icentrum Market Demand Study

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iCentrum – Market Demand Study

Prepared for Birmingham Science Park-Aston and Birmingham City Council

Final Report

November 2011

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1.0 Introduction

1.1 Appointment

Ecorys was appointed by Birmingham City Council to undertake this study in September 2011. The client for this study is a combined group of representatives from Birmingham City Council and Birmingham Science Park Aston (BSPA).

Ecorys is working in partnership with Thomas Lister on this study. Thomas Lister is providing specialist input on the property market.

1.2 Study Objectives

Fundamentally, the study is to provide a rapid review of the potential market demand for the iCentrum building which is proposed as Phase 1 of the Digital Plaza proposals at BSPA. The study is part of a suite of studies being prepared simultaneously including:

• Partnerships and Networks Study – Ecorys • Building and Infrastructure Study – GVA Grimley

1.3 Work Undertaken

Our approach and work undertaken has included the following:

• an inception meeting at BSPA;

• a review of the role of incubation and innovation space;

• a review of socio-economic characteristics in the city, city-region and region;

• preparation of a selection of case studies profiling existing examples of supply and highlighting elements of good practice;

• consultation with key stakeholders;

• consultation with existing tenants at Faraday Wharf, BSPA;

• an electronic survey of tenants at BSPA and businesses within the West midlands ICT cluster; and • based on the preceding areas of work an assessment of how the demand profile may emerge.

1.4 Document Structure

The remainder of this report is structured as follows:

• Section 2 – provides an overview of incubation and innovation space as tools for economic development;

• Section 3 – presents a review of existing supply and good practice; • Section 4 – reports back from our stakeholder engagement work; • Section 5 – sets out the findings from the business survey; • Section 6 – highlights analysis of local economic characteristics; • Section 7 – contains our assessment of the property market;

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• Section 8 – is a profile of demand; and • Section 9 – contains the study conclusions • Annex 1 – contains the stakeholder consultee list

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2.0 Incubation, Innovation and Economic

Development

2.1 Introduction

Innovation is a key economic development policy for UK and other western industrialised nations. It is reflected in policy interventions at national, regional and local policy and, in the current economic climate, is viewed as an effective means of assisting economic growth through business development, job creation, increased productivity and Gross Value Added (GVA) growth. This section sets out the context to innovation policy in the UK.

2.2 Incubation

Business incubation refers to the provision of services, facilities or conditions aimed specifically at assisting businesses to develop. Since the early 1980s there has been a marked growth in the number of incubation centres in the UK and in the USA, Germany and Southeast Asia. Storey & Greene (2010)1, have outlined four particular features of incubator support:

• Shared office accommodation – Typically this is provided at a subsidised rate. The advantage being that it helps the new technology business to retain its working capital. This is helpful to the fledgling business that is likely to be spending heavily on R&D at this stage and have minimal revenue flow.

• Shared support services – This also provides a cost saving to the business by reducing its overheads and running costs.

• Professional business support and advice – The value of this support is that technology-oriented business founders are expected to bring with them ‘technical’ knowledge but may have little or no business knowledge. Providing expert advice and assistance is, therefore, designed to overcome this ‘imperfect knowledge’.

• Network provision – Another advantage for businesses in incubator units is that they can use the ‘brand’ of the unit to enhance ‘reputation’ and legitimacy of their business. So, if the incubator unit is on a science park or a university research facility, the new business becomes more credible to its customers and suppliers. Businesses can also develop linkages and networks with other businesses in the incubator.

Incubation sites are generally selective in terms of businesses that are accepted. Preference is often restricted to younger businesses (start-ups and those that are less than five years old) and/ or high-technology-related businesses.

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2.3 Innovation

2.3.1 Innovation, Business Birth Rates and Growth

Innovation is critical to the ability of developed economies to sustain their relative national income levels in the face of competition from emerging economies. Increasingly the goods and services countries like the UK can provide will fall within the capabilities of countries like India and Brazil as these countries increase their base of knowledge industries. Over time, this competition will drive down rewards to labour and capital in the developed countries in those sectors where outputs become increasingly commoditised. Put another way, the ability to sustain high levels of rewards to labour and capital in the UK will increasingly depend on the ability to operate competitively in markets which cannot be contested by emerging economies. In such markets the UK and other developed economies can more readily exploit the potential that more limited competition gives for high levels of added value. Sustaining high levels of added value therefore depends critically upon exploiting attributes of goods and services that cannot readily be replicated by competitors, these include:

• Reputation - the major accounting and legal firms are examples of businesses where clients are prepared to pay more for work backed by the repute of a few major players, who in turn are able to recruit the very best people;

• Experience / expertise - the City of London is an example of an area populated by firms whose combined and accumulated experience and expertise would be very difficult to replicate elsewhere;

• Brand value – the high-end German car sector and the Italian garment industry are examples of industries where the brands command high prices based on design and manufacturing quality;

• Product leadership – every product and service evolves, in some sectors very rapidly and in some cases with large step changes rather than evolution; staying ahead in areas such as technical capability, design, presentation, marketing and distribution all contribute to retaining a dominant market position.

Innovation is a common and critical factor across all of these; innovation covers areas such as the development of new ways of financing investment, new legal structures, financial products (including those which contributed to the current recession), new materials, new products as in sectors such as pharmaceuticals, enhancing the performance of existing products such as cars in response to CO2 reduction measures, enhancing aesthetic or ergonomic design, and so on.

While innovation in processes is important in all sectors, but especially in those where price competition is keenest, innovation in products and services is a key driver of value retention and growth. The role of new and small firms in product and service innovation varies by sector and also by region. In industries where the costs of R&D are high and act as barriers to entry, such as pharmaceuticals, small firms will play a limited role. In others where barriers to entry are low, small firms usually play a stronger role, whether selling to final consumers or within a supply chain selling to larger firms.

