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Title: BITS incubator program - pilot evaluation-[World Wide Web]

Notes: The BITS (Building on Information Technology Strengths) Incubator Program is providing funding over four years to June 2004 for 10 business incubators focussed on Information and Communications Technology (ICT). The role of the BITS Incubators is to help start-up businesses to commercialise research and development and reach a stage in the development of their business where they can attract investment to support further growth. To this end, the BITS Incubators are assisting in the development of business plans and marketing strategies and providing start-up and seed funding. Some BITS Incubators also provide training courses for new entrepreneurs and others provide office space at below-market rates. In return for services and investment provided, the BITS Incubators take equity in the firms that they assist. As a consequence, BITS Incubators need sufficient capital to carry them through until they can get returns on their investments. The pilot evaluation has examined three BITS Incubators - ITem3 located in Sydney, Australian Distributed Incubator (ADI) in Melbourne and Playford Capital in Adelaide. The first two of these are for-profit incubators, while Playford is a not-for-profit. ADI offers a business training program. ITem3 provides office space to some of its incubatees. The incubatees and graduates interviewed were appreciative of the investment and assistance that they had received from their Incubator. Nearly all the incubatees and graduates interviewed believe that incubation had played a critical role in the survival and growth of their businesses. The incubatees of one of the Incubators have achieved average annual sales growth of 21 per cent. One third of the incubatees and graduates interviewed are already exporting goods and services and another third plan to do so in the near future. The sixteen companies interviewed already provide jobs for 110 staff members. Most are showing good employment growth in the short period since they commenced incubation. In addition, these companies contract out work to other firms. We estimate that this has created a further 55 jobs. Up to 30 December 2002, only four of the 16 firms interviewed have been successful in attracting venture capital. This can be explained by the relatively short time that the Program has been operating and the major decline in new investment by business angels and venture capitalists during this period. The three BITS Incubators in the pilot evaluation had received 0.2m in BITS funding up to 30 December 2002 and had used this to leverage a further 3.1m in cash plus a significant amount of in-kind investment from other sources. This leverage is likely to increase further. The sustainability of the BITS Incubators will rest in considerable part on successful sale of equity in incubatees and graduates (investment exits). Since the dramatic deterioration of the market in early 2000, the scope for such sales has declined and the time frames for achieving them have lengthened. The gap between the level of funding that the BITS Incubators can provide and minimum venture capital investments has also created problems. As a consequence, some BITS incubatees and graduates are giving more attention to `organic growth` - that is, growing their businesses through increased sales. This will in general provide a slower growth path, and planned exits by the BITS Incubators are likely to result in lower returns. International comparisons between BITS Incubators and incubators in other countries are complicated by the fact that the business model adopted by BITS Incubators is a relatively recent phenomenon. However, a recent European study provides some useful comparisons. By international standards, the BITS Incubators in this pilot evaluation have performed well, especially when the prevailing market climate is taken into account.

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