environment that universities find themselves in. Findings from the CFE (2018) research state that “the key challenges faced by accelerators were financial sustainability of their programme, attracting investors and providing valuable post- accelerator support”, this also holds true for UBIs and shows the innovation support sector is a challenging one. 8

University Business Incubators: Viable funding and income strategies A recent report confirmed that “Nearly half of the incubators and accelerators revealed that they were at least partially funded by public money. This stresses the importance of finding out how effective these initiatives are to policymakers as well as the organisations running the programmes themselves” (Bone, Allen, & Haley, 2017). This demonstrates a desire to move towards private funding with more incubators adopting a hybrid funding model and seeking to reduce the reliance on public funding. As opposed to BIs, accelerators are often funded by corporations. A current trend is for corporate funded accelerators, which are growing very rapidly. This may be an additional source of funding that UBIs or university entrepreneurship centres can tap into in order to become less reliant on university, government or public funding to sustain the incubation of startups. 1.1.3 Incubator Target Market There are many similarities in all entrepreneurship support units but the key differences help build an overview of their purpose, so it is important to define the target market for each. A number of methods including assessing the businesses Vision, Mission, Vision, (VMV), Unique Selling Point (USP), stakeholders, and their cost structure and revenue flow can inform this. Private BIs are often reliant on revenue generation for their income. This means that they have to be selective when assessing the viability of any startup. There are usually community and socioeconomic goals within the BIs USP, but there is still a need for them to remain competitive and profitable. Private Accelerators are not as reliant on revenue generation as BIs because they are largely funded by multinationals which allows them to be highly selective. Their primary goal is not to generate a profit and as such do not charge startups rent or membership fees. Accelerators are aware that there is a high failure rate for startups so put an emphasis on idea generation and developing talent. This is to take advantage of ‘the next big thing’ before the competition. UBIs are often either wholly or partly public funded which means they have different stakeholders and goals to private BIs and accelerators. Startups who may not have the chance to be considered for a BIs due to financial reasons, or because their concept is not as lucrative, may be able to join UBIs. This is an important differentiation as it shows that UBIs are not solely focused on profit but enabling a diverse and inclusive cross-section of the region the opportunity to be entrepreneurial. This fits with 9

University Business Incubators: Viable funding and income strategies most universities’ Widening Participation statements. There is a core focus of nurturing a startup into maturity rather than the quick validation nature of accelerators. Universities do run accelerator programmes but following a review of information on university websites it became clear that these are largely programmes held within incubators or innovation centers, rather than the standalone entity that are found in corporate accelerators. University accelerators may take equity from startups - often as a spin-out process - and the application process is considered more competitive than UBIs because of this. 1.2.1 Formative Research & Knowledge Gap Research into BIs and UBIs has been published since their inception in the early 1950’s. This research has taken many forms reviewing BIs impact, development and evolution. To establish the fundamental questions surrounding funding and income for UBIs was important to review previous research by conducting a literature review of books, journals, case studies, databases and other empirical research. Before reviewing BI funding streams it was important to establish how the developed and their priories. Hanadi & Busler (2010) enabled this by succinctly conducting a SWOT for USA and UK BIs. Their findings showed that the strengths of BIs were the contribution to economic development USA & UK. Weaknesses included lack of support in hiring qualified incubator managers in the USA and the international economic crisis for both the UK and USA. Interestingly, they argue that the UK and USA have different opportunities and threats in relation to BIs. For the USA, Internationalisation and accelerator projects were opportunities and the key threat was the impact of international economic crisis. In the UK, investment in the sector was the opportunity and public sector funding was the threat. Whilst this give an interesting landscape for 2010, it is important to note that there have been many changes in the subsequent years, meaning the international economic crises may no longer be a threat to the USA and it can be argued that the opportunities of accelerator projects and investment have been realised. However, this may not be the case for public funded UBIs which can be slower to adapt than private funded BIs. There is HESA published reporting on funding and income for universities that supports research when looking into the funding and income of UBIs. HESA reports on data including Income from intellectual 10

University Business Incubators: Viable funding and income strategies property (fig.2), which could be used as a comparator to universities who have successful UBIs, or are known for research spin-outs. Source: HESA (2018) Figure 2 - Income from business and community interactions Further analysis of HESA’s spin-offs and startup companies shows Kingston University at the top for Spin-off activities from 2014/15 – 2016/17 (HESA, 2018). Although this data shows the activity for universities it is not an indicator of revenue streams linked directly to this and does not confirm funding or income generated from these activities. 1.3.1 Problem Formulation Summary At present, there is a lack of research published showing UBI performance in the medium and long- term which can be used to supported by UBIs and no consensus on viable revenue streams. A more rigorous performance measure may help evidence the value of UBIs to encourage investments and funding. It is widely agreed that BIs and accelerators are a popular pathway for startups to consider, and universities now have established a legitimate role in this arena. The problem formulation exercise 11

University Business Incubators: Viable funding and income strategies confirmed that there is a knowledge gap in the funding and income area of BI and accelerators. By collecting primary data, this report has a unique and informative perspective on the issues of Innovation and academia. The report has shown that there is a large body of research in startup assistance programmes, but that there is no standard or accepted models of viable funding or income currently. In order to take the problem further, it has been assumed that the predominant aim for UBIs should be to avoid an overreliance on public funding such as the Higher Education Innovation Fund (HEIF), in order to ensure sustainability and become future-proof. This assumption was then be tested to confirm if it is true. Other factors were uncovered by the literature review and primary research that were yet to be considered. (1) The topics discussed above highlighted a knowledge gap with limited research and investigation into the issue. Further research into this topic was needed to full understand the commonalities and differences with UBIs funding and income. (2) Within the review of research there does not currently seem to be a one-size-fits-all business model or funding best practice. Research in the form of a full literature review was conducted to confirm or refute this statement. 12

University Business Incubators: Viable funding and income strategies Chapter 2 - Literature Review 13

