I conducted this interview in the summer of 2006, as part of my thesis. It was previously published on my personal blog, but it [the whole blog] has since disappeared into MySQL “does not compute” hell. Here goes.

The Interview

VvW: What is the ESA Incubator all about?

BN: It is actually called ESI, the European Space Incubator. It is part of a network, called ESINET, and consists of 35 incubators, spread across most of ESA member-states and some Eastern European countries (eg Ukraine, Bulgaria).

The ESI business-model, in a large part conceived through Niels Eldering’s thesis [a fellow Rotterdam School of Management graduate] and BN’s Business Plan, could be described as consisting of three dimensions. These are the start-ups, the stakeholders, and the supporting services.

1st Dimension: The start-up

The start-up is seen as a place where fertile (space) technology meets an individual or a team of people. They in turn go through an incubation process (at the ESI) and finally come out as a company to do business.

2nd Dimension: Stakeholders

This doesn’t apply to all incubators in the network, but in the Netherlands, the two main stakeholders are the ESA and the Dutch ministry of economic affairs (EZ). Both naturally want to promote employment, economic growth, and entrepreneurship in the Netherlands. Furthermore, ESA has the objective to improve the image of space in the eyes of the general public, of investors, and of businesses.

The latter is of particular importance, as space is still perceived as expensive, dominated by large players, and generally irrelevant to the lives of Earth’s citizens. What the incubator aims to do is to show to it’s stakeholders and to the general public, that space-technologies and space-systems can be benefited from in everyday life.

3rd Dimension: Support

This happens both through 3rd parties, something called Key Innovation Business Services (KIBS) and in-house. Through this, the aim is to prepare the start-up for doing business in the real world, and to receive further investment. The latter of course depends on the ambitions of the founder. Some are pretty limited in their targets. They only want to set up in their country, or perhaps the Benelux. Others want to go cross-continental or even global.

VvW: Exploring the “Support”-angle further, how does the ESI assist it’s starters in finding private financing?

BN: First, it is necessary to assess the type of start-up. Depending on the type of product/service and the market, an advice is given as to what the growth-strategy should be. This doesn’t always need to be angel or venture financing. In many cases, the advice is to consider a strategic partnership. In this case, there’s a larger company already active in the market/industry that the start-up is targeting, and has an interest in taking a stake in the company, with the option to acquire it at a later stage. This requires there to be a kind of fit between the partners. So far, the ESI has had two start-ups taking that option.

Then there is also the option for a joint venture, an equal partnership between two starters in ESINET, or a starter and an existing company. One ESI start-up has done that.

For private financing, like a business angel or venture capitalist, start-ups usually still have a way to go. Usually, they first attract financing from the 3 F’s: Friends, Fools, and Family. This can happen before or during the incubation-phase. More experienced investors usually require the company and idea to be more mature. With a proof of concept, you can attract a business angel. When you are ready to sell a commercial product, you can approach venture capitalists. There are some exceptions to this of course, but this is the way it usually works.

The aim is to ultimately have a core group of business angels that are allied with the incubator. To a degree, this is already the case with venture capitalists, of which a group is being made aware of the inner proceedings of the incubator-companies. The idea is that the start-up does not need to educate these people on space or their idea, the incubator is already doing that for them. And the incubator will basically give residing start-ups feedback on their stage of development and, depending on that, the availability of pots of business angel- or venture capital.

VvW: What are the advantages of a start-up approaching investors through the incubator, rather than going at it alone?

BN: To start, a venture capitalist can receive thousands of business-plans during a year. The aim is that ESI-plans land on top of that pile. This is because the ESI, and the ESA, provides a quality label to its’ residing startups, which manifests itself in four ways.

For one, there’s the quality of the work done at the ESA, their procedures and methodologies. The incubator tries to pass those on to the start-ups.

Second, there are the favourable statistics for technostarters residing in incubators. A survey from 2004 [which I still have to read] reports that ca. 87 % of start-ups in the incubation process are still alive after three years. For a standalone technostarter, this figure is much lower, between 20-30 %.

