ArticlePDF Available

A Real Options-Driven Theory of Business Incubation

  • Dilts+Partners, LLC

Abstract and Figures

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-ý-vis incubator management and good entrepreneurial failure.
Content may be subject to copyright.
A Real Options-Driven Theory of
Business Incubation Sean M. Hackett
David M. Dilts
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.
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
Theoretical foundations in the incubator-incu-
bation literature are rooted in market failure
arguments. Market failure occurs when the com-
petitive transactive space for the production and
sale of goods and ideas fails to produce a desired
outcome. Sources of market failure include extern-
alities, imperfect information, monopoly power,
and public goods. Incubator-incubation research-
ers who subscribe to market failure theory believe
Vanderbilt University
Management of Technology Program
Box 1518, Station B, Nashville, TN 37235 USA
Vanderbilt University
Management of Technology Program
Box 1518, Station B, Nashville, TN 37235 USA
Journal of Technology Transfer, 29, 41–54, 2004
#2004 Kluwer Academic Publishers. Manufactured in The Netherlands.
that structures and strictures within the market
impede the successful development of entrepre-
neurial new ventures, and that incubators-incuba-
tion are one approach to remedying these market
failures. Other theoretical underpinnings include
structural contingency theory (Ketchen et al.,
1993), co-production of value theory (Parks et
al., 1981) in Rice (2002), and network theory
(Nohria and Eccles, 1992). Structural contingency
theory suggests that the configuration of the
incubator must obtain ‘‘fit’’ with environmental
needs in order to achieve incubation success. Co-
production of value theory asserts that the
incubation process is co-produced by the incuba-
tor manager–incubatee dyad, implying that the
time intensity of business assistance interventions
must be strategically allocated by the incubator
manager to the incubatees, and that incubatees
must be properly prepared to utilize the advice and
insights resulting from the intervention (Rice,
2002). Network theory proposes that the primary
value-added feature of incubators is the set of
institutionalized processes and norms that care-
fully structure and channel knowledge throughout
the incubator network in order to create condi-
tions that facilitate the development of incubatees
and the commercialization of their innovations.
While these perspectives and the incubator-incu-
bation literature in which they are employed serve
to adequately describe why and in what config-
urations and contexts incubator facilities are
operated, they do not provide an integrated,
theoretically driven explanation of the factors
that constitute the incubation process, nor do
they account for the underlying dynamics of these
factors, nor do they explain how, and why and in
what context these factors are related (Hackett and
Dilts, 2003, 2004). The absence of an integrated
explanation constitutes a gap in our understanding
of how and why the incubation process contributes
to incubation outcomes.
In order to integrate the
factors in a way that enables us to predict and
explain incubation outcomes, a theory of business
incubation is required.
The literature on incubators-incubation is
reviewed extensively by Hackett and Dilts in
another article in this issue of the Journal of
Technology Transfer. The objective of this article is
to address one of the challenges identified in that
literature review: To develop new theory that
describes the underlying dynamics of the factors of
the incubation process, and explains how and why
these factors come together and foster incubatee
success (or failure) in the early stages of new
venture development. Accordingly, this article
employs a conceptual framework of the incubation
process (Hackett and Dilts, 2003) and draws upon
options theory in order to build a theory of
business incubation. Options theory asserts that
decision-makers create low-cost options to initiate
(but not fully commit to) risky investments;
subsequent investments are based on reductions
in uncertainty and the perceived likelihood of
return on option investment.
Previous management researchers have also
extended options theory beyond the financial
domain from which it is derived. For example,
McGrath (1999) uses options reasoning to exam-
ine the ‘‘antifailure bias’’ in entrepreneurship
research. Hurry and Bowman (1993) apply options
reasoning to cast light on the process of developing
organizational strategy. Several authors adopt an
options perspective to suggest optimal methods for
selecting technology development projects
(Alvarez and Stenbacka, 2001; Hurry et al.,
1992), while Copeland (2002) uses options theory
to make clear the benefits of stage-gate capital-
intensive project selection-rejection decision-mak-
ing. Adding to this growing base of applied
options theoretical reasoning, we employ options
logic to synthesize and extend insights from
research on incubators-incubation and, in turn,
build a theory of business incubation.
In this section, we have provided a working
definition for incubators-incubation, described the
theoretical foundations of extant incubator-incu-
bation research, and noted our objective of
building a theory of business incubation by
drawing from options theory. The remainder of
the article is organized in the following manner.
First, we make explicit our assumptions regarding
the logic of business incubators and the process of
business incubation in order to establish the terms
and concepts of discourse. Second, we consider a
number of alternative theoretical foundations for
explaining the incubation process and predicting
incubation outcomes. Third, we draw from
options theory to build a theory of business
incubation. Fourth, we offer some concluding
42 Hackett and Dilts
2. Business incubators and the business incubation
In this section, we describe the logic of incubators-
incubation by populating a standard logic model
with elements of incubator-incubation phenom-
ena. This logic model emphasizes the fact that the
incubator is a means to an end, and not an end in
itself, and draws attention to the fundamental
importance of the incubation process vis-a
predicting and explaining incubation outcomes.
Next, we offer several conceptualizations of the
incubator to help anchor our theory development
efforts. Finally, we introduce the incubation
process model that will be used to organize our
theory construction efforts.
The logic of incubators-incubation
Business incubators are not the all-powerful
innovation hatcheries capable of incubating and
taking public ‘‘infinitely scaleable, dot-com
e-business start-ups’’ less than a year after entering
the incubator that the media made them out to be
during the stock market bubble of the late 1990s.
Rather, incubators tend to incubate intermediate
potential ventures in their early stages of develop-
ment. These ventures have the potential to
generate jobs beyond the position created by and
for the founder; annual revenues can range from
negative income up to 10 million dollars. Accord-
ing to the National Business Incubation Associa-
tion (NBIA), average incubation cycle times are
between two and three years.
To the extent that an incubator is the oper-
ationalization of a community strategy to promote
the survival of new firms, an incubator is an
enabling technology, rather than a critical or a
strategic technology.
This categorical distinction
is not trivial: The underlying value of an enabling
technology is a function of the critical and
strategic technologies it enables. The mere exis-
tence of an enabling technology such as a business
incubator does not, in and of itself, necessarily
translate into the development of critical and
strategic technologies embedded in the products
and/or services of innovative new firms; a lack of
inputs such as capable entrepreneurs and/or
critical or strategic technologies for commerciali-
zation might go a long way toward explaining why
many incubators perform so poorly. The logic of
incubators-incubation is depicted in Figure 1
Conceptualizations of the incubator
The incubator is an entrepreneurial firm (Rice and
Matthews, 1995) that performs a bridging function
by sourcing and ‘‘macro-managing’’
the innova-
tion process within emerging, weak-but-promising
intermediate potential organizations, infusing
them with resources at various developmental
stage-gates while containing the cost of their
potential failure. In this view, the incubator
functions as a place where resources can be
rationally invested in stages in selected incubatees
that fail quickly, cheaply and often at various
stages of the development path to success or
terminal failure. Because most incubators do not
take equity positions in most incubatees—relying
instead on rental and services income as well as
public and private subsidies—they are able to
select and nurture ventures that have a greater
likelihood of failure in proportion to upside
potential than either a venture capitalist, or a
firm engaging in corporate venturing would be
willing to select, thereby resolving market failure
in the intermediate potential venture marketspace.
Galunic and Eisenhardt (2001) refer to modular
organizations as ‘‘dynamic communities’’ in which
resources and processes are reconfigurable and
deployed in accordance with needs determined
through a co-evolution with the market. With its
enabling bundle of new venture development
capabilities, the incubator is a dynamic community
where selected incubatees can plug their emerging
organizations into the incubator’s environment,
routines, norms, network and expertise in cost-
effective and efficient ways unavailable to ‘‘weak-
but-promising’’ go-it-alone intermediate potential
Finally, the incubator is a manufacturer of new
firms. A dominant design for the incubator
facilities has been articulated by the incubator
configuration stream of research (Hackett and
Dilts, 2004). The focus of competition in the
incubator-incubation industry is the production
process (i.e. the incubation process) occurring
within the incubator.