University Business Incubators: Viable funding and income strategies 2.1.1 Literature Review Outline Following on from the Problem Formation Report, which posed key questions relating to UBI income and funding, the report has considered the initial research conducted from the problem formulation section and bolstered this with a full literature review on the subject. This has influenced the primary data collection to seek answers to the question posed, in order to fill the gap in knowledge that currently exists in this area. The literature on both university entrepreneurship and business incubators has vastly expanded since the turn of the century. This dovetails with the increase in business incubators over the UK and globally as a way to support startups and regional economic growth. The initial steps taken to conduct a systematic literature review were: (1) Review of current results from literature in library databases including iCat (Kingston University's library online library catalogue) and Business Source Premier (EBSCO). (2) Record and filter results to establish relevant keywords and relevant articles, newspaper articles, reviews, conference proceedings, peer-reviewed journals and books. See Appendix 5 for a record of searches conducted on iCat outlining the variety of results and the filtering process. (3) Narrow results of relevant literature by utilising filters and keywords of regions (e.g. UK or London) and year of publication. (4) Analyse filtered results by reading abstracts and summaries to ascertain the key topics and disregard publications that are unhelpful to the area of UBI or BI funding and income. (5) Read, review and contrast publications to form a base of knowledge to build the finding of the literature review. Apply this to both the initial theories outlined in the problem formulation and the primary research collection. 14

University Business Incubators: Viable funding and income strategies In this search, all material types were in scope for consideration and include articles, newspaper articles, reviews, conference proceedings, peer-reviewed journals and books. Results from these searches produced a large number of results on various subjects. The most popular terms were ‘Research and Development’ and ‘Economic Development London’, highlighting that these were too general. Conversely, the abbreviation UBI did not produce any relevant results for business incubators. Recording the results of the searches was an important step in the literature review process as it allowed keywords to be defined. The results could then be catalogued and relevant articles were included, therefore not diluting the literature reviewed by other irrelevant work. Filtering by region allows the literature review to rule out results that are focused on specific regions globally that were not comparable to the UK. Whilst there are a number of important pieces of research conducted on BIs before 2009, filters that show articles published after 2009 are relevant as they include information and data that is more up to date. They also give a context of the sector after the 2008 economic crisis and recovery, which is important to BIs development and shows how they have adapted and evolve since this milestone. It was also important to review the pedigree of the work by checking journal rankings – such as the Chartered Association of Business Schools (CABS) rankings, and peer review process. This is so it can be confirmed that the work has passed the academic rigor expected, and the publication’s validity could not be questioned when citing the work. From the myriad of sources considered for the systemic literature review, a useful starting point [after reviewing the widely accepted entrepreneurship theories], was to analyse research reports from Government or creditable associations which had a specific focus on BIs. When starting the process of reviewing research, an additional definition used to describe a ‘successful’ UBI, in terms of operations and financing was noted. Lalkaka and Shaffer (1999) define the concept of financial sustainability as being able to continue to achieve positive cash flows in the future. In order to do achieve this, it was surmised that to be able to find strong sponsors the UBI will need a clear mission. 15

University Business Incubators: Viable funding and income strategies 2.2.1 Academic Theories and Frameworks There are a number of academic theories and frameworks, which are widely used in the entrepreneurship field. In 2013, Tavoletti conducted one of the most comprehensive literature reviews to date, in which he sought to ascertain if BIs were an effective use of infrastructure or a waste of public money. Whilst researching, he claimed that BIs could be less effective to startups than not using a BIs. Startups from non-BIs reportedly had a slightly lower failure rate of to 32% compared with 38%. This research is contested by other data showing startups growth and attributing it to UBIs. Key findings from Tavoletti’s literature review were: (1) a proposal to protect weak-but-promising startups, (2) take full region into account when accessing where to set up a BI, (3) the suggestion that BIs are a process but not a tangible investment, and (4) they should take advantage of new technology and innovations, such as virtual BIs. Dempwolf and D’Ippolito’s 2014 discussion details the roles of profit and not-for-profit models of organisations involved in startup assistance when defining characteristics of Accelerators. Fig. 3 outlines the various objectives of each assistance programme that also helped to form a model of funding and income for UBIs, which reinforces these objectives. Broad Organisation Types Category Objective Single Primary Objective Single Primary Objective Nonprofit/ Commercialisation of university Proof-of-concept centres University Accelerators Public Good and sponsored research Incubators Local/regional economic development For-profit/ Profit from investment in Innovation Accelerators Venture Development Private startups Corporate Accelerators Organisations Interests Further corporate innovation Social Accelerators strategy Source: Dempwolf, Auer and D’Ippolito (2014) Figure 3 - Unique characteristics of organizations that engage in startup assistance Clarysse, et al. (2005) sought to investigate the incubation strategies employed, focusing on the similarities and differences in ‘spin-offs’, or ‘spinning out’, and propose models of incubation strategy. This is a particularity interesting concept that has been well researched using current case studies and 16

University Business Incubators: Viable funding and income strategies primary data but focus on the Research Institutions (RI). There does not appear to be comparative research on UBI funding strategies. This is an area which would benefit from additional research to confirm or deny a model of revenue generation. From research by Vanderstraeten et al. (2016) investigating the customisation of BI strategies in Brazilian incubators, evidence supported the theory of flexible service offerings to increase success of startups. A model of payments and funding could be established on this basis. With additional research, a variety of customisable options could be used as a business model for UBIs. This would be an attractive selling point and could mean potential funding streams from public or private sources. These funders would benefit from the startups successes the most, allowing UBIs to self-generate revenue and become a sustainable asset for UK universities. As previously outlined, BEIS’ research paper into business incubators and accelerators found that corporate-funded programmes are now in the marginal majority, with 51% of programmes receiving finance from this source. Accelerators were found to be less reliant on public funding than BIs. 100% of incubators in the North East were public or university funded and over 35% in Wales, Scotland and the West Midlands (Bone, Allen, & Haley, 2017). This confirms an overreliance on public funding but also a regional imbalance. An indication from this research is that any funding models proposed would only be effective and applicable to certain regions of the UK. The focus of this report has review two tangible academic theories: resource-based view (RBV) and stakeholder theory. This is because they are critical elements to incubators’ and UBIs’ revenue generation and possible fail points if not considered correctly. Renault (2017) outlines the variety of stakeholders and their interests succinctly by stating: “Different stakeholders want different things. All nonprofits and governments have stakeholders who support the program financially or as volunteers. These can be partners, contractors or community members who have stakes in the program’s mission. Common stakeholders are state, regional or local government entities, such as economic development organizations.” For innovation centres, and UBIs in particular, stakeholder theory is a useful concept to identify who has an interest in the business unit and the differences between private and publicly funded BIs. 17

