In a knowledge-based economy, the creation of wealth becomes synonymous with creating products and services with large software content. However, despite a few major players, the software industry as a whole is fragmented and consists mainly of small, niche market entrepreneurial ventures. The authors study the California software industry to characterize the major barriers to success for these ventures. Simultaneously, a fundamental shift of software technology to a component-based development paradigm will reinforce the industry’s fragmented nature by fuelling a third party, independent software component economy. Coupled with the globalization of the IT industry in general, the need for startups and small companies to form strategic partnerships will become increasingly critical to their ability to create wealth. In recent years, innovative public–private partnerships have attempted to assist startups by addressing their lack of physical resources or capital. This is best illustrated by the dramatic growth of incubators and regional capital networks. In this paper, the authors propose a ‘‘ virtual incubator’’ model to facilitate startup success and business network formation, shifting the focus to the ‘‘ virtual value chain’’ and to connecting startups with business expertise and strategic partners in the marketplace. The authors provide a theoretical basis for the model and its implementation, important to potential investors in virtual incubators.

1. Ž .Research Policy 29 2000 125–134
www.elsevier.nlrlocatereconbase
The virtual incubator: managing human capital in the software
industry
Michael J. Nowak a,)
, Charles E. Grantham b
a
Xerox Venture Lab., Xerox Technology Enterprises, Xerox, Palo Alto Research Center, Palo Alto, CA, USA
b
Institute for the Study of Distributed Work and the Fisher Center for Management and Information Technology, Haas School of Business,
UniÕersity of California Berkeley, Berkeley, CA, USA
Abstract
In a knowledge-based economy, the creation of wealth becomes synonymous with creating products and services with
large software content. However, despite a few major players, the software industry as a whole is fragmented and consists
mainly of small, niche market entrepreneurial ventures. The authors study the California software industry to characterize the
major barriers to success for these ventures. Simultaneously, a fundamental shift of software technology to a component-based
development paradigm will reinforce the industry’s fragmented nature by fuelling a third party, independent software
component economy. Coupled with the globalization of the IT industry in general, the need for startups and small companies
to form strategic partnerships will become increasingly critical to their ability to create wealth. In recent years, innovative
public–private partnerships have attempted to assist startups by addressing their lack of physical resources or capital. This is
best illustrated by the dramatic growth of incubators and regional capital networks. In this paper, the authors propose a
‘‘virtual incubator’’ model to facilitate startup success and business network formation, shifting the focus to the ‘‘virtual
value chain’’ and to connecting startups with business expertise and strategic partners in the marketplace. The authors
provide a theoretical basis for the model and its implementation, important to potential investors in virtual incubators.
q 2000 Elsevier Science B.V. All rights reserved.
Keywords: Virtual incubator; Managing human capital; Software industry
1. Introduction
In a knowledge-based economy, the creation of
wealth becomes synonymous with creating products
Žand services with large software content Hagel and
.Armstrong, 1997 . Software is that ubiquitous tech-
nology that powers everything in the Information
Age, embedded in everything from automobiles to
electric can openers. The knowledge encapsulated in
)
Corresponding author. Tel.: q1-650-813-7122; e-mail:
nowak@pahv.xerox.com
software will increasingly define the economic value
of the intellectual capital it represents. Speaking of
the importance of this new kind of capital, Stewart
Ž . w x1997 declares: ‘‘ . . . for a new Information Age
economy, whose fundamental sources of wealth are
knowledge and communication rather than natural
resources and physical labor.’’
At the heart of this new economy lies the software
industry, providing the enabling tools and infrastruc-
ture to IT professionals in virtually all other indus-
tries. A key characteristic of the software industry is
that, despite a few major players, as a whole it is
0048-7333r00r$ - see front matter q 2000 Elsevier Science B.V. All rights reserved.
Ž .PII: S0048-7333 99 00054-2

2. ( )M.J. Nowak, C.E. GranthamrResearch Policy 29 2000 125–134126
fragmented and consists mainly of small, niche mar-
ket entrepreneurial ventures. The predominance of
entrepreneurs and small companies in the industry
will only be accelerated by the move towards a new
Ž .component-based software development technol-
ogy. Together with the globalization of business and
the marketplace, both trends will fuel the need for
more strategic alliances and wide-ranging partner-
ships. This seems to be especially true in California
where software development often sets international
standards, for example JAVA and HTML language
variants.