A Real Options-Driven Theory of Business Incubation 43
Incubation process model
Guided by Campbell et al.’s (1985) description of
the value-added contributions of business incuba-
tors, an insight that business incubation and
venture capitalists’ investment activities share
functional similarities, our systematic review of
the literature, and fieldwork in North America and
Asia, we understand the principal elements of the
incubation process to be incubatee selection,
monitoring and assistance, and resource infusion.
This process is depicted in Figure 2. Briefly, the
model indicates that incubatees are selected from a
pool of incubation candidates, monitored and
assisted, and infused with resources while they
undergo early stage development. Outcomes refer
to the survival or failure of the incubatee at the
time it exits the incubator. Controls include
regional differences in economic dynamism, level
of incubator development and size of incubator.
The model is atemporal with arrows in the model
indicating the relationships amongst the con-
structs. The arrows that lie between constructs
represent the fact that we do not know whether
these constructs overlap; because no one has
conducted research using these constructs the
possibility for interaction must be depicted.
Arrows going backward from outcomes to the
constructs of interest indicate feedback loops that
occur over time and through experience, suggest-
ing organizational learning effects.
3. Alternative theoretical foundations for the study
of incubators-incubation
In the introduction to this article, we touched
upon the theoretical foundations employed in
Figure 1. Business incubation logic model.
44 Hackett and Dilts
extant incubator-incubation research. In this sec-
tion, we consider a variety of theories as alter-
natives for grounding our incubation process
Behavioral theories
Behavioral theories examine the influence of the
environment on the unit of analysis (Skinner,
1976). A behavioral approach could be used to
study the influence of the external environment on
the incubator, and the influence of the internal
incubator environment on incubatees. However,
the existence of three discrete environments
(external, incubator, and incubatee) significantly
complicates an empirical behavioral study of the
incubation process. Additionally, behavioral the-
ories cannot be used to adequately address the
resource munificence construct in our model.
Economics theories
Classical theories of economics focus on supply
and demand equilibria. A classical economics
theory of business incubation would predict the
incubation of new ventures centering on innova-
tions that are perceived—from an economic
rationality/transaction cost economics perspective
(Coase, 1937)—to be capable of satisfying demand
while maximizing profit potential when properly
commercialized. Classical theories of industrial
economics can be criticized, however, for their
assumptions that markets operate perfectly ration-
ally and at arms’ length. Such assumptions
frequently do not describe the experiences of
Figure 2. Incubation process model.
A Real Options-Driven Theory of Business Incubation 45
many incubatees, who often rely upon personal
relationships and face-to-face transactions when
diffusing their innovations.
Resource-based and knowledge-based views
The resource-based view (Barney, 1991; Penrose,
1959; Rumelt, 1984; Wernerfelt, 1984) is a strategic
view of the firm’s ability to extract rents from
‘‘bundles of innovations’’ as a function of four
dimensions: value, rareness, imitability and sub-
stitutability (Barney, 1991). From a resource-
based perspective positive incubation process out-
comes could be explained and predicted as a
function of these four dimensions. For example, a
well-funded incubator with impeccable innovation
industry contacts and access to a pool of high-
quality innovations and experienced entrepreneurs
and management teams is more likely to be
associated with successful incubation outcomes
than an incubator without access to these
resources. The resource-based view is a compelling
theory, and can provide insight into the way in
which the incubator values and selects incubatees.
However, the resource-based view can be faulted
for ignoring issues of process (Foss, 1998) and as
such is not an appropriate lens for examining the
incubation process.
A subset of this lens, the knowledge-based view
(Nonaka, 1994; Nonaka and Takeuchi, 1995) of
the firm, could be used to explain the incubation
process as the accumulation and application of
new venture development know-how to the
mentoring of the incubatees. However, while the
knowledge-based view could provide an interesting
foundation for future research, it does not
accommodate the selection process component of
the incubation process in our model, and is thus an
inappropriate lens for this study.
Dynamic capabilities theory
An extension of the resource-based and knowl-
edge-based views of the firm, the dynamic cap-
abilities theory focuses on processes that develop
through path-dependent organizational learning
over time and which enable the firm to achieve and
maintain strategic competitive advantage when
market environments shift (Deeds et al., 1999;
Teece and Pisano, 1994). These processes can
include new product development, strategic deci-
sion-making and alliance formation (Eisenhardt
and Martin, 2000) and, in high-velocity markets,
the ability to ‘‘continuously morph’’ (Kotha and
Rindova, 2001). A dynamic capabilities approach
would facilitate inquiries into the way in which an
incubator, over time, builds new venture develop-
ment resources and capabilities and allocates these
resources to the transformation of incubatees into
value-producers. Moreover, a dynamic capabilities
approach would serve as a strong theoretical
foundation for studies centering on development
strategies of incubatees, and new ventures writ
large. When the incubator is the unit of analysis,
however, the focus on building and maintaining
strategic competitive advantage that is intrinsic to
the dynamic capabilities perspective is not so
important because the typical incubator does not
have many local competitors.
Agency theory
Agency theory focuses on the relationships
between principals who delegate tasks to their
agents (Eisenhardt, 1989). Problems arise in the
relationship because it is inefficient for the
principal to continuously monitor the agent and
because of goal or perspectival differences between
the principal and agent. Agency theory could
provide an adequate foundation for research
centering on the incubator manager–incubatee
dyad. However, agency theory does not address
the issue of network effects that have been
identified in previous incubator–incubation
research. Specifically, a focus on the incubator
manager–incubatee dyad neglects the fact that
relationship-building throughout the incubator
network is associated with incubation success
(Hansen et al., 2000; Lichtenstein, 1992). More-
over, the incubatees do not work for the incubator
manager in the traditional sense of the principal–
agent dyad: Rather than working for the success of
the principal’s firm and shareholders, the incuba-
tees work to attain their own firm’s success.
46 Hackett and Dilts
Institutional theory
Institutional theory posits that organizations
monitor competitors and trend toward isomorph-
ism (Dimaggio and Powell, 1983; Zucker, 1987).
Research questions emanating from this perspec-
tive center on the ‘‘process of becoming institution-
alized, and the . . . impact of institutions on
organizations, especially on organizational struc-
ture and processes within the organization’’
(Kuhns, 1999, p. 28). From an institutional
perspective, the incubator could be viewed as
mediating the impacts of institutions on the
incubatees, amplifying the positive and mollifying
the negative. Alternatively, if the incubator itself is
perceived as an institution by its stakeholders, the
manner in which the incubator impacts the
organizational structure and processes occurring
within incubatees could also be examined. Recent
research employs an institutional perspective to
compare the evolution of various phenomena in
the venture capital industries in China and the
West (Bruton and Ahlstrom, 2003) suggesting that
institutional theory may be useful for future
incubator-incubation research that examines the
effects of local, regional, national and interna-
tional institutions on the incubator and its
Structuration theory
Structuration theory is a constructivist approach
to understanding the production of and reproduc-
tion of social systems (Giddens, 1984). It is related
to institutional theory, and has been used to
examine the field of entrepreneurship and the
process of instantiating a new firm (Jack and
Anderson, 2002; Sarason et al., 2002). This
theoretical approach could be used to support
research on how the embedded incubator context
facilitates the reproduction of viable business
systems within incubatees. Such an approach is
useful in developing a deeper theoretical under-
standing of the differences between incubated and
non-incubated firms, and for studies centering on
incubatee development. It could prove particularly
useful in participant observation-based case
Scaffolding theory
Scaffolding theory is a communicative approach
that centers on providing learners with concep-
tually driven assistance, on demand, and with an
initial high intensity that decreases as the learner
builds competencies (Presseley et al., 1996). A
scaffolding perspective would center on the
incubator manager–incubatee dyad, with the
manager as teacher and the incubatee as learner.
While this approach does not address the selection
and resource infusion aspects of our process
model, this approach can be recommended for
researchers seeking to explore the educational/
coaching aspects of the incubator-incubation
Options theory
A real option is created through an initial
investment decision, followed by subsequent
investment decision(s) (Rosenberger, 2003).