University Business Incubators: Viable funding and income strategies External Stakeholder Internal Stakeholders VC Firms Multinational Multinational VC Firms Corporations Corporations (with investment) (with investment) Business Angels Government / Business Incubator Managers Legislators Incubator Chamber of Suppliers Shareholders Incubatees Commerce Source: Adapted from Field (2014) Figure 4 - Private Business Incubator Internal and External Stakeholders As seen in fig. 4 there is commonly a bigger focus on stakeholders that can provide funding to startups. This is largely because they are able to help the success of the startup and by association the BI. Other differences to fig. 5 are that multinational corporations and Venture Capital (VC) firms can become internal stakeholder, where as in UBIs they largely remain as external stakeholders. External Stakeholder Internal Stakeholders Multinational Chamber of Incubator Managers Students Corporations Commerce Business Angels Government / University University Legislators Business Incubator VC Firms Funding Providers Shareholders Incubatees (National, EU) Local Council Suppliers Lecturers Alumni Source: Adapted from Field (2014) Figure 5 - University Business Incubator Internal and External Stakeholders 18

University Business Incubators: Viable funding and income strategies In addition to the stakeholders listed in the figures there are also other minor stakeholders who help shape the UBI, such as innovation centre stakeholders, Small Business Development Centers and other research centres and University Technology Transfer Offices (UTTOs). Although stakeholders could be seen as the key to successfully generating revenue for a UBI, an additional relevant theory from entrepreneurship literature which could also support revenue generation is the RBV. Aldrich’s (1999) theory emphasises the importance of financial, social and human resources. By ensuring value is given to these important resources, it is theorised that the ability to detect and act upon discovered opportunities is greater. Simply by ensuring that UBI managers have this viewpoint will open them to opportunities that may not be apparent to others that could be a significant advantage in the competitive innovation support market. RBV has an advantage to incubators because it can be applied as a managerial framework. This can distribute resources strategically to gain to maintain a competitive advantage. RBV also relates to successful growing and developing viable revenue streams. Gassmann & Becker (2006) state that by identifying the differences between incubators it is possible to establish their specific assets, capabilities and competencies. This is relevant to the research of UBIs and non-UBI incubators in relation to funding and income because of their differences and capabilities. 2.2.2 Research Reports by Public & Economic Development Agencies Research reports from bodies such as the International Business Innovation Association (InBIA), publish practical reports designed to help inform Entrepreneurship Centers on innovation projects including incubators. They are a very useful reference point when considering the literature review and the primary data collection. This is because the contextual elements of entrepreneurship such as stakeholders, mission, objective and common indicators are clearly considered. They are also set against academic frameworks such as stakeholder theory and program theory. Although InBIA reports, in particular, have a bias towards to the US market enough parallels can be drawn to inform the primary data collection of the report from InBIA (Renault, 2017). The report does show the importance of the stakeholders to innovation projects. Public funds and economic development agencies such as the HEIF and Research England Development (RED) are purported to be a financial cornerstone in newly founded UBIs, and those that are more established in the region. 19

University Business Incubators: Viable funding and income strategies An example of one of the funds offered is RED fund and is a call for funding applications from UBIs in University Enterprise Zones (UEZ) and follows on from £15 million of capital funding invested in 2015. This fund established four pilot UEZs in Nottingham, Liverpool, Bradford and Bristol. The application process, whilst very time consuming and in-depth, offers between £500k and £1.5 million to UBIs. Application criteria includes evidencing a strong relationship or partnership with key local businesses and Local Enterprise Partnerships (LEP). The university must also align the academic strengths of the university with the sector strengths, develop and share best practice on business incubation and have insights on likely impacts (Research England, 2019). Whilst funding opportunities such as these could assist UBIs in establishing the incubator, due to their finance limit and strict timeframes they can be problematic. A strategic sustainability plan involving other streams of revenue or income should be implemented to enable the incubator to be self-sufficient. Other useful research conducted by the BEIS provides a clear comparison of business incubator types and their common features. This has assisted in categorizing the similarities and differences in incubators and has influenced the design of the survey when describing incubator types. This table can be seen in Appendix 2. 2.2.3 Analysis of Profit Sharing Agreement Research There are number or papers dedicated to profit sharing agreements and capturing the equity of startups as a way to finance an incubator, often found in the private incubator sector. From reviewing the body of work, it becomes clear that rather than being a simple and quick way to raise revenue, it is complex and can be problematic. Research conducted by Durkin & Kircher (2010) analyses the specifics of establishing a University Incubator in the USA. They noted that equity may not yield money and could cripple startups. Instead, revenue income streams, such as royalty agreements are reviewed more favorably. It was noted that most universities reported that contracts used also contained clauses preventing the incubator from taking more than was needed for the UBI to break even. An additional interesting point was the notion of requiring startups to connect with the university. This was facilitated by using a matched funding initiative for startups if they hired students, which also demonstrated value to the university due to jobs and internships. Lerner, Leamon & Hardymon (2012) catalogues a cautionary tale when looking at US universities investing in startup venture by highlighting an early experience of Boston University. The University 20

University Business Incubators: Viable funding and income strategies initially invested $142 million in 1987 onto a startup company and assisted with subsequent funding rounds. However, after product portfolio problems, the company’s Initial Public Offering (IPO) was valued at $90 million in 1992. This resulted in a loss to Boston University of over $90 million. Whilst this is now a dated and extreme example, it does highlight that taking startup equity should be reserved for incubators at a certain stage of maturity and that all risks should be considered before any commitments are made by the UBI or university. It is also necessary for a diversified approach to revenue and income with an appropriate mix of revenue streams for UBIs is critical now more than ever. 2.2.4 How Guides and Toolkits for Incubator Managers Can Impact UBIs Christiansen, an MBA student from Cambridge University, published his dissertation in 2009 on accelerators, and although not specifically about UBIs, it does have some interesting findings that can be considered by UBIs. One of the key takeaways from this work was that it can often be the innovation of the incubator itself, which creates a successful framework for startups to thrive. This provides additional evidence that hybrid or specialised models of incubator management may serve UBIs and their startups well. (Christiansen, 2019) Further research also found a number of toolkits or short online modules from companies, from reviewing the various sources of information. One such example is from infoDev, a research, capacity building and advisory services programme linked to the World Bank. This stood out as one of the most comprehensive guide aimed at tutoring incubation managers on each step of setting up an incubator. infoDev also includes a study that outlines average revenues generated by incubator grantees. Although this information can help to inform UK UBIs, this network of over 80 incubators is contained in 5 countries and the UK is not included in this (Webb, 2008). This confirms that a localised UK data capture of incubators’ income and funding streams would be beneficial and can be used as a comparator to this study and a useful benchmark. Findings from case studies within the module outline key success factors as ‘quality leadership’ and outlined “funding needs are both related to the establishment of the incubator and the start of the incubator’s activities.” (infoDev, n.d.) 21