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In sectors where barriers to entry are low, many new firms are founded specifically to exploit and develop a new idea, so that a high proportion of innovation will be concentrated in such new firms. Small firms, both new and established ones, also tend to have internal structures that do not stifle innovation or delay responses to opportunities, whether generated externally by changes in the market, or internally through innovative thinking.

2.3.2 Business Birth Rates: Regional Variations and the Role of Cities

As with previous recessions, at the present time small firms are expected to be a key element in the recovery of output and employment. However, the experience of past recessions and of measures to increase regional growth rates by increasing small business start-up and survival rates suggest that the already more prosperous regions achieve higher rates, and usually in sectors which have higher added value and higher growth rates. Regions such as Scotland and the North East of England had lower birth rates than regions like the West Midlands, which in turn lagged behind the south and east of England. Most previous research has shown that there were large differences between the regions in self-employment and small firm formation, and that it was the more prosperous areas which had higher birth rates and where small businesses were growing faster.

Much of the research in this area has looked at factors such as business finance and support mechanisms such as the role of regional agencies, but more recent work on agglomeration and its role also sheds light on the underlying factors, in particular:

• Larger agglomerations of people and businesses provide wider and deeper markets and therefore proportionately more opportunities for niche businesses to find markets large enough to deliver adequate returns to labour and capital. Variety is a critical driver, and more people with higher incomes mean the spread of demand for varieties of goods and services is wider: put another way, a provider of a specialist service will find a larger and wealthier market in Birmingham than in (say) Dundee, so where a threshold market size is required, it is more likely to be found in larger cities;

• Innovation frequently comes from interaction between individuals and businesses, and the cost of interaction and therefore of innovation is much lower in a large agglomeration because people and businesses are concentrated more densely in such areas which also tend to have better transport links;

• Large agglomerations attract migrants (whether from other regions or countries), and migrants tend to be less risk averse and / or better qualified than those who choose not to migrate; in some sectors such as the media, the largest city may be the single, dominant concentration of talent and opportunity and will therefore tend to draw in, and re-cycle, people looking to develop businesses (including single person self employment) in that sector.

The evidence therefore suggests that a limited local market base, together with the strong pull exerted on talent and entrepreneurship by the larger and more affluent cities, will limit the number and / or quality of start ups within the less prosperous regions. Accordingly, because of their importance for future growth and for retaining skills, the less prosperous regions must try to retain and nurture their start ups, and especially those which involve innovation rather than those which are simply “more of the same”. In contrast, the more prosperous regions can sustain overall growth even if the “churn” of small firms is higher; a high churn points to more risk taking, which will pay off for successful firms, while with a sufficiently high rate of start up there will be net growth even if the business death rate is also high.

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In the less prosperous regions which lack all the benefits of the large agglomerations, innovation centres and incubators exist to make the option of remaining within the region more attractive to the start up and small growing firm. This is achieved by providing a range of support functions, some of which are intended to improve access to markets and resources, either directly through providing access to contacts and networks, or indirectly by providing assistance in areas such as administration to free up the owners’ time to develop the market and/or the product or service. The latter is important, as any new start and small business encounters significant regulatory and other demands which can distract the owner from the core tasks of finding and serving customers and continuing to develop the “offer”.

2.3.3 The Business Incubator / Innovation Centre

Economic development agencies and partnerships in the UK have long recognised the problem of low business birth rates and have developed various programmes and initiatives to try to address at least the symptoms, if not always the underlying causes. In the 1970s and 1980s, much of the focus was on resources external to the business; business premises and finance, and the policy debate was on whether there were market failures in provision of these resources. As wealth (including home ownership and therefore collateral for borrowing) has increased, and as the lessons from interventions have been learned, more focus has been given to three critical areas:

• converting would-be entrepreneurs into actual businesses;

• putting business skills alongside the technical skills which are typically the basis of the business; and • business aftercare, to sustain fledgling businesses and enable them to grow

Enterprise events, for example, tend to generate substantial interest in business start-ups, but follow up has often been poor, and more recent emphasis has been on improvement so that interest is converted into action. Initiatives here have included “team business” models and mentoring by established entrepreneurs; and also have resonance with the Government’s latest mentoring programme designed to support economic growth.

Business incubators or innovation centres are designed to address all three of these areas for selected businesses that have growth potential, and which are expected to benefit from close support, with the objective of accelerating and sustaining company development. In the UK, incubators are largely seen as facilities in which a number of new and growing businesses operate under one roof sharing services and equipment, and having equal access to a wide range of professional, technical, and financial programs. In contrast, the US literature sees incubation as a programme; the distinction is important, because facilities alone will not achieve the objectives of enhancing business skills, freeing up resources for tasks such as market development or providing adequate aftercare.

Both within UK and internationally, incubators vary in the way they deliver their services, in their organisational structure, and in the types of clients they serve. The main variations are whether there is an attempt to cluster similar types of businesses, and the extent to which the incubator provides business support resources and services. There are also differences in delivery mechanisms; in many instances support services are organised through a dedicated incubator management team and delivered through a combination of in-house expertise and an external network of contacts.

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A comprehensive incubator programme might provide all or most of the following:

• Assistance with business basics through to comprehensive business training programmes • Help with networking activities both with other incubator firms and externally

• Assistance with market research / marketing / presentation skills

• Help with accounting and financial management which might be a service available on site • Links to higher education resources and strategic partners

• Access to business angels / mentors, investors or venture capital

• Management team development including assistance with sourcing non-execs • Advice with product / technology commercialisation and with intellectual property • Access to legal and financial services and advice

• Help with regulatory compliance

• Help to identify specialist suppliers and other resources.