Option creation and subsequent incrementally
staged investments (i.e. option exercise) confer
future decision rights, preferential access to
opportunities, access to a potentially valuable
upside, and the ability to contain downside risk
by limiting the cost of failure to the sunk cost of
constructing the option, minus any remaining
option value (Bowman and Hurry, 1993; Cope-
land, 2002; Dixit, 1992; Dixit and Pindyck, 1994;
Luehrman, 1998; McGrath, 1999; Mitchell and
Hamilton, 1988; Trigeorgis, 1993). Option crea-
tion and exercise are impacted by five factors: ‘‘(1)
uncertainty, (2) asset value, (3) irreversibility, (4)
exercise costs, and (5) competition’’ (Rosenberger,
2003). When investment decisions are encumbered
by extreme volatility, option creation increases; as
volatility is reduced, options exercise increases
(Rosenberger, 2003). A real options perspective
would view incubatee selection as the creation of
an option, and subsequent resource infusions and
monitoring and assistance as option exercises.
Theory selection
While some of the alternative theoretical lenses
reviewed above show great promise in a variety of
future research applications, the real options
A Real Options-Driven Theory of Business Incubation 47
perspective seems to be the best available lens for
capturing the operational setting and underlying
logic that drives the incubation process of selec-
tion, monitoring and assistance, and resource
infusion vis-a
`-vis incubatees. Accordingly, in the
next section—using the incubation process model
in Figure 2 as our organizing guide—we employ
options theoretic reasoning to build a theory of
business incubation, motivating propositions
along the way.
Proposition 1: The options lens is the most
appropriate theoretical approach for developing a
theory of business incubation that predicts and
explains business incubation outcomes.
4. A real options-driven theory of business
Ultimately, a theory is a parsimonious description
of the causal relationships between observable
variables or non-observable constructs that is
broadly generalizable to some discrete phenomena
(Bacharach, 1989). A good theory ‘‘explains why
empirical patterns were observed or are expected
to be observed’’ (Sutton and Staw, 1995). In this
section, we draw from real options theory and the
discussion above to build theory that explains and
predicts how and why variation in the measures of
the constructs in our model of the process of
business incubation can be expected to explain and
predict the likelihood that new ventures will
survive the early stages of development.
Theory of business incubation
Our theory of business incubation is thus:
Business incubation performance—measured in
terms of incubatee growth and financial performance
at the time of incubator exit—is a function of the
incubator’s ability, developed over time and with the
accumulation of new venture development capabil-
ities and resources, to create options through the
selection of weak-but-promising intermediate poten-
tial firms for admission to the incubator, and to
exercise those options through monitoring and
counseling, and the infusion of resources while
containing the cost of potential terminal option
The function described in our theory above is
expressed as follows:
.BIP ¼business incubation performance
.SP ¼selection performance;
.M&BAI ¼monitoring and business assistance
intensity; and
.RM ¼resource munificence.
In the following subsections each construct in our
theory is defined, and the causal linkages among
the constructs are explained.
Business incubation performance. Business
incubation performance (BIP) is measured in
terms of incubatee growth and financial
performance at the time of incubator exit.
Operationally, there are five different mutually
exclusive incubatee outcome states at the
completion of the incubation process:
1. The incubatee is surviving and growing profit-
2. The incubatee is surviving and growing and is
on a path toward profitability.
3. The incubatee is surviving but is not growing
and is not profitable or is only marginally
4. Incubatee operations were terminated while still
in the incubator, but losses were minimized.
5. Incubatee operations were terminated while still
in the incubator, and the losses were large.
Historically, the literature has suggested that the
first three outcome states are indicative of incuba-
tion success and the last two outcome states are
indicative of failure (Hackett and Dilts, 2004). A
real options perspective, however, can be used to
argue that, in addition to the first two outcome
states, the fourth outcome state is a success
because the cost of failure has been limited to the
48 Hackett and Dilts
cost of creating the option less any remaining
option value.
Additionally, we recommend that
the third outcome state be considered a failure:
The incubation of ‘‘zombie companies’’ is not
identified in any known incubator’s mission
Selection performance. Selection performance (SP)
refers to the degree to which the incubator behaves
like an ‘‘ideal type’’ venture capitalist when
selecting emerging organizations (options) for
admission to the incubator. Relevant dimensions
of selection performance include a propensity to
select an emerging organization for admission to
the incubator based on managerial characteristics,
market characteristics, product characteristics
and financial characteristics. Managerial
characteristics refers to the prior employment
experience and technical expertise of the
applicant’s management team. Market
characteristics refers to the properties of the
market which the applicant intends to enter.
Product characteristics refers to the properties of
the product or service which the applicant intends
to commercialize. Financial characteristics refers
to the profit potential of the applicant. Ceteris
paribus, incubators that operate like venture
capitalists and emphasize the importance of
managerial team characteristics, market and
product characteristics, and expected financial
outcomes (Riquelme and Watson, 2002) in
selecting candidates for incubation can be
expected to outperform incubators that do not.
Incubators that maintain certain standards for
admission create value when selecting options that
seem to have greater potential for success and
when rejecting those with limited potential (i.e.
deferring the option), by (a) helping contain the
cost of potential entrepreneurial failure, (b)
boosting the chances for success for ‘‘weak-but-
promising’’ firms (through systematic incubation
in the nurturing environment of the incubator),
and (c) offering rejected companies’ management
the opportunity to reflexively reconsider the
objective potential of their planned business
model. Additionally, widespread knowledge of
the existence of a selection mechanism can induce
positive business-building behaviors and self-cor-
rective measures in the entire pool of shadow
leading them to structure themselves so
they are better qualified for admission, and,
intuitively, better positioned for success in the
The utility of applying the options lens to
selection processes within incubators is under-
scored by the fact that the options lens helps to
explain why the incubator selects firms that the
rest of the market rejects. The value of a start-up
venture is particularly uncertain during its early
stages, when it is struggling to overcome a lack of
resources and simultaneously develop its organiza-
tional self and its first product(s) (McGrath, 1999).
Moreover, the selection of the options is con-
strained by the need to select ‘‘weak-but-
promising’’ options.
Thus, makes a traditional
valuation of an incubator’s option portfolio is
particularly tricky. However, because the incuba-
tor functions as a remedy for market failure vis-a
vis the survival of intermediate potential new
ventures, and because the incubator’s performance
is measured in terms of its incubatee’s survival or
death, it is possible—and sufficient—to value the
incubator’s portfolio in nominal or percentage
terms rather than monetary terms.
With the
above points in mind, we motivate our second
Proposition 2: Business incubation performance is
positively related to selection performance.
The incubator obtains certain future decision
rights related to the developmental path of the
incubatee when it transforms the incubation
applicant from a ‘‘shadow option’’ to a ‘‘real
option’’ by recognizing its underlying potential
and admitting it to the incubator. In options
terminology, these rights include the option to
defer, the option to switch, the option to abandon,
and the option to change size (expand/contract).
While the decision rights that a venture capitalist
acquires when taking an equity stake in a portfolio
company are explicit and legally bound, the
incubator acquires more informal, flexible influen-
cing rights related to the development path of the
incubatee. We term the operationalization of these
decision rights in an incubator ‘‘macro-manage-
ment’’ of the innovation process. Macro-manage-
ment occurs through the value-adding processes of
monitoring and assistance, and resource infusion,
A Real Options-Driven Theory of Business Incubation 49
and in extreme cases, through expulsion from the
Monitoring and business assistance intensity.
Monitoring and business assistance intensity
(M&BAI) refers to the degree to which the
incubator observes and helps incubatees with the
development of their ventures, including helping
them to learn from low-cost failures and
containing the cost of potential terminal failure.
Monitoring and business assistance intensity is
characterized by dimensions of time intensity of
assistance provided, comprehensiveness of
assistance provided, and degree of quality of the
assistance provided. Time intensity of assistance
provided refers to the percentage of working hours
devoted to monitoring and assisting incubatees.
Comprehensiveness of assistance provided refers
to the degree to which strategic-, operational-, and
administrative-related assistance (Chrisman, 1989)
are provided by the incubator to the incubatees.
Quality of assistance provided refers to the relative
value of the assistance provided by the incubator
to the incubatees. Adapted from (McGrath, 1999;
Rice, 2002).
The incubator adds value to the options by
making available a range of high quality monitor-
ing and business consulting services inside the
business incubator (Allen and Rahman, 1985;
Brooks, 1986; Hansen et al., 2000; Mian, 1997;
Sherman and Chappell, 1998; Smilor, 1987;
Temali and Campbell, 1984; Udell, 1990). Moni-
toring and the provision of real time feedback help
contain downside risk to the options by (ideally)
preventing them from making stupid but costly,
and potentially terminal business mistakes. Mon-
itoring can be both passive and active (Rice, 2002).
