In the decade since mobile money first sparked international interest in African innovation, hundreds of tech hubs have sprung up across the continent; global giants like GE have rushed in to build innovation centers; and the venture capital industry has steadily grown. Nevertheless, the continent’s tech scene continues to face challenges.
The rise of African innovation has inspired thousands of new start-ups, and this trend will continue into the foreseeable future. Existing acceleration programs, however, still leave growth-stage companies in need of additional support to secure investment and scale their businesses across borders. With many of the continent’s acceleration programs lacking in quality, we hoped to introduce an innovative post-acceleration program, XL Africa.
After infoDev launched its mLabs in Kenya, Senegal, and South Africa in 2011, they introduced incubation programs that successfully supported the creation of over 100 start-ups that raised close to $15 million in investments and grant funding, and developed over 500 digital products or services. As these ecosystems and start-ups have matured, more needs to be done to improve the marketability of these companies to global and local investors.
“What can we do today to prepare students for the labor force in 20 years?” the director general of Israel’s Ministry of Finance, Shai Babad, asked. At an Annual Meetings event last Friday, Babad was asked for his thoughts about successful government policies to enable start-up ecosystems. However, he answered the question with one of the many questions that policymakers continue to wrestle with in the new digital economy.
In recent years, many of the World Bank Group’s country partners have posed similar questions. As Trade & Competitiveness Director Klaus Tilmes commented, “Many clients are now less interested in our money, and more in our knowledge around best practices and effective incubator models. They’re asking ‘How can we create our own start-up ecosystems?’ So we are trying to become more systematic and leverage tools to expand our programs and build them into our lending projects.”
No state is more renowned for its success in building such ecosystems than Israel. The small country contains the highest number of start-ups outside of Silicon Valley and receives the most VC investment per capita. With a population of only 8 million, Israel has over 6,000 start-ups, and 1,000 new start-ups are launched every year. In 2016 alone, Israeli start-ups raised over $4.8 billion.
Start-ups are transforming cities. Entrepreneurs are inspiring creative communities and transforming the social and economic landscape of the neighborhoods where they cluster.
What drives entrepreneurs together and creates these communities? To answer this question, we looked at catalysts of entrepreneurial communities in cities around the world. The team found that a range of spaces — such as innovation hubs, incubators, maker spaces and fab labs — are at the core of these communities. They represent the main link between entrepreneurs and the broader economic and social fabric of the city. We call these “Creative Community Spaces” (CCS).
How are these CCS helping transform our cities? We compiled a set of case studies from around the world and analyzed their impact. There are more details in this report.
The corporate world is at the forefront of the tech-led transformation of the economy. The democratization of technology, whereby exponential cost reductions have allowed almost anyone to produce tech-based innovations, is disrupting core sectors of the economy.
Technology disruption is not confined anymore to the digital world. Data analytics, artificial intelligence, 3-D printing, robotics, sensorization, and an ever-evolving list of technology platforms have blurred the boundaries that once-protected physical ("brick and mortar") sectors, such as the hospitality, automobile, construction and manufacturing sectors.
Business as usual has not served companies in these sectors well. Traditional innovation models to create products and services do not match the pace and agility of competitive disruption from tech actors (e.g., large technology platforms with unbeatable access to data access and capital, such as Google or Amazon, and small and agile local startups). Thus, a new corporate innovation model, “Corporate Innovation 2.0,” is emerging.
The main characteristic of this new model is that it’s open by nature, as opposed to having a closed R&D process. Established companies tend to offer good structures for marketing, distribution, processes, scaling up products, etc., but, compared to start-ups, they often have a weakness in generating and rapidly applying creativity to develop new products and services.
Using open innovation techniques, corporations are trying to address this weakness by absorbing start-up innovation. We have seen three main types of mechanisms in this emerging model: corporate accelerators, competitions to generate new ideas, and co-creation with startups of new products and services.
Helen Mwangi and her solar-powered water pump in Kenya © infoDev/World Bank
Managers of initiatives that support innovative entrepreneurs have a choice to spread their resources (and luck) among many opportunities or focus them on the most promising few. In developing countries, public and donor programs can learn a lot from how private investors pick and back innovative ventures.