In addition, the facility housing the incubator would be expected to provide good quality business premises with services such as high-speed Internet access. In some cases incubators provide access to facilities and equipment that would not otherwise be available or which would be too expensive for a new start business to buy or lease.

The other important advantage claimed for incubators is that they encourage a positive and mutually supportive business culture among firms, by exposing small businesses to similar firms and therefore enabling the sharing of experience and ideas. There is some evidence that this helps to reduce the risks involved in business start up. However, this is difficult to test, as most incubators are selective with regard to the businesses which are admitted, and which are, therefore, those most likely to succeed in any event. The added value of the incubator is that incubator businesses grow at a faster rate than they would outside the incubator programme.

Where an incubator provides a tailored programme, the amount of time a business spends in that programme can vary, depending on the type of business and the owner’s business expertise / competence. Time to market and the need for research and development are key factors, with life science businesses typically spending more time in an incubation programme than a manufacturing or service business with a shorter time needed to bring a product or service to market.

With increasing use of ICT, the "virtual Incubator" has developed to provide services to tenants and businesses within an area and not just within an identifiable facility; in time this is expected to increase, and incubation may therefore increasingly be seen as a process or programme rather than time spent within an incubation facility. The iCentrum and Science Park Without Walls concepts are very well placed to tap into this changing preference for fixed place working and are proposed with a model of working in mind that speaks to the future rather than the past.

As the type of assistance provided by an incubator programme and especially by a physical centre is resource intensive, it is also important to consider:

• the commercial model, and how tenants of a physical centre and any remote or virtual users will be charged for services, and whether charges should be linked in some way to ability to pay as the business develops; and

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• the business exit strategy: there is an opportunity cost to society if a business remains in a centre beyond the point where it can grow unassisted in an external environment, as that company will be using space and services that could benefit another new start business.

As discussed further below, the role of the private sector in providing incubation facilities and services may lead to some tensions both with regard to the admission strategy and to the exit strategy - a “churn” of businesses and a focus on high growth but potentially high risk businesses is potentially at odds with the need to generate adequate returns from rental income at a physical centre.

2.3.4 The Role of the Public Sector

While there is clearly a need for some public funding to create and sustain business development schemes, reviews of business start up schemes have pointed to the apparent contradiction that arises when the public sector takes too strong or prominent a role, namely that people in (what are perceived to be) safe jobs are encouraging others to take risks, while possibly never having done so themselves. The public sector has therefore increasingly played a role as funder, as information provider and as a broker, pointing people to appropriate sources of advice and assisting with funding.

Especially in the early stages, while the public sector plays a critical role in, for example, organising and funding start-up events, there is a need for advice and counselling some of which is best provided by an advisor or mentor that has direct business start-up experience. There is reported evidence, for example, that the majority of would-be entrepreneurs prefer to talk to, other entrepreneurs, rather than public sector officials; at the same time, would-be entrepreneurs see the public sector as the better source of some types of advice and information. It is therefore important that programmes established to increase business start-ups strike a balance between public and private sector roles.

Innovation centres are part of the support process designed to enable a business to grow once it is through the start-up and has the capability to produce a basic business plan. The existence of support services, of which innovation centres are a particular type, have very little impact on the business birth rate, but the evidence suggests they do affect survival and growth rates. As discussed below, with support from the public sector, business incubation has developed as a business sector in its own right, albeit one in which the great majority of players are not for profit organisations.

2.3.5 Business Innovation and Incubation as an Industry

In the UK, business incubation has developed as an industry, in which the private sector has taken on a significant role alongside the public sector. Many business incubation facilities (or environments) operate as not for profit organisations, providing services to start-ups and early stage businesses. As noted above, this traditionally includes space, shared admin and business support services; as businesses mature the basis of the service offer and its price usually adjusts. While the focus remains on start-up businesses, the need to generate commercial returns means that some centres also include established businesses as ‘anchor tenants’, which clearly assists with revenue and cash flow.

Increasingly, centres offer a range of pre-incubation activities, which blurs the distinction between start-up and the traditional role of incubation as it assist with concept development and first stage business planning. Pre-incubation services usually target under-represented groups and/or areas where

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self-employment and raising awareness about entrepreneurship are important components of the programme. The other main trend is for incubators to extend their reach into the wider business community, and now the majority of businesses assisted by centres are not located within the centre itself.

Business incubation environments are tending to become increasingly sector specific. The principal sectors include high tech industries, creative industries, knowledge-based businesses, bioscience/ biotechnologies, advanced manufacturing and energy. This may reflect the fact that many centres are linked to universities or have links with major local firms, but occupancy will also reflect the centre’s selection criteria; in this instance high-tech and high growth SMEs.

Even though tenants of the centres represent only 23% of the client base, UKBI report that 67% of operating costs come from rentals indicating the importance of revenue from tenants. However, 28% of income comes from grants and other sources (which would include external parties using the premises and facilities), and only 5% from consultancy and external work. This does suggest a property focus in commercial terms, and does raise a concern that the need to generate returns based on rentals and occupancy rates may generate a tension between the core business development objectives and the need to break even, which is an inevitable consequence of a strong private sector role. At the same time however, it also signifies the importance of non-property rental income and the scope to grow this by making iCentrum more attractive to non-tennants.