In the best of cases, monitoring and feedback are
provided proactively and real-time in order to
reduce the incidents of cost-incurring mistakes. In
his case-based exploratory research, Rice (2002)
suggests that the time-intensity devoted to coun-
seling tenant companies may be a good predictor
of business incubation outcomes. By helping
incubatees with strategy formation and monitor-
ing the development of effective strategy imple-
mentation mechanisms and sustaining business
structures, the incubator can identify developmen-
tal stage-gates at which the options to switch
strategies, to expand or contract incubator
resource infusions as market and strategic needs
dictate, or to abandon the option altogether
present themselves. This leads us to motivate our
third proposition.
Proposition 3:Business incubation performance is
positively related to intensity of monitoring and
business assistance efforts.
Resource munificence. Resource munificence (RM)
refers to the relative abundance of incubator
resources and is characterized by dimensions of
resource availability, quality and utilization. We
borrow from Daft (1983) to define business
incubator resources as ‘‘all assets, capabilities,
organizational processes, attributes, information,
knowledge, etc., controlled by [the incubator] that
enable the [incubator] to conceive of and
implement strategies that improve its efficiency
and effectiveness’’ (Daft, 1983) in Barney (1991),
as they relate to facilitating new venture
development. Incubator resources can be divided
into two sub-categories based on whether they are
internal or external to the incubator. Internal
resources are resources that are inside the
incubator and are related to economics,
environment, personnel, or operations. External
resources are resources that are outside the
incubator and can best be summarized as the
combination of the innovation communities
encompassing the incubator and the clusters of
industrial innovation networks connected to the
incubator and related to the incubatees. Resource
availability refers to the incubator’s ability to
provide incubatees with access to resources.
Resource quality refers to the relative value of
the resources the incubator provides to the
incubatees. Resource utilization refers to the
incubatees’ usage of the resources they receive
from or through the incubator. Generally,
incubator resources are built, maintained and
allocated by the incubator manager, sometimes
in concert with an incubator advisory board.
The infusion of incubator resources into the
options (i.e. incubatees) confers access to a
potentially valuable upside. For the incubator,
this upside is not necessarily an equity cash-out, as
not all incubators take an equity stake in their
50 Hackett and Dilts
incubatees. However, facilitating the survival of
incubatees or containing the cost of failure of the
options to the sunk cost of creating the option
minus any remaining option value, and reporting
these successes, can result in the renewal of annual
operating subsidies, a very important upside with-
out which many incubators would close.
Intuitively, it seems likely that an incubator
high in resource munificence (e.g. a well-funded,
well-managed incubator with an impeccable net-
work and access to a selection pool of high-quality
innovations and experienced entrepreneurs and
management teams) is more likely to be able to
infuse its incubatees with resources and conse-
quently to be associated with successful incubation
outcomes than an incubator without these
resources. Accordingly, we motivate our fourth
and final proposition.
Proposition 4:Business incubation performance is
positively related to resource munificence.
5. Conclusions
The objective of this article was to build a theory
of business incubation by drawing from options
theory. The theory that we developed helps to fill a
gap in a stream of research that has been mainly
atheoretical. It draws scholars’ attention to the
complexity of the incubation process, while
providing a parsimonious framework for describ-
ing it, and predicting and explaining incubation
process outcomes. Our theory challenges the
notion that most new ventures must fail, and
extends our understanding of options-driven
behavior in early stage new venture settings.
From an options theoretic perspective, the incu-
bator can be said to function as a laboratory for
small- and medium-scale entrepreneurial adven-
tures which are always kept to a boundedly
rationally minimum investment cost. By staging
investments of incubator resources in accordance
with the level of venture development attained, the
incubator-incubation process is no longer viewed
as successful only if the incubatees survive, but
also when incubatees cease operations as quickly
(and as cheaply) as it becomes apparent that the
reduced potential for venture success no longer
justifies continued investment. Alternatively,
because it recognizes the volatility of entrepre-
neurial ventures and the indeterminacy—at the
time of incubatee selection—of outcomes, the real
options lens supports the incubator’s decision to
invest resources in incubatees even when a net
present value (NPV) analysis suggests that such an
investment would not be rewarded (Copeland,
Our model of the incubation process and
specification of the range of possible incubation
outcomes offer several implications for managerial
practice and policy-making vis-a
`-vis incubator
management and good entrepreneurial failure.
First, incubator managers can use the model to
develop inspection points and then audit their
incubation processes. Second, with a real options
perspective, a positive view of incubatees that fail
quickly and cheaply can be adopted. The relevance
of this approach vis-a
`-vis incubator managerial
practice and policy-making should not be under-
stated: Incubators that help their incubatees fail
quickly and cheaply are successful incubators
because quick and cheap failures provide oppor-
tunities for entrepreneurial learning, firm recovery
and repositioning (or later firm ‘‘reincarnation’’ in
the event of terminal firm failure), an optimal
allocation of incubator and incubatee owner
resources, and an optimal injection of organiza-
tional population churn into the local economy.
We would like to thank Germain Bo
¨er, Austin
Cheney, Lori Ferranti, James Foster, Josh John-
son, William Mahaffey, Dave Owens, Surya
Pathak, Ken Pence, Steven Van Dyk, John
Westbrooks and Bin Xie for their comments and
suggestions on earlier versions of this paper.
1. See Storey (2003) for a more detailed explanation of the
situations in which publicly subsidized interventions are
appropriate for remedying entrepreneurial market failures.
2. We define incubation outcomes in terms of incubatee
success and failure. In previous research (Hackett and Dilts,
2004), incubation success was described in accordance with the
literature as follows: (a) The incubatee is surviving and growing
profitably; (b) The incubatee is surviving and growing and is on
a path toward profitability; (c) The incubatee is surviving but is
A Real Options-Driven Theory of Business Incubation 51
not growing and is not profitable or is only marginally
profitable. Failure was described in accordance with the
literature as follows: (d) Incubatee operations were terminated
while still in the incubator, but losses were minimized. (e)
Incubatee operations were terminated while still in the
incubator, and the losses were large.
3. This categorization of technologies was first introduced by
Whelan (1989) and cited in, and made widely known by
Coombs and Richards (1991). Briefly, critical technologies are
technologies that confer a competitive advantage today,
strategic technologies are technologies that are expected to
confer a competitive advantage in the future, and enabling
technologies are complementary technologies that capacitate
the functionality of critical and possibly strategic technologies.
4. We employ the logic model to help clarify assumptions
regarding incubator-incubation phenomena. The use of logic
models to conceptualize and evaluate intervention programs—
and business incubation programs are indeed intervention
programs (Rice, 2002)—has an established track record in the
public sector, e.g. U.S. Department of Justice (1994); Urban
Institute (1997).
5. Although we include New Venture Development and New
Product Development in the Activities column in Figure 1, they
are beyond the scope of this paper, are primarily the
responsibility of the incubatee, and are not discussed in detail.
6. Macro-management of the innovation process is the
incubation process; i.e. the value-adding processes of monitor-
ing and assistance, and resource infusion, and in extreme cases,
expulsion from the incubator.
7. Financial dependency on annual subsidies forces incuba-
tors to operate in a politically charged environment where they
must constantly demonstrate the ‘‘success’’ of the incubator and
its incubatees in order to justify continued subsidization of
incubator operations with public funds. Such a politically
charged environment can tempt incubator-incubation industry
stakeholders to underreport incubator-incubation failures and
over-report successes. By redefining what constitutes success
`-vis an incubation outcome, the real options perspective
enables the creation of an environment in which more accurate
reporting is less politically and budgetarily dangerous. See
Udell (1990) for a discussion of the inaccuracy with which
incubators report their successes.
8. Lumpkin and Ireland (1988) note that most incubators use
at least some of these selection criteria.
9. A ‘‘shadow option,’’ is an option that has not yet been
recognized as having latent value (Bowman and Hurry, 1987).
10. Because the incubator represents an attempt to help
entrepreneurial new or young firms overcome some resource
gap(s) that prevent them from succeeding in their early stages of
development, it is important from an economic rationality
perspective to differentiate the types of applicants for admission
to a business incubator in the following ways: (a) those that
cannot be helped through business incubation, (b) those that
should be incubated due to the existence of some resource
gap(s) and (c) those that do not need incubation. Ideally, only
those firms that are ‘‘weak-but-promising’’ (weak due to a lack
of resources, but promising in the sense that they have built a
compelling business case) should be considered incubation
candidates (Culp, 1996).