University Business Incubators: Viable funding and income strategies Average Revenue by Category, Budgeted vs Actual (n=49) InfoDev Grant $93.77 Development banks/Development Agencies $61.01 $16.82 NGOs/Civil Society Organisations $53.36 Foundations $0.35 $0.36 $9.45 $69.02 Government $5.46 $229.60 Private Investment $49.90 $233.60 Debt Financing (e.g. bank loan) $46.02 $219.70 Fees paid by Client or Other Earned Revenue $347.99 Value of In-Kind or Bartered Goods $377.43 Transfer Payment (e.g. from a parent company) $9.92 Other $13.66 $9.56 $5.84 $122.06 $97.99 $- $50.00 $100.00 $150.00 $200.00 $250.00 $300.00 $350.00 $400.00 (in 000's) Figure 6 - Average Incubator Revenue by category [US] Source: infoDev, n.d. SUPER, the Start-Up Promotion for Entrepreneurial Resilience, is an EU funded university who have worked on toolkits for UBIs. They support previous theories that UBIs in particular, have to find ways to compensate for these revenue shortfalls. This is backed up by the World Bank (2010), which states “in developing economies most of incubators are not in a position to cover all operating costs with earned revenues or return on client investment in the short-term”. The World Bank then goes on to enforce this by stating that UBIs will have a better chance of success when they have a broad mix of public and private sector sponsors. Although the literature reviewed agrees that this is an ideal scenario for UBI success, within the UK it remains unconfirmed that this is widely adopted principle or is easily adopted and possible for UBI to achieve. A challenge identified by Vanderstraeten et al. (2012) showed that there was a need to collect data on the achievements of incubators, be it successes or failures. They adapted a tool, first popularised by Kaplan and Norton, called Strategy Map for Economic Development Incubators (SMEDI) shown in fig. 7 and Balanced Scorecard for Economic Development Incubators (BSEDI) - Appendix 8. 22

University Business Incubators: Viable funding and income strategies Commercial Financial Sustainability Side Financial Rent Paid Services Cost Advantage Subsidies and perspective sponsorship LONG-TERM Structurally stable Efficiency Entrepreneurship and STRATEGIC tenant portfolio Value creation business development GOALS Stimulate a Offer proactive Create a continuous and in-depth platform for EXTERNAL ALIGNMENT learning services the environment adapted to the establishment Customer Efficiently offer perspective company s a wide variety and development development of of services phase start-ups and small businesses INTERNAL Optimise the Proactive Resource Organise ALIGNMENT selection tenant follow- sharing process entrepreneursh process Internal Business Processes up process with other -ip related perspective Optimise the incubators or activities graduation External networking external Offer relocation process system with partners support to graduating Process to refer experts Set up a companies possible process to Develop a assure an tenants within knowledge efficient and the incubator s management lean network system organisation Innovation and Learning Continuously Set up a Continuously Continuously perspective improve the process to seek for new seek for new selection and assure high and innovative graduation ways to ways establish quality improve and develop process efficiency start-ups and Continuous service small businesses innovation Source: Vanderstraeten et al. (2012) Figure 7 - SMEDI-Strategy Map for not-for-profit Economic Development Incubators 23

University Business Incubators: Viable funding and income strategies This was in a bid to standardize the data collected from incubators so that more could be learned from them globally. Starting with financial stability, the strategy map is a very intuitive visual representation of a variety of factors relating to the successes of UBIs. Whilst it is not all encompassing, it does identify many of the key factors and could be used as a template for further development after primary data has been analysed. The research by Miller and Bound (2011) in their Nesta report, looks at success factors of the different funding and income methods. The report identified the below groups (fig. 8) as common financing methods used. These groups can be reviewed in terms of external stakeholders and has been incorporated in to the primary data collection, with a view to expanding the types of funding or income methods and highlighting those most beneficial to UBIs. Funding Strategies Alumni University Angel Multinational funding Investors corporations Private Public Funding Venture Companies (EU, Government, Sponsorship capital firms Council) Income Strategies Research Intellectual Sale of Equity Membership Property (IP) in successful (£250 per month Startups avg) Rent for Advertising residents space Source: Miller and Bound (2011) Figure 8 - Common UBI funding and income strategies. 24

University Business Incubators: Viable funding and income strategies 2.3.1 Case Study - Oxford Startup Incubator Funding Models Oxford University’s Oxford Startup Incubator is one of only a handful of UBIs that publishes an annual report with financial data. The incubator boasts over 125 startups and an income of £17.63 million. The annual report lists revenue streams as licensing and venture income, consulting and services income, equity realisations (Oxford Startup Incubator, 2018). Whilst this is impressive, it is an outlier within convention of UBIs, as Oxford University has a very strong global brand and tops league tables. This means some income generation streams may not be possible for all universities to replicate, if they are not of a similar pedigree to Oxford University. A practical document written by Oxford Startup Incubator titled ‘How to Set Up a Successful University Startup Incubator’ outlines the core success factors involved in UBIs. Concepts such as the “ideal” incubator strategy are tackled by an in-depth review of both UK and US university business incubators. They affirmed previous highlighted arguments by Christiansen and concluded there was no ‘one-size- fits-all’ approach to this and that creativity was key (Oxford Startup Incubator, n.d.). Oxford Startup Incubator also publishes useful information identifying the modes [or stages] of company development and the income taken from participants for each. These are: Mode 1: pre-incorporation Mode 2: company is incorporated Mode 3: company is incorporated and requires investment This model is unusual for a UBI in that the incubator accepts equity from its startups. (Naylor, 2016) 28

University Business Incubators: Viable funding and income strategies Selection into the Incubator: Mode 1 - Driven by entrepreneur founders - Venture is not incorporated - Built on Ideas, not University IP - Enjoy, where appropriate, support - Building value from Oxford s academic community - Equity charge - Able to start without investment Venture Develops - Connected to Oxford Mode 2 Venture exits the incubator - Venture is incorporated - Revenue generating (or showing other commercial progress)] - Cash charge for incubator support (optional, can opt out at any time) Lots of hard work Venture Develops and some luck . Mode 3 - Venture is incorporated - Venture attracts external investment - Cash charge for incubator support (optional, can opt out at any time) Source: Naylor (2016) Figure 9 - Oxford Startup Incubator startup incubation modes 2.4.1 Incubator Success Factors Using a business model to review the different types of effective funding and income allows the incorporation of stages of development for the incubator. Verma (2004) composed a comprehensive model for successful incubators, which encompasses a variety of factors that should be considered to ensure the incubator is viable and sustainable. It is well considered and has a number of clear elements needed. Whilst not as modern as other sources in the literature review it is still relevant to UBIs. This is a useful reference point to consider later in the project, alongside the data collected to create a new UBI success model and road map. 29