Third, there are the networking-aspects of the ESI. Business incubation does not work well as a standalone function, it has to be part of a network. In the case of the ESA, it is present in 17 countries, as well as active in non-member states, such as the US and Russia. This can be useful as a gateway for the start-up to expand or move to another country. It’s also good for cross-fertilisation—between different ESI-start-ups and -graduates, suppliers and customers, investors, and other companies. Through the ESINET-network, it is also easier to conduct international market-studies.

Last, but not least, there is the access to the ESA technology and resources (experts, labs, test centre, software tools, facilities, etc.).

VvW: Are there examples of venture capitalists investing in any of the ESI startups?

BN: Sure, there’s ThruVision, which received a substantial amount in two rounds of investment [note: I know the exact sum, but am not sure if I can make this public knowledge: I think it's public since it is mentioned on their web site; perhaps you should have a look (http://www.thruvision.com)]. This company has now graduated, i.e. no longer resides within the ESI.

VvW: From your experience with venture capitalists, how do they feel about the companies that are still in the incubation-/seed-stage?

BN: As was mentioned, they prefer more mature ideas to work with. The key-phrase here is “work with.” Venture capital really means two things, investment + support. Along with the investment, the venture capitalist wants to coach, put people in the right place—on the board, as a CEO. For the latter, most of the start-ups in the ESI-program are founded by someone with an engineering-background. A founder is typically someone that understands the technology and how to build a service or product on top of it.

A venture capitalist, on the other hand, looks at the team, the product/service, the market. He or she will look for people that can run the course, manage the growth. The preference then usually falls to someone with a track-record, who has experience doing that. In the case of ThruVision, the founder is now the technical director, and the CEO is someone with an impressive business-cv.

Another statistic from the European Venture Capital Association (EVCA): In something like 95 % of start-ups invested in by venture capitalists, the founder has been replaced as CEO.

VvW: Do venture capitalists also support the incubator itself in some ways?

BN: Not hands-on, no. They do provide access to a network of companies, investors, and people to work with, which wasn’t there before. There will be more, once the ESINET-fund is started.

VvW: What is the ESInet fund?

BN: First a little background. There is obviously a gap between early stage and growth. This was known from the start of the incubator. This is especially so when you talk about space. Investors look at the space-sector with skeptical eyes. They see it as a market for large players like Alcatel and Astrium. They see it as a niche-market. And when you think about satcom, there’s a lot of international competition from the terrestrial systems. The satcom has already lead to a few big-name and big-investment projects to go bankrupt, example of this are Iridium and GlobalStar.

Furthermore there’s a misunderstanding about what the utilization of space-technologies and -systems really means. Utilization means you are using something that already exits. You only need to adapt it to a non-space sector. This means testing, modification, and validation, something that doesn’t need to take years, rather months. Space-systems refer to satellite-technology, for which you don’t need to build the satellite, you need to be able to receive a signal and use it. For space-technologies, we are talking about transferring and adapting applications and materials used and developed for space to non-space sectors.

First investors need to get this picture. But even if a few of them understand, that doesn’t mean they have the needed expertise. Usually venture capitalists are experienced in certain areas like biotech, meditech, telecoms, etc. Space-related technology does not have that many corresponding VC-experts. So the thought was, if investors will be so hard to find, why not start our own fund?

And this is where the ESINET-fund comes from. Its fund managers don’t need to be convinced on potential business development from space systems and technologies (much) and there is funding for early stage ideas. ESA was convinced to sponsor the fund with 5 million Euros and recently selected a management company from 12 applicants to manage the fund and raise more. The target-size of the fund is 40-50 million Euros in total, to be completed by mid-2006. The ESI is responsible for the deal-flow. This will mostly come from ESI-startups, though if those do not fulfill the needed requirements, investment van occur into other ESA-“ventures.”

The fund-management company will act much like a venture capitalist as far as investing is concerned. It will be present during selection of start-ups and have a supporting role in the development of invested-in companies. And it will take shares in the companies it invests in.

VvW: What do you think the effect will be on other investors, to have this fund running?