These competitive drivers will have a profound
effect on the US economy and in particular the
management and commercialization of intellectual
capital. It will present a host of human resources
management challenges to both large and small com-
panies, with the roles and responsibilities of employ-
ees undergoing profound redefinition. Indeed, the
entire role of strategic partners in the value-added
chain of an industry continues to undergo dramatic
evolution. In this paper, we review some of the
current publicrprivate efforts to assist startups and
small companies, the critical creative element in the
software industry. The authors propose a virtual
incubator model to enable small company success
and to allow US industry to take advantage of the
evolution towards distributed human resources and a
business landscape dominated by international strate-
gic partnerships.
2. Software industry evolution
2.1. Technology
The software industry is poised to undergo a
dramatic evolution in the next decade, evolving from
an object-oriented programming paradigm, where the
software expert is still critical to the development of
business applications, to the component-based soft-
Ž . 1,2
ware development CBSD paradigm. In a com-
ponent-based software economy, software experts
1
Component-based Software White paper, NIST. Can be found
at www.atp.nist.gov.
2
Russell Dewey, ‘‘Streamlining Software Development’’.
will only develop relatively generic components
which business or domain experts can purchase and
modify to create domain-specific applications. This
separation or specialization of work will allow soft-
ware and business experts to focus exclusively on
their own areas of expertise, much as assembly lines
permitted specialization in manufacturing.
In this transition, analogous to what the machine
tool industry experienced during the 19th century
Industrial Revolution, this new approach to software
development will lead to a replacement of hand-
crafted, artisan-tailored lines of code with software
‘‘parts’’ or components and automated processes for
their assembly. This will lead to dramatic increases
in the quality, maintainability and flexibility of soft-
ware while reducing its cost, development time and
complexity. It will also create a new industry of third
party software component foundries that can special-
ize around particular competitive advantages in soft-
ware functionality or business domain knowledge
and create independent, interoperable, top-quality
components for sale.
2.2. Globalization
Globalization of the information technology busi-
ness will have a critical impact on the ability to
create wealth among software companies. A host of
technology and market drivers coupled with govern-
ment deregulation are creating a new global market-
place, particularly for software.
The explosive growth of the Internet and the
Ž .Internet Service Providers ISPs as a low-cost, eas-
ily accessible marketing, sales and distribution chan-
nel for new software products will allow easy access
to mass markets for all producers. On the other hand,
large dominant firms will have the ability to create
global scales of economy and global name brands
and hence take greater advantage of their size and
depth.
We believe that there is an interesting parallel
here to other waves of technical innovation. The key
characteristic that these technologies have is that
they tend, over time, to increase the density of the
social networks of innovators. According to theory
Ž .Wellman, 1999 , this increase should increase the
pace of innovation; and we feel, spread it out over

3. ( )M.J. Nowak, C.E. GranthamrResearch Policy 29 2000 125–134 127
wider spatial areas, i.e., lead to global innovation
Ž .Katz et al., 1963; Robertson, 1971 . The current rise
of LINUX
3
is an excellent case study of this type of
innovation being fuelled internationally through use
of the Internet as a communication medium.
Taken together, these trends only exacerbate the
need to immediately translate state-of-the-art techno-
logical innovation into sustainable competitive ad-
vantage in the marketplace. This will increase the
pressure on software manufacturers to shorten prod-
uct development cycles and lower development costs,
Žsince product lifetimes and hence revenue generat-
.ing ability are likely to decrease with greater com-
petition. As a consequence, the continued globaliza-
tion of the world economy will drive the need to
form strategic partnerships at all stages of a business
endeavour: technology, product and market develop-
Ž .ment Shapiro and Varian, 1998 .
2.3. A fragmented industry
The last basic characteristic of the software indus-
try to consider is that despite a few major players it
is as a whole highly fragmented, consisting mainly
of small, niche market entrepreneurial ventures. Our
study of the number of firms vs. annual revenue for
software companies in California shows the average
Žannual revenue to be US$2.8 million a gross mea-
.sure of size with a standard deviation of US$17.3
million, indicating a very wide distribution of firm
size heavily weighted towards the low end. Further-
more, all trends suggest that it will remain a frag-
mented industry with its members increasingly re-
liant on strategic alliances to remain competitive.