In the early days of infoDev’s Climate Technology Program, our thinking was very much about letting a hundred flowers bloom: supporting a large number of firms with the hope that a few would emerge as blockbusters. Firms were selected on the basis of objective metrics tied to the innovative nature of their ideas and their economic, social and climate-change impacts. For example, while infoDev’s partner the Kenya Climate Innovation Center has more than 130 companies in its portfolio, a $50 million venture-capital fund in California would have at most six. Inspired by private investors, we have since rethought our program objectives for these centers, as well as the way we select and support businesses. The Kenya center is going through a rationalization of the firms it supports.
Like many public programs, infoDev and its network of Climate Innovation Centers had good reasons to support large numbers of companies. The main reason is the need to spread the entrepreneurship risk through a diversified portfolio. A recent infoDev literature review found that up to a third of all new firms do not survive beyond two years, let alone grow. Out of those that survive, data from high-income countries suggest that fewer than 10 percent become high-growth firms. So casting a wide net increases the chances of hitting the jackpot. The opposite approach, picking winners, is seen as destined to fail and distort the market.
Sinah Legong and her team meet at Raeketsetsa, a program that encourages young women in South Africa to get involved in information and communications technologies. © Mutoni Karasanyi/World Bank
Olou Koucoi founded Focus Energy, a company that brings light, news and entertainment to people living off-grid in his country, Benin. Its spinoff program ElleAllume hopes to train more than 1,000 women to bring power to 100,000 Beninois homes this year. “At the end of the day, [inclusive hiring] is not a gender decision, it’s a business decision,” he says.
Over the past few months, I interviewed a number of incubator and accelerator programs to compile best practices for the World Bank Group’s Climate Technology Program. The research spanned 150 programs in 39 countries, ranging from relatively new to seasoned veterans of the clean tech incubation space. The consensus regarding gender diversity and inclusion was almost unanimous; all but one program echoed Koucoi’s sentiments – in principle.
In practice, however, encouraging more women into the clean energy sector and related programs has proved challenging. Below are some of the most popular explanations for the low levels of female representation:
“We can’t find them.”
Many clean energy incubation programs said they had difficulty recruiting due to a lack of women in the industry and strong women’s networks to tap into. While there is no shortage of women in clean energy (with industry-specific examples such as clean cookstoves serving as a good example) there are few women-led businesses. This lack of visible leadership translates into lower rates of participation.
“We would love to focus on bringing more women into the program, but we have limited resources.”
Incubation programs are often lean, with little time and few resources to expand on offerings and create targeted programs for women. Instead, to create quick wins and draw in additional funds, programs often take a “low-hanging fruit” approach, seeking out the most visible companies to recruit and invest in, which tend to have male co-founders.
“Does it really matter at the end of the day?”
Many programs are pro-gender-diversity in principle, but gender-agnostic in practice. This stems from a disconnect between the “gendered-lens” approach discussed when fundraising for incubation programs and the results frameworks which judge their success. Such factors as the number of companies exited are still weighed much more heavily than gender balance.
Below are some of the best ways I have found to create more gender-diverse and inclusive programs:
A market in Ramallah, West Bank. © Arne Hoel/The World Bank
Snapchat made its historic initial public offering this month with a market valuation of $33 billion, which qualifies it as a decacorn (a firm valued at least $10 billion, compared to a unicorn, which is valued at a mere $1 billion). Snapchat, once the bane of parents as a teenage distraction, overtook Alibaba’s record of raising $22 billion in 2014 and has spawned two 26-year-old multi-billionaires.
It is tempting to be dazzled by the likes of Snapchat, Uber, Facebook and Airbnb and to conclude that the start-up scene is dynamic and thriving. However, the reality is rather different, and perhaps even somewhat grim: U.S. Census data released in 2016 show that new business creation is near a 40-year low. According to a number of researchers, the rate of business start-ups and the pace of employment dynamism in the U.S. economy have fallen over the past decades.