BN: It’s always a nicer picture to have a fund tied to an incubator. Having a fund will hopefully attract other investors. Many venture capitalists like to invest in syndicated deals, meaning a group of investors spreading the risks between them. In investments, there’s also usually a leader and followers. It is hoped that the fund can fulfill a leading role in the process.

For business angels and the three F’s, there will always be space. For one, they invest much smaller sums, and second they provide the added value that they bring as people. Like many informal investors, business angels are often interested in a hands-on approach, to be involved in their start-ups, which will benefit entrepreneurs greatly.

VvW: What is the investment climate like in the Netherlands, compared to other European countries?

BN: The Netherlands is not so great for finding private capital, except for subsidies. Both the UK and Germany rank highly for private capital. France and Italy have good governmental support.

VvW: OK, back to your start-ups, what criteria do they need to fulfill to become part of the incubator?

BN: During the course of the incubation-phase, they are asked to prepare financial projections, including parameters like Net Present Value (NPV), Return on Investment (ROI), and other ratios. Templates are provided, if needed, and access to third parties that can help. Over the course of the incubation-phase, the incubator-staff tries to follow the evolution of the NPV. In the future, it is hoped that NPV will be calculated at the application-stage, before the start-up becomes part of the incubator. If that’s possible, of course.

Other than that, the number 1 criteria is the market. If they are not able to define it, they will not be accepted. Similarly, a market-study must be prepared.

VvW: How does the ESI feel about teams starting?

BN: Very supportive. On the whole there are both types, entrepreneurs starting solo and finding partners along the way. Or entrepreneurs that start in a team. Generally the incubator encourages partnerships between technologists and business-people. Investors invest in a team after all. The incubator also has good ties with MBA-programs to find people for start-ups.

VvW: Is the staff able to deal with all the demands of the incubator?

BN: The staff has broad knowledge about issues like legal and intellectual property matters. There are specialists that advise on strategy, market, technology, etc. But it is impossible to know everything in depth. For that the start-up can approach third-party specialists, of which they can get the contacts via the incubator.

VvW: Do you compete with other incubators?

BN: Not at all. In fact, collaboration is encouraged and projects are sent to others as well. Geography is also very important to entrepreneurs, they have a life, etc., so it’s not that feasible to draw them away from a more logical location-choice.

Note: If you have any questions, don’t hesitate to post a comment or mail me. If you are interested in applying to the incubation programme at the ESA also, check out this page and also don’t hesitate to ask me about my experiences of working with two tech-startups in the programme.

Vincent

Like

Unlike

The opinions expressed within this blog are those of the authors alone. ©2011 Tech IT Easy. All Rights Reserved.

Related posts:

1. From medical to space-tech – How technology affects incubation-strategies
2. At last, Vince is getting serious: an interview with Bruno Naulais, the director of ESA incubator ESI
3. The Poor Man’s Business Model—How Out-of-the-Box thinking can generate tremendous value for customers
4. My theory of the firm
5. My call: software companies can't take off well in financial centers

It’s funny! Recently, 37signals’ David Heinemeier Hansson gave an interesting talk on finding a business-model for your start-up. He said something along the lines of “It’s no rocket-surgery!” Well, what I’m about to speak of is in fact rocket surgery.

As some of you may know, I wrote a thesis a while back on high-tech start-ups, their strategies of finding funding, and how they interrelated with incubators, a key-component in the innovation-system for high-tech start-ups. As it turned out, not all the start-ups I interviewed were high-tech, which showed some interesting differences in ambition, funding-need, and funding-strategy, but also not all the incubators, I looked at, were focussed on high-tech.

For some, it was a conscious choice; ESI, the ESA-incubator, faces the unfamiliarity in the market with space-technology, and their focus is to promote the utilisation of space-technologies, which is very-very different from the development of space-technologies. For instance, you can use materials or mechanisms used in space-tech in creating products like bikes, which obviously carries far less risk and development-times.