It should be noted that, unlike many business assistance programmes, business incubators do not serve any and all companies. Entrepreneurs who wish to enter a business incubation programme must apply for admission, and acceptance criteria vary between different locations. In general, only those businesses with feasible business ideas and a workable business plan are admitted. It is this factor that makes it difficult to compare the success rates of incubated companies against general business survival statistics. Again there may be a tension in the selection process, where a centre may have to consider the risks involved – in terms of rental payments – in admitting a business offering leading edge innovation and high growth potential, but with higher risks than a less innovative but commercially more attractive tenant. The existence of such tensions highlights the need for effective monitoring and regular auditing / evaluation, and the avoidance of simplistic box-ticking as a way of overseeing public sector investment in incubators

Capital funding of centres is typically a mix of public sector funds including HEIF (Higher Education Innovation Fund), ERDF, development agencies and local authorities. There is usually also a Public Service Agreement (PSA) which sets out objectives, targets and monitoring plans; as noted above, it is important that monitoring and evaluation are robust, because of the potential conflicts between the objective of covering operating costs and that of assisting high growth potential businesses.

UKBI reports that there are some 300 business incubators in the UK with some 12,000 companies. There is a spectrum from stand alone business incubators to those based on a science or business park, within a University campus or a private sector large corporate. Business incubators can be found throughout the UK and in all types of locations, depending on market need. However, many are in close proximity to research activities where there is technical support and equipment. Examples include universities with a strong bioscience offering, where it is usual to find a business incubator dedicated to commercialising bio businesses or innovations. Similarly, incubators can be used to drive forward the

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development of a strong cluster of businesses; such as IT, creative industries, and environmental technologies, which then attract other innovative start-ups in related sectors.

The size of business incubation facilities varies quite widely; the average size is around 36,000 ft² but there are large variations around this. The average centre has 32 units, but some have up to 200 while virtual centres have no actual units.

2.3.6 Next Generation Incubation and Innovation

Next generation centres will be used by (current and) next generation entrepreneurs. The physical and service offer will be less about the configuration of space and more about the support services on offer, connectivity to the outside world and fast, state-of-the-art Broadband provision. Increasingly, connections beyond the West Midlands and the UK will be more important to next generation entrepreneurs and will be in demand.

BSPA’s Science Park Without Walls concept is responding to this changing requirement. The partnership with Cisco is a key aspect in the delivery strategy and will support the high-tech cluster development at iCentrum. A further point worthy of note is in relation to the way space is configured in the centre. Clearly some businesses and entrepreneurs will want to have a unit with their name on the door and to develop their business from that base. Others will want a much more flexible approach and to reduce their overheads at the same time. If a creative business does all its social networking on-line, then it won’t want to pay for meeting room space or plush reception areas. If a creative business is used to working with cloud computing systems such as Huddle or Dropbox, then it may have less need for access to servers. The Broadband connection speed and reliability will be an important consideration and the development of tailor-made networks for the creative and knowledge sector (i.e. sohonet

http://www.sohonet.com/1) illustrate how important this is to this type of business. The space at iCentrum can offer something different to the commercial market in Birmingham and, simultaneously, attract a new type of entrepreneur if it considers space for the following types of user:

• Coworking is a style of work which involves a shared working environment, sometimes an office, yet independent activity. Unlike in a typical office environment, those coworking are usually not employed by the same organization. Typically it is attractive to work-at-home professionals, independent contractors, or people who travel frequently who end up working in relative isolation. Coworking is the social gathering of a group of people, who are still working independently, but who share values and who are interested in the synergy that can happen from working with talented people in the same space.

• A collaborative workspace or shared workspace is an inter-connected environment in which all the participants in dispersed locations can access and interact with each other just as inside a single entity. The environment may be supported by electronic communications and groupware which enable participants to overcome space and time differentials. These are typically enabled by a shared mental model, common information, and a shared understanding by all of the participants

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Sohonet is a global expert in connectivity and data management for the media and entertainment industry. It offers an extensive range of services backed up by unrivalled support and expertise to enable pan-global collaboration within the media community. Sohonet provides services including secure high-speed networking, Internet connectivity, hosting, data management and digital negative management for file-based productions.

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regardless of physical location. Users of this approach may want to be based in iCentrum but then linked to colleagues wherever they choose to be.

• Open innovation is a paradigm that assumes that firms can and should use external ideas as well as internal ideas, and internal and external paths to market, as the firms look to advance their technology. The boundaries between a firm and its environment have become more permeable; innovations can easily transfer inward and outward. The central idea behind open innovation is that in a world of widely distributed knowledge, companies cannot afford to rely entirely on their own research, but should instead buy or license processes or inventions (i.e. patents) from other companies. In addition, internal inventions not being used in a firm's business should be taken outside the company (e.g. through licensing, joint ventures or spin-offs); iCentrum has potential to develop this approach over time.

2.4 BSPA and iCentrum

This section is taken from the GVA Grimley report on Buildings and Infrastructure which has been produced simultaneously to this report and both are informing development of the iCentrum proposals.

2.4.1 The Science Park

BSPA is located on a 14-acre campus close to Birmingham City Centre. The Park is wholly owned by Birmingham City Council (BCC) which is working towards the creation of a ‘Digital District’ incorporating the Digbeth and Eastside areas, co-located with Birmingham’s Enterprise Zone. The aim of a Digital District is to encourage business growth, inward investment and improved services in the sector. At BSPA there is an opportunity to create a new focus and expression of the Digital District vision, in the form of a 11,000 m² development known as the Digital Plaza – an exemplar for the City and the Region.

2.4.2 Digital Plaza and iCentrum

The iCentrum building is to be the first expression of the Digital Plaza concept on the BSPA campus and is intended as a 4,200 m² home for new incubator space, new innovation space and the iCentrum programme. The building is to become the front door to BSPA and, through state of the art connectivity, the hub of a virtual science park – the ‘Science Park Without Walls’ (SPWW).