11. For example, the options portfolio could be described as
‘‘highly likely’’ ‘‘likely’’ ‘‘neutral’’ ‘‘unlikely’’ or ‘‘highly
unlikely’’ to have good returns where good ¼incubatee
survival. Percentages could also be assigned. For example, 80%
of the options are expected to succeed while 20%are expected
to fail. Ex post-facto assessments (snapshot ‘‘report cards’’)
could also be made at discrete points in time. For example, in
accordance with our definition of BIP, options that failed
quickly and cheaply or that survived and made a profit or were
on a path to profitability at time of incubator exit would be
counted as successes while options that are marginally viable or
were terminated with heavy losses would be counted as failures.
Aldrich, H., 1999, Organizations Evolving, Thousand Oaks, CA:
Sage Publications.
Allen, D.N. and S. Rahman, 1985, ‘Small Business Incubators:
A Positive Environment for Entrepreneurship,’ Journal of
Small Business Management 23 (3), 12–22.
Alvarez, L.H.R. and R. Stenbacka, 2001, ‘Adoption of
Uncertain Multi-stage Technology Projects: A Real Options
Approach,’ Journal of Mathematical Economics 35 (1), 71–
Bacharach, S.B., 1989, ‘Organizational Theories: Some Criteria
for Evaluation,’ Academy of Management Review 14 (4),
Barney, J., 1991, ‘Firm Resources and Sustained Competitive
Advantage,’ Journal of Management 17, 99–120.
Bowman, E.H. and D. Hurry, 1987, ‘Strategic Options,’
Working Paper 87–20. Reginald Jones Center, the Wharton
School: University of Pennsylvania, Philadelphia.
Bowman, E.H. and D. Hurry, 1993, ‘Strategy Through the
Option Lens: An Integrated View of Resource Investments
and the Incremental Choice Process,’ Academy of Manage-
ment Review 18 (4), 760–782.
Brooks, O.J., 1986, ‘Economic Development Through Entre-
preneurship: Incubators and the Incubation Process,’
Economic Development Review 4(2), 24–29.
Bruton, G.D. and D. Ahlstrom, 2003, ‘An Institutional View of
China’s Venture Capital Industry: Explaining Differences
Between China and the West,’ Journal of Business Venturing
18 (2), 233–259.
Chrisman, J.J., 1989, ‘Strategic, Administrative, and Operating
Assistance: The Value of Outside Consulting to Pre-venture
Entrepreneurs,’ Journal of Business Venturing 4(6), 401–
Coase, R.H., 1937, ‘The Nature of the Firm,’ Economica 4,
Coombs, R. and A. Richards, 1991, ‘Technologies, Products
and Firms’ Strategies: Part 1—A Framework for Analysis,’
Technology Analysis and Strategic Management 3(1), 77–86.
Copeland, T., 2002, ‘The Real-options Approach to Capital
Allocation,’ IEEE Engineering Management Review 30 (1),
Daft, R., 1983, Organization Theory and Design, New York,
NY: West.
Deeds, D.L., D. DeCarolis, and J. Coombs, 1999, ‘Dynamic
Capabilities and New Product Development in High
52 Hackett and Dilts
Technology Ventures: An Empirical Analysis of New
Biotechnology Firms,’ Journal of Business Venturing 15,
Dimaggio, P.J. and W.W. Powell, 1983, ‘The Iron Cage
Revisited: Isomorphism and Collective Rationality in
Organizational Fields,’ American Sociological Review 48,
Dixit, A., 1992, ‘Investment and Hysteresis,’ Journal of
Economic Perspectives 6(1), 107–132.
Dixit, A. and R. Pindyck, 1994, Investment Under Uncertainty,
Princeton, NJ: Princeton University Press.
Eisenhardt, K.M., 1989, ‘Agency Theory: An Assessment and
Review,’ Academy of Management Review 14 (1), 57–74.
Eisenhardt, K.M. and J.A. Martin, 2000, ‘Dynamic Capabil-
ities: What Are They?,’ Strategic Management Journal 21,
Foss, N.J., 1998, ‘The Resource-based Perspective: An Assess-
ment and Diagnosis of Problems,’ Scandinavian Journal of
Management 14 (3), 133–149.
Galunic, D.C. and K.M. Eisenhardt, 2001, ‘Architectural
Innovation and Modular Corporate Forms,’ Academy of
Management Journal 44 (6), 1229–1249.
Giddens, A., 1984, The Constitution of Society: Introduction of
the Theory of Structuration, Berkeley, CA: University of
California Press.
Hackett, S.M. and D.M. Dilts, 2003, Variables of the Business
Incubation Process: A Conceptual Framework, Nashville,
Tennessee: Vanderbilt University – Management of Tech-
nology Program Working Paper Series 03–502.
Hackett, S.M. and D.M. Dilts, 2004, ‘A Systematic Review of
Business Incubation Research,’ Journal of Technology
Transfer 29 (1), 55–82.
Hansen, M.T., H.W. Chesbrough, N. Nohria, and D.N. Sull,
2000, ‘Networked Incubators: Hothouses of the New
Economy,’ Harvard Business Review 78 (5), 74–84.
Hurry, D., A.T. Miller, and E.H. Bowman, 1992, ‘Calls on
High-technology: Japanese Exploration of Venture Capital
Investment in the United States,’ Strategic Management
Journal 13, 85–101.
Jack, S.L. and A.R. Anderson, 2002, ‘The Effects of
Embeddedness on the Entrepreneurial Process,’ Journal of
Business Venturing 17, 467–487.
Ketchen, D.J.J., J.B. Thomas, and C.C. Snow, 1993, ‘Organiza-
tional Configurations and Performance: A Comparison of
Theoretical Approaches,’ Academy of Management Journal
36 (6), 1278–1313.
Kotha, S. and V. Rindova, 2001, ‘Continuous ‘‘Morphing’’:
Competing Through Dynamic Capabilities, Form and
Function,’ Academy of Management Journal 44 (6), 1263–
Kuhns, B.A., 1999, Technology Transfer Performance: The
Impact of Entrepreneurial Responses to Institutional and
Commercial Pressures in US Universities, Houston, Texas:
University of Houston.
Lichtenstein, G.A., 1992, The Significance of Relationships in
Entrepreneurship: A Case Study of the Ecology of Enterprise
in Two Business Incubators, Unpublished Dissertation,
Philadelphia: University of Pennsylvania.
Luehrman, T.A., 1998, ‘Investment Opportunities as Real
Options: Getting Started on the Numbers,’ Harvard
Business Review 76 (4), 51–67.
McGrath, R.G., 1999, ‘Falling Forward: Real Options Reason-
ing and Entrepreneurial Failure,’ Academy of Management
Review 24 (1), 13–30.
Mian, S.A., 1997, ‘Assessing and Managing the University
Technology Business Incubator: An Integrative Frame-
work,’ Journal of Business Venturing 12 (4), 251–285.
Mitchell, G.R. and W.F. Hamilton, 1988, ‘Managing R&D as a
Strategic Option,’ Research-Technology Management 27 (3),
Nohria, N. and R. G. Eccles (eds.), 1992, Networks and
Organizations, Boston, MA: Harvard Business School Press.
Nonaka, I., 1994, ‘A Dynamic Theory of Organizational
Knowledge Creation,’ Organization Science 5(1), 14–37.
Nonaka, I. and H. Takeuchi, 1995, The Knowledge-Creating
Company: How Japanese Companies Create the Dynamics of
Innovation, Oxford: Oxford University Press.
Parks, R.B., P.C. Baker, L. Kiser, R. Oakerson, E. Ostrom, V.
Ostrom, S.L. Percy, M.B. Vandivort, G.P. Whitaker, and R.
Wilson, 1981, ‘Consumers as Co-producers of Public
Services: Some Economic and Institutional Considerations,’
Policy Studies Journal 9(7), 1001–1011.
Penrose, E., 1959, The Theory of the Growth of the Firm, New
York, NY: Wiley.
Presseley, M., K. Hogan, R. Wharton-McDonald, and J.
