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PRE-INCUBATION AND INCUBATION IN LATVIA: ASSESSMENT OF
SOME CRITICAL CONDITIONS’ TO ESTABLISH EFFICIENT
INCUBATION CYCLE
Viesturs Zeps*, Valdis Avotiņš (corresponding author)**, Agnese Grineviča*,
Natālija Lukaša***, Vita Brakovska*, Krišjānis Zariņš
* - Investment and Development Agency of Latvia, Pērses street 2, Riga, LV – 1442, Latvia
** - Engineering Research Centre of Ventspils University College, Inženieru Street 101a, Ventspils,
LV – 3600, Latvia; E-mail: valdis.avotins@venta.lv
*** - Ventspils High Technology Park, Inženieru Street 101, Ventspils, LV – 3600, Latvia
Abstract
Within last two decades business incubators (BI) have become an important policy
measure in Central and Eastern Europe and Latvia in particular. Usually business
incubation is a process of nurturing and developing a new business idea and helping
businesses to grow and survive. The incubator itself is an environment, either virtual
or real, within which incubation takes place. Government has supported BI in Latvia
in several following rounds and new upcoming state aid program outlines importance
of this tool for regional development.
Incubation culture in Latvia is often misperceived to serve only a social function. As a
result for publicly funded incubators process orientation dominate over expected
results. Another weakness is lack of political attitude towards pre-incubation as the
crucial aspect of incubation cycle. Pre-incubator can be defined as a risk-reduced
environment where entrepreneurial ideas are pre-filtered for market viability thus
helping to avoid greater costs and failures of setting up new company in the further
phases of business development.
Besides equity gap lack of pre-seed finance is critical to promote business ideas into
new innovative firms. In addition to inspiration and awareness authors of new
business ideas need professional couching to turn in new firm and follow-up services
(consultations, mentoring, infrastructure) until it is ready to pass the entrance criteria
of BI. Without support authors often fail before or after setting firm.
Aim of this report is to introduce the concept of pre-incubation and explore the
existing routes to support new innovative business ideas within developing incubation
concepts. The paper approaches incubation policy, analyses available in market
incubation models and services according growth cycle, examines efficiency of
incubation system and identifies critical factors for efficient incubation system in
Latvia. Special attitude is paid to best practices of pre-incubation concepts and their
adaptation and importance of university research centre and incubator linkages.
Keywords: business incubators, pre-incubation, technology incubator, new
commercial idea, business services, entrepreneurship education
1
Introduction
Majority of EU countries repeatedly are facing failures in their innovation systems:
too few new business ideas from universities, research and industry fail to mature into
sustainable high growth start-ups and latterly into companies. There exist a paradox:
societal attitudes towards entrepreneurship are positive, support to idea holders and
needed know how formally is available and actors may obtain driving environment
and required services – but still only a few come to take a risk and real action to start
a firm.
The essence of answer to the question what is environment, facilities and services of
early business development to be developed and offered is entrepreneurship centres,
business incubators and technology centres. However, in reality it is only a part of the
answer. The early stage business development to be successful and sustainable
critically requires more specific format and content of support and earlier as
incubation to would-be entrepreneur.
Creation of new innovative firms has been set as one of key priorities in Latvia’s
innovation policy framework. Following the National Development Plan 2007 –
20131 and National Reference Framework Document 2007 – 20132 were an
evolutionary strategy to triple financial resources to support innovative
entrepreneurship. However, too little was achieved until 2009 and increasing
economic downturn has even more worsened the planned support to new innovative
companies in Latvia.3
The poor incubation performance so far requires assessment of existing early stage
support initiatives and outcomes of local and national business incubation
programmes, identifying its weaknesses and bottlenecks and introduce systematic
approach in new innovative enterprise creation, education and research and support
services. Understanding of aforementioned will help to boost new high growth
innovative companies and guide them to become sustainable.
Aim of this report is to introduce the concept of pre-incubation and explore the
existing routes to support new innovative business ideas within developing balanced
incubation system in Latvia.
1. The emergence of Pre-incubator
Since the beginning in the mid of 20th century, the concept of business incubators
(BIs) has continuously evolved and has been adapted in many countries, reflecting
very specific economic, institutional, regional and technological conditions.