Science Parks stimulate innovation through aggregating – or Clustering – talent, technology and finance. By facilitating collaboration, Science Parks support inter-cluster communication and support invention and innovation. iCentrum will go a step further, enabling collaboration within the ICT, digital media and games sectors across physical boundaries as part of a virtual network utilising digital connectivity. The SPWW concept includes transnational EU funding for the District+ project, linking BSPA and iCentrum to key European locations with a similar vision for virtual clustering.

2.4.3 Faraday Wharf

The iCentrum building is to be integrated into the Science Park and located next door to the highly successful Faraday Wharf building at BSPA, which provides a home for cluster-relevant innovation space and for programmes which support start-up firms and incubator concepts such as ‘Entrepreneurs for the Future’ and ‘International Investment Forum’, the fast-track ‘Oxygen Accelerator’ mentoring programme and the Cisco-supported ‘Tele-presence’ conferencing tool. Faraday Wharf is currently 90% occupied and

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space is required for physical growth and for the further development of these successful programmes and initiatives.

2.4.4 The iCentrum vision

The iCentrum building will exemplify ‘connected real estate’, offering state of the art ICT collaboration platforms in a state-of the art eco-friendly building. Workspace within the building will promote smarter working, promote creativity and collaboration and support environmentally sustainable working. Broadband links and internal wired and wireless connections will facilitate the virtual collaboration and development that new businesses require. Space will be made available to new and established firms on a service-based arrangement, with the emphasis on flexible occupation, flexible allocation and flexible use of space. This study, and the design work which will follow it, present an opportunity to turn the vision into reality – by translating concepts into specific design requirements and a design approach for the spaces and systems within the iCentrum building.

2.5 Summary

The proposals for iCentrum are exciting and can support a new dynamic in economic development and entrepreneurship in Birmingham. It will be part of a new paradigm in supportive business environments to accelerate development of jobs and economic activity for the twenty-first century. Moreover, the potential for iCentrum to be part of a network of like-minded centres based in universities around the UK and internationally should not be underestimated either.

The business model for delivering iCentrum will need to determine the delineation of space between incubation and innovation users as there is a clear link with ability to pay rent and, therefore, a link to the fundamental viability of iCentrum. At the concluding chapter of this report we set out our thoughts on the split and the sources of demand able to support that split, but further detailed discussions will be required between BSPA and its joint venture delivery partners about the economic model to be used for the centre.

In broad terms, incubation and innovation has been a relatively successful policy approach in the UK and one that has grown in stature since the 1970s/80s. However, there is no guarantee of success and a series of key determinants of success can be identified which include:

• the skills and experience of Centre management staff who have to understand the sector (high-tech in this instance), be able to deal with property enquiries, be competent financial managers, have an aptitude for marketing and be the public face of the Centre.

• the range of services on offer must go beyond what is on offer by competitors and be part of the unique selling point of the Centre.

• the rent charged must take account of the Centre’s business model but also be responsive to prevailing market trends in the area so that the market position is based on a combination of rent charge and service offer; and

• the mix of businesses on site must be such that agglomeration benefits from them clustering together can be possible and a growth-oriented culture can develop on site.

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3.0 A Review of Existing Supply

3.1 Introduction

In examining the issue of supply, there are two interrelated factors that could have a measurable impact on market demand, particularly if iCentrum looks to attract entrepreneurs, investors and blue-chip companies from the West Midlands, the UK and overseas.

Firstly, there is the need to obtain an understanding of the current supply of incubator and science park accommodation in the region, since iCentrum will have to directly compete for local demand on parameters such as location, type and quality of service, rental and service costs and relationships with local businesses, sector representatives and higher education institutions. Secondly, the iCentrum offer will have to sufficiently differentiate itself from other incubators and parks located throughout the UK. For overseas businesses and investors, what is it that will persuade them to choose iCentrum and Birmingham Science Park, Aston ahead of other locations such as Tech Hub, Liverpool Science Park and Cambridge Science Park, to name but three?

3.1.1 Critical Assessment Criteria

To ensure that iCentrum sufficiently differentiates itself from regional, national and even international competition, it is of critical importance to understand the current and future supply of incubation and grow-on space across the country. In undertaking an examinatigrow-on of existing supply, it is necessary to identify how iCentrum can compete and how the proposed development can add value to existing provision, whilst avoiding displacement from Faraday Wharf and other regionally based parks. Critical factors to be discussed include:

• linkages and formal relationships with universities and other Higher Education Institutions; • establishment of partnerships with 'anchor tenants' and well known and established companies; • size of similar developments in terms of overall and individual unit floorspace;

• the proportion of sector specific parks and those with more open tenancy; • type and number of tenants;

• trends in core accommodation and support services offered, including the identification of potential selling points for iCentrum;

• ratio of incubation to innovation space; and

• occupancy levels, including information on time required to reach current occupancy and the prevalence of waiting lists

The long-term vision and aspiration for iCentrum is to become an ICT cluster within ten years. This is a bold endeavour and one that will require significant investment in both the physical infrastructure, but also the entrepreneurial culture and environment. With this is mind, there is a need to identify critical success factors from regional, national and international examples, with an emphasis on identifying factors that can be readily transferable within the iCentrum concept.

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3.2 Overview of the UK Position

Given the breadth and volume of incubators and science parks in the UK, an assessment of four or five parks per region has been undertaken, including provision offered in Scotland and Wales. Selection criteria centred on the similarities and relevance to the proposed iCentrum development.

3.2.1 Floorspace

The proposed iCentrum development is a 4,200m2 or 45,208ft2 mixed use development entailing flexible office space, break out areas and conferencing/meeting rooms. It is important to the short-term success of the development, that the total floorspace is appropriate for the likely demand. Too small and businesses will look elsewhere and too large and there is the unwanted scope for lower occupancy rates that could make the development unsustainable.

