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FEASIBILITY ASSESSMENT OF A HIGH TECHNOLOGY INCUBATOR IN THE SOUTH AFRICAN CHEMICAL SECTOR KEY FINDINGS 11 March 2011

Elena Broughton

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  • FEASIBILITY ASSESSMENT OF A HIGH

    TECHNOLOGY INCUBATOR IN THE SOUTH

    AFRICAN CHEMICAL SECTOR

    KEY FINDINGS

    11 March 2011

  • Study overview

  • Study background

    Chemin plans to remodel and reaffirm its mandate to incubate innovative and high technology chemical sector-related projects

    Envisaged high-tech start-up and business incubator: Goal:

    Increase capacity base and depth of chemical processing technologies in SA

    Targeted activities: Innovative technologies with intensive R&D base Downstream activities in the chemical sector

    Targeted businesses: Domestic high-tech start-ups and businesses Foreign companies entering SA market

    Location: Midrand, Gauteng

  • Study scope St

    ud

    y sc

    op

    e Feasibility analysis

    Locational analysis

    Target marketing profiling

    Market viability assessment

    Operational model

    Incubation model

    Operating funding requirements

    Human resource requirements

    Incubation services and soft-landing services

    Seed funding requirements

  • Best practices in brief

  • General trends observed

    Most of incubators in Asia and Latin America have a technology focus Developed countries: mixed-client incubators most common

    Greater inclination towards semi-virtual and virtual service offerings

    Some offer soft-landing services, but these are: Established incubators:

    Incubators proven to be successful

    Incubators with positive track record offering support to domestic businesses

    Transformed from incubators with international potential (international partnerships)

  • General challenges experienced

    1. Financial constraints: Inadequate or under-estimated start-up finance

    Working capital limitations

    2. Inadequate management capabilities

    3. Poor location chosen for political considerations

    4. Constraints around seed capital for tenants Bureaucratic appraisal

    High collateral

    Lack of information on sources

    5. Overambitious measures of performance set by the government

  • Funding and finances

    1. Non-profit model most common Mainly public sector funded

    2. Two prerequisites for success:a) Diversification of sources:

    o Reduce dependency on one source/public sector

    o Incubators deriving larger revenue from own activities-tend to be more successful

    b) Secure funding for continued support

  • Management and operations

    1. Sound management practices the key 2. Representative governing board:

    A graduate firm

    Experts (Technology transfer, accounting, legal, IP)

    Local government representation

    National development agency representation

    3. A strict selection and exit criteria a must

    4. Three years incubation period average

    5. Graduation only after satisfying exist criteria

  • Service offerings

    Value added sharing of know-how rather than physical aspects

    Shared administrative services

    Office equipment

    High-speed internet

    Assistance with client

    Presentations

    Training in business etiquette

    Basic services

    Entrepreneurial training (business basics to management)

    Increased access to investment

    Relationship building with local R&D and HE institutions

    Assistance in setting up production

    Strong mentor programme

    Value-adding services

    Assistance with import/export law

    Cost of doing business

    Translation

    Language training

    Visa and permits

    Drivers license,

    Housing

    Soft-landing services

  • Soft-landing services - come in packages

    Premium

    Standard

    Basic/Welcoming

    package

    Office space rent (1 month)

    Meeting room access (12h)

    Business development support/advice (12h)

    Environmental scanning of local competitors

    Organised meetings with stakeholders (3-7)

    Networking event attendance

    Office space rent (5-15 days)

    Business development support/advice (4-8h)

    Meeting room access (8h)

    Envionmental scanning of local competitiors

    Organised meetings with stakeholders (1-2)

    First talk/introduction

    Brief local market entry consulation

    Initial partner search

    Initial business development advice (2-4h)

    Meeting room access (2-4h)

