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The Contribution of Entrepreneurship to Economic Growth and Employment
Unemployment, under-employment and less than robust economic growth are huge challenges in multiple parts of the globe. Many see entrepreneurial early-stage companies as a key (in some cases the key) engine to making substantive progress on these challenges. During its first term, the Global Agenda Council on Fostering Entrepreneurship established realistic and unrealistic expectations in its field and illustrated them by a selection of initiatives that promote entrepreneurship. The outcomes are showcased in this report.
The Council’s hope is that the many constituents with strong interest in promoting greater employment and more robust economic growth will find this report a constructive but sanguine statement about realistic expectations from this sector. Realistic expectations are important. If expectations are too high and those expectations are not met, there can be a backlash against what is a pivotal sector of the economy. If expectations are too low, individuals and organizations may not be challenged to deliver to their capacity.
In addition, it is important to recognize that employment growth comes as a natural outcome of entrepreneurial growth and not vice versa. To set expectations about the likely job-growth implications, it is necessary to understand how private or public sector initiatives promote underlying entrepreneurial activity. Building the skills set of existing and potential talent for these ventures is an important priority. The start-ups themselves can play a key role here, creating a multiplier effect. For example, Omada Health incorporates the training of new employees as part of its business model. Many other start-ups expect the government or perhaps larger companies to provide training for the employees they will hire.
Developing an innovative ecosystem is complex. The process will benefit from including both simultaneous private and public sector entrepreneurial initiatives. A central challenge is the alignment of these initiatives so they become reinforcing rather than at cross purposes.
High Expectations for Big Contributions from Entrepreneurial Companies
There are many, diverse public-sector calls worldwide for governments to stimulate start-up growth. Recent downturns or slowdowns in many parts of the world have led to heightened pressure on governments to take measures to kick-start economic growth and increase employment. Multiple initiatives have focused on early-stage company efforts – such as Silicon Roundabout in the UK, the Returned Student Enterprise Park in mainland China, Dubai Silicon Oasis, Skolkovo in Russia and Singapore’s Technology Incubator Scheme.
Assertions have also raised expectations about the role of young entrepreneurial companies. Many comments have come from venture capital associations. For example, the president of the US National Venture Capital Association (NVCA) in 2011 introduced a report on the contributions of venture capital (VC) as follows: “For a decade now, NVCA has used data collected by IHS Global Insight to tell the story of venture capital’s outsized impact on US job creation and economic growth. The [2011 Report] reinforces this narrative.” A 2004 report published by Deutsche Bundesbank focused on VC-backed firm data from 16 OECD countries from 1990 to 2001 and likewise highlighted the positive role of the sector: “These results therefore call for innovative policy instruments that would stimulate the participation of private VC funds available in the market.”
But the realities and challenges across the globe are different. The Members of the Global Agenda Council on Fostering Entrepreneurship come from a diverse set of countries and regions encompassing vast differences in the underlying ecosystems supporting the growth of early-stage companies. These differences should and do affect expectations on the impact of employment and economic growth.
Yet there are also similarities across countries and regions: these include the DNA of entrepreneurs, the “roller-coaster ride” of most early-stage companies, and the disproportionate contribution of the small percentage of start-ups that grow to become high-impact companies. Entrepreneurs are inherently optimistic and resilient. Obstacles they see as “doable challenges to overcome or manoeuvre around”, others see as crippling barriers. The limited infrastructure for starting and then scaling companies in many countries is seen by entrepreneurs in those countries as a deterrent to their competitors more than as a barrier for themselves. While the business media typically showcase start-up companies with ever-increasing revenues, the reality is that almost all ventures have their down quarters or down years, and their founders and early executives experience multiple dark moments. Another similarity is that the largest aggregate contribution to economic growth and employment will come from a small percentage of companies. This small percentage of companies is what Endeavor, a private-sector organization that has played a pivotal role in helping to expand the entrepreneurship culture in many countries – initially in South America and more recently in the Middle East, Africa and South-East Asia, showcases as high impact ventures.