The comparatively low performance of business incubators and low outflow of new
innovative technological firms required more carefully studying early stage of
business cycle. As a result, the pre-incubation activities – raising the entrepreneurial
attitudes and behaviour, changing entrepreneurial mindset in educational process,
reshaping enterprise education, and further on, creating up specialised support
facilities, has obtained increasing role. In most EU member states a major failing of
1 See more detailed information in www.nap.lv/en
2 See more detailed information in www.fm.gov.lv/en
3 Zeps V., Avotins V. Concepts of technology and business incubators, their Relevance to Latvian
economic development. Ventspils University College, Ventspils University College, Ventspils, 2008,
pp.221-230.
2
the innovation system is that inventions generated at universities and public research
institutes are too rarely commercialised by the creation of new, innovative firms.
The core of the concept to meet this bottleneck is a university-associated facility, the
pre-incubator, which is a new device for managing the spin-off process. The
innovative feature of the pre-incubator is a specific management, legal and service
structure that allows academic researchers to test the feasibility of their business ideas
before they take the risk of setting up a company. The legal entity of the pre-incubator
forms an umbrella under which potential entrepreneurs, guided and controlled by the
management staff, can test their products on the market, thus gaining valuable
business experience. This experience, in addition to continuous training and coaching,
is expected to increase the sustainability of the future company.4
Continuously these obstacles fostered the establishment of the first European business
pre-incubator at the University of Bielefeld in 1997.5 Since that, pre-incubation
activities have spread rapidly, in the 21st century entrepreneurial centres and pre-
incubators have increased by number in the higher education institutions (HEI).6
For example, in Finland most significant development of pre-incubators (Pre-BI)
counts for period after 2002, totally 18 incubators were located into HEI premises and
in many cases pre-incubators were established as a part of BI, and principally
integrated due to their special role as catalysers of spin-offs from HEIs.7 Pre-
incubation is only a part of a wider incubation cycle.
1.1. Characteristics of Pre-Incubator
Concept of the pre-incubation has not yet been deeply researched; therefore it might
be too early to give well-balanced definition. Pre-incubators are designed to address
asymmetry of information, approaches and way of action between academics and
entrepreneurs, especially: “missing personal skills as well as unawareness of the value
of their intellectual property”.8
The definition given by Dickson9 was developed by Rajaniemi10 as “a risk-reduced
environment where entrepreneurial ideas are pre-filtered for market viability thus
helping to avoid greater costs and failures of setting up a new company in the further
phases of business development”. The pre-incubator usually provides both internal
and external learning venues where students and idea authors develop a new venture
plan within a protective environment before committing to the risk of running a
business.11
4 Wirsing B.; Traude A.; Steffens J.; Sheen M.; Löffler B.; De Lapparent D.; Broadfoot C.; Alonso-
Gonzalez J.-L. Becoming an entrepreneur for a trial period: the pre-incubation experience. The
International Journal of Entrepreneurship and Innovation, Volume 3, Number 4, 1 November 2002 , pp.
265
5 Rajaniemi L., Niinikoski E.R., Kokko E. Pre-incubation in Higher Education. Examples of pre-
incubation and some critical conditions to be taken into account in order to establish pre-incubation
activities. EKIE project, Interreg IIIC, Oulu University, 2005, 203 p.
6 Ibid, p. 4
7 Ibid. p.17
8 University start-up of international entrepreneurs, 2005. Retrieved 06.06.2009 from www.usine.uni-
bonn.de
9 Dickson A. Pre-incubation and the New Zealand business incubation industry, 2004, p.15. Quoted
from Rajaniemi L. et al. p.11
10 Rajaniemi L. et al. p.4
11 Dilts, J.,C., Hauser, W.,J., Lewison, D., LeHere, M. E-Venture: Setting up shop online: creating a
student e-business pre-incubator experience. In Journal for Advancement of Marketing Education –
3
In 21st century pre-incubation concept has slightly diversified understanding of
pre-incubation as a learning and business plan development promoting
environment, where participants can improve their skills and their own business
idea and getting needed support to do this.
Pre-BI takes care on business idea risk. Test of markets for intended products and
services during the pre-incubation time allow for nascent entrepreneurs to test the
feasibility of their actual business idea before establishing new firm. This is also
helping for Pre-BI to select more successful business ideas for further development.12
The average pre-incubation time is 3-6 month; however it could be prolonged to one
year depending on assistance required. It is important to fix beginning and ending of
support period. Pre-incubation usually start with a contract and ends when period is
over or earlier if new firm is established.