2.4. The new software industry landscape
These three evolutionary factors: technology the
globalization of markets and the fragmented and
entrepreneurial structure of the industry will lead to a
new competitive landscape for the software industry.
Advances in technology will lead to the growth of a
large, third party, independent software component
industry enabled by the CBSD paradigm. Growth of
3
See www.redhat.com for example.
the Internet as a low-cost, easily accessible market-
ing, sales and distribution channel for new software
products 4
will lead to increased opportunities and
competition. An industry dominated by entrepreneurs
and small companies will have an even greater need
to form global strategic alliances.
These changes will drive competition in the soft-
ware industry for the coming decades and cause it to
mature in an unlikely direction: back towards its
roots of entrepreneurialism and an industry model
based on alliance formation and distributed human
resources. Consequently, a better understanding of
the basic success factors for a software entrepreneur
Ž .Bell, 1991 is critical to the understanding of how to
stimulate strong economic growth. Key questions
are:
Ø What are the strategic variables for a software
entrepreneur to succeed in the evolving electronic
commerce marketplace?
Ž .Ø How does one create, maintain and value sus-
Žtainable competitive advantage Hamel and Pra-
.halad, 1994 in new ventures with information-
based products and services?
Ø Where will the management and executive talent
for this explosively expanding industry come
from?
Ø How do we integrate socially diverse teams of
software developers quickly and establish com-
puter mediated communication channels?
3. The California software industry
The California Trade and Commerce Agency,
Office of Strategic Technology sponsored in 1997 a
study to develop a comprehensive strategy to ensure
the long-term viability and economic solvency of the
software industry. The study took the form of inten-
sive interviews with software industry executives,
professional organizations, and regional industry
councils that took place over the period of 1 year.
4
As a consequence, Bill Gates and Microsoft have recently
shifted their business development strategy to software develop-
ment, as opposed to providing content, for the Internet. See
Business Week, 9r8r1997, p. 126.

4. ( )M.J. Nowak, C.E. GranthamrResearch Policy 29 2000 125–134128
Table 1 illustrates the geographic and market
breakdown for business resource requirements for
startups in the software industry in California.
A major finding of the study is that software
startups require external support not usually provided
by financial resources. Indeed, these needs are usu-
ally pre-cursors to obtaining the capital that the firms
need to grow. Three critical needs of software star-
tups in California are:
Ø access to low cost infrastructure resources
Ø access to adequate management skills and knowl-
edge
Ø access to business networking resources for mar-
keting
There is an apparent lack of these resources in
California and elsewhere around the country. Most
existing public resources operate only in an ‘‘aware-
ness mode,’’ telling new companies what they should
do but failing to provide necessary resources for
survival or access to those resources. As a conse-
quence, four out of five startups in California fail,
taking with them the potential for new market cre-
ation and economic growth. The prime reason for
this failure is under-capitalization, often rooted in the
lack of experienced management and of an adequate
understanding of seed investing by local investors.
From this study, it is clear that small businesses
and startups need a way to quickly gain the knowl-
edge and hire the experience to complete effective
business planning. The following key disciplines
represent the knowledge required by a software
Table 1
Order of magnitude estimates for software industry in 1997.
Number of annual startups
Segment Northern CA Los Angeles San Diego Total
Office automation 30 15 5 50
Networking 120 60 20 200
Internet apps 180 90 30 300
Operating systems 12 6 2 20
Manufacturing 6 3 1 10
Telecom 120 60 20 200
Databases 150 75 25 250
Scientific 12 6 2 20
Games 30 15 5 50
Total 660 330 110 1100
startup and appeared to be lacking at various levels
by all those interviewed:
Ø Business Planning
Ø CompetitiÕe Assessment — substitute product as-
sessment and barriers to market entry.
