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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Related posts:

1. Why you should invest your time & money into space technolology
2. Some thoughts on the investment-climate for innovative start-ups
3. Rebooting entrepreneurial brainstorming sessions: what elements should they contain?
4. The mystery of "ambition" and how it correlates with success
5. At last, Vince is getting serious: an interview with Bruno Naulais, the director of ESA incubator ESI