A critical factor in accounting for the decline in business dynamics is a lower rate of business start-ups and the related decreasing role of dynamic young firms in the economy. For example, the share of U.S. employment accounted for by young firms has declined by almost 30 percent over the past 30 years. This statistic has significant implications given that the churning effect of new firms is an important means of reallocating capital and labor from low-productivity to high-productivity activities, which in turn is required for long-term productivity-led growth.
If this were not worryisome enough, the data also shows that since around the year 2000, there are far fewer high-growth young firms being created in the United States. Most start-ups fail, but a very small percentage (between 1 percent and 5 percent, based primarily on data from OECD countries) are innovative and dynamic, grow rapidly and create the most jobs and value, thus making a disproportionate contribution to overall productivity growth.
The likelihood of a start-up in the United States becoming a high-growth firm is now lower than before the year 2000, which is counterfactual in the age of digital disruption. No one is quite certain of the economic, social, and demographic factors behind these trends of declining start-up activity and the dearth of high-growth firms in the United States, but there are a number of theories, including the effects of the Great Recession, generational cultural changes and changing risk appetite of young people, a burdensome regulatory environment, and the increasing importance of large, innovative firms that have adapted many of the appealing features of startups.
A World Bank Group team is exploring the topic of high-growth entrepreneurship in developing countries to examine whether there are similar patterns and trends as in the United States and OECD countries. This study looks at the prevalence and characteristics of high-growth firms in various economies, the attributes of the firm and the entrepreneur, the business environment, and other factors such as the role of foreign direct investment and spillovers/linkages and agglomeration effects. The focus of the study will be also to assess the policy instruments being deployed and how effective are these in providing targeted support to high growth firms.
The Global Entrepreneurship Congress (GEC) this week in Johannesburg, South Africa provides an excellent opportunity to exchange ideas and deepen insights on the challenges of identifying and nurturing high-growth firms. This year’s GEC theme is “Digital Disruption.” More than 4,000 disruptors — entrepreneurs, investors, policymakers and ecosystem builders from more than 160 countries — are coming together to exchange market-specific insights on how to identify and nurture the most innovative high-growth entrepreneurs from across the world to create high-quality jobs, drive productivity-led sustainable growth and find solutions to global challenges.
Israel has one of the most admired innovation systems in the world. With the highest Research & Development (R&D) spending and venture capital investment as a percentage of GDP, the country has positioned itself as a global leader in research and innovation, earning the title of “start-up nation.”
Avi Hasson, Chief Scientist of the Ministry of Economy and Industry and Chairman of the Israel Innovation Agency, was at the World Bank Group last week to share some of the “secret sauce” behind Israel’s success in the innovation and entrepreneurship space.
Hasson highlighted the key role played by public-private partnerships over the last 40 years. Those partnerships have resulted in the establishment of an innovation infrastructure — including educational and technical institutions, incubators and business accelerators —anchored within a dynamic national innovation ecosystem built around shared social goals.
Specifically, to reduce the risk for investors, the government has focused on funding technologies at various stages of innovation — from emerging entrepreneurs and start-ups to medium and large companies. Strengthened by that approach, the Israeli ecosystem is maturing: according to Hasson, mergers and acquisitions have increased and exit profits have almost tripled over the last three years, with more and more new projects being started by returning entrepreneurs.
Start-up ecosystems are emerging in urban areas across the world. Today, a technology-based start-up develops a functioning prototype with as little as $3,000, six weeks of work, and a working Internet connection.
Entrepreneurs are not seeking large investments in hardware or office space. Rather, they look for access to professional networks, mentors, interdisciplinary learning, and diverse talent. Cities are best suited to meet their needs, as they provide diversity and allow for constant interaction and collaboration. Thus, the shift caused by the so-called “fourth industrial revolution” makes cities the new ground for organic innovation.
The urban innovation model can be applied in cities in both developed and developing countries. The same trends are driving the urbanization of organic innovation ecosystems in New York City, London, Stockholm, Mumbai, Buenos Aires and Nairobi. This presents a great opportunity for developing countries to build innovