How to Promote Productive Entrepreneurship Communities
How can decision makers empower local entrepreneurship communities to become more productive? Endeavor Insight’s recent report, funded by the Bill & Melinda Gates Foundation, conducted extensive research on six cities around the world to tackle this question.
As the World Bank’s ‘Doing Business’ report points out, moving from the bottom quartile of countries in terms of the ease of running a business to the top quartile implies a 2.3 percentage point increase in national annual growth. Finding the best ways to develop productive entrepreneurship environments, is therefore a critical effort. Endeavor’s report, Fostering Productive Entrepreneurship Communities, offers five key lessons garnered from its research.
Lesson one: Not all entrepreneurship communities develop along the same paths
The first lesson is that entrepreneurship communities in the study see different courses to their development. The two cities in focus in the report are Bangalore and Nairobi. The study found that entrepreneurs who have built large tech companies in Bangalore often reinvest their expertise and money back into their entrepreneurship community by supporting former employees who start their own ventures, and by providing mentorship and investment. Founders of the largest local companies also collaborated to launch important trade groups that reach thousands of local tech founders through events, training programs, and policy initiatives.
In Kenya on the other hand, the tech community, has developed along a different course. Since its founding in 2007, Kenya’s tech giant, M-Pesa, has lifted an estimated 194,000 households out of poverty. Endeavor Insight relates that this achievement gained the attention of aid organizations and donors which began to fund tech-based startup initiatives. This, in turn, led local organizations providing personal microfinance loans and educational services to rebrand themselves as entrepreneurship support programs, such as accelerators or incubators. More than 20 of these support organizations have opened in Nairobi, and its software sector constitutes one of the world’s most heavily supported entrepreneurship communities in the world.
As a result, Nairobi’s tech sector has developed a few unique traits such as attracting a large proportion of entrepreneurs from outside of Kenya (mostly the US and Europe), and a large amount of grant funding for local founders. Local support organizations are the source of most of these grants. The report also claims that when Bangalore and Nairobi’s tech sectors were at comparable sizes, Bangalore’s had already developed many of its distinct characteristics, which did not include support organizations.
Lesson two: A small number of companies which reach scale make their entrepreneurship community productive
The second important insight offered by the report is that entrepreneurship communities create a fairly small group of companies that reach scale, and these are the actors that generate productivity. This productivity was measured by comparing job creation at each company. Endeavor Insight breaks down this concept into four distinct trends:
Trend one: The vast majority of companies in entrepreneurship communities are micro-businesses (defined as having 3–5 employees) which make little impact on new job creation, and economic growth.
Trend two: Companies that have reached substantial scale (defined as having 100 employees or more) contribute a disproportionate amount of a community’s productivity. In Nairobi for example, only eight software companies reached this scale (at the time of the study). These firms constitute 1% of the city’s entrepreneurial software companies, but have produced 40 percent of new job creation.
Trend three: Generating more firms that reach scale is the key factor allowing productive entrepreneurship communities to outperform less productive ones. The report notes, for example, that while Bangalore has almost five times as many software companies as Nairobi, its tech community has produced over 70 times more new jobs.
Trend four: We can identify startups that will reach scale by their tendency to grow far more quickly than peers within their first few years. According to the research, most international entrepreneurship support programs target early stage startups that fall into the category of low-productivity micro-businesses. These analyses suggest accelerators typically help low-productivity startups make slight improvements, but are largely unsuccessful at identifying/helping startups increase local productivity.
Lesson three: Receiving experience, support, or investment from entrepreneurs that have scaled their business is correlated to faster startup growth
The third lesson is that founders of the fastest growing startups are more likely to have received work experience, support, and investment from leaders of highly productive companies. Receiving experience, mentorship, or investment from a founder of a scaled startup was linked to approximately two times greater prevalence of top performance. For example, when founders worked for a combined total of 20 or more years, their companies were much more likely to be top performers in their respective communities.
Lesson four: Networks shape the behavior and growth of entrepreneurship communities
The research used network analysis to assert that the dynamics of influence in a community often shape its development. Many of the most influential network members in Bangalore are organizations run by individuals with experience leading entrepreneurial ventures that have scaled to more than 100 employees. Conversely, the most influential network members in Nairobi come from support programs. These accelerators, incubators, and business plan competitions are led by people with no entrepreneurship experience, and startups participating in these organizations are more likely than other startups to rely on grant funding. The report asserts that the influence of these leaders with no entrepreneurial experience may help explain Nairobi’s lower productivity.
Lesson five: Increased influence of leaders of top performing companies may drive more productivity in entrepreneurship communities
When more influence is given to people who have led firms that scaled, it positively impacts productivity in the greater community. In Bangalore’s network, over 40% of the experience, support, and investment comes from this category of leaders. These relationships are rarer in Nairobi, but may still lead to an average of 1.9 times greater prevalence of top performance in the city. The two most common types of connectivity in Nairobi are linked to lower performance: experience at a company smaller than 100 employees and support organizations led by people with no entrepreneurial background. Data shows that these organizations rarely connect founders to mentors with experience at scaled companies. Therefore, increasing the influence of the best performers in a network should have a positive impact on productivity.
Recommendations
According to the report, decision makers can increase productivity by reversing top-down approaches (influence derived from leaders without entrepreneurial experience) and implementing bottom-up initiatives (support from entrepreneurs who have successfully scaled). Decision makers should encourage top-performing entrepreneurs to be more active influencers for rising startups. Support organizations, in particular, should look for opportunities to involve the leaders of scaled companies into executive or board-level roles.
Room for Improvement
Endeavor Insight’s study offers a trove of knowledge for entrepreneurs as well as policy makers. However, there may also be a few blind spots which pose further questions. The report measures new job creation rather than total job creation, so it is equally important for policy makers to consider the fact that micro and small enterprises (MSEs) often account for the majority of jobs (e.g., over 50% of workforce in Jordan). So, how can decision makers support policies for scale-ups without disincentivizing micro-businesses?
Secondly, Bangalore’s tech industry gained momentum with Infosys around 1981, while Nairobi’s tech story starts in 2007 with M-Pesa. The study claims that Bangalore and Nairobi developed differently (even at comparable stages), and that Nairobi’s network characteristics may be stunting its productivity. Does this account for the fact that Bangalore’s access to a much larger and connected market may have propelled higher growth? And does Nairobi rely more on grants because there are simply fewer resources available in the market?
Finally, according to the report’s fifth lesson, support organizations implicitly decrease the relative influence of leaders from scaled entrepreneurial ventures. Besides operating on the assumption that influence is a limited resource (which if one person gains, another must lose), does this statement dismiss the impact of support programs? One of their key functions, for example, is helping startups reach entrepreneur mentors in places where they are in shorter supply, such as Nairobi. Given the core differences between cities in focus, this report calls for further research on how the needs of certain communities may differ according to the resources available to them in their respective ecosystems.
