Potential new legislation and a soon-to-come government agency will look to put fragile states at the center of the US international development strategy. A specific type of startup incubator, the “startup studio”, can play a role in achieving desired objectives.
Opposition to the Global Fragility Act (H.R.2116), which looks to establish 10-year plans within US Department of State and US Agency for International Development (USAID) to address issues in the world’s most fragile states, is down to one senator. The brand new United States International Development Finance Corporation (DFC) is planning its rollout as it awaits its first funding approval. Both initiatives recognize that, looking forward, the large majority of people living in extreme poverty will also be living in states currently classified as ‘fragile’, or as susceptible to political instability/violence.
The future of international development includes enhanced monitoring and evaluation, a growing focus on fragile states, taking advantage of opportunities to engage with receptive governments, and supporting the types of innovation that add value without taking market share away from competitors. In particular, private sector development led by innovation is increasingly viewed as an under-utilized tool for helping foster the type of strong middle class that brings about numerous second and third-order benefits, ranging from increased tax revenue to a civil society that has the leverage to demand accountable governance.
Development Finance Institutions (DFI’s) such as the World Bank, the UN Capital Development Fund, USAID, and the US DFC will continue to support entrepreneurial ecosystems by promoting policies that make starting a new business less cumbersome, providing business development services, de-risking investments by providing insurance and guarantees, and making direct investments into growing companies and social enterprises that align with development objectives. Also, these institutions have and presumably will continue to make direct investments into startup incubators that help aspiring founders that come to them with their ideas. However, these organizations have yet to fully embrace one of the more recent developments in entrepreneurship and apply them to fragile states: the startup studio.
Startup Studios vs. Incubators
Startup incubators and startup studios are similar in that they both help potential companies build out business plans, work on product-market fit, identify intellectual property issues, and network in co-working spaces. However, there are several key differences between incubators and studios that appear to make studios better suited for the less permissive business environments in fragile states.
Startup studios look to build several startups following a repetitive process that involves rapid development and prototyping of new products within an infrastructure that enables efficient venture building. Startup studios foster new ventures by coming up with new ideas for businesses, attempting to execute these ideas with in-house management, sales, human resources, and technical professionals to help turn ideas into profitable businesses, and investing with the goal of a profitable exit. When companies are ready to be independent, some studio employees leave to work for the company, and the studio recruits, trains, and replaces them as needed.
By working on different startup attempts at the same time, studios increase their probability of achieving profitable exits. This also moves the costs of startup failure away from the individuals who would otherwise have to take the risk of starting a company on their own, and move it onto a diversified studio that is better-equipped to take losses. Furthermore, being involved in a new venture at the pre-idea phase also allows a studio to prioritize social impact in new ideas, incorporate impact into the core business model, and try to focus on the types of market-creating innovation that have the most development impact.
As startup studios continue to gain popularity and build a longer track record of success in more developed markets, DFI’s will undoubtedly look into directing funds towards building new studios. As development organizations turn their attention to fragile and/or post-conflict states like Chad and Afghanistan, the advantages that startup studios have over traditional incubators will become more pronounced.
Startup Studios in Practice
While the success of any individual startup studio isn’t guaranteed, the model’s chances for success in underdeveloped states is made more likely by the potential of copycat companies. Startup studios, such as Germany’s Rocket Internet, have deployed the copycat strategy in which they take proven concepts from more advanced economies and bring them into markets where they don’t exist while tailoring them for that particular market (examples include Jumia, otherwise known as “African Amazon”, and Azmalo, or “Pakistani eBay”). While the copycat model has been criticized for mooching off of other people’s ideas, this criticism ignores the challenges of doing business in less permissive markets, and, in the context of alleviating poverty, any solution with the potential for outsized positive impact should be carried out to its fullest extent.
A startup studio requires a substantial initial investment that may not see a return for years. This is where the patient capital of development finance institutions can play a role. DFI’s will continue to promote capital flows and access to debt and equity financing for small and medium-sized enterprises by de-risking investments through insurance and guarantees, but this strategy does nothing to de-risk an equally important investment: the investment of time and money it takes to get a company off the ground.
The startup studio is not a panacea. Some studios may fail to get a company off the ground, some promising companies may be stymied by non-permissive business conditions and/or government actions, and some studios may struggle to attract and maintain the necessary human capital and expertise without substantial outside support. With that said, startup studios may be exactly the kind of apolitical and easy to evaluate solution that DFI’s are looking for.