    Working place (desk) with internet connection

  • Facility requirements

    General size

    1. Self-sufficiency benchmark: 2 000m 70% gross rentable area

    2. Tenants: 8-123. Space:

    Flexible to allow enlarging or dividing on a modular basis

    10-150m per unit/tenant4. Incubator manager to supported

    incubatees: 1:20

    Provided facilities

    1. Incubator space (offices, workshops, or halls)

    2. Security

    3. Laboratory space (manufacturing)

    4. Office equipment

    5. Specialised equipment or facilities e.g. library, warehouses, etc.

    6. Common areas: equipped conference rooms, exhibition space, training rooms, and reception

    7. Telecom infrastructure: telephone, local area network, and internet services

    8. Basic business equipment: computers, copiers, fax machines, etc.

  • Market viability: high-tech

    business incubator

  • Chemical sector classification

    The DTI classification SIC edition 5 (SIC5) and SIC edition 7 (SIC7) codes

    Sub-sector 2: Commodity Organics SIC5 331/SIC7 191: Coke Oven Products

    Sub-sector 1: Liquid Fuels SIC5 332/SIC7 192: Petroleum refiners/synthesisers

    Sub-sector 2: Commodity Organics Ups

    trea

    m

    SIC5 334/SIC7 201: Basic chemicals, including plastics

    and synthetic rubber in primary forms

    Sub-sector 3: Primary Polymers & Rubbers

    Sub-sector 4: Commodity Inorganics

    Sub-sector 5: Fine Chemicals

    Sub-sector 6: Pure Functional & Specialities

    Sub-sector 7: Bulk Formulated Chemical

    Sub-sector 2: Commodity Organics

    SIC5 335/SIC7 202: Other chemical products

    SIC7 201: Pharmaceuticals, medicinal chemical and

    botanical products

    Sub-sector 6: Pure Functional & Specialities Do

    wn

    stre

    am

    Sub-sector 7: Bulk Formulated Chemical

    Sub-sector 8: Pharmaceuticals

    Sub-sector 9: Consumer Formulated

    Sub-sector 11: Rubber Products SIC5 337/SIC7 221: Rubber products

    Sub-sector 10: Plastic Products SIC5 222: Plastic products

    Highly diversified industry with a number of classifications (the dti, CHIETA, and SIC)

  • Technology intensity of the chemical sectorTechnology intensity Manufacturing industry

    High-technology

    industries

    Aircraft and spacecraft

    Pharmaceuticals Office, accounting and computing machinery

    Radio, TV and communications equipment

    Medical, precision and optical instruments

    Medium-high

    technology industries

    Electrical machinery and apparatus, n.e.c.

    Motor vehicles, trailers and semi-trailers

    Chemicals excluding pharmaceuticals Railroad equipment and transport equipment, n.e.c.

    Machinery and equipment, n.e.c.

    Medium-low

    technology industries

    Building and repairing of ships and boats

    Rubber and plastics products Coke, refined petroleum products and nuclear fuel

    Basic metals and fabricated metal products

    Other non-metallic mineral products

    Low-technology

    industries

    Manufacturing, n.e.c.; Recycling Wood, pulp, paper, paper products, printing and publishing

    Food products, beverages and tobacco

    Textiles, textile products, leather and footwearSource: OECD, 2011

  • Chemical sector dynamics South Africa

    Contributed 2.4% to national GDP (2013)

    Accounted for 20.8% of the manufacturing industry (2013)

    Above average growth rate of 7.0% (2003-2013)

    SA: 3.6% (2003-2013)

    Highly reliant on imports to satisfy domestic demand

    Pharmaceuticals (42.5% of trade deficit in 2015)

  • Chemical sector - Gauteng

    Accounts for 44.4% of SAs chemical sector (2013)

    Downstream industries 57.9% (2013)

    Largest sub-sector: other chemicals & man-made fibres industry

    38.4% of the chemical sector

    66.3% of downstream industries

    Grew at 3.4% (2003-2013)

  • Chemical sector composition (2007)

