A Real Options-Driven Theory of Business Incubation.pdf - A...

A Real Options-Driven Theory of
Business Incubation
Sean M. Hackett
1
David M. Dilts
2
ABSTRACT. This article employs real options-theoretic
reasoning to develop a theory of business incubation. This
theory seeks to predict and explain how business incubators and
the process of business incubation increase the likelihood that
new ventures will survive the early stages of development. It
conceptualizes the incubator as an entrepreneurial firm that
sources and macro-manages the innovation process within
emerging organizations, infusing these organizations with
resources at various developmental stage-gates while
containing the cost of their potential failure. The incubator is
the unit of analysis while incubation outcomes—measured in
terms of incubatee growth and financial performance at the
time of incubator exit—provide indicators of success. Our
model of the incubation process and specification of the range
of possible incubation outcomes offer implications for
managerial practice and policy-making vis-a `-vis incubator
management and good entrepreneurial failure.
JEL Classification: M13, O2, O31, O32, O38
1. Introduction
The failure of new ventures in their early stages of
development is a common occurrence (Watson et
al. , 1998; Zacharakis et al. , 1999). Evolutionary
theorists contend that the forces of selection that
eliminate uncompetitive firms are a necessary
phenomena that contribute to the maintenance
of healthy populations of organizations (Aldrich,
1999). The continuing growth, since 1980, in the
number of business incubators operating in North
America, however, suggests that many govern-
ments, local communities and private investors
believe that it is desirable to try to help ‘‘weak-but-
promising’’ firms to avoid failure by incubating
them until they have developed self-sustaining
business structures.
1
We define business incubator as a shared office-
space facility that seeks to provide its incubatees
(i.e. ‘‘portfolio-’’ or ‘‘client-’’ or ‘‘tenant-compa-
nies’’) with a strategic, value-adding intervention
system (i.e. business incubation) of monitoring and
business assistance. This system controls and links
resources with the objective of facilitating the
successful new venture development of the incu-
batees while simultaneously containing the cost of
their potential failure (Hackett and Dilts, 2004).
Although much of the literature centers on
incubator facilities, it is important to also recog-
nize the key role that the entire incubator network
plays in incubating new ventures. This network
typically includes the incubator manager and staff,
incubator advisory board, fellow incubatee com-
panies and employees, local universities and
university community members, industry contacts,
and professional services providers such as law-
yers, accountants, consultants, marketing special-
ists, venture capitalists, angel investors, and
volunteers.