Entrepreneurship and Economic Development Part II: Implementing the Ecosystem
*This is the second in a series of blogs written by Steven Koltai on entrepreneurship in conflict-affected states. The first blog introduced the concept of the Six Pillars of an entrepreneurial ecosystem. This blog looks at some of those pillars in depth. The third blog suggests an alternative to traditional economic development that relies more heavily on promotion of entrepreneurs and small and medium sized (SME) business. The final blog consists of a review of what Koltai considers to be case studies of some successful entrepreneurship ecosystems.
In the first blog we discussed how entrepreneurship could create jobs and build economies in countries emerging from conflict, thereby providing the critical foundation for political stability, a robust civil society and equitable economic progress. My entrepreneurship ecosystem model (the “Six+Six” model) highlights six pillars of entrepreneurship and six categories of stakeholders. This connection between entrepreneurship and job creation is especially important for conflict-affected economies where small and medium-sized enterprises (SMEs) provide over 30% total employment and 16% of GDP in low-income countries, and 57% of employment and 39% of GDP in middle-income countries.
In this second blog, we are focusing on specific programs that Fund, Connect & Sustain and Celebrate (change the culture of entrepreneurship); some of the six pillars of the ecosystem.
Funding is widely considered to be the lifeblood of entrepreneurial activity. Parenthetically, much anecdotal information in the entrepreneurship field actually points to the importance of mentorship which we’ll discuss next, as the single most important factor for success for entrepreneurs, but we’ll nevertheless start with funding since that’s what most people THINK is most important.
The availability of funding for startups – or more often lack thereof – is undoubtedly one of the key barriers to starting a business. Many entrepreneurs lament the fact that banks in their country are of no help in providing startup capital. Well, of course not! That’s not what banks do anywhere (including in the US). Since banks are fiduciaries of other people’s money, they require guarantees of collateral which are almost always something that the vast majority of entrepreneurs cannot provide.
Similarly, most other financial institutions also largely ignore small-and medium-sized businesses. Even venture capital, often viewed as the panacea for start-up financing needs, is not only unavailable in most emerging markets but even in developed countries like the US, is confined to certain areas (the old adage of the famous Sand Hill Road in Palo Alto: “we only invest within a half hour’s drive). By the way, even in “developed” entrepreneurial countries like the US, available venture capital is on the decline. The National Venture Capital Association (NVCA) reported investments in US-based VC funds in Q1 2012 declined by a third (down 35%) versus the prior year.
Sometimes micro-financing has been used to fund smaller ventures. While important to small companies, micro-financing is rarely available to scalable companies; “micro-financing” typically leads to “micro-companies.” Consequently, startups all over the world quickly realize that the hardest money to raise is the first dollar; there is thus a clear dearth of funding options.
One important solution that has evolved in the U.S. is Angel Investing. Angel investors are wealthy individuals – often former entrepreneurs – who understand the upside return possibility of investing in startups and usually personally enjoy helping grow companies. By some estimates, Angel Investors today account for more than 90% of all earliest stage startup funding, compared to less than 9% of all startups who at any time in their life cycle, early or up to Initial Public Offering (IPO), EVER receive traditional VC funding. Angel investors are proving even more important to spurring entrepreneurship in post conflict, emerging markets than they have been in the US.
According to the Arab Business Angel Network, only 11 investment transactions below US $1 million occurred between investors and SMEs in the MENA region from 2005-2008. In Tunisia, a prominent example of a post-conflict emerging market (“ground zero” for the Arab Spring) the university system produces 65,000 new graduates a year, a third of whom major in computer science, giving the country an enormous educational and human capital advantage over its neighbors. Yet despite this advantage (a key indicator of entrepreneurship readiness of an economy) the dearth of financing options forces the overwhelming number of Tunisian entrepreneurs to turn to banks for funding, which can take over 70% of the businesses’ equity in bank debt. But even in Tunisia, there are really only one or two Angel networks.
Connect & Sustain/Mentoring
As emphasized in the “Six + Six” model, no single factor – including funding - is enough to ensure a successful entrepreneurial ecosystem. According to Maher Kallel, President of CBA, “80% of companies, younger than one year, go out of business in the absence of the mentoring that CBA provides to the SMEs in which it invests.” A number of other successful angel networks incorporate this holistic approach – Jordan-based Oasis 500 and the Egyptian-based Flat6Labs (paired with Sawari Ventures) also provide qualified entrepreneurs with training, mentoring, seed money, and access to angel investors.
We call this combination of entrepreneurship support programs around a funding source, “The Doughnut”.
The success of Volcano Transport in another historic post conflict State, Rwanda, also illustrates the interconnectedness between funding, training/mentoring, and celebrating entrepreneurs. Born in neighboring Burundi, Oliver Nizeyimana moved to Rwanda after the 1994 genocide. In 1999, as a student and commuter who had suffered what seemed like endless journeys to Rwanda’s National University, Nizeyimana wanted to start a bus company that made punctuality its core value. Without the collateral necessary for a bank loan, Oliver turned to the head of Akegera Motors, the exclusive representative of Toyota in Rwanda, to supply busses to him on credit. Volcano Transport has grown from two busses bought with $28,000 of seed money, to over 60 busses supporting a business valued at an estimated $3 million. Nizeyimana, who has gone on to earn an MBA from the Maastricht School of Management in The Netherlands, acknowledges that there is much more to entrepreneurship than raising capital. Among other factors, Oliver was able to start his company because he found someone who believed in his business dream and understood his vision.
Nizeyimana has been celebrated as an innovative, social entrepreneur. Stories that focus on the positive effects of entrepreneurs like Nizeyimana are crucial to raising awareness and attracting people to the entrepreneurial lifestyle. Within the “Six + Six” model, I continually underscore the importance of “celebrating” entrepreneurs alongside the other pillars. Marketing campaigns in countries as diverse as Ireland, Malaysia and Chile have used success stories to promote entrepreneurship as a worthy pursuit and to challenge the culture of intolerance toward failure. Within a single generation, societal attitudes in Ireland and Chile changed dramatically, creating an environment that rewards risk-taking and innovation in business.
As with the entire entrepreneurship ecosystem model, it is as true for developed as developing countries. In the US, when I took part in the 2011 State of Maine Juice Competition, I had the pleasure of mentoring EepyBird, a cutting-edge web-advertising company. EepyBird was made famous by creating a viral video of two go-carts launched by a combination of Coke Zero and Mentos mints. Not only does the video provide an original way to advertise Coke products, but it also showcases entrepreneurship as fun, creative, and within the reach of the average person.
In the next blog, we will propose a change in the way official development assistance is provided that is consistent with the “Six + Six” model of supporting entrepreneurs and the jobs they create, what I call “invest, don’t donate.” In the final blog, we will tie all of these concepts together by looking at some best practice case studies of entrepreneurship ecosystem building in post-conflict societies.
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