Reflecting on the national incubators and science parks has facilitated the identification of important trends for both total floorspace and the size of individual units. The total floorspace of most developments ranges from 15,000ft2 to 65,000ft2, indicating that the proposed iCentrum development falls in the middle of this range. In respect of individual unit size, proposed office space tends to be small, particularly within the incubator space, with sizes in incubators peaking at 250 to 300ft2. Unit sizes for grow on office space tend to peak at 5,000ft2, whilst floorspace for individual laboratory units can vary significantly.

3.2.2 Tenant Type

There are currently discussions taking place regarding the criteria for prospective tenants, most notably whether iCentrum should target a specific sector or group of sectors or whether the development should be open to a range of sectors and tenants. Analysis of UK science identifies an important trend in respect of tenant focus. The majority of parks reviewed bring together companies from four or five principle sectors, usually Creative and Digital, Medical Technologies and Biotechnology. However, there are some notable examples of sector specificity across the UK and two, in particular, that are worth highlighting (greater detail on these two parks is provided in Annex 2).

Firstly, Begbroke Science Park, in Oxfordshire, which offers office and laboratory space to spin out companies and new starts in Nanotechnology, Aerospace and Automotive sectors. The park is home to research groups from six different academic departments, and over 30 high technology/start-up companies which have either spun out of the University or which have located there because of the close links available.

A more pertinent example, particularly given the target audience and likely competition for iCentrum, is Cambridge Science Park. In developing the selection criteria for prospective tenants, Cambridge Science Park wished to preserve the intrinsic nature of the park for the mutual benefit of all occupiers and has successfully introduced a range of selection criteria. With this in mind residency was restricted to:

• scientific research associated with industrial production;

• light industrial production which is dependent upon regular consultation with the tenant's own research, development and design staff established in the Cambridge area, or the scientific staff of the University or of local scientific institutions; and

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3.2.3 Accommodation and Services Offered

For both the UK and regional assessments, there are two important components in relation to accommodation and services. Firstly, it is important that iCentrum provides a certain core of services that are required by businesses regardless of sectoral focus. Secondly, there will be a need to identify services and facilities that can differentiate the iCentrum offer from direct competitors.

In analysing the service offer of UK science parks and incubators, the following represent core accommodation and service content:

• Administrative and operational support relating to the day-to-day running of the business; • Access to onsite or online business support services, including accounting, leadership and

management, access to finance and business/strategic planning; • Availability of communal areas;

• Conference and meeting rooms;

• Hot desk facilities and drop-in office locations;

• Laboratory space, if required, depending on user type;

• Office space of varying sizes to accommodate expansion and development;

• The ratio between innovation space (80% of floorspace) and incubator space (20% of floorspace) is approximately 80:20.

Based on findings from the UK analysis there would appear to be scope in developing a unique service offer for iCentrum. For example, and particularly given the sectors prioritised for the development, only one of the science parks reviewed provided resident businesses with access to 'thinking or conceptual space'. In addition, there appears to be a lack of an integrated service offer, where businesses can readily access all the services required within the same premises. Thoughts here turn to examples from Silicon Valley relating to venture capital/investment opportunities and access to legal services where these services are integrated as part of the package including the physical building offer. Perhaps more importantly, iCentrum needs to consider the service offer in the light of technological advancements and the reduced requirement for a physical space. Striking the appropriate balance between virtual and physical services will have an implicit impact upon overall market demand and take-up of the facility.

It is important to note here, the recent promise of investment by Cisco as part of the British Innovation Gateway (BIG) initiative, which is a five-year investment of cash, technology and human resources, which aims to develop Britain’s innovation ecosystem and create an environment in which start-up digital businesses and their ideas can flourish. The next stage of the BIG initiative is Cisco’s investment in a National Virtual Incubator (NVI), which is a sustainable public technology network that promises to stimulate entrepreneurship by connecting physical sites through IT infrastructure. The main goal of the NVI is to help accelerate the growth of start-up and SME businesses, by facilitating their contact and collaboration with other like-minded businesses, partners, advisors and investors. The development of such an initiative in the innovation hotspot of the ‘silicon roundabout’1 (which has seen a 200% increase

1

Silicon Roundabout is on Old Street in London located between the City of London and the Eastend. An availability of cheap premises has led to ICT start-ups and SMEs locating in the area creating a high-tech cluster. The cluster is now attracting firms like Google to the area, see: http://www.bbc.co.uk/news/technology-15088359)

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in the number of technology start-up businesses over the last 12 months) will have important implications for iCentrum and the nature of its core offer.

3.3 Overview of the West Midlands Position

Following on from an examination of incubator units and science parks across the UK, it is imperative to obtain a more detailed understanding of the supply of such services in the West Midlands, again with an emphasis on identifying trends in relation to partnerships and affiliations, tenant type and number, floorspace and core service offer. Detailed information on each of these factors will go a long way to ensuring a differentiated product and service offer that will, in turn, secure sufficient market demand to make the centre economically viable.

3.3.1 Supply Overview

Before looking in detail at the nature and extent of supply, a light touch assessment has served to highlight a number of key trends in respect of partner affiliation and tenant companies. As can be seen in Annex 2, the overwhelming majority of successful science parks and incubators reviewed in the West Midlands, have direct links, affiliations or formal partnerships with regional universities. Many are located on university campuses with relevant departments facilitating access to research opportunities and services. It is interesting to note that the university affiliated incubators and parks tend to have higher tenant numbers and overall occupancy rates, when compared to privately owned parks.

