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Measuring the Performance of Toronto’s Business Incubators

The Challenge

Canada’s middleclass is in grave danger. The growth of service related employment is outpacing the growth of manufacturing employment (Bernard, 2009). Manufacturing jobs, typically known for paying well and having fewer required skills, are being replaced primarily by low paying service sector jobs (MacLachlan & Sawada, 1997), often referred to as McJobs.  With fewer well-paid opportunities for unskilled workers, Canada risks further income inequality.

Among the contributing factors is the transition towards what is widely recognized as the “knowledge-based economy”. An expression used to describe greater economic dependence on knowledge, information, and a highly skilled workforce (OECD & Eurostat, 2005). The Canadian government and the governments of many developed countries are facing the challenge of not only job creation, but generating jobs with compensation levels similar to the jobs that have been offshored, and ensuring that workers have opportunities to learn the necessary skills for this new economy.

A Solution

In 1979 David Birch demonstrated the significantly positive impact small businesses have on job creation in the U.S. (Neumark, Wall, & Zhang, 2011). Later research has confirmed that small businesses are more effective at job creation than larger ones (Neumark et al., 2011).  Thus entrepreneurs play a critical role for economic growth (new companies, innovative ideas, job creation). The Kauffman Foundation developed a video that does an excellent job illustrating the three things entrepreneurs do for our economy. Unfortunately, for a variety of reasons it is expected that most new businesses will fail within their first few years of operation.  This is where an economic development tool known as a business incubator becomes relevant.

So, What is a Business Incubator?

Unfortunately a standard definition does not yet exist from either academia or industry (Hamdani, 2006; Ratinho, Harms, & Groen, 2013). Having analyzed several definitions, in my opinion a business incubator provides business support services to companies in an effort to help them develop into successful and sustainable ventures.  Ideally these support services will decrease the likelihood that new business will fail. In reality there are so many different types of business incubators it is difficult to find definition capable of encompassing them all. One example of this is a business accelerator, a model that has increased in popularity in recent years.  Known for focusing on later stage startup businesses in need of raising startup capital to accelerate growth.

The Research Project

The Master of Business Administration program at Ryerson University’s Ted Rogers School of management requires students to complete a capstone research project. The purpose is to provide students with a substantial project they can use to demonstrate their capabilities, and enhance opportunities for employment.  The focus of my project was obviously business incubators. More specifically,  How can business incubators in Toronto measure their performance based on the outputs they generate, and how can they use these outputs to indicate the success of an incubator program?”.  Answering this question required two steps. The first compiled a list of Toronto business incubators and their characteristics to analyze possible trends.  The second analyzed the published performance metrics of three different incubators extracting the most relevant metrics.

Summary of Key Findings

Not surprisingly, ICT was the most common industry sector focus (40%) and business acceleration the most popular incubation model (60%).  However, it was interesting to find that 60% of current Toronto business incubators were founded in the last three years. Since 2010 the number of business incubators in Toronto has skyrocketed with more emerging every few months. This raises some questions about how many incubators the city can support.

The performance metrics a business incubator chooses to track are dependent on the goals and objectives of its stakeholders. Generally speaking, an incubator’s success is judged based on the success of the incubated companies. However, this is not always the case.  A University incubator for example may judge its successes based on the learning outcomes of its students, not necessarily the success of the venture itself. After analyzing the three incubators and assessing the academic literature, eight key measurement areas emerged. They include (1) Incubator Attractiveness, (2) Company Status, (3) Economic, (4) Financial, (5) External Engagement, (6) Innovation Commercialization, (7) Internal Support, and (8) Company Satisfaction. Some areas will have a greater priority depending on the goals and objectives of the incubator’s stakeholders. A description of each can be found in my research poster.

Concluding Remarks

The rapid growth of accelerators may have implications for Toronto. It could result in (1) a diluted application pool forcing accelerators to lower their acceptance criteria, and (2) the chances of producing successful company are reduced, which could result in the eventual failure of the accelerator. Toronto is a mega city and is not likely to reach maximum capacity in the immediate future, but the question does merit further investigation.

The popularity of the accelerator model raises some concerns for entrepreneurs.  The model is typically known for a focusing on later stage startups, fulfilling different business development needs than the traditional incubation model. Therefore care should be taken to ensure that the needs of entrepreneurs in early stage ventures are still met, such as helping them through the ideation stage.

Business incubation comes in so many different shapes and sizes that it makes comparing them a challenge. Comparing an accelerator program focused on the quick-to-market ICT sector to an incubator program focused on the slower-to-market energy or healthcare sector requires an understanding that the two have different time-to-market horizons. Differences like this need to be taken into consideration for performance metrics to be useful in comparisons.

When selecting performance metrics it is essential to consider both the stakeholders involved, and the program’s goals and objectives.  A for-profit accelerator is likely to prioritize return on investment, whereas a non-profit incubator focused on economic development will prioritize job creation and economic impact. Whatever the incubator’s priority, one of the best indicators of performance should always be the status of the companies inside.

Geoffrey Smith is a graduate of the Ryerson MBA MTI  (Management of Technology and Innovation), class of 2013. 

Prior to graduating he worked as the manager of a business incubator within the energy sector known as the i-CUE. Housed within Ryerson University’s Centre for Urban Energy. His incubation research continues today with plans for an academic journal article in the near future. You can connect with Geoffrey through LinkedIn.

References

Bernard, A. (2009). Trends in manufacturing employment.Statistics Canada.

Bosma, N., & Stam, E. (2012). Local policies for high-employment growth enterprises.

Caley, E., & Kula, H. (2013). Seeding success: Canada’s startup accelerators. MaRS Data Catalyst.

Hamdani, D. (2006). Conceptualizing and measuring business incubation Statistics Canada, Science, Innovation and Electronic Information Division.

MacLachlan, I., & Sawada, R. (1997). Measures of income inequality and social polarization in canadian metropolitan areas. The Canadian Geographer/Le Géographe Canadien, 41(4), 377-397.

Miller, P., & Bound, K. (2011). The startup factories. The Rise of Accelerator Programmes to Cerca Con Google,

Neumark, D., Wall, B., & Zhang, J. (2011). Do small businesses create more jobs? new evidence for the united states from the national establishment time series. Review of Economics & Statistics, 93(1), 16-29.

Organization for Economic Co-operation and Development, & Eurostat. (2005).  Oslo manual: Guidelines for collecting and interpreting innovation data (3rd ed.). Paris: OECD.

Ratinho, T., Harms, R., & Groen, A. (2013). Business incubators:(How) do they help their tenants? New Technology-Based Firms in the New Millenium, 10, 161-182.