Ø Marketing — product development, market de-
velopment, market penetration, acquisitions and
promotion
Ø Sales
Ø Financial Planning and Analysis — sensitivity
analysis for various plan scenarios
Ø Human Resources — attracting and retaining the
right talent
A better understanding of early-stage or seed invest-
ing has also been recognized as a growing need in
the investment community. 5
The lack of a coherent,
stable and widely accepted format for structuring
early-stage deals with well-known startup risks has
led to a widespread under-capitalization of new ven-
tures around the country. The SBA reports a very
Ž .low percentage approx. 5% of new investment
flowing into startups and small ventures. 6
In summary, the critical resources for a successful
startup to a large extent are not being provided by
either the private or public sector. In the private
sector, until recently a business model that would
provide these services and resources in a profitable
fashion had not been apparent. On the other hand,
the public sector has always struggled with the ques-
tion: should it help supply these critical resources to
industry? In the end, both efforts have tended to be
geographically focused, unnecessarily restricting the
scope of the business opportunity and the potential
for economic growth.
5
The Ewing Marion Kauffman Foundation can be found at
www.emkf.org.
6
‘‘Trends in Venture Capital Funding in the 1990s’’, Nicole R.
Onorato, US Small Business Administration, Office of Advocacy,
August, 1997.

5. ( )M.J. Nowak, C.E. GranthamrResearch Policy 29 2000 125–134 129
4. Managing intellectual or human capital?
Clearly, there are radical changes coming to the
software industry as a new development paradigm
fuels fundamental structural changes and electronic
commerce follows the hyper-growth of the Internet.
As their ability to compete on a global level in-
creases, however, software entrepreneurs face a more
critical knowledge gap in an even more competitive
climate. Although often spoken of as intellectual
capital management issue, the real hurdle for an
entrepreneur is to acquire and manage the technical
and business knowledge and expertise to compete in
the global market, which increasingly is also ones’
Ž .local market Kanter, 1995 . We concentrate in this
paper on the root cause of that knowledge gap.
Indeed, the California study illustrates clearly that
the critical issue for the software industry of the
early 21st century will be human capital. The critical
human resources dynamic for the industry has been
and will continue to be one of constant shortage.
Here, we believe, is where the need for tripartite
cooperation between universities, the public sector
and private commercial interests is the greatest. Un-
derstanding and exploiting the nature of the triple
helix may be the key for the US software industry to
stay competitive for the foreseeable future.
The authors first present a brief review of current
public and private sector approaches to assisting
entrepreneurs and small companies in their struggle
to survive and prosper. At the end, they present a
new, hybrid model to facilitate startup success and
economic growth.
4.1. Public sector programs
The traditional approach for the Federal Govern-
ment has been to create grants programs to fund
technology development for mission-oriented agen-
cies such as the Departments of Defense or Energy.
The Small Business Innovative Research grant pro-
gram administers over US$800 M 7
a year to small
companies in staged grants, but typically addresses
only technical issues which often are not transferable
7
An interesting commercial web site about SBIRs is
www.win-sbir.com.
to the commercial marketplace. 8
At the US Depart-
ment of Commerce, the Advanced Technology Pro-
gram, 9
NIST is pioneering an innovative approach
to funding R&D in industry in that the technology
development funded must be targeted towards prod-
ucts or services for commercial markets. Analysis of
the economic impact of these funds is currently
underway.
State governments 10
have created grants and other
financial assistance programs, often to leverage off
of Federal funding, but typically do not focus on the
knowledge gap, even when working with small,
innovative companies. In California, there are many
nascent government-sponsored efforts throughout the
state, but they are unfocused and independent of
each other and there is no coordination mechanism
between regions nor a consensus that it is needed. In
due course, there is great skepticism among en-
trepreneurs and within the software industry about
what value the public sector can add.
4.2. Public–priÕate partnerships
The US Small Business Administration 11
has
been a strong advocate of small business around the
country, making incredible progress in recent years
in making low-cost loans available to small busi-
nesses, in stimulating the creation of Small Business
Investment Funds, and other financially oriented as-
sistance. One form of public–private partnership has
been the creation of ACE-NET, 12
which tries to
take advantage of the Internet to link potential in-
vestors with entrepreneurs and in the process create a
new, nationwide equity market for US small busi-
ness.
8
Personal observation. Most SBIR grants lead to the develop-
ment of technologies for government consumption with require-
ments that make commercial exploitation at best difficult.
9
More information can be found at www.atp.nist.gov.
10
States such as California, Michigan and New York have been
quite active in economic development and small business assis-
tance.
11
More information can be found at www.sba.gov.
12
Information about ACE-NET can be found through the SBA
web site or directly at https:rrace-net.sr.unh.edu.