University Business Incubators: Viable funding and income strategies Shared Services H1+ 1. Logistical or physical services H2+ 2. Shared business services 3. Financial consulting 4. Management assistance 5. Professional business services Facilities and Location 1. Flexibility in size of lease 2. Flexibility in length of lease 3. City centric location Funding and Support 1. Financing arrangement 2. Organisational arrangement Incubator Governance H3+ Business Incubator 1. An experienced incubator manager H5+ Success 2. A key board of directors 3. A noted advisory council H4+ 4. Concise program milestones with clear polies and programs Mentoring and Networking 1. Entrepreneurial network 2. Entrepreneurial education 3. Tie to a university 4. Community support 5. Affiliation with key institutions, both private and public Entry Criteria Exit Criteria Age of facility 1. Ability to create jobs 1. Time limit on tenancy Size of facility 2. Present a written business plan 2. Space requirement 3. Tie to a university 4. Have a unique opportunity 5. Advanced technology related firm 6. Space requirement 7. Complementary to existing firms 8. New start-up firm 9. Age of firm 10. Affiliated with university 11. Be able to pay operating expenses Source: Vernon (2004) Figure 10 - A Priori Model of Incubator Success Factors 30

University Business Incubators: Viable funding and income strategies This dovetails well with Ganzevoort’s more modern concept of a phased plan of incubator sustainability influenced by June Lavelle, founder of the National Business Incubation Association (NBIA) (2014). a) Foundation Phase  Planning  Feasibility study  Raising finance  Marketing  Relationship building  Finding the right management team and board b) Development Phase  Marketing  Relationship building  Building up the services and resources, including specialist services/facilities  Loss of initial set up funding c) Mature Incubation Phase  High quality  Flexible, ‘full service’ incubation environment  Networks Both frameworks show that it is not enough to simply have some funding or income in place when setting up a UBI. There is a need for a full feasibility study to identify a unique selling point (USP) and a phased implementation strategy. However, there is a key requirement for viable revenue generation as without this any further progress with the UBI would not be possible. A point to note is that, similar to startups, not all UBIs will have or use the same model. This is largely because they may be in different stages of maturity and also because they may cater to different sectors or industries. For this model, it is useful to consider UBIs as business units with a function to perform. By using a hybrid of both models to capture elements of data in from the questionnaire survey from incubator managers it is then possible to focus the data in a way that can allow it to be practically applied to an incubator at any stage. The result of this is a clear impact for UBI allowing clear guidance on how to improved revenue at any stage of development. 31

University Business Incubators: Viable funding and income strategies ------ Special for UBIs ------ Special for Private Incubators - Universities - Technical - University - Student - University - Government - Assistance reputation Experience - Incubator - EU - Monitoring - Collaborations - Learning Managers - Mentoring - Spin-outs IP - Students - LEP & SMEs - Education - Academic - Academics - Financial - Regional expertise - Incubates - Venture - Assistance economic - Facility - Alumni capital development - Funding - Local Council - Angel contacts investors -Profit - Chamber of - Equity Commerce - Multinational - Funding corporations - Office - Government / - Investors Legislators - Networking with social - VC Firms capital (with - Seed capital investment) investment Public / Private Rental Fees / Membership / Shares Source: Adapted from Torun (2016) Figure 11 - Business Model Canvas of University Business Incubators and private incubators 32

University Business Incubators: Viable funding and income strategies 2.5.1 Summary of Literature Review An exhaustive literature review was conducted. This consisted of over 50 sources of articles, newspaper articles, conference proceedings, online courses, peer-reviewed journals and books. A large amount of analysis is summarised in the below table and focused of key statics primarily from government sources. Percentage Number Author Year 1980 Incubators (Worldwide) 1980 12 53 CFE 2013 Hassan Incubators (Worldwide) 2013 58233% 7,000 – 15,000 2017 [est.] 2017 [increase since 1980] 2017 2017 Incubators (UK) 53% 205 BEIS 2017 Accelerators (UK) 41% 163 BEIS 2017 Pre-accelerators (UK) 3% 11 BEIS Virtual accelerators (UK) 2% 2017 Virtual incubators (UK) 1% 7 BEIS Number of Universities who 78% 4 BEIS 2017 130 BEIS offer incubators 2017 Accelerators now receiving 51% BEIS 2017 corporate funding 2017 Incubator funding from 100% BEIS public/HEIs in the North East 2017 Incubator funding from 35% BEIS 2017 public/HEI in Wales, Scotland 6900 BEIS 2017 and the West £33m Midlands HE-BCI 2017 4 (from Startups Supported by BEIS) 2017 Incubators (UK) BEIS 2017 HEIs Offering Financial 31% CFE Support to SMEs 2017 CFE 2017 Startup Financial Support 55% from Accelerators (2017) 88% CFE 2017 12% Average Acceptance for New 18% CFE Startups 17% 65% CFE UBIs Surveyed UK - Accepting 9% Graduates CFE CFE UBIs Surveyed UK - Targeting Graduates CFE UBIs Surveyed UK - Undergraduates UBIs Surveyed UK - Postgraduates UBIs Surveyed UK - Alumni UBIs Surveyed UK - External Entrepreneurs Average Incubator Staff 33

University Business Incubators: Viable funding and income strategies Annual Fees - SETsquared £2,100 CFE 2017 (Revenue generating) Number Author Year Percentage Annual Fees - SETsquared (Pre £1,400 CFE 2017 revenue generating) £250 CFE 2017 Membership (Average cost per month) 90% 1 CFE 2017 £642,400 Number majority funded by 71% CFE 2017 EU 11% CFE 2017 17% UBIs receiving HEIF Funding CFE 2017 ERDF (HEI Average Additional 32% CFE 2017 38% CFE 2017 Funding for having UBI) Tavoletti 2013 BIs Surveyed UK - Home Tavoletti 2013 BIs Surveyed UK - EU BIs Surveyed UK - Non- EU/International Failure of BI Startups Failure of Non-Bi Startups 34