Mistretta, 1996, ‘The Challenges of Instructional Scaffold-
ing: The Challenges of Instruction that Supports Student
Thinking,’ Learning Disabilities Research and Practice 11
(3), 138–146.
Rice, M.P., 2002, ‘Co-production of Business Assistance in
Business Incubators: An Exploratory Study,’ Journal of
Business Venturing 17, 163–187.
Rice, M.P. and J. Matthews, 1995, Growing New Ventures,
Creating New Jobs: Principles and Practices of Successful
Business Incubation, Westport, CT: Quorum Books.
Riquelme, H. and J. Watson, 2002, ‘Do Venture Capitalists’
Implicit Theories on New Business Success/Failure have
Empirical Validity?,’ International Small Business Journal 20
(4), 395–420.
Rosenberger, J., 2003, What are Real Options?: A Review of
Empirical Research. Paper presented at the Academy of
Management, Seattle, WA.
Rumelt, R.P., 1984, ‘Towards a Strategic Theory of the Firm,’
in R.B. Lamb (ed.), Competitive Strategic Management,
Englewood Cliffs, NJ: Prentice-Hall.
Sarason, Y., J.F. Dillard, and T. Dean, 2002, Structuration
Theory as a Framework for Exploring the Entrepreneurship
Domain. Paper presented at the Academy of Management
Annual Meeting, Denver, CO.
Sherman, H. and D.S. Chappell, 1998, ‘Methodological
Challenges in Evaluating Business Incubator Outcomes,’
Economic Development Quarterly 12 (4), 313–321.
Skinner, B.F., 1976, About Behaviorism, New York: Vintage
Smilor, R.W., 1987, ‘Managing the Incubator System: Critical
Success Factors to Accelerate New Company Develop-
ment,’ IEEE Transactions on Engineering Management EM-
34 (4), 146–156.
A Real Options-Driven Theory of Business Incubation 53
Storey, D.J., 2003, ‘Entrepreneurship, Small and Medium Sized
Enterprises and Public Policies,’ in Z. J. Acs (ed.), Hand-
book of Entrepreneurship Research: An Interdisciplinary
Survey and Introduction (Vol. 1), Dordrecht: Kluwer
Academic Publishers Group, p. 560.
Sutton, R.I. and B.M. Staw, 1995, ‘What Theory is Not,’
Administrative Science Quarterly 40, 371–384.
Teece, D. and G. Pisano, 1994, ‘The Dynamic Capabilities of
Firms: An Introduction,’ Industrial and Corporate Change 3
(3), 537–556.
Temali, M. and C. Campbell, 1984, Business Incubator Profiles:
A National Survey, Minneapolis: University of Minnesota,
Hubert H. Humphrey Institute of Public Affairs.
Trigeorgis, L., 1993, ‘The Nature of Option Interactions and
the Valuation of Investments with Multiple Real Options,’
Journal of Financial and Quantitative Analysis 28 (1), 1–20.
U.S. Department of Justice, Bureau of Justice Assistance, 1994,
Assessing the Effectiveness of Criminal Justice Programs,
Washington, D.C.
Udell, G.G., 1990, ‘Are Business Incubators Really Creating
New Jobs by Creating New Businesses and New Products?,’
Journal of Product Innovation Management 7, 108–122.
Urban Institute, T., 1997, Developing and Using a Logic Model,
Washington, D.C.
Watson, K., S. Hogarth-Scott, and N. Wilson, 1998, ‘Small
Business Start-ups: Success Factors and Support Implica-
tions,’ International Journal of Entrepreneurial behavior &
Research 4(3), 217–238.
Wernerfelt, B., 1984, ‘A Resource-based View of the Firm,’
Strategic Management Journal 5, 171–180.
Whelan, R., 1989, How to Prioritize R&D. Paper presented at
the BAM Conference, Cardiff, United Kingdom.
Zacharakis, A.L., G.D. Meyer, and J. DeCastro, 1999,
‘Differing Perceptions of New Venture Failure: A Matched
Exploratory Study of Venture Capitalists and Entrepre-
neurs,’ Journal of Small Business Management 37 (3), 1–14.
Zucker, L.G., 1987, ‘Institutional Theories of Organizations,’
Annual Review of Sociology 13, 443–464.
54 Hackett and Dilts
... However, there are contradictory views on what constitutes success for a business incubator and what should be evaluated (Torun et al., 2018). Some authors argue that incubator success should be based on growth of the incubatee business (Hackett & Dilts, 2004), while others advocate for meeting the incubatees' objectives (Bergek & Norrman, 2008). Regarding the evaluation focus, many authors posit that for a successful performance evaluation, the focus should be on the incubation process (Bergek & Norrman, 2008) as opposed to outcomes and impacts (Sherman & Chappell, 1998). ...
... Finally, in the case of the benchmarking approach, performance measurements differ for each assessment and few assessors present benchmarks for these measures (Torun et al., 2018). Hackett and Dilts (2004) propose a model to assess performance of business incubators that draws from real options theory. The aim of their model is to explain and predict the likelihood of new ventures surviving the early stages of development. ...
... The literature on business incubation suggests the first three outcomes as indicative of success. However, according to the options theory, the fourth outcome also denotes success because the incubatee ceased operations rapidly and in a cost-effective way as it became apparent that further investment would not lead to venture success (Hackett & Dilts, 2004), minimising the cost of failure. Helping incubatees to cease operations quickly and cheaply provides opportunities for entrepreneurial learning and allows the temporarily failing firms to rethink their business ideas as well as increased efficiency in allocation of incubation-incubatee resources (Hackett & Dilts, 2004). ...
Full-text available
Business incubators are entrepreneurial support mechanisms developed to serve multiple purposes and have distinct services that cater to their specific cohorts. Consequently, there is no consensus about measures, metrics and methodologies appropriate for assessing their outcomes. Given the evolution of the internet and web technologies, and in a COVID environment, business incubators are emerging as fully virtual with programs delivered entirely online, making the evaluation of outcomes even more complex. This is because processes are less bounded and incubatees tend to be geographically dispersed. To date, research on the effectiveness of virtual incubation programs is sparse and therefore the contribution of virtual business incubators (VBIs) to small business development still remains unclear. This research proposes a framework to evaluate outcomes of VBIs. The framework is informed by THE Rural Woman virtual business incubator and community of practice (TRW-VBI-CoP) in conjunction with the literature and comprises: i) properties of the digital technology, ii) trust, iii) characteristics of virtual organisations and iv) success factors of virtual communities. TRW-VBI-CoP is used as a case study to examine its service provision processes and how these relate to program outcomes. Program outcomes are evaluated at individual level, from incubatees’ perspective and comprise knowledge acquisition and self-efficacy enhancement, both critical to the survival, growth and success of their new business ventures. Importantly, the proposed framework, can be adapted and applied to a wide range of VBIs, regardless of their orientation/speciality (e.g., general vs specialised), characteristics of target group (e.g., rural vs metropolitan and female vs mixed gender) and stage of business development. The context influences incubatees’ perceptions, needs and wants, and therefore affect service provision processes, management practices and services provided by the VBI, which directly impact the outcomes achieved. The research findings reveal that TRW-VBI-CoP has successfully created an online environment for learning and networking governed by trust mechanisms where incubatees acquire entrepreneurial knowledge and enhance their self-efficacy. Culture, alignment of objectives between TRW-VBI-CoP and incubatees and the high degree of homophily, all foster the development of trust. The learning and network management platform (L&MNP) employed, complemented with other digital tools, confer TRW-VBI- CoP with the flexibility to quickly respond and adapt to the needs of incubatees. Moreover, as a community of practice, support and resources do not stem exclusively from the management team, but from the dynamic collection of incubatees, established businesses and affiliated partners. This research contributes to the literature of VBIs by deriving and validating an outcome evaluation framework that includes key variables for the provision of business programs and support online linked to entrepreneurial knowledge and self-efficacy obtained by the incubatees.
... Following Hackett and Dilts (2004a) real options-driven theory, an incubator takes on a role like an "ideal type" venture capitalist during the selection performance in choosing potential incubatees from a pool of candidates; followed by monitoring and provision of business assistance in observing and assisting incubatees; as well as resource munificence in terms of assets, capabilities, organisational processes, attributes, information, and knowledge to facilitate the entrepreneurial process. These resources which include both tangible and intangible resources such as capabilities and assets are made available to incubatees to help them to respond to market opportunities or threats (Christensen & Overdorf, 2000). ...