    Sub-sector/industry GA TOTAL

    Up

    str

    ea

    m

    Fine Chemicals 2 5

    85 or

    4.5%

    Commodity Inorganics 25 48

    Primary Polymers & Rubbers 0 9

    Commodity Organics 5 17

    Liquid Fuels 0 6

    Do

    wn

    str

    ea

    m

    Rubber Conversion 70 139

    1 782

    or

    95.5%

    Plastic Conversion 389 758

    Consumer Chemicals 121 230

    Pharmaceuticals 70 95

    Bulk Formulated 14 51

    Specialties 283 509

    TOTAL 9791867

    Provincial distribution (%) 52.4%

    Majority of firms operated in the downstream industry

    Every 2nd company is located in Gauteng

    Largest concentration: specialities and consumer chemicals

    Gauteng is an ideal platform for the downstream chemical industries growth and development: cluster of industry and

    proximity to the market

  • Chemical sector R&D trends

    Chemical sciences - average R&D spending(2012/2013): R1.5 bn or 6.1% of all R&D spend by research field Ranked 6th out of 15 fields HEIs spending:

    Accounted for 30.4% of R&D spend Tripled in two years: R158.8 m in 2010/2011 to R444.3 in 2012.2013

    Chemical sector highly IP-intensive: Accounts for 38% (215) of patent grants in SA (2014) 40% (85) of these are associated with downstream industries

    Basic material chemistry (35 grants) Pharmaceuticals (26 grants) Biotechnology (12)

    Technology generators with strong chemical field R&D (mainly upstream): Ten in Gauteng Four in KZN Four in the Eastern Cape

  • Market viability existing domestic businesses

    5 downstream chemicals

    One pulp and paper

    manufacturing

    9 waste management

    related industry

    15 projects

    Insulating varnish Fuel performance catalyst Sodium Hydrogen Diacetate High purity ferric sulphate in

    powdered form PHMB, chlorhexidine base and

    DKB inhibitor

    Chemical and chemical products industry

    Linkages with HEIs

    8 materials recovery industry projects o Heavy metals recoveryo Chromium oxide green recovery o Waste oil recoveryo Al oxide and titanium dioxide extraction o Activated carbono Aggregate from fly asho Petroleum jelly and caustic recovery

    One waste management project o Waste water treatment

    Not a downstream chemical industry But an emerging industry with high

    growth potential

  • Market viability potential for domestic spinoffs

    Downstream industries suitable for incubation Gauteng notable opportunities:

    High concentration of the industry Established and relatively-large other chemicals & man-made

    fibres industry Hosts half of chemical-related businesses in SA Hundreds of downstream businesses Significant R&D capability by technology generators Largest prospects for spinoff companies

    Feedback from HEIs: Many technologies are licenced to existing companies Pharmaceuticals and cosmetics most viable Need for labs and manufacturing facilities

  • Demand for business incubation services

    For businesses in development stage (Incubation)

    Market validation

    Technical feasibility/lab tests

    Market studies and evaluations

    IP evaluations and IP protection applications

    Economic feasibility assessments

    Engineering and pre-production prototypes

    Marketing and business plans

    Labs and manufacturing space

    For businesses in commercialisation stage (Post-incubation)

    Production activities

    Market monitoring

    Business growth advice

    Product support

    Market diversification

    Technology marketing

    Licensing

    Entrepreneurs frequently engaged/experts in technical matters Insufficient knowledge and time for business and admin matters

    Internal (to incubator) or third-party support is needed

    Training and skills development customised and practical learning

  • Viability statement business incubator

    A truly chemical sector incubator not practical Half of incubatees should be from the sector

    Existing business pipeline: Majority non-chemical industry

    Include chemical transformation

    Marketing as high-tech incubator not reasonable Existing businesses within material recovery should be

    retained

    Material recovery - innovative but not high-tech industry

    Downstream chemicals mainly medium-high tech industries

  • Recommendations

    Re-define the target market Medium-tech chemical activities Material recovery involving chemical transformation

    Refrain from using high-tech chemistry incubator Market as downstream chemical and chemical materials

    recovery incubator with focus on innovative businesses Marketing efforts:

    Rebrand Intensively publicise new Chemin targeting past partnerships

    and new target markets Initiate a business plan competition Establish affiliations with HEIs and research facilities Improve network and collaborations with the CSIR, ARC, etc. Establish partnerships with potential funders and set-up in-house

    funds (where feasible)