University Business Incubators: Viable funding and income strategies Due to the literature review conducted there is now a confirmation of common income and funding streams that are viable to incubators. This is shown in the below table (fig.12). Data has been gathered from secondary research and directly incorporated to the primary data collection as funding and income methods. These are: Loans, Grant & Donations Source Fees for Service Source Corporate sponsorship Santander (2019), Rental Income Duggins (2018), Duggins (2018) Membership Bone, Allen, & Public Funds & Economic Bone, Allen, & Haley Training Haley (2017) Development Agencies (2017), Miller and Bounds (2011), CFE Duggins (2018), Alumni donors (2017) Bone, Allen, & Long-Term Financial Haley (2017) Commitments from Local Duggins (2018), CFE Duggins (2018), Sources (2017) Bone, Allen, & Haley (2017) Private Grants CFE (2017) Consulting Services Duggins (2018), In-Kind Financing (or Bone, Allen, & Local Private Investment (infoDev, n.d.) Bartered Goods and Haley (2017) Services) Government Subsidies (infoDev, n.d.) (infoDev, n.d.) (infoDev, n.d.), Duggins Profit Sharing Multilateral Programs (2018) Agreements Source Debt Financing Brokerage Fees Lair (2012) Non-Governmental Lair (2012), Organization’s (NGOs) (infoDev, n.d.) Equity Agreements Naylor (2016) (infoDev, n.d.) Royalty Agreements - University Support Percentage of Annual Lair (2012) Rent Free Facilities, Turnover Seconded Staff Long-Term Agreements to (infoDev, n.d.) Cover Operating Deficits Source Lavelle (2014) Lavelle (2014) Figure 12 - Common Business Incubator income and funding streams 35

University Business Incubators: Viable funding and income strategies and limitations These revenue streams were able to be included in the incubator survey to confirm which the most common sources are for different stages of incubators. Common themes in the literature was that each unique set of circumstances for incubators (for example region, sector, university pedigree, network, stage of development) dictated which revenue stream might have a positive impact on the sustainability of the incubator. Revenue streams that may work for a Local Enterprise Partnership (LEP) focused incubator in the north of England may not be viable for a global tech focused incubator in London. By conducting a survey of this hypothesis, a conclusion over a specific revenue stream for each variable of incubator may be possible. 36

University Business Incubators: Viable funding and income strategies and limitations Chapter 3 - Research Methodology 37

University Business Incubators: Viable funding and income strategies and limitations 3.1.1 Proposed Research Methodology The literature review has formed the basis for the primary research and influenced the direction of the primary data collection. Within the problem formulation report and the literature, it was necessary to confirm for the report a positivism approach should be taken. This is a process of confirming the knowledge and then seeking to propose a question and hypothesis. The question and hypothesis has then been confirmed using the primary data collection. The confirmed hypothesis is used to measure the explanations and construct a model of funding and/or income for UBIs. The second layer of the model includes a deductive stance, which leads to the third layer; a survey with a quantitative and qualitative aspect of data collection. 1. Philosophical Stances Epistemology 1 Positivism Deductive 2 2. Approaches Realism Experiment 3 3. Strategies Survey 4 Mono Method 5 Interpretivism Case Cross-sectional 6 Study Mixed Data Action Method Ontology Research collection & Analysis Objectivism Grounded Longitudinal Theory Multi-method 4. Choices Ethnography 5. Time Horizons Constructivism Archive Research Inductive Axiology Pragmatism 6. Techniques and Procedures Source: Saunders et al. (2007) Figure 13 - The Research Onion 38

University Business Incubators: Viable funding and income strategies and limitations 3.1.2 Data Collection In the project formulation initial review of relevant academic theories, the data was taken from trusted and frequently [cited journals, government papers, BI rankings, networks and associations]. The literature included both empirical and qualitative research from these sources. Whilst there are some interesting insights included in the literature, it does not contain research with a clear focus and relevant to UBIs funding and income in the last 10 years. Secondary Data There was a need to complete a full literature review on the subject area following the problem formulation. This is to confirm that there is a gap in the knowledge of current research. Models or theories surrounding the topic were also in scope and were collated and reviewed. Sources used for this research were: - Global and national UBI rankings bodies. - Government studies such as HESA HE reports. - Review of Higher Education funding opportunities, such as the HEIF. - Self-reported database of companies and website reviews. Primary research is also needed as secondary data has been shown to have different reasons and objectives for the research. There is also a need to have current and regional data for any findings that can implemented into an action plan for UK based UBIs. Primary Data Data was collected in the form of a survey to establish patterns of funding and income from different types of UBIs. The Survey engaged specifically with UBI managers to allow an opportunity for them to feedback on this information. Contact details and permission was also requested so that managers can be contacted in the future in order to answer other specific questions on results of the surveys and gain additional insights. This may also have been helpful to clarify anomalies, new innovations or follow up on key points where the initial dataset was inconclusive. 39

University Business Incubators: Viable funding and income strategies and limitations 3.1.3 Measuring Success Factors and Research Limitations In order to validate the success of the research project, realistic data capture objectives were set and, for the data to be considered accurate, a total of responses versus the total business incubator population agreed. A clear representation of UBI manager responses are needed to validate the hypothesis. This report acknowledges and accepts that there will be certain limitations and boundaries for the research. This is due to a regional differences, which may take into account local funding opportunities that may not be applicable nationally or internationally. In addition, the research and subsequent funding model is time sensitive because of possible social, political, customer habit and technological changes, which could render the findings void or obsolete if a radical change in any of the above were to occur. 3.1.4 Primary Research The primary data collected was in the form of a questionnaire survey sent to both BIs and UBIs. Before this primary data collection, it was important to identify and qualify BIs and UBIs to ensure the data collected was valid, and to assist in informing the survey line of questioning. This has taken the form of desk research, or secondary research. This research has collected relevant data, which is publically available, and collated income and funding information from UK universities and private BIs. The contact, have been gathered from public sources (see 3.1.6) and government databases. The sample was then narrowed to include incubator managers who have valid email address. Once the primary research data was gathered, it was analysed in a number of different ways. A review of surveyed incubators’ locations has been conducted to ensure that a fair representation of the incubator sector has been collected. Revenue stream survey data was analysed in detail and was converted into yes/no answers to see if either a positive or negative correlation between incubator type and revenue stream could be substantiated. This data is key to answering the research question and providing an informed conclusion and recommendation to the research. 40