The build-up of revenues and headcount of start-up companies in their early years, with rare exceptions, is relatively small. Very few companies reach 50 employees or US$ 20 million in revenues in their first two years. This is especially the case in countries where there is a relatively small domestic market or where the economy is heavily dominated by large well-established companies that do not interact with or buy from early-stage companies. Expectations must be grounded in the specific business/political/social environment to which they pertain.
A Large and Diverse Set of Entrepreneurial Initiatives
The Council has identified numerous and diverse initiatives that promote entrepreneurship. Private sector initiatives include incubators and accelerators, funding vehicles, awareness and idea evaluation programmes (business-plan contests, conferences, “seed camps” and the like), mentorship programmes, education programmes and large-company programmes to purchase from start-ups. Public-sector initiatives include variants of the above private-sector initiatives. They also include initiatives that can only come from the public sector; these include taxation relief, immigration assistance, stimulus packages, rollouts of science parks and relief from government regulations. The Council outlines realistic expectations for a selection of these initiatives.
Two different time horizons are distinguished: a short-term horizon (1-2 years) and a medium-term horizon (3-5 years). What is an unrealistic expectation in the short term can become realistic over the medium term.
- Business Incubator/Accelerator Initiatives.These initiatives are rapidly growing across the globe. They encompass a physical aspect since they often create an area where new ventures can be housed and are connected to broadband and other infrastructure. In addition, they may contain a business aspect through support and mentoring, covering a broad spectrum from team formation, financing, marketing, customer development, prototyping, etc. The physical aspect is relatively simple and provides a variety of economies of scale and community membership on its own. The more challenging task is finding or developing the people who can select and provide the value added services to grow a strong set of new ventures. This generally takes much longer than a couple of years, unless the incubator or accelerator is located within an existing ecosystem of entrepreneurial activity. The incubator needs to be much more than a real-estate play with a rent-based business model. A premium should be placed on giving former/existing entrepreneurs key on-site roles. Important value added activities include access to follow-on funding, business development networks, recruiting, legal and accounting advice and partnership opportunities. Examples include Ycombinator, Techstars and Plug and Play in the United States, Jungle Ventures, and Clearbridge Accelerator in Singapore, and Raizcorp in South Africa.
- The Skolkovo Foundation in Russia is a big initiative of this kind. Realistic progress over an initial one to two years will be the construction of physical infrastructure and the delivery of educational programmes. Even over three to five years, only a small set of companies is likely to show high impact from the Skolkovo initiative.
- Funding Initiatives. These initiatives facilitate access to finance for entrepreneurial projects. The challenge here is not whether funds can be quickly spent but rather the speed at which good investments can be made and the ventures scaled in a sustainable way. It is unrealistic to expect that, within a one to two year period, quality ventures based on a strong pipeline of diverse good ideas can be built from scratch. The build-up of quality investments in most cases requires both experienced evaluators and access to a good deal flow. A diversity of ideas can reduce the risk of duplicate funding of ventures with very similar ideas. Countries with a rich heritage of new entrepreneurial companies likely will best be able to quickly leverage new funding initiatives to foster high-impact entrepreneurial ventures – but in most cases those countries already have an active venture-capital market. Countries with little such heritage will first require a more grass-roots build-up in quality individuals to vet new ideas and in the entrepreneurs with those ideas. The Endeavor experience shows that the build-up of such a broad-based culture is a medium- to long-term project.
- Awareness and Idea Presentation/Evaluation Initiatives, such as idea-to-plan weekend programmes and entrepreneurship game programmes. Such programmes have the potential to kick-start significant awareness and stimulate interest in entrepreneurship across a broad spectrum of people in a short time period. This is especially the case when there is a potential for a certain level of celebrity through the programme. Shifting from a new idea to an established venture with sizable growth in revenues and headcount, however, is unlikely to occur within two years. Moreover, due to the likely broad base of those participating in these programmes, there is in all probability a high failure rate in the early years. Raizcorp in South Africa has promoted programmes to facilitate the pitching of ideas by entrepreneurs within two years, and actual results within three to five years. The three to five year vision included national radio and television programmes that contributed much greater awareness of the value of entrepreneurship and promoted role models. Joint public-private sector initiatives in Cote d’Ivoire, Haiti and Rwanda are targeting the creation of ventures that provide jobs for youths and women. The most realistic expectations in the one to two year horizon are greater awareness, with the prospect that significant progress in employment will likely start in the three to five year horizon.