6. ( )M.J. Nowak, C.E. GranthamrResearch Policy 29 2000 125–134130
State-sponsored venture funds, 13
and other pub-
lic–private partnerships like The Capital Network 14
Ž .TCN have been a recent innovation with the
promise of addressing the knowledge and human
resources gap as well as the funding needs of en-
trepreneurs. The state-sponsored seed and venture
funds typically take a minor equity stake in the
entrepreneurial venture while focusing on its critical
needs, albeit typically from a local, state perspective.
Capital networks like TCN are often non-profit eco-
nomic development organizations which train en-
trepreneurs in basic business skills as well as provide
access to investors, but usually from a state or
regional perspective.
4.3. Incubators 15
Often working in conjunction with state and re-
gional funds and networks are places especially de-
signed to foster the growth of small companies.
Studies have documented that legitimate incubators
increase their tenant companies’ likelihood of suc-
Ž .cess to 80–90% compared with 20% in general by
providing startups with a supportive network, infras-
tructure and physical facilities. Critical to a success-
ful incubator environment is that it should offer
experienced business and management advice and
mentoring as well as access to professional expertise,
usually coupled with an explicit requirement that
entrepreneurs complete a thorough business plan.
To date, there is no single formula for a success-
ful business incubator. According to the National
16 Ž .Business Incubator Association NBIA , most
Ž .49% incubators are non-profit, operated by groups
ranging from community development organizations
to municipal governments seeking to create new jobs
and increase local tax bases. Academic related incu-
Ž .bators 13% serve as a link between innovations
developed by universities or colleges and the busi-
13
The National Association of State Sponsored Seed and Ven-
ture Funds is headquartered in Oklahoma City, OK.
14
The Capital Network of Austin, TX, can be found at
www.thecapitalnetwork.com.
15
US Small Business Administration, ‘‘Business Incubators
Hatch Young Companies’’, more information at www.sba.gov.
16
More information can be found at www.nbia.org.
nesses that market them to the general public. The
‘‘mixed’’ or ‘‘hybrid’’ incubator, which links private
companies and public institutions in an effort to
create new business, comprise 18% of the total.
Ž .Finally, a growing number 12% are for-profit incu-
bators, which make money by acquiring equity in
their tenant companies or charge for rent or other
services. According to the founder and first execu-
tive director of the NBIA, Carlos Morales, for-profit
operations are expected to grow to at least half the
total of all incubators in the next few years: ‘‘The
future is private, for-profit incubators.’’
4.4. The electronic community
A different approach to facilitating small business
and startup success in the private sector is now
occurring through the growth of a non-profit consor-
Ž 17 .tium CommerceNet in Silicon Valley. Com-
merceNet was founded in 1994, received initial fund-
ing from the Federal Government, and is now a joint
venture participant in an ATP award 18
to develop an
Internet-based infrastructure for electronic com-
merce. It has grown to a consortium of nearly 300
corporate and organizational members who together
are struggling to form a global business community
around the idea of electronic commerce.
4.5. A new model proposed
Our analysis of software industry trends suggests
a time of increasing competition and opportunity for
entrepreneurs and small companies. Our case study
of the software industry in California shows that its
entrepreneurs face the same general issues all en-
trepreneurs face: the critical shortage of financial and
human capital. Current approaches to public–private
partnership have some merit, especially when fo-
cused on training and access to business and man-
agement experience. However, it is clear to us that
there is a great need for a new approach or model to
facilitate startup success and business network for-
mation. An open question at this conference is the
optimal location for R&D centers of excellence? We
17
More information can be found at www.commerce.net.
18
See 4
.

7. ( )M.J. Nowak, C.E. GranthamrResearch Policy 29 2000 125–134 131
propose that it is not their location but their connec-
tion, with each other and with business centers of
excellence, that is the key question and focus on how
to structure a virtual ‘‘network of innovation’’?
Based on the findings of the case study and our
own observations we conclude that the new model
needs to provide the small business community with
a structure and mechanism to easily access:
Ø information on ‘‘best practices’’ for business de-
velopment
Ø industry and management experience
Ø resources for international marketing, sales and
distribution
Although space does not permit an extensive dis-
cussion of our methodology, the clear focus has to be
on wealth creation. Essential to our approach are the
Ž .ideas of Rayport and Sviokla 1995 on the virtual
value chain. In short, every business today competes
in two worlds: a physical world of resources that
managers can see and touch and a virtual world
made of information. The physical world may be
addressed via incubators, but there is also the essen-
tial virtual part of the equation. From that perspec-
tive, key steps in our methodology are shown in
Table 2.