University Business Incubators: Viable funding and income strategies and limitations Steps in the methodology (fig. 14) have been completed in the below sequence with the influence of previous research conducted in the same area by Gozali et al. in 2015: Identify dimensions of the elements of the incubation process (through literature study) Preliminary Study (gather opinions literature, articles, websites and from incubator managers) Comparison between different UBIs and BI nationally Create research instrument (Survey questionnaire with follow up interview options) Measure sample size Conduct quantitiative and qualitative analyses (based on data collection from incubator managers) New incubation funding and income model for UBIs created adapted for different stages of maturity Source: Adapted from Gozali et al, (2015) Figure 14 - Methodology of Study 41

University Business Incubators: Viable funding and income strategies and limitations 3.1.5 Questionnaire Pre Testing The questionnaire was created in Qualtrics, a software program for collecting and analysing data for market research. As part of the functionality, it is possible to generate test responses before publishing and distributing the questionnaire. A test of 500 responses were generated to ensure there were no issues with the survey before it was sent to respondents. Finished questionnaire testing showed: Test Iterations: 500; Saved Responses: 500; Average Questions per Test: 21.352. The test confirmed all mandatory questions should be answered which will help to provide more detailed and useful data. 3.1.6 Questionnaire – Data and Information Collection Thirty six percent of all collected contacts are named individuals, working as incubator managers or in a related field such as an innovation center, with publically published email addresses. The desk research and business incubators and accelerators: UK directory (Bone, Allen & Haley, 2017) databases have been combined to send the survey to 560 individual contacts. It is important to note that many of the public contacts found via the UK directory database are not named contacts and, as the database is 2 years old, some contacts may be void. Of the initial dataset of contacts, 78 were not contactable or not interested, so the dataset was reduced to 482. This is a strong set of potential respondents to analyse revenue trends across the sector. 42

University Business Incubators: Viable funding and income strategies and limitations Generic Contacts Email Out Of Sample Responses Response Contacts 360 Address Not Office/Not size Rate Named Interested Contacts Know 309 14 4.53% 47 4 Total Contacts 200 25 2 173 25 14.4% 560 72 6 482 39 8.09 % Figure 15 - Incubator survey dataset responses The survey was sent out on the 21st May 2019 and after 2 weeks, a subsequent reminder email was sent on 4th June 2019. By 18th June 2019 the survey achieved 39 individual responses from incubator managers from a wide range of incubator types and locations, offering a valid sample of the sector. Appendix 6 shows the full business incubator survey questions and Appendix 7 the email sent to the sample. A complete table of respondents can be found in Appendix 11. 43

University Business Incubators: Viable funding and income strategies and limitations Chapter 4 - Findings 44

University Business Incubators: Viable funding and income strategies and limitations 4.1.1 Data Analysis Once the responses to the 16 questions of the survey had been collected and processed, the data was reviewed and analysed. All respondents confirmed the name of the incubator or innovation programme (note: one incubator was in the process or rebranding and a possible name change). Results showed a variety of locations from 39 responders. The most popular location with 20.5% [8 respondents] was London. Figure 16 - Location of Incubators (Numbers do not correspond to respondents numbers) This matched the map of incubator and accelerator density (per 1000 new businesses) in the UK shown in fig. 1 of the report and confirms a comprehensive range of regional incubators are included in the data. It also mirrors the areas of density. This confirms that the survey sample was true reflection of UK business incubators. As this is the case, it has been determined that the sample is non-bias and a true representation of the sector. 45

University Business Incubators: Viable funding and income strategies and limitations When asked to confirm incubator type, UBIs were the most common responders to the questionnaire with 58.97% of the total [23 responses]. For-profit Incubator and Other also received 23.08% of responses [9 responses]. Private Incubator, Government Incubator, Non- Profit Incubator, Technology Park and Mixed Portfolio were also represented with some responses. Incubation Type Percentage Responses University Business Incubator 58.97% 23 Private Incubator 5.13% 2 Government Incubator 5.13% 2 Non-Profit Incubator 5.13% 2 For-Profit Incubator 10.26% 4 Technology Park 0.00% 0 Mixed Portfolio 2.56% 1 Other 12.82% 5 Total Responses 39 Figure 17 - Type of incubator or innovation model survey responses The oldest incubator in the data was established in 1983, and the newest established incubator was in 2019. The mean age of an incubator was in the dataset was 9. When responding to the duration allowed by startups, 61% [23 responses] reported that there was not an upper limit set to the amount of time that the startup could stay active within the incubator. 24 months was recorded by 8 respondents, 12 months was recorded by 5 respondents and 18 months was recorded by 3 respondents. Figure 18 - Maximum duration a startup remain in the incubator 46

University Business Incubators: Viable funding and income strategies and limitations The size of incubators ranged from only 6 startups to 150. The average maximum capacity of startups that incubators could host at any one time was a mean of 52.29 companies. When asked if the incubator has an accelerator program linked 53.85% [21 out of 39 responses] confirmed that this was offered. This ability to host a large number of startups for longer durations than expected, and to provide an accelerator opportunity, shows that incubators are keen to host as many startups as possible to increase revenue streams and maximise on the possibility of nurturing gazelle startups. Field Minimum Maximum Mean Std Variance Count Deviation Max number of startups or 6.00 150.00 52.29 47.15 2223.00 38 company tenants Figure 19 - Capacity of incubators Respondents were asked to use sliders to insert the percentage values [up to a maximum of 100%] over revenue options, giving an approximate amount if needed. Survey results of proportion of the overall annual expenditure is covered by the revenue streams have been summarised in the graph below. A full list of the responses can be seen in Appendix 9. The most common mean answer was Rental Income at 33%, with University Funding second with 26.06% and Public funds and economic development agencies at 13.22%. When reviewing only UBIs those that used University funding was 57.14% of respondents. Figure 20 - Mean proportion of the overall annual expenditure is covered by the revenue streams (%) 47