Availability of physical space is an advantage for Pre-BI (but not a pre-condition) to
collect a critical mass of nascent entrepreneurs and combine individual work with
network and joint training activities. As pre-incubators do not need to limit clients
according to available space per tenant, they are able to keep with low fixed
expenditures. There are examples of completely virtual services and this is rather
question of learning process quality and need of face-to-face advice.
Selection procedures usually are more formal than strict: critical is idea’s
commercialisation potential. Stuff of Pre-BI usually has defined selection criteria
evaluating feasibility of idea and the readiness of Pre-BI to pre-incubate the idea.
Selection panel is formed from stakeholders and field experts.13 Unlike the BIs, Pre-
BI do not have strong exit rules in place, participants are likely to be transferred to the
BI if such opportunity exist.14
Pre-BIs offer services during the period of pre-company development. This is
individual work by local stuff, usually free-of-charge e.g. Venture Cup, Seed Forum
and Connect nationwide practices, or for nominal cost, including evaluation of
business idea, assistance to develop business plan, assistance in setting right
contacts, testing markets, office facilities, training and providing access to valuable
networks.15 Specialised and more expensive coaching, financial counselling and
mentoring services are externalised. Networking services are popular to help to
nascent entrepreneurs with market knowledge and barriers and strategic contacts.16
Pre-BI need appropriate intellectual (personnel with adequate skills to administrate
and service ideas), physical (office and infrastructure) and financial (regular external
financial donations to cover administration and external service costs) resources.
Financial sources for Pre-BIs vary and therefore whole business model differs from
BI, where grants are given only to cover special services to tenant companies. Pre-BIs
mainly are embedded in larger organisations as they are not self-sustainable and need
Volume 11, Winter 2007, pp.3
12 Rajaniemi L. et al. pp.12.-13.
13 Broadfoot C., Sheen M. A guide to pre-incubator best practice. Manual describing the best practice
scheme which is transferable to any region. University of Strathclyde. Available in www.usine.uni-
bonn.de
14 Dilts, J.,C., Hauser, W.,J., Lewison, D., LeHere, M. E-Venture: Setting up shop online: creating a
student e-business pre-incubator experience. In Journal for Advancement of Marketing Education –
Volume 11, Winter 2007, pp.8
15 University start-up of international entrepreneurs, 2005. Retrieved 06.06.2009 from www.usine.uni-
bonn.de
16 Rajaniemi L. et al. p.83.
4
rich host organisation, which may usually be HEIs, thus they are usually oriented
towards commercialisation of the available research. Majority of Pre-BIs are multi-
area pre-incubators as they offer basic business services attracting specialised
expertise from outside.
Recently new Pre-BIs are usually created in technology centres and incubators as a
pre-stage for whole business incubation cycle. In such model BI shares with Pre-BI
facilities, expertise, personnel, finance, networks and services. Finally this results in
more productive way of servicing idea holders.17 The model of Pre-BI in rural areas is
less clear and less efficient due to lack of critical mass of innovative ideas. Pre-BI
requires good linkages with entrepreneurship education, usually in HEIs or life-long
learning centres and to BIs.
1.2. Pre – incubator as a part of entrepreneurship education
Comprehensive school as a rule decreases entrepreneurship spirit of individual; as a
result perceptions and attitudes are negative to become an entrepreneur. The role of
business incubator is to re-train, to reposition attitudes and change mindset and
behaviour. Entrepreneurship education has growing importance in educating new
entrepreneurs, increasing their entrepreneurial spirit, skills and values. As a result,
new study programs on entrepreneurship are designed and introduced, content of all
courses are extended by adding entrepreneurial additives or case studies.
Entrepreneurship education can be better understood through its aims and objectives:
To promote external entrepreneurship, setting up and managing companies;
Strengthening the intrapreneurship, entrepreneurial way of action or
Supporting the enterprising behaviour, skills and perceptions of the individuals.
These aims are more explained in figure 1. The process of entrepreneurship education
might be split into three stages. First, usually in the format of basic studies
entrepreneurship study courses help to improve students’ understanding about
commercial activity and increase their overall level of entrepreneurial skills.18
However, such offer is insufficient, as the life requires practical entrepreneurial
capabilities.
General and theoretical information about entrepreneurship offered to students in the
first stage do not allow students to act as an entrepreneur. Therefore in the second
stage students pass through training processes, with the help of entrepreneurship:
enterprise games, practice enterprises, simulation enterprises. Not all students
necessarily later will become entrepreneurs, but definitely can be offered to all
selected students motivated in developing their own entrepreneurial skills.