A quick assessment of tenant type highlights that companies tend to be new start-ups or fledgling businesses, with a significant number spinning out from university departments and research programmes. The companies are often high growth businesses that seek to expand and internationalise rapidly in the early years of development. There is only limited engagement with well known and established businesses and iCentrum's idea of securing an 'anchor tenant' could represent a unique selling point that may serve to increase interest in the wider development and service offer. Such a tenant would serve to place the Birmingham ICT cluster on the technological map.

3.3.2 Floorspace

As in the case of the UK assessment, the proposed size of the phase one iCentrum development closely reflects the size of similar developments in the West Midlands, with total floorspace ranging from approximately 30,000ft2 to 50,000ft2. There are examples of incubators and science parks that have far larger floorspaces in excess of 100,000ft2, but these are well established, have benefited from a phased developmental approach and often provide access to laboratory space.

Focusing briefly on the size of individual lettable units, the trend points to units of between 100ft2 and 4-5,000ft2. The smaller units often represent office space for fledgling businesses, those that require access to broadband, but limited additional floorspace.

3.3.3 Tenant Type

Following on from the assessment of UK tenants, a review of West Midlands tenant groups highlights two differing but equally successful approaches. The majority of parks reviewed focus attention on three or four sectors, but these sectors are related in some way by their focus or type of technology. The most

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common group of sectors brought together are IT, Creative and Digital, Medical Technologies and Biotechnology. Although different sectors, they have been placed together because of their usage of similar technologies and the related crossover in terms of research and development. Provided that an appropriate entrepreneurial culture and environment can be established, there is significant scope for knowledge sharing and developmental networking.

However, there are examples, thinking primarily of Birmingham Research Park, where the technologies used and research undertaken are so specialist that the benefits and added value to be obtained from 'rubbing shoulders' with companies from other 'related sectors' is minimal. In this instance, however, it is important that an effective network is established to ensure resident companies can benefit from research and technological development occurring among like-minded businesses at other regional, national and international locations.

3.3.4 Tenant Numbers and Occupancy Rates

As touched upon in the supply overview, those incubator units and science parks affiliated with, or attached to, regional universities, tend to have a greater number of tenants and overall occupancy rate. Of those directly affiliated or partnered with regional universities, the number of tenants range from between 65 and 150, whereas as those identified as private parks cater for between 15 and 45 tenants, although clearly, tenant numbers correlate directly with size and quality of site. Based on these figures, however, it would appear that the presence of a university, and active engagement between it and the innovation/ incubation centre can command a higher level of occupancy and a greater number of overall tenants.

3.3.5 Accommodation and Services Offered

As in the case of the UK assessment, there are clear trends in both the types of accommodation offered and the core service offer of parks in the West Midlands. All of the incubators and parks reviewed have the following core accommodation and service offers:

• Flexible workspaces and hot desk facilities;

• Access to both incubator and innovation space that provides opportunity for growth and expansion; • Conference facilities and meeting rooms;

• Laboratory space (not directly relevant to the proposed service offer of iCentrum); • Administrative services, including reception, secretarial, mail, IT support;

• Superfast Broadband services;

• Either onsite or referral access to business support services, including business planning, intellectual property, academic research and development, access to finance and grant funding;

For iCentrum to differentiate itself sufficiently from other facilities in the West Midlands there is the need to identify and provide additional services at reasonable cost. Such services could include onsite access to banking and funding, legal services and venture capitalists and investors, the latter of which will be discussed in relation to Palo Alto and Silicon Valley.

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3.4 Sustainability of the iCentrum offer – Income Streams

During the design, construction and early occupation phases of iCentrum development, much of the income generated will result from public and private funding agreements, together with rental and business support charges. Whilst such sources of income would ensure the short-term viability of a science park, longer term sustainability will be dependent on the identification of alternative sources of income. Examples of potential income streams include:

• Membership and subscription charges;

• The attraction of a transnational ‘anchor’ tenant’, with both the time and monetary resources to invest in the concept and its ongoing development (See the AOL business incubator case study below) • Associated with the above, the attraction of foreign direct investment opportunities, primarily via

engagement with entrepreneurs and businesses seeking development or expansion within the UK market (These can be achieved through offering soft landing and networking services, as exemplified by Liverpool Science Park’s Innovation Centre which has been constructed with funding from ERDF and is jointly owned by Liverpool City Council, University of Liverpool and Liverpool John Moores University);

• Charges for other services including conferences and networking events, meeting room/drop-in space and provision of other recreational and networking activities, a point supported by the service offer of the AOL business incubator.

3.4.1 The importance of high occupancy

As recent European Commission Community Research1 has outlined, science parks are property initiatives engaging in leasing land and office spaces. However science parks and commercial properties are different in their objectives. Commercial properties usually target the achievement of substantial profit, whilst science parks are driven by supporting and assisting economic development, measurable through increased employment and tax revenue through assisting technology commercialisation and enterprise creation. The common requirement for both types of property to assist in the achievement of their aims is a high occupancy rate.

The achievement of a viable occupancy rate will be heavily dependent on the specific service offer and the attraction of suitable market demand, Research undertaken by UKSPA has shown that the highest occupancy rates tend to be in science parks and incubators that target particular sectors or sub-sectors and have formal linkages to higher education institutions and research and development activities. It is important to note that the most successful science parks are those that have an occupancy rate of between 85 and 95 per cent. A long-term trend of 100 per cent is not as appealing to potential tenants as there is no availability for grow-on space or for the introduction of entrepreneurs and business start-ups with new ideas and knowledge to share.