- Mentorship Initiatives. Entrepreneurs and their teams can benefit greatly from the sage input and experience of one or more advisers. In most cases these individuals will come from the private sector. Endeavor (see above) has played a pivotal role in growing the entrepreneurship culture in many countries. Its experience demonstrates that the build-up of such a broad-based culture is a medium- to long-term project. In many countries, Endeavor has chosen among its first generation “high-impact entrepreneurs” to be role models and mentors to the second generation of Endeavor entrepreneurs. In some cases, government programmes have explicitly focused on supplementing the domestic pool of mentors with entrepreneurial advisers from abroad. Singapore has successfully enticed high-tech global entrepreneurial executives from abroad. With sufficient publicity and incentives, such initiatives have the potential to quickly build up the available mentorship pool and to develop a cluster of ready executives to scale start-up companies. US government aid programmes in Palestine to promote start-ups also have the establishment of a pool of mentors as a key element. Expectations of significant impact on the number and growth of Palestinian start-ups is realistically a medium-term rather than a short-term objective. The Chinese experience with the Cradle Plan in TusPark has highlighted the value of mentors with past entrepreneurial experience linking up with the next generation of entrepreneurs.
- Government Regulation Reduction Initiatives. Many countries are increasingly recognizing that “one-size-fits-all” regulatory burdens often fall disproportionately heavily on young or small companies. The Obama Administration’s StartUp America initiative aims to reduce such barriers to high-growth entrepreneurs. In the short run, a realistic expectation is understanding the obstacles and taking steps to create predictable frameworks for businesses to collaborate and interact with government agencies. Realistic medium-term objectives for government agencies include reducing or eliminating regulatory hurdles and providing better road maps for entrepreneurs to navigate the regulations. It is likely that the key barriers to high growth will differ across regions. For example , a shortage of talented software engineers is likely to be a drawback in countries with little past investment in tertiary education whereas, in other countries, the availability of talent may be large and capable of supporting the growth of multiple software companies with R&D undertaken in that region.
- Large-scale Government Initiatives. In both China and India, sizable investments by multiple levels of government (federal, state and local) have led to a build-up of not just some high-growth start-ups but of a larger number of small and medium-sized enterprises. In China, these initiatives include over 800 incubators, pioneer parks and high-tech industrial zones. In India, incubators have been linked to the high-impact government-backed Indian Institutes of Technology (IIT). These elite universities have a prestigious alumni base in larger companies who can play key roles in offering further assistance to ventures developed in the IIT incubators.
Much more needs to be done to develop playbooks on how entrepreneurs can learn from past entrepreneurial successes and failures. Playbooks can also help growing ventures navigate and benefit from the diverse private and public sector initiatives. They can provide important guidance on ways to benefit from possible mentorship possibilities. Multiple failures as well as successes exist in these areas. Much can be gained from not making the same mistakes as past ventures or entrepreneurs.
During this first year of the Global Agenda Council on Fostering Entrepreneurship, our Members have naturally focused on aligning our views as well as collectively driving insight in this important space. While the Council will continue to develop new insights going forward, it will also place greater emphasis on creating impact. In the short term, the Council plans to do this via three avenues: 1) the Council aims to publish focused insights via appropriate channels, such as Op-Eds, online videos and conferences; 2) Council Members are working with the World Economic Forum’s Programme Team to ensure Council insights are reflected in forthcoming events – with a particular focus on the Annual Meeting of the New Champions; 3) the Council will engage closely with the entrepreneurship project work that the World Economic Forum is conducting. As this project has dedicated resources that can help the Council mitigate some of its time and bandwidth constraints, it will allow Members to catalyse their insights and ideas into actionable pieces – in particular around the themes of entrepreneurial ecosystems and job creation.
The opinions expressed here are those of the individual members of the Council and not of the World Economic Forum or any institutions to which they are affiliated.