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

• Driver’s 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 000m² • 70% gross rentable area

2. Tenants: 8-123. Space:

• Flexible to allow enlarging or dividing on a modular basis

• 10-150m² 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 Up

stre

am

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 SA’s 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 m²)– 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 – 872m²

• 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 (m²) Number of units Total space (m²)

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: elena@urban-econ.comTel: +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