... UBIs act as an accelerator for the commercialisation of the universities' research outcome (Hassan, 2020). There is a limited number of studies that applied Hackett and Dilts (2004a) through the lens of real options-driven theory, except for Posza (2019) who identified the real options at every stage of the business incubation process in the eight Hungarian business incubators. As explained, UBIs' activities are comparable to investing in companies and as such the real options-driven theory answer which factors should be taken into account when selecting the incubatees, and whether predefined criteria contribute to the economic results of incubation, ...
... In other words, the university incubator's role and performance in the entrepreneurial process depends on the ability of the incubator (or the incubator manager) to identify and create real options that can be found in each stage of the incubation process (pre-incubation, incubation, post incubation). Incubators control and link resources with the objective of facilitating the successful new venture development of the incubatees while simultaneously containing the cost of their potential failure (Hackett & Dilts, 2004a). This implies that beyond the low-cost physical facilities offered by UBIs, it is crucial to recognise the importance of the entire incubators' networks (such as funders, government agencies and industry partners) and the roles they play in incubating new ventures to success; hence facilitating the entrepreneurial process. ...
Full-text available
Objective of the study: To clarify the role of university-based incubators in facilitating the entrepreneurial process by elucidating the value-add of the incubation activities through the lens of real options-driven theory and resource-based view theory.Methodology/approach: An in-depth case study of five Malaysian research-led universities is conducted through thirteen semi-structured interviews with UBI managers and staff.Originality/Relevance: Integrating real options-driven theory and resource-based view to understand the roles of UBI in supporting the entrepreneurial process, elaborated in the three stages of incubation: pre-main-post incubation phase.Main results: UBI has a decisive role in facilitating entrepreneurial process through selecting potential entrepreneurs, mobilising the optimal mix of tangible and intangible resources, and monitoring the entrepreneurial process. All the five UBIs displayed interorganisational relationships with the various stakeholders and have capable incubator manager as a linchpin to facilitate the incubation process from pre to main incubation phase. However, there is little evidence on aftercare post incubation services to support the entrepreneurial growth stage, which are crucial for their continuing survival and growth.Theoretical/methodological contributions: It adopts a multi-theoretical lens of real options-driven theory and resource-based view theory to explain the roles of UBIs in the entrepreneurial process.Social/management contributions: It provides insights, best practices, and frameworks regarding the incubation process of Malaysian UBIs, and how its roles can be enhanced to drive more successful entrepreneurial processes.
... The real option theory supports the contribution of the business incubation process to the growth of startups. This theory was advocated by Hackett and Dilts in 2004. It looks at the sustainability of incubatee startups in terms of incubatee growth and financial performance at the time of incubator exit as a function of the incubator's ability, developed over time and through the accumulation of innovative venture development capabilities and resources, to create options through the selection of weak but promising intermediate potential firms for admission to the incubator and to elicit innovative venture development capabilities and resources from these firms. ...
... It looks at the sustainability of incubatee startups in terms of incubatee growth and financial performance at the time of incubator exit as a function of the incubator's ability, developed over time and through the accumulation of innovative venture development capabilities and resources, to create options through the selection of weak but promising intermediate potential firms for admission to the incubator and to elicit innovative venture development capabilities and resources from these firms. Hackett and Dilts (2004) showed how to see the incubation process through the lens of real option theory. According to their research, this article connects the business incubation process with real option theory and identifies real options in the business incubation process. ...
Full-text available
The focus of this study was to determine how business incubation services accelerate the growth of start-ups in Nairobi City County, Kenya. The specific objectives were to examine the effect of networking services, physical incubation infrastructure, management advice, financial resources, and business planning on the growth of startups. The theories of the firm, stochastic theory, social network theory, real option theory and trait theory of entrepreneurship anchored the study variables. A descriptive research design was used, and a sample of 227 respondents was selected using proportionate stratified and simple random sampling techniques from a target population of 567 startups that had been in an incubation process. A questionnaire was used to collect primary data, and the data was analyzed using descriptive and regression statistical techniques. The findings indicated that there was a significant and positive relationship between networking services, physical infrastructure, management advice, financial resources, and business planning and the growth of startups. In order to have access to physical infrastructure, startups are encouraged to join startup associations like the Association of Startups and SME Enablers of Kenya, the Association of Countrywide Innovation Hubs, and other independent incubation facilities. A clear act governing startups can offer tax incentives to startups, reducing costs in the form of financing and providing tax breaks to startup investors, improving their financial standing. Incubator owners are encouraged to take startups through business planning courses that are critical to ensuring they scale up their businesses. Finally, through the triple helix model, business incubators can partner with universities and government agencies to create synergy instead of competing among themselves.
... There has been growing interest in business incubation and, accordingly, a significant body of research has developed in recent years (Hackett and Dilts, 2004b). It is widely recognized that new technology-oriented firms often face difficulties arising from market failure problems (e.g., Colombo and Delmastro 2002;Link and Scott 2003;Hackett and Dilts 2004a). Because markets for knowledge are imperfect, such firms can appropriate only a part of the social benefits that they generate. ...
... We find that while the number of STBI graduates is closely correlated with the infrastructure as well as the human and financial resources used by the STBI, the firm size, in terms of employment and value added, as well as the labor productivity of the graduates are unrelated to such resource inputs. We also find that the educational levels of incubator managers and the financial support given to their clients have significant impacts on the number of graduates, a point consistent with the theoretical model developed by Hackett and Dilts (2004a). ...
Full-text available
This paper examines the association between the outcome of business incubation and the resources used by incubators, by using a small panel of science and technology business incubators (STBIs) in China. We find that while the number of firms graduating from an STBI is closely correlated with the infrastructure as well as the human and financial resources at the STBI’s disposal, the graduates’ firm sizes, in terms of employment and value added, as well as their labor productivity are unrelated to such resource inputs. We also find that the educational levels of incubator managers and the financial support given to their clients have significant impacts on the number of graduates. However, the number of graduates does not increase with the scale and diversity of the cities in which their STBIs are located or with the presence of foreign ventures and universities in the locality. We do not find that universitybased and government-established STBIs differ significantly in their incubation performance.
... However, there are a variety of entrepreneurial support organizations with different functions and performances. This has led some authors to describe incubation as the "black box" of entrepreneurial support (Hackett & Dilts, 2004;. This research is part of this body of work aimed at better understanding the different facets of incubation. ...
While entrepreneurship has traditionally been studied from the perspective of the entrepreneur or entrepreneurial enterprise, a modern view emphasizes the importance of the context in which the entrepreneur or enterprise operates. From this perspective, the entrepreneurial ecosystem describes the entrepreneurial context by disentangling the complex interdependent interactions between various organizations (biocenosis) and the milieu/environment in which the entrepreneur or company operates (biotope). However, previous research has neglected to provide a holistic view of the complex dynamics of ecosystems. In response, this HDR thesis develops the state of the art of this emerging theoretical framework, identifies research gaps that require further investigation, and designs a research program (i.e. the BEES program, Building Entrepreneurial Ecosystems Sustainably) to provide concrete directions for the development of entrepreneurial companies. This program contributes i) to the theorization of the entrepreneurial ecosystems theoretical current through a holistic vision; ii) to a better understanding of the complex strategic dynamics and behaviors in this context; iii) and to its successful adaptation and implementation in different contexts. The CEED program facilitates the adoption of an ecosystem approach to building an entrepreneurial society and provides the impetus for the construction of a new school of scientific thought based on the ecosystem approach.
... As it was said [1] is it that S. M. Hackett and D. M. Dilts [6] say that the result of business incubation can be described by a formula where they talk about BI munificence (or in other terms how generous the BI is). This approach raises questions, does it mean that BI do a kind of charity work? ...
The main stages of the study and analysis of the business incubation process (in the relevant organizations) are presented, both from the perspective of a resident and from the side of a business incubator. The accepted approach to the specifics and characteristics of the leading business incubators / accelerators and other similar organizations from the point of view of project management is explained. In the process of research, a review of academic works and sources of professional associations / institutional organizations was carried out, in which the existing definitions of a business incubator are analyzed, an overview of the organization / business model (business incubator) is provided together with data collection (from interviews and questionnaires). The most famous business incubation programs have been studied. A functional model of a business incubator has been obtained, as well as a set of key performance indicators (KPIs) and metrics that can be useful for a business incubator to achieve effective company management.