In the third stage students are trained to obtain practical knowledge to start firm. Here
offer is more specified towards encouraged starters, nascent entrepreneurs or even
start-up founders who aim to practice entrepreneurship in controlled circumstances.
They have strong motivation to establish their own firm during study process and are
interested to continue development in incubator. This stage usually is performed in
operating pre-incubators.
17 Rajaniemi L. et al. p.88
18 Ibid. p.10
5
Figure 1. Typical ways to develop entrepreneurship in education19
These three stages of entrepreneurial education creates the needed for nascent
entrepreneur set of skills, spirit and knowledge. The practical component might not be
transferred and aims of second and third stages achieved if the quality of the first
stage would be neglected. Therefore, the entrepreneurship education should be
approached as the integral part of pre-incubation process. In the same time, studies in
pre-incubator may account academic credits after completion of activities.20 During
this transitional phase students have access to facilities, technical resources, and a
network of people. While most academic programs focus primarily on graduate
students, the focus here is on undergraduates.21
1.3. Pre-incubation in the business incubation system
The route from pre-incubation to traditional business incubation is made easier by
offering tailored services to would-be entrepreneurs, locating further on in BI
facilities. Pre-BI should be promoted as a one integral component of a rather long new
business development process. The strategic approach of a Pre-BI is how more
efficiently link pre-incubator to other new firm support mechanisms already exist in
the region (market or – are available). Pre-BI should have its mission and goals and
this may differ depending on region, aims of entrepreneurship education and
environment and set linkages in incubation system. Pre-incubator could be perceived
19 Table modified by Authors, Source: Rajaniemi L. et al. p.9 synthesised with Simo Saurio, Best
Practices of Pre-Incubation in Higher Education, National Business Incubation Association,
presentation at the 18th International Conference on Business Incubation, The Power of Supporting
Entrepreneurs, April 25-28, 2004 Atlanta, Georgia, see also www.finpin.com
20 State-of-Art of Enterprise Education in Europe. Results from ENTREDU Project, 2002. Edited by
Hytti U. Written jointly with Kuopusjarvi P., Vento-Vierikko I., Schneeberger A., Stamfl C.,
O’Gorman C., Hulaas H., Cotton J. and Hermann K. Publication of Entredu Project, Leonardo da Vinci
programme of the EC, Turku Finland.
21 Dilts, J.,C., Hauser, W.,J., Lewison, D., LeHere, M. E-Venture: Setting up shop online: creating a
student e-business pre-incubator experience. In Journal for Advancement of Marketing Education –
Volume 11, Winter 2007, pp.7
6
rather a stage than a facility, meaning that certain services are offered in the early
state of the development of a business idea.22 Another important and a more concrete
difference comparing to incubator relates to funding. Pre-incubators or their ‘clients’
do not receive incubation or investment support as established enterprises as those in
regular incubator do.23
Modern term “Business Incubation” is defined as actively creating a nurturing,
instructive, and supportive environment for selected ambitious businesses in the early
stages of development and emphasizes the need for selection and graduation
policies.24 Usually it is a process helping businesses to survive and thrive, while an
“incubator” is the environment, either virtual or real, within which incubation takes
place.
The uniqueness of business incubator is integrated services in one place, which
complement each other. There exist other policy measures that can contribute to
innovative firm promotion, like support to new product development, personnel
training, support to exhibitions and trade fairs etc. However they can solve one
separated component when start-up need all of them and in a specific way. In a
broader sense there is a lot of common between incubation and wide counselling,
training and mentoring services. This creates bases for virtual incubation25 .
Incubators cater for start-up companies, helping them to survive and grow during the
start-up period when they are most vulnerable. Incubators provide hands-on
management assistance, access to financing and managed exposure to critical business
or technical support services.26
In the 1990s, a “new economy incubation” trend emerged to develop business
incubators around specific industrial and technological clusters with high value added
with aim to mobilize ICT and provide a convergence of support, towards creating
growth-potential, tech-based ventures.27 If the traditional incubators serve as regional
job development tool providing “space and dial” functions and motivating people to
involve in business, the new form concentrates only on new high growth technology
based firms that involve high risk and at the same time expectations of high return
thus they are usually operated by venture capital funds. Between the “traditional”
regional development model and “new economy” incubators, there is an array of
other types such as Business & Innovation Centres (BICs), technology centres,
and innovation centres that all share basic incubator characteristics.