  • Market viability: soft-landing

    services

  • Soft-landing services potential target market

    Foreign start-up companies: In early concept stage

    With a functional product and in early validation stage

    Commercialised foreign start-ups looking to scale in South Africa and beyond

    Returned SA ex-pats

    SA scholars/researchers based overseas

    Incubation graduate businesses from other countries interested in expanding their global markets

  • Demand for soft-landing services

    Current size limited: Sector-specific focus

    Competition from other countries that are currently offering both financial and non-financial support to attract foreign start-ups

    Competition from private sector and foreign government supported platforms in SA (embassies and other expat business networks)

    Potential to attract restricted : Lack of track record in incubating high-tech businesses

    Lack of experience in hosting foreign businesses

    No established partnerships with other foreign incubators in the same sector

  • Recommendations

    Overall demand insufficient in the immediate future Using exiting staff may jeopardise the quality of services

    provided to incubatees

    Hiring new staff not cost-effective at the moment

    Refrain from offering these services as part of Chemin

    A wider target market should be explored in the short-term (i.e. include other industries)

    Recommended approach: Unit within SEDA but outside Chemin

    Focus on provision of services to businesses from a variety of sectors

    Seek specific advise and services from specific incubators when needed (i.e. networking)

  • Viability: Premises and location

  • Recommendations

    Existing headquarters in Midrand (i.e. Willows Office Park) not suitable for the incubator: Not owned by Chemin - limited flexibility Small office space to host incubatees (250 m) No manufacturing space No longer available for lease

    Midrand generally an ideal location Home to many smart and high-tech industries Central location relative to:

    HEIs and research institutions in Gauteng Embassies and consulates Central to the consumer/market

    New location and offices should be chosen wisely: Mogale City is not suitable (sub-part facility, small size, services supply

    challenges, remote location) New office would need to offer both office space and manufacturing space

    (may make Mogale City facility redundant)

  • Recommended business

    incubator concept

  • Incubation framework

    Model Non-profit

    Target market

    A innovative domestic venture operating in:

    Downstream chemical sector

    Waste recovery industry (chem. processes & formulations)

    Type Primary focus: facility-based incubator

    Secondary focus: virtual support

    Capacity & Expertise Internal expertise

    External expertise

    Tenant-businesses supported 8 10

    Average incubation period Three years

    Facility ownership Rented (long-term lease) space

    Customisable facilities for production activities

    Location

    General location: Midrand, Gauteng

    Site-specific requirements:

    o Easily accessible from the N1

    o Accommodates light industries

    o Offers modern office facilities

  • Incubation model

    Concept Phase Development Phase Commercialisation Phase

    Pre-incubation Incubation Post-incubation

    Not Included as

    part of the

    programme

    Pre-incubation

    support to be

    offered through

    universities

    Entry point: Stringent

    selection process

    Graduation: exit

    policy

    Seed funding

    support for

    deserving tenants

    Analysis and

    validation

    Technology support

    Early

    commercialisation

    support

    Virtual post-

    incubation

    support

  • Entry process

    Complete application form

    Presentation of the basic business plan to the selection committeeApplication

    Post-concept phase

    Innovation-based business model

    Early stages of development with high-growth potential

    Provide economic benefits to South Africa

    Illustrated ability to pay incubator rents while they develop positive cash flow

    At least one project champion fully committed and involved in the project

    Business has legal freedom to operate

    Business idea financial viable

    Preference intention to set up a business in Gauteng

    Evaluation (criteria)

    Support to be provided

    Payment conditions

    Incubation period

    Progress monitoring and meetings

    Exist policy

    Signing MOU and Lease Agreements

  • Facility size and CAPEX requirements

    Optimum space requirements 872m

    CAPEX requirements:

    Self build option: R6.3 million

    Renting: R1.1 million

    Collaboration with HEIs: almost as much as with R6.3 million excluding labs

    Space function Size per unit (m) Number of units Total space (m)

    Client office space 15 10 150

    Incubation manager's office 15 1 15

    Internal experts' offices 15 2 30

    Administrator's office 12 1 12

    Small boardroom 24 1 24

    Large meeting room 51 1 51

    Subtotal 282

    Circulation factor (30%) 85

    Usable square meters (office component) 367

    Common area factor, including kitchen and canteen area, reception area, printer area (15%) 55