With high-technology, it’s all about making life a little easier, because the market is simply not able or willing to carry the technology- and market-risks that companies (to be) carry in this segment. Of course, this is a problem with entrepreneurship in general. For instance, back in the day, the first *official* VC-fund was American Research & Development (ARD), which collected funds, not from a limited set of institutions and for a limited time-frame, as is common practice today, but instead just opened itself up to common shareholders. Since high risk and high reward are correlated, it attracted a lot of attention, and eventually lawsuits followed from people that felt cheated (most often by some investment-adviser collecting his commission) when the risks proved true. And then VC-funds became more conservative, and less and less commercial money went towards highly risky ventures, like e.g. Space.

Today, most VCs prefer there to be no technology-risk, and many would also prefer for there to be no market-risk either (which translates into a company already having customers, which is generally good advice, but doesn’t work for all companies).

Back to incubation. I consider ESI a medium-tech incubator, and it does take measures, both on the technology-side and the investment-side, to make life a little easier for both start-ups and investors. As opposed to the Erasmus Medical Centre (EMC), which I consider a very high-tech institution, and acts accordingly. Why is it high-tech? Medical patents last around 15 years. Yet development can cost billions, the risk of failure is high, approval from regulatory institutions can take a long time, sometimes bringing the whole process to about 10 years of development-time. So not only is the chance of success low and the cost high, but you don’t have much time to collect the reward!

How the EMC works is like any high-tech institution. Scientists develop a process or product, it is part owned by them and part owned by EMC. Actually, it is very much owned by the EMC, though I won’t reveal the exact percentage. But considering the possible reward is huge, even a small percentage will set that inventor up for life. The EMC basically has complete freedom to do with the technology as it pleases. Often, it will license the patent, sometimes it will sell it, and sometimes it will decide to start and incubate a company.

In this case, still, it holds complete control. The inventor can decide to take part in that process, but essentially the EMC chooses who runs it. It also set up a seed-fund with banks and VCs, of which it also collects part of the rewards. Nice, no!?

Compare that to the ESI. The ESI usually licenses its technology, fairly freely from what I can gather. Their objectives are different, they want to educate the market. They don’t own equity in firms, though obviously there is a licensing agreement in place somewhere. When I interviewed them, they were planning to do something to make seed-funding for start-ups easier, but at the time of my working there, it was basically all left up to me and my partners.

From my research, I understand that the way incubators behave, very much depend on the objectives of their stakeholders. The objectives of the EMC and the ESA are very different. The EMC creates technologies that are meant to be commercial, and is also a cornerstone of Dutch innovation. The ESA creates technologies that are used in public programmes, licenses it to partners, but is also fighting an uphill battle as far the public’s and business-world’s perception of space-tech is concerned; it is simply too abstract for many to care, which raises questions about whether programs like the € XX-million space-toilet should really exist. Of course, when you bring space-tech *to earth*, that changes the picture somewhat.

Incidentally, there are very few successful independent incubators, simply because society considers it unethical for an incubator to exist—either because they don’t understand the kind of service that incubators can provide (nor is there a real quality-guarantee), or because they consider their residents as sub-par to regular, independent start-ups—both topics for another day.

There’s definitely much more to say about this, including the role, I think, incubators should play in (funding) high-tech entrepreneurship, but I’ll leave that for another day.

P.S. I hope this sheds some light on why I still don’t see software (and webware) as high-tech (1 & 2) and why VCs like that world so much.

P.S.2 This also sheds some light (in my opinion) on the media-industry, which others and myself frequently write about on Tech IT Easy. Music is just another technology, with its production- and high marketing-costs, as well as high risks of failure, and the way record-companies deal with artists reminds me a lot of the EMC-model. Food for thought…

This piece was written by Vincent van Wylick, co-author extraterrestrial on Tech IT Easy. The image is courtesy of rocket-surgeons.com.

Like

Unlike

The opinions expressed within this blog are those of the authors alone. ©2011 Tech IT Easy. All Rights Reserved.

Related posts:

1. Why you should invest your time & money into space technolology
2. At last, Vince is getting serious: an interview with Bruno Naulais, the director of ESA incubator ESI
3. Some thoughts on the investment-climate for innovative start-ups
4. The mystery of "ambition" and how it correlates with success
5. Networking: Weak ties, strong ties, and their implications