After the exit from the Pre-Bi new business idea should be stable enough to enter the
incubator as newly established company. According to the initial evaluation of the
idea, the development stage of the product (service or good) as well as the location
where owner resides new entrepreneur would try to continue the incubation process
within larger premises supplemented with more targeted and hands-on support
provided by business incubator operators.
22 Saurio 2003, p.15-16.
23 Ahola, S., Honkanen, V., Entrepreneurship education in finnish polytechnics. University of Turku,
Finland, 2004, pp.19
24 UK Business Incubation, http://www.ukbi.co.uk/
25 Erikson, T. Training programmes as incubators. Journal of European Industrial Training. Nr.1
(2003), 36-40.p.
26 Zeps V., Avotins V. Concepts of technology and Business incubators, their Relevance to Latvian
economic development. Ventspils University College, Ventspils, 2008, pp.221-230.
27 OECD, Technology Incubators: Nurturing Small Firms, 1997, pp.13
7
In a previous paper authors have analysed two models of business incubators that are
relevant to Latvia.28 A traditional business incubator - an organization that focuses to
new job creation and systematizes the process of creating successful new enterprises
by providing them with a comprehensive and integrated range of services, which can
include: incubator space, which might be available rental or virtual, basic business
services, including secretarial support and shared office equipment, “hands-on”
business counselling and access to specialised assistance, access to BI inner or
external networks.
New economy incubators
are usually funded by venture capital companies or set up
by large multidisciplinary consultancies that are able to offer a complete
range of technological, advisory and other business support services to their clients.
Large multinationals have also been keen to capitalise on their expertise in the e-
economy by offering advisory expertise to new high-tech start-ups within a virtual
incubator model. The strategic objectives and way of operation of “new economy”
incubators differ fundamentally from their “traditional” equivalents.
Figure 2. Key elements of the system of business incubation
Most incubators choose not to maintain their own investment fund, serving instead as
a broker that introduces its portfolio ventures to external sources of capital via wider
network of financiers. Hybrid form with well integrated and tailored services
represent business accelerator.
The system of business incubation from the entrants’ viewpoint is reflected in Figure
2. Pre-incubation stage gives the tenants the opportunity to develop their ideas in an
environment with other like-minded, budding entrepreneurs. Incubation itself includes
more stages of the business development, where the resources at the initial stage are
more oriented to test the idea (proof of concept) and to find first customer, while at a
28 Zeps V., Avotins V. p.223.
8
Pre-incubator
Emphasis on the learning,
encouragement, and networking
process to involve and test the
abilities of person to become a
successful businessmen.
Traditional / Regional
Incubator
Oriented to job creation;
Partly charged services:
Space and Dial services;
Mentoring, Consultancy;
Serch for funding options.
Post-incubation services
Network of Companies
(Alumni) / partners/ service
providers. Graduates may
contribute to incubators with
spin-offs,
Incubator may provide
consultancy for full charge.
Services:
Development of Business Plan or idea
Detection of needed knowledge/
know-how
Mapping of available and needed
subsidies, application for grants (if
available)
Some incubation services (counselling,
mentoring, signposting) - Free of
charge
Duration– up to 6 months
„New Economy”
Venture Type Incubator
Profit oriented
Usual Incubation services.
Provision of Venture finances;
Involvement in Management;
Funds available in-house;
Technology Consultations
Pre-incubator
Emphasis on the learning,
encouragement, and networking
process to involve and test the
abilities of person to become
successful entrepreneur.
Traditional / Regional
Incubator
Oriented to job creation;
Partly charged services:
Space and Dial services;
Mentoring, Consultancy;
Search for funding options.
Post-incubation services
Network of companies (Alumni)
/ partners/ service providers.
Graduates may contribute to
incubators with spin-offs,
Incubator may provide
consultancy for full charge.
„New Economy”
Venture Type Incubator
Profit oriented
Usual Incubation services.
Provision of Venture finances;
Involvement in Management;
Funds available in-house;
Technology Consultations
Business Accelerator
Growth Oriented
Usual Incubation services.