These steps above all revolve around the develop-
ment of sustainable competitive advantage for a firm
and its strategic partners. At first cut, they are blind
to geographic and resource constraints and focus
solely on pooling resources to optimize the strategic
teams’ chances for success. Pooling technical and
business talent across all frontiers, providing a clear
focus on wealth creation and a strategy to meet the
business opportunity at hand would be the main goal
Ž .of the ‘‘virtual incubator’’ see Table 3 .
It is clear to us that an entrepreneurial firm has
many needs that must be addressed in order to
become a successful venture, but that not all re-
Table 2
Methodology
Ø identify strategic opportunities
Ø identify key core competencies and human resource
requirements
Ø actively manage intellectual capital
Ø create strategic alliances
Table 3
The virtual incubator
Ø Human resources focusqcapitalsa source of integrated
resources
Ø Focus on strategic alliance formation: bringing all essential
ingredients for success together as early as possible
Ø Intellectual capital valuation and management expertise
on-board and active from the start
Ø Internet-based, distributed resources
Ø For-profit
Ø Private sector plays lead role, university and public sector
supporting roles
Ž .Ø Formalized management control systems accounting, etc.
for stability
Ø National and international business and market focus and
reach
Ø Work in conjunction with physical incubators when needed
sources must be co-located. Indeed, with the global-
ization of today’s technical and business resources,
that is an unreasonable constraint.
We propose to create a ‘‘network of innovation’’
which brings together, if only in a virtual sense,
centers of technical and business or management
excellence. This connectivity between practitioners
of ‘‘best practices’’ would facilitate powerful al-
liances of startups, universities, and large companies
which would have excellence as a common underly-
ing theme and wealth creation as an ultimate com-
mon goal. In much the same way as the CBSD
paradigm allows application builders to combine
‘‘best of’’ components to build competitive software
products, the ‘‘virtual incubator’’ will allow the best
marketeers, technologists and managers to self-as-
semble into strategic alliances to address business
opportunities. 19
To summarize our concept of the virtual incuba-
tor, we include the table of essential elements below.
Clearly our strategy has been to borrow elements of
success from all the previous models of public–
private partnership described above, albeit with a
new focus on the virtual value chain and strategic
alliances. It is also evident that the concept may need
fine-tuning for a particular industry, location or mar-
19
A recent New York Times article, ‘‘Warmth, but No Walls,
in This Incubator’’ by William R. Long describes how this works
for a software company in a virtual incubator in Colorado. See the
New York Times of January 17th, 1999.

8. ( )M.J. Nowak, C.E. GranthamrResearch Policy 29 2000 125–134132
ket, we have primarily focused on the software
industry because of its trend setting nature and grow-
ing role as a key source of value-added for all
industries. However, about 30 of the newest business
incubator programs in the country are ‘‘virtual’’
incubators, suggesting the power of the concept and
underlying ideas. 20
5. A new approach to organizing work in incuba-
tors
As we have noted, the advent of the Internet age
has ushered in a period of significant development of
new models of doing business and managing organi-
zations. Various authors have talked about ‘‘the
networked organization,’’ ‘‘virtual corporations,’’
Ž‘‘cellular firms,’’ and ‘‘distributed firms’’ Di Mar-
tino and Wirth, 1990; Drucker, 1994; Grantham,
.1996a; Miles et al., 1997 . Futurist Alvin Toffler
describes a ‘‘third wave’’ economy characterized by
continual and continuous change, demassified manu-
facturing, mass customization, and intensive depen-
dence on information and knowledge as sources of
Ž .competitive advantage Toffler, 1980 .
Developments in Information Technology are ac-
tually enabling, if not driving, enterprises to adopt
new work practices, new organizational structures,
and even new management styles in order to extend
their businesses both domestically and abroad. As
the pace of business activity increases and markets
emerge and disappear almost overnight, different
approaches are required to respond to these rapid
changes. The traditional industrial model of hierar-
chical, formal, layered organizations may soon be
antiquated and replaced by more flexible, dynamic
structures. Mature organizations or industries with
cultural barriers to such change risk falling behind
and being unable to compete effectively and hence,
we believe our case study illustrates a need for a new
model of business in the software industry.