Whilst it is not possible to identify the occupancy rates of individual regional and national competitors, the annual survey of UKSPA members indicates a national average occupancy rate of approximately 85%

1

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3.5 The Market Leader: Palo Alto, USA

Numerous attempts have been made by national governments to 'clone' Silicon Valley and replicate many of the environmental and infrastructural 'ingredients' that make the area so successful. Academic research has contributed a great deal in support of these attempts and yet nothing to date has mirrored the level of success. It is true that the UK has the Cambridge Phenomenon and countries such as Sweden, Germany and China, to name but three, have made significant contributions to technological advancement. It would also be true to state that elements of Silicon Valley's infrastructure and 'culture' have been replicated in such locations, however the results have been far less pronounced.

The factors that contribute to the success of Palo Alto are well known and include: low taxes, venture capital, risk-taking start-up culture, business webs, physical infrastructure, IT-savvy local population, good local markets, networking skills, activities and organisations for communities of interest, co-location of companies in various stages of development, flexible organisational structure, legal/accounting services, local academic and research institutes, commercial partnerships between academia and industry, activist government policy, presence of role models and human talent.

However, whilst the factors are simple, the 'basic chemistry is complicated and the order in which they come into play and the reactions they will produce are hard to finesse'. A key message for individuals with a vested interest in iCentrum is that the infrastructure, environment and culture prevalent in Palo Alto and the wider Silicon Valley has developed organically and over many years. Relationships and partnerships are constantly changing as individuals and companies adapt to new technologies, 'fads' and client/customer demands.

Whilst aspiring to emulate the success of Palo Alto and Silicon Valley is very noble and understandable, in reality it is not feasible, at least in the short-term. However, in setting the bar and the standards so high, it will be possible to replicate 'elements' of the Silicon Valley model in iCentrum and facilitate the project's progression towards being one that attracts companies and entrepreneurs from across the UK and internationally. Table 3.1 sets out some of the key components of Silicon Valley that make it so successful and draws out some pointers for the development and sustainability of iCentrum.

Table 3.1 Contributory factors to the success of Palo Alto and Silicon Valley

Social Networks and the regional advantage of Silicon Valley: The difference between Silicon Valley

and many other areas that have sought to replicate it is not in resources or location but in their 'commercial culture'. In essence, the relative success and failure of the two areas centred on the dichotomy between an 'insular' and an 'open' culture. Route 128 (in Massachusetts) firms were characterised as insular and proprietary whilst Silicon Valley firms were open and linked by social and economic networks that facilitated their adjustment to the vicissitudes of market shifts.

Inter-company engagement: One of the most important aspects of Palo Alto and Silicon Valley that

has made it so successful is the way in which the internalised labour market works, characterised as it is by extensive labour mobility. There is a far higher propensity and incidence of inter-firm mobility with the loyalty of engineers and developers to advancing technology rather than to individual firms or industries. The inherent sense of community, and the loyalty to that community, promotes the establishment of cross-institutional ties enabling Silicon Valley, as an 'organism', to solve technical problems more easily and rapidly than technical people limited to contact with other employees within their company.

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The role of Venture Capital: The openness and flexibility of Silicon Valley's social and economic

networks extends much further than simply the companies. In particular, venture capitalists and lawyers play more than their conventional roles; they influence the structure and future development of the client companies. Venture Capitalists, often successful entrepreneurs of the past, not only provide the

necessary financial resources to support start-ups and spin-offs, they also play the multiple roles of broker, management consultant and recruiter.

Stanford's place at the epicentre of technological innovation: The final piece in the Silicon Valley

Network 'jigsaw' is the University of Stanford and the implicit role it plays at the epicentre of

technological innovation. the education sector has been vital because 'the constant movement back and forth between industry and university has blurred the boundaries of both and created elaborate social networks that keep academic research focused on practical problems and infuse industrial activity with up-to-date science'. Most notably, in the last fifty years university faculty, staff and graduates have launched some 1,200 companies, including Hewlett Packard, Facebook, Apple, Google, Intel and Cisco Systems, more than 50 percent of Silicon Valley's product comes from companies of Stanford alumni and, in addition, Stanford is responsible for generating lots of patents and those patents are heavily featured in the research of others. It would be difficult to argue that any other single university has had the same impact on the technology and ICT landscape.

3.5.1 Palo Alto and the Return of AOL

The four contributory factors outlined above should not be viewed in isolation from the physical and cultural environments that have been created in Silicon Valley over the last fifty to sixty years. However, what they do illustrate are some of the transferable lessons than can be implemented as part of the iCentrum development. They also played an important role in encouraging AOL to return to Palo Alto last year in an attempt to re-invigorate its business and, in particular, it's technological and product development. The story of AOL represents the first of a number of case studies and serves to highlight some of the strategic advantages that can be obtained from the presence of an 'anchor tenant'.

Case Study One: AOL Business Incubator AOL Tries for Some Silicon Valley Cred

The benefits to be obtained from locating your business in the Silicon Valley area, in terms of research and development, product innovation and knowledge sharing, play an important role in the attraction and retention of large and successful companies. Indeed, some of these companies, thinking principally about AOL and Nokia, have established their own research centres in order to continue to benefit from the entrepreneurial spirit and knowledge sharing that takes place.

Rationale for re-locating

Established twenty eight years ago, AOL was 'a hot stock' in the 1990s, arguably leading the way in dial-up internet technology. However, a disastrous merger with Time Warner in 2009 has seen the scale and influence of AOL diminish significantly. Nevertheless, the brand still has a certain degree of 'pulling power', particularly when you throw the entrepreneurs and technologists of Silicon Valley into the mix. Having recently signed a seven-year lease on a 225,000 ft² building, the Internet giant is taking the opportunity to tap into the youthful technological knowledge base of Palo Alto.

icentrum Market Demand Study