Global born tenants;
Involvement in Management;
Technology Consultations
UP TO 6 MONTHS 12-36 MONTHS UP TO 12 MONTHS
later stage (closer to exit) companies are forced to grow and become sustainable for
competition in the market. The Pre-BI acts as a beacon, which clearly identifies
specialist start-up advice and support on offer by the host organization, and can
signpost to appropriate governmental and non-governmental organizations in the
region that support enterprise activity.29
The system of business incubation is usually supplemented by various additional
support tools such as grants for small businesses, pre-seed tools, business plan
competitions on regional and national levels etc. The most important is the
coordination and mutual interaction between the elements of the system.
2. Analysis of Latvian business Incubation system
The rationale for publicly funded (full or partly) business incubators - as with other
types of subsidised assistance to SMEs - lies ultimately in addressing market failures,
i.e. gaps and deficiencies in the support structure available to smaller firms (lack of
affordable, divisible work space, facilities, services, of access to finance, information
and other resources, etc). These market failures arise from the relatively high costs
and risks of providing services to new SMEs compared to mature firms and the
unwillingness of the private sector to assume these costs and risks often giving
modest returns. Other incubator models do not, however, have market failure as
their rationale. Incubation, not only in the US, but also in Europe, often serves also
as an important catalyser for the commercialisation of research and technology and
provides a “laboratory” of sorts to promote entrepreneurship.30
2.1. Business incubation in Latvia
The serious state policy to start Business incubation policy measure was launched at
the beginning of 2007 by the Ministry of Economics of Latvia. The previous several
initiatives to support business incubators were isolated, short term focused and usually
stopped without continuation (PHARE, budget funds etc.). Thus, incubation culture in
Latvia is still in the early stage of development.
The support from the Ministry of Economics contributed to the emergence and
development of 11 business incubators. This first national program to develop
business incubation was lacking overall understanding of incubator as a business
entity, but in line with local consultants’ lobby for additional subsidy program, and as
a result, did not set clear requirements and goals to be reached by the operator.
Following this, the established incubators started to operate with their own general
understanding of incubation as over-subsidised. The analysis of the incubators already
in market shows that they do not consider themselves as business projects thus being
fully dependent on the public funding, being not targeted to take care on income side,
self-sustainability and long-term operation. The risk is high that the invested resources
in majority of existing BIs will be ‘wasted’ without any further funds.
The second ongoing funding scheme elaborated by the Investment and Development
Agency of Latvia (LIAA) intends to provide necessary funding to BIs until the end of
29 Davison, H. Bridging the gap: harnessing graduate enterprise through pre-incubator support.
Northern Economic Review 32, Northumbria University, 2002, pp146
30Rustam Lalkaka. Best Practices in Business Incubation: Lessons (yet to be) Learnt. Paper
presented to Belgian Presidency's international conference on business centres, Brussels,
November 2001.
9
the 2014. The scheme is intended to serve as a regional development tool rather than
foster growth of knowledge intensive companies. Having almost non-existent outflow
of high-growth new firm deal flow, limited lobby from regions and influence to
municipal elections the another more advanced alternative, so called Technology or
“New Type” incubator program (also elaborated under the support from DG
Enterprise and Industry) was cancelled, regional aspect became the core component
not to cancel the funding for the program within overall budgetary reductions in
today’s economic downturn that confuses other integral parts of innovation system.
Major characteristics of the new support program to BIs are:
Procurement of incubation services from 9 Business incubator operators that are
located in the regions of Latvia (outside Riga city and Riga district).
Procurement of incubation services from one business incubator operators that
located in Riga city and provides services to companies that represent creative
industries.
One operator is obliged to provide traditional services to a number of companies
in at least 2 cities at the same time providing virtual incubation to those tenants
that are not located in the urban areas.
To avoid artificial competition and to increase the concentration of the
competence within the operators only one operator will be able to settle in the
particular city.
The minimal size of the sustainable incubator is required to be at least 2000 m2,
while it is also required to strive for higher occupancy rates to achieve economies
of scale.
The total available amount for the operating incubator is 2 MLVL for 5 years. The
performance of the incubators will directly influence the amount of the fee they will
receive for services provided. The program will be generally monitored on the
quarterly basis while in-depth examination will be carried out in the 3rd year of
operation and before the submission of the final reports.
2.2. Pre-incubation initiatives in Latvia
Core idea of the pre-incubation is to provide early support for spin-offs and start-ups
of knowledge intensive enterprises. It can be done by raising the entrepreneurial spirit,
organizing enterprise education and building up support facilities, pre-incubators, as a
pre-stage for business incubators. Pre-incubation has a crucial role in filling the gaps in
the existing innovation systems.
