2012 marks a new chapter in Mexico’s history with a change in the political party in power resulting from this year’s presidential election. For the 500 business incubators that make up Mexico’s National Business Incubation System, born of a Federal government initiative in 2004, it means a real possibility of losing the funding that, for many programmes, is a sole source of revenue.

Until now...

Incubators in Mexico enjoy a resource that programmes in other countries desire but rarely have: government funds for start-ups. Although the amounts are small, between 25,000 and 50,000 Mexican pesos (approximately US$ 1,900 to US$ 3800), the funds are enough for an incubator to cover programme costs and the company to cover initial expenses. A change in government policy could mean these start-up funds would no longer be available; a loss for both the incubator and the companies it serves.

Advantageous as these funds might seem, the requirements that necessarily come with government monies have been a burden to the incubators that access them. Conditions such as the creation of a specific number of jobs, the length of time it takes to receive the funds and the complexity of the process for reporting expenditures have lead some programmes to forgo, or at least limit, their reliance on these funds and the time and resources it takes to manage them.

Instead, these incubators must rely on bootstrapping, corporate sponsorships, and university backing to support their operations and start-up funding. Programme fees paid by the entrepreneur are often also a part of the business model but universities are often prohibited from incurring financial gain limiting an incubator’s ability to generate revenue through client fees. To avoid this pitfall, incubator proponents have found new ways to incorporate 32 percent of them through less rigid entities such as social organizations and NGO’s, and a few others have chosen the for-profit route. These programmes will be well-positioned to deal with any policies set forth by the new administration.

Regime changes are common, and political power struggles lead to a change in political actors, priorities and areas of focus. Additionally, the need felt by a new administration to differentiate itself from the dethroned regime requires a marked shift in policy. This is the situation incubator managers in Mexico are expecting in the coming months, as the new administration sets forth its own agenda and appoints its own officials to the offices that regulate and fund incubation programmes.

Strong legacies

Programmes that have demonstrated value to the university, NGO, state or local government that sponsors it will be better positioned to seek support to face government changes. The private university system Instituto Tecnologico y de Estudios Superiores de Monterey (ITESM) has 33 incubators at campuses around the country. This school, founded by successful business people on the premise of offering a strong education for future entrepreneurs, has created an incubation system that is now an integral part of the school’s offering to its business-minded students. The director of the incubation system Karla Giordano explains, everyone from the guard at the parking lot entrance to the President of the University knows what the business incubator does, and their role in serving the entrepreneurs who are a part of it. This attitude has evolved through trial and error since ITESM’s first incubator was created in 2001, but is now the premise of a successful and respected national programme that the university would not allow to expire.

Incubators that have adopted the practice of diversifying their revenue stream will find the transition challenging, but not insurmountable. For one, they will have other institutions' skin in the game. Sponsor or partner institutions that have invested in a programme will be inclined to save their investment either by replacing the lost revenue source or finding a new one. Additionally, the process a manager undertakes in gaining the financial support of a partner institution ultimately leads to the development of personal relationships, which can prove valuable when the incubator is in need of institutional support.

Future scenarios

For those programmes that have depended solely on government funding however, the scenario they face is much more bleak. By not adding financial support from their sponsoring institution, they will find themselves alone facing a difficult battle. A study sponsored by the Ministry of the Economy in 2010 showed that 16 percent of the incubators evaluated required strengthening and only 6 percent were fully mature. The rest were somewhere in between, with 60 percent deemed too new to evaluate. Programmes that have fared poorly or with no real track record to illustrate success will struggle to find new partners and new sources of revenue.

There are other outcomes besides total elimination of the funding programme, and Mexican incubator managers would welcome certain changes. The possibility of having an official at the head of the agency that regulates business incubators, who has had experience as an incubator manager would be an important first step to improve some of the problems. The head of the Business Incubator at the Jesuit University of Guadalajara (ITESO), Oscar Fernandez, would welcome this scenario. He believes that if programme requirements are created according the real needs of entrepreneurs, and allow for enough time and flexibility, entrepreneurs would benefit and be able to take full advantage of their incubation programme.

In conversation with  Oscar Fernandez Larios, Manager of the ITESO Incubator for Technology Companies

What are you expecting to see this year after the presidential election?

There are a couple of scenarios we could face in 2013 and one of those is the loss of funding and having to operate without government support. What worries me most are our incubatees. Many of them, I would say the majority, are waiting to receive this assistance. We could move to having a large part of each project funded by incubatees’ own funds, but the reality is that many of our clients, and anyone who seeks the incubator’s support, come with few resources, which makes this situation so complicated.

Mexico’s Ministry of the Economy has programmes that support business incubators. What would you like to see change in these programmes?

The difference I would like to see going forwards is that the government think of realistic scenarios. When you are in this industry you see that, in reality, incubation is not a quick process; you cannot support a company for three months and be done. What I would like to see in terms of government funding is to have someone running the programmes,  who actually understands and knows incubation. Because when they set objectives and documentation requirements, you can tell they think it’s a very short process. I’d like to see, a person who is knowledgeable about support for incubators, who knows how to do business,  someone that  has, at least, had experience in an incubator and knows how the things work within that setup.

What are you doing to prepare for the change in government and the uncertainty that currently exists?

What we are doing is analysing the possible scenarios. I believe that any incubator has to at least think about what will happen if we stop receiving funds. What would happen if we don’t get any funding until the end of the year? What would happen if they change the procedures we work under?

We are working with two primary scenarios: one optimistic and one pessimistic. In the optimistic scenario everything remains more or less the same; they might change a few procedures but we would continue to work in more or less the same way. That is the positive scenario. In the pessimistic scenario everything changes. We went as far as considering the elimination of the Ministry of Small and Medium Enterprises and the creation of a new ministry. Or the new government begins to support other agencies and they leave incubators poor. And then we began to see how we could continue to work in that scenario. Because we have the university’s support the scenario is not so adverse. It is now the university that carries a significant part of the staff expenses for the incubator, so the change would be in terms of the number of companies we could support in a year. We would be serving them more or less with the university’s own funds and the projects that are selected would have to come in with a higher level of funds than what are needed now. We would also look to get service providers willing to work pro bono, companies that have previously received our assistance to help with mentoring, and negotiating with service providers that have been working with us to lower their rates. In essence we would see a reduction in the number of projects we can assist and we would have to urge the university to rapidly find ways to take equity or charge a fee for a given period of time.

What advice would you give other incubators going through this scenario?

The most important recommendation is to leave time for thinking. Sometimes there isn't  much time because operations ruthlessly require you to be constantly on the move, you have to keep up with the day-to-day, and if you don’t pay attention you don’t have time to think. What we did here to give ourselves that time is to go outside of Guadalajara, outside of the environment of the incubator and we had a planning and analysis session for two days in a small town nearby. Regardless of whether you leave town or not for this work, the time to think and analyse the “what ifs” is very important. Until now we have not heard any news about the funding future and we may not hear anything until December, but in the mean time the entrepreneurs that need our support continue to come and we have to provide answers. That’s why it is important to think and be prepared so you are not caught off guard.

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Ana Greif holds a Master’s in Public Policy and Management Degree from Carnegie Mellon University and is the President of Varela Consulting LLC. Ana specializes is business incubation as an economic development tool, providing consulting services, leading trainings and performing studies on Business Incubation in the US, Mexico, Uruguay, Australia, Africa, Singapore and Russia. She is also the National Business Incubation Association’s (NBIA) main point of contact for Latin America. (www.varelaconsulting.com)