    Total office component 422

    Lab space 50 1 50

    General light manufacturing & storage space 40 10 400

    TOTAL 872

  • HR composition

    Minimum six permanent staff members:

    External experts:

    Registrar of preferred companies/individuals with track record and proof of expertise

    Offering assistance that cannot be provided by internal experts

    Hired on a need-based only

    Required Staff Number Contract type

    Management Incubation Manager 1 Full time

    Internal Experts 2 Full time

    Support staff

    Receptionist 1 Full time

    Admin 1 Full time

    General 1 Full time

    External experts Consultants Project based Project based

  • Incubation stage services

    Secretarial services

    Shared receptionist

    Mail and business address

    Infrastructure and facility based services

    Fully furnished office space

    Manufacturing/storage space

    Material handling equipment (hand trucks, lifts, etc.)

    Lab facilities and equipment

    Fully furnished training and meeting space

    Fully furnished kitchen area

    Canteen facilities

    Internet access (high-speed)

    Shared office equipment

    Funding and access to financing

    Seed funding

    Fundraising - access to external sources of funding

    Customised training and access to knowledge

    Business training programmes

    Link to higher education and their resources

    Access to library and knowledge databases

    Business services

    Technical Feasibility/Lab Test

    Market Study and Evaluation

    IP Management

    Economic Feasibility

    Engineering Prototype

    Marketing Plan

    Business Plan

    Pre-Production Prototype

    Market Validation

    Product development

    Market Monitoring

    Business Growth

    Product Support

    Technology Marketing

    Assigning/licensing

    EIA authorisation

    Networking opportunities

    Mentoring and coaching

    Networking among incubatees

    Linkages to experts, mentors and investors

  • Post-incubation services

    Virtual-based services

    Range:

    Assistance with increment of sales

    Assistance with improving the production processes

    Internationalisation

    Technology transfer

    Business model change

  • Operating budget (estimate)

    Office and manufacturing space

    Total: R3.0 million pa

    About R1.7 million for salaries and wages

    R0.7 million for renting office and industrial space

    R0.2 utilities

    R0.1 maintenance and repairs

    Only office space

    Total: R2.5 million pa

    About R1.7 million for salaries and wages

    R0.4 million for renting office and industrial space

    R0.1 utilities

    R0.05 maintenance and repairs

  • Seed funding requirements

    Services covered by seed funding

    Technical feasibility (R45k)

    Market Study and Evaluation (R60k)

    IP Management (evaluation and

    protection) (R90k)

    Business Plan (R150k)

    Economic Feasibility (R100k)

    Marketing Plan (Part of BP)

    Market Validation (15% of product

    development cost)

    Engineering Prototype

    Pre-Production Prototype

    Services NOT covered by seed funding

    Proof of Concept

    Market Needs Assessment

    Venture Assessment

    Disclosure of Invention

    Product development mass production

    Market Monitoring

    Business Growth

    Product Support

    Market Diversification

    Technology Marketing

    Assigning/licensing

    EIA authorisation

    R400-R500k

    Project dependent

    TOTAL SEED funding requirements: R5 million per incubation round Competition-based Supports TEN incubatees physically located at the incubator Prototypes to be funded using external sources

  • Thank you

    Elena BroughtonE-mail: [email protected]: +27 12 342 8687Website: www.urban-econ.com

  • Chemical sector and R&D classification

    R&D field The DTI classificationSIC edition 5 (SIC5) and SIC

    edition 7 (SIC7) codes

    Food chemistry; Surface

    technology and coating; Selected

    basic material chemistry

    Sub-sector 6: Pure Functional &

    SpecialitiesSIC5 335/SIC7 202: Other chemical

    products

    SIC7 201: Pharmaceuticals,

    medicinal chemical and botanical

    products

    Selected basic material chemistry Sub-sector 7: Bulk Formulated

    Chemical

    Pharmaceuticals; biotechnology;

    Micro-structure and nano-

    technology

    Sub-sector 8: Pharmaceuticals

    - Sub-sector 9: Consumer Formulated