The LIAA has developed integrated support measure from three complementary
elements promoting entrepreneurship: Students Training Course „Become an
Entrepreneur in 5 days!”, The National Competition on Innovative Business Ideas
„Cup of Ideas” and Pre-seed support tool.
1. The goal of Students business training course „Become an Entrepreneur in 5
days!” is to form teams from university students with various educational
backgrounds (basically – combination of business and science) and during 5 working
days prepare their ideas to be further developed. The method allows students to test
themselves whether they may or may not become successful entrepreneurs. The
activity has been implemented since 2006.31 The result of this activity is created
31 See more detailed analysis in publication: Zeps, V., Avotiņš,V., Smid, S. New Strategies for
Entrepreneurship and Small and Medium Size Enterprise Development, Ventspils University College,
Ventspils, 2008, pp.240-248.
10
student companies, which have developed basic concept of business idea and are
ready to continue the implementation of it as registered business entity.
2. The goal of The National Competition on Innovative Business Ideas „Cup of
Ideas” is to encourage the society to start their own business and to promote an
economic growth in Latvia. It is done through giving the knowledge and skills to
authors of innovative ideas for further development of business plans. The activity is
implemented since 2007. The expected result of this activity is number of registered
companies, which start to implement business plan designed during the competition.
Within 6 month of the project period, the participants receive services of training and
short-term mentoring as well as an opportunity to receive start-up capital.
3. The goal of the Pre-seed support tool is to ensure an opportunity for owners
(individual authors or companies) of innovative ideas to apply for funding (up to 5000
LVL or ~7000 EUR). The activity is implemented since 2008. The expected result of
this activity is larger number of innovative ideas implemented in Latvia.
Rather huge amount of funding to the pre-incubation and incubation stage for new
companies is available through the promotional programs implemented by team
ALTUM (structural unit of the state joint-stock company “Mortgage and Land Bank
of Latvia”). The primary product of ALTUM is sub-prime loans to business projects
with good survivability and development prospective, which are not financed by
commercial banks due to insufficient mortgage collateral and other project risks.
Moreover ALTUM implements Business start-up training, consulting and financial
support program, where support is provided to persons willing to start up their own
business. The programme participants initially have to take the training course, and,
upon its completion, draft a business plan for starting business. The business plan is
evaluated by experts, and in a case of a positive decision, the program participant is
granted funding for implementation of the project (loans up to 50 thsd LVL, grants to
start operation of the enterprise and to cover consulting services fees). The program is
co-financed by the European Social fund (ESF).
As an additional initiative related to incubation should be mentioned part of the
currently European Investment Fund (EIF) managed and financed from EU Structural
Funds so called holding fund activity, basically a portfolio of several financial
instruments, namely Seed/Start-up fund. It is envisaged that as a part of currently run
tender for fund management companies EIF will select and help to set up seed and
start-up funds managed by the same fund management company with total funds
under management up to 20 MEUR, that will serve as commercial sources of
seed/start-up funding. It is expected that these funds shall become operational in
second half of 2009.
Seed Fund with total investment 6,3M EUR aimed to provide financing for research
commercialisation. Maximum investment will not exceed 100 000 EUR for new
companies (no older than 5 years) and investment decisions will be made evaluating
initial concept description of new product or business idea.
Start-up fund (16,2M EUR) will support new firms with aim to provide funding for
product development and initial marketing in enterprises that have not
yet commercially sold their goods or services and do not have profit.
Maximum investment will not exceed 1MEUR; investment decisions
based on individual business plan.
There exist several more entities in Latvia that provide pre-incubation services:
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Business Laboratory of Stockholm School of Economics in Riga (SSE Riga);
Connect Latvia with its Spring Board panels and pre-training to business idea
holders to prepare for venture capital;
Seed Forum, similar to Connect Latvia, but more focused to organise
international investor forums as a meeting place with less focus to pitch
training;
Training and mentoring program financed by Ministry of Economics and
oriented to promote women entrepreneurship “Līdere” (Leader).