University Business Incubators: Viable funding and income strategies and limitations The key data on revenue streams was also able to provide analysis by correlating incubator type by the revenues streams used. As outlined in the methodology, the revenue stream survey data was converted into yes/no answers to provide a correlation between incubator type and revenue stream. The table below (fig.21) shows a strong positive (green; 0.3321) correlation between UBIs and university funding and a negative (red; -0.2618) correlation for for-profit incubators. This was an expected result and enforces the concept that this is an important funding stream for UBIs. Importantly UBI has a negative or strong negative correlation for membership fees, training fees, consulting services fees and equity agreements. However, this was not the case for non-UBIs, specifically private incubators, who provided a strong positive correlation. This was highlighted by respondents in the survey and an area of interest. This is a key confirmation of the research question as it validates hypothesis 3, showing non-UBI are able to exploit income from equity and consulting more readily. UBI Private Incubator For-Profit Incubator Mixed Portfolio Other Non-Profit Incubator Government Incubator Public funds & Economic development 0.0706 - - - 0.0839 agencies 0.0929 0.1327 0.0226 - University funding 0.3321 Donations - - - 0.0894 sponsorship 0.1633 0.1376 0.2618 0.0848 - Private Grants Non-Governmental Organisations -0.184 - - - 0.0971 Alumni donors 0.0405 0.0853 0.0405 Rental Income 0.1701 0.2289 Membership Fees - 0.0773 - - Training Fees 0.157 0.0612 0.0612 Consulting Services Fees -0.152 0.0148 Equity Agreements 0.1471 - - - - Royalty Agreements - 0.0722 0.0722 Brokerage Fees 0.0879 0.0852 0.0799 - - - - - 0.0418 0.0418 0.1072 0.0459 0.2774 -0.051 -0.051 - - 0.0468 0.032 0.2091 - 0.3245 0.1468 0.5814 - - - 0.1164 0.1864 0.0525 - 0.4018 0.0525 - - 0.0739 0.1415 0.8858 0.0591 0.3568 0.2928 - 0.2981 0.3918 - 0.0576 0.6956 - 0.1111 0.0464 Figure 21 - Correlation between incubator type and revenue streams 48

University Business Incubators: Viable funding and income strategies and limitations This is an important learning point which can be further investigated and adopted by UBIs if some initial barriers can be overcome. Revenue by type of incubator and age has also been shown in Appendix 11 and 12. This shows the data by each respondent in more detail. Appendix 13 shows a full tabular dataset of corelation between incubator type and revenue streams. 4.1.2 Qualitative Data Analysis When asked about other methods of funding or income incubators are pursuing, 8 respondents replied ‘No’. Other responses offer some insight into areas of interest for development and growth of viable revenue streams, such as: “Some small grants, particularly as funding for pilots. We also charge for some programmes for growth stage ventures though our support for early stage ventures is free or very very low cost. We are exploring other funding models to increase and diversify our income streams.” (R6). Two respondents (R20; R21) hired out facilities to generate income but interestingly one respondent reported the possible loss of an income stream thought to be very important by for-profit incubators due to conflicts with regulations of public funding. Stating that “We may remove subscription fees as this causes issues with European Regional Development Fund (ERDF) funding.” (R26). Others were already actively modelling the incubator on a fully self- sustaining model with a two year plan (R23). When seeking to find out more about one of the most popular and discussed funding methods, Public or Government Funds, the number of incubators that have applied for this funding there are even split between ‘Yes’ [14 responses] and ‘No’ [14 responses]. Figure 22 - Number of incubators how have applied for public or government funds 49

University Business Incubators: Viable funding and income strategies and limitations Funding challenges relating to public or government funds received 8 qualitative responses which outlined the challenges when applying for these funds. Respondents reported the process as being difficult and bureaucratic. Challenges included processing and approval of application. Once granted, incubators suffered delays in receiving the funds (R26; R36). One interesting income stream highlighted was incubators accepting equity or royalty agreements from startups. 14.28% [4 respondents out of the 28 in total] confirmed that they did accept equity or royalty agreements from startups. When asked, 7 respondents replied with details of the royalty agreements with startups. Two respondents outlined the details for the equity required form startups as: “10% plus 1% per month after 8 months, or payment (encourages startups to create revenue early).” (R10) “Typically to-date these have been 5% of the company at seed round for shares at par value.” (R17) Other respondents reported difficulty in agreeing such income as university policies did not allow for such investments. Respondents [8] were very positive when talking about considerations for incubator funding and income, which they have not yet tried. These included equity, consultancy fees, service fee corporate sponsorship events space hire and growing a 'virtual office' offer. 23 respondents replied to outline the key challenges they perceive that their incubator currently faces. The biggest financial challenges facing incubators are funding and income alongside cash flow, funding cuts, space, support, sponsorship, choosing the right startups and competition. Crucially, the respondents below substantiated previous reports claiming there is no clear literature or research on a business model for incubation when looking specifically at viable income and funding revenue streams: “There is no business model for incubation - our goal is a mixed model of donations-based funding (from government, the University or private donation) and self-generated revenue (i.e. membership costs or consulting fees to external Sustainability” (R6). 50

University Business Incubators: Viable funding and income strategies and limitations “Having a sustainable business model which doesn't rely on government funding.” R36 The survey then sought to discover the effect of the limited funding and income on the incubator’s ability to be effective and innovative. 23 respondents replied to comment on how revenue streams can limit the incubator operations. Comments included limiting expertise, staff limits/reductions and growth restrictions with one respondent automating all processes to combat this. Only 4 respondents confirmed that they are not affected by this. The majority confirmation by respondents supports the theory that a resource-based view is considered important to incubator success: ”It encourages innovation by the incubator.” (R9). ”It does not - it only limits the scale of what we can do. We believe our work is very effective and quite innovative!” (R29) Following the main survey questions, respondents were then asked if they would be happy to be contacted with a short and informal follow up interview with the researcher to discuss these issues. Twenty individual responders agreed to this and have submitted contact details for subsequent contact. This can be particularly useful to qualify any conclusions taken from the report when looking at the next steps of the research. When reviewing respondents [R3, R4, R6, R11, R17 & R27] that reported income revenue streams of training, consulting and royalty agreements, the dataset showed that they had been established longer; an average of six years [2013]. This was younger than the mean incubator age of nine years. UBI were only represented in two of the six respondents, the others being for-profit incubators or consultant for incubators. This confirms that for-profit incubators either have a need to have diverse income streams or are more entrepreneurial in their ways of capturing income. This also supported by the positive correlation of for-profit incubators and revenue streams in the primary research. Additionally, none of these respondents set limits on the duration a start-up could stay in the incubator, meaning they did not further limit their income. To analyse one of the key elements to the data collected, an initial index of the revenue streams reported by respondents has been conducted to compare incubator type and age, which are the elements of the initial research question. 51