Full-text available
The Real Options theory (“ROT”) states firms should be approached as a combination of real assets and real options. Domestic equity research analysts do not seem to evaluate companies applying ROT. After reviewing 344 (from a total estimated 368) equity research reports or analyses on Brazilian listed power generation companies produced between December 31, 2020, and April 30, 2021, we find only discounted cash flow (“DCF”) techniques are applied. No single mention to ROT is made. To estimate the magnitude of potential misvaluations, we use the Black-Scholes method to price the growth plans made publicly available by each of those 15 companies in that period and compare the outcome with the analysts’ forecasted equity value upside per company. Our results suggest local analysts have ignored a sizeable intrinsic value to those companies by failing to apply ROT. Potential explanations range from behavioral biases to low power sector representativeness at IBOVESPA.
Conference Paper
Full-text available
Entrepreneurial Ecosystem (EE) research has explored bottom-up ecosystems that spontaneously appear then develop over time and top-down formed ecosystems deliberately established through organizational sponsorship designed to enable productive entrepreneurship. Despite the crucial role organizational sponsorship plays in entrepreneurial support activities, prior research has overlooked the critical design methods used to formulate the strategy and temporal dynamic factors required to establish and operate top-down emerging resource-constrained ecosystems. Specifically, in the year leading up to initial ecosystem launch, which design methods are used to determine entrepreneur support activities and timing, then what is modified during the first year of operation? Approaching top-down established ecosystems as operating entities and building on current EE theory along with a range of design theories, this study examines relevant literature with a focus on initial and ongoing operating strategy formulation. The findings argue that effectuation principles can be used to design emerging top-down ecosystems better and proposes a new fourth, temporal effectuation means principle to explain support activity introduction timing and sequencing. By doing so, this paper offers evidence and theoretical elaboration for an extended version of the effectuation concept to build emerging entrepreneurial ecosystems in uncertain resource-constrained locations. These findings could be particularly relevant to inner-city, migrant-based, remote, transition economies or economically/demographically declining regions with a desire to promote entrepreneurship.
Full-text available
The aim of this paper is to provide an overview of current understanding of the role and key success factors of business incubation in supporting start-ups and micro-enterprises. This paper draws upon the results of workshops project initiated by the Algerian ministry of start-ups and micro-enterprises, through its operating division called Algeria Venture. The purpose of the workshops was to review universities as well private incubators operating in Algeria, on models of incubation, which have various factors on the greatest impact on sourcing and building high growth potential of innovative firms. This paper also drew upon the provisional results of-and contributes to-ongoing research on the role of the degree of cooperation of incubators ecosystem, for new firms in supporting startups and micro-enterprises ecosystem. This research reviews the results of a qualitative study of factors identified by universities and private incubators. In order to address themes emerging from group works, social learning and action learning theories are used to evaluate the perception of incubators' management and operations' staff, regardless of the identification and degree of influence of factors on incubation effectiveness. The focus was made on seven preliminarily factors, naming (1) incubatees sourcing; (2) incubatees project's phases; (3) maturity level of the incubator; (4) typology of the incubator; (5) revenue model of the incubator (6) KPIs to measure effectiveness; and (7) incubatees profiles and motivations. For this purpose, the researcher conducted a study with 40 universities and private incubators, represented by 52 management and operations' staff respectively. Subjects of the study were gathered during almost one-week workshops using a research methodology, which combined qualitative techniques. Participatory observations with action learning approach, and analysis of learning deliverables were utilized to examine differences in incubators effective practices, and challenges. These discussions can be formulated into the following question: Research question: What are universities and private incubators prevailing factors in term of performance and ecosystem building? The study examines the degree of awareness of management and operations' staff of incubators about success factors of an incubation program, and how those factors relate to start-ups and micro-enterprises ecosystem building.
Full-text available
Business incubators have been proven as effective in creating jobs and accelerating the growth of new businesses. The purpose of this paper is to investigate and identify the situation and factors of business incubator as a catalyst to facilitate successful implementation such as, 1) young entrepreneur, 2) job creation, and 3) Networking business incubators and (SMEs) among OIC countries. Although the basic concept of business incubation remains until today, there have been several enhancements to the capability of business incubators to create entrepreneurs and improve economic driver. Moreover, institutional theory stated that business incubators have generated some positive results for small businesses’ success. The nature of this research is mainly a mixed methods approach such as case study and qualitative (literature review). Case studies reflect a comparative analysis of entrepreneurship ecosystem between Asia and Arab world. Some data retrieved from journals, articles, and business incubator report. Findings of this paper show that the rapid expansion of business incubators in Asia and the Arab world is an important phenomenon affecting the economic growth in those countries. Moreover, much attention and great support from central and/or local government has relation on growth in incubation industry. Furthermore, partnerships and sharing among different incubators is a crucial component to make incubators more successful. The findings of this paper help governments and local authorities to shape future polices for incubation industry, entrepreneurs, and economics development among OIC.
This research examines two questions: What is the significance of relationships and how do they influence entrepreneurship? What kinds of settings or networks of relationships are conducive to entrepreneurship and how do we create them?^ A two track approach was used. First, a conceptual framework was developed in order to understand the questions and to make sense of observations about relationships and entrepreneurship. Second, actual examples of relationships were examined in order to see how they influence entrepreneurship and to learn under what circumstances they are successful. Two business incubators, the Fulton-Carroll Center in Chicago and the Enterprise Development Center on Route 128, were chosen as settings in which to explore these behaviors. The research methods used include in-depth interviews, participant observation and focus groups.^ The major finding is that the most important contribution of business incubators to entrepreneurship lies in the opportunities they provide for entrepreneurs to interact and develop relationships with other entrepreneurs, the incubator manager and other individuals associated with the incubator. Entrepreneurs receive three types of benefits: instrumental (such as increased sales, lower costs, enhanced capabilities and reduced risk), psychological and developmental. A typology which distinguishes the content of the exchanges and the structure of the relationships is presented in order to describe the variety of interactions within the incubators and to provide a basis for comparing them. Nine factors collectively influence the development of relationships and the interaction: the types of businesses, the personal characteristics of the entrepreneurs, the stage of the firms' development, the existence of a critical mass of firms, the layout of the incubator space, norms and attitudes, the existence of forums for discussion and the actions of the incubator manager. Lacking sufficient resources and skills, entrepreneurs must create or establish access to them by developing relationships of interdependence with others. Relationships are the vehicle that make the interactions as well as these benefits, possible.
Conference Paper
This paper focuses on dynamic capabilities and, more generally, the resource-based view of the firm. We argue that dynamic capabilities are a set of specific and identifiable processes such as product development, strategic decision making, and alliancing. They are neither vague nor tautological. Although dynamic capabilities are idiosyncratic in their details and path dependent in their emergence, they have significant commonalities across firms (popularly termed 'best practice'). This suggests that they are more homogeneous, fungible, equifinal and substitutable than is usually assumed. In moderately dynamic markets, dynamic capabilities resemble the traditional conception of routines. They are detailed, analytic stable processes with predictable outcomes. In contrast, in high-velocity markets, they are simple, highly experiential and fragile processes with unpredictable outcomes. Finally, well-known learning mechanisms guide the evolution of dynamic capabilities. In moderately dynamic markets, the evolutionary emphasis is on variation. In high-velocity markets, it is on selection. At the level of REV, we conclude that traditional REV misidentifies the locus of long-term competitive advantage in dynamic markers, overemphasizes the strategic logic of leverage, and reaches a boundary condition in high-velocity markets. Copyright (C) 2000 John Wiley & Sons, Ltd.
Understanding sources of sustained competitive advantage has become a major area of research in strategic management. Building on the assumptions that strategic resources are heterogeneously distributed across firms and that these differences are stable over time, this article examines the link between firm resources and sustained competitive advantage. Four empirical indicators of the potential of firm resources to generate sustained competitive advantage-value, rareness, imitability, and substitutability are discussed. The model is applied by analyzing the potential of several firm resources for generating sustained competitive advantages. The article concludes by examining implications of this firm resource model of sustained competitive advantage for other business disciplines.