Figure 3. Business incubation system in Latvia, May 2009
Note: FFF – fools, friends and family, LIAA – Investment and Development Agency of Latvia, EIF –
European Investment Fund, VC – venture capital, BAN – business angel network, LMG-
Latvian Mortgage Bank
Mapping of measures of Latvia’s business incubation system help to assess all
incubation initiatives and elements according to their performance, contribution in
business cycle and need for financing. Figure 3 reflects quite many (app. 12) existing
incubation measures and in the same time outlines their isolation. The fragmented and
occasionally based Latvian business incubation system in pre-incubation stages is not
supported by smart and well tuned pre-seed and risk finance tools thus creating wide
death value for new business ideas. Traditional BI in regions with inexperienced
management and poor strategy has not created strong networks or linkages with Pre-
BIs to encourage sufficient deal flow of new ideas with high commercial potential.
Elaborated model of incubation system gives us the advantage to identify six in total
differing by specific services incubation stages. The split of business incubation in
“proof of concept” and acceleration stages is important approach helping to
differentiate incubation services between generating first deals and expanding into
markets. This is crucial from all three, service, financing and public intervention sides
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helping to minimise risks involved. Each of stages requires specific knowledge, skills
and way of management. At the acceleration stage, new company starts the serial
production and besides the provision of some services that costs close to real market
prices, incubator manager is looking for the next stage financier. Such incubation
system model is applicable to medium and high growth incubatees where risk
financiers can find attractive deal flows. However, simplified incubation systems
cannot reach regional or national economic targets as there dominate new job creation
or replacement of existing jobs with any kind of workplaces not always giving
expected economic growth.
The BI operators manage too small incubator space insufficient to become sustainable
thus forcing actors to spend too much effort for lobbying or struggle for public
donations. Frequent changes and cut-offs of public support so far create need to be
involved in different projects to get financing for BI administration survival usually
having quite little touch to incubation essence. As a result BIs have little interaction
and common linkages and new innovative firms find BI on their own initiative to find
subsidised space, infrastructure and cut their costs in early stage development instead
of obtaining couching and mentoring services. Such fragmented Latvia’s incubation
system simply cannot provide integrated and accelerating services to potential high
growth knowledge intensive new firms with high value added growth potential. The
extremely low high growth firm deal flow is the prices we pay for low and
fragmented incubation system performance as majority of all incubators are more
process (in isolation) than goal oriented.
Recently designed pre-seed and start-up EIF schemes have not yet been launched,
however the question from where the sufficient deal flow for investments will arise
seems to be unanswered.
Conclusions
Policy makers in EU in general and local policy makers in particular put increasing
attitude on the early stage business support infrastructure to become more result-
oriented and more productive. The demand for pre-incubation instruments and
services has received positive response and several new policy measures were
implemented with a measurable success.
The economic downturn in Latvia has released spirit of nascent entrepreneurs and
increased demand for well functioning business incubation system. The authors
believe that there still exist too fragmented approaches to incubation support
measures. The entrepreneurship education measures are not built-in incubation system
and they are weakly linked with pre-incubation initiatives.
Although all of the pre-BI initiatives are located in the Capital city only few have
regional component, however the business incubators are located in the regions of
Latvia meaning that resources allocated by government would ensure more hands-on
services to lifestyle business that tend to occur in environments without strong links to
Universities and centres of competence.
The isolated and poorly coordinated initiatives of pre-incubation system (even alone
being efficient) may confuse direct target groups - young entrepreneurs, employees in
industry, on proper measures and may discourage them to involve in entrepreneurship
at all. Pre-incubation, incubation and follow-up services should create a continuous
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system of support to emerging new knowledge businesses thus increasing the
effectiveness of the whole BI system.
The existing Pre-BIs initiatives demonstrate too large focus to academia, as a result
having weak long term outputs and links to BIs, thus the real challenge for incubation
system is political will and ability to refocus the concept around the deal flow
spinning out from industry.
Universities and Higher Education institutions are encouraged to work with industry
in creating start-ups via different instruments however partly approach for their Third
mission is still too academic and process oriented, more attached to life-long learning
concept than really pushing the students into business.
The BIs heavily funded from the state form the core of the incubation system,
however their effectiveness clearly depend on their capacities to reorganize their
inefficient operational models to sustainable ones, that partially will be enforced by
new incubator support program.
We may expect positive contribution to the incubation system pipeline caused by
increasing support to new technological firms from European Investment Fund’s
financial measures. A set of new Pre-BI initiatives for the next 5 years in a framework
of fund program “Innovation culture and Entrepreneurship motivation” will
encourage the state administration to create the proper Pre-BI system in Latvia.
The authors hope that this paper contributes to raising awareness for the key question
on how to create efficient and productive business incubation system in Latvia.
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