We believe that successful models for work
organization in this ‘‘New Economy’’, which is
epitomized by the virtual incubator will include
small-scale networks of interlocked specialists com-
20
See 19
.
ing together on a temporary basis to approach a
focused market or software project. This combina-
tion of relatively autonomous entities or ‘‘business
atoms’’ will stay together just long enough to meet
its members’ specific goals and then disband, with
individuals and teams moving on to other projects
and other ventures. Formal workgroups with member
relationships that span long periods of time and
numerous work efforts will be replaced with these
focused, temporary, virtual organizations of organi-
Žcally formed business ‘‘molecules’’ Grantham,
.1996b; Hagel and Armstrong, 1997 .
These ‘‘disposable organizations’’ 21
litter Silicon
Valley and add a critical, dynamic human element to
the rush of new technology and ready capital. The
authors believe it is this dynamic element which
constitutes the Valley’s greatest asset. In other words,
it is not just the acceptance of an incredibly fluid
work environment, but the eagerness and ability of
the population to constantly reconfigure to capitalize
on technological and business opportunities and to
thrive in such an organizationally uncertain climate.
Yet our formal knowledge of how these new
forms of organization and management actually op-
erate is relatively limited. And while we sense that
these new management approaches may be more
appropriate for the new economy, little research has
been done to show that they actually produce higher
quality products and services for customers, a higher
quality of life for employees, or higher levels of
profitability for shareholders and other investors. The
regional success of Silicon Valley in the new econ-
omy, we believe, is the best indicator to date.
Another compelling present-day example of this
new organizational model can be found in Holly-
wood. For large film ventures today, it is typical for
literally hundreds of small firms and individual enti-
ties to coalesce around a project — usually a script
Ž .Morley and Silver, 1977 . These projects are led by
producers and directors who recruit talent for all key
Žroles including both on-screen and off-screen con-
.tributors . Often the members of a film project par-
ticipate in a shared equity model, and the final
21
Jim March, Stanford University, Professor Emeritus in Busi-
ness, Sociology, Political Science, and Education, private commu-
nication, 1998.

9. ( )M.J. Nowak, C.E. GranthamrResearch Policy 29 2000 125–134 133
product is delivered through existing distribution
Ž .channels Laumbacher et al., 1997 . Combinations of
talent from a particular film may work together on
future endeavours; but in general, once a particular
project is completed, the virtual organization that
created it comes to an end.
The film industry offers a unique and rich exam-
ple of how business and organizational structures
have shifted over time from the large, vertically
integrated production enterprises of the early studio
era to the more loosely connected functional net-
works of independent actors, production companies,
Žand distributors of today Bordwell et al., 1985;
.Lewis, 1985 .
Similar organizational transformations have oc-
curred in other traditional industries during the past
half-century as information technology has become
increasingly pervasive in business and in our per-
sonal lives. Each stage in the evolution of computing
has brought with it changes in how individuals within
organizations interact with each other, with cus-
tomers, and with information itself. No longer is
information technology merely an automation func-
tion. It has become the key business infrastructure of
the Internet Age, enabling businesses to be con-
nected and related to partners, suppliers and cus-
Žtomers around the world Daft and Lengel, 1986;
Finholt and Sproull, 1990; Prahalad and Hamel,
.1993 .
6. Conclusion
The authors propose a virtual incubator model to
facilitate small company and startup success and to
enable US industry to take advantage of the evolu-
tion towards distributed human resources and a busi-
ness landscape dominated by strategic partnerships.
The development of sustainable competitive advan-
tage for a firm and its strategic partners would be its
operational focus, with ‘‘best practices’’ and excel-
lence the underlying theme and wealth creation as
the ultimate common goal. We also need to examine
new and innovative ways of organizing to do this
‘‘knowledge work’’. One of these new models has
emerged from this case study that looks at a more
temporary project focus of software teams, than a
more traditional ‘‘permanent’’ organizational struc-
ture. By supporting a virtual ‘‘network of innova-
tion’’ to connect centers of technical and business
excellence, universities, the public and private sector
could play a critical role in addressing the knowl-
edge gap which will increasingly limit growth in a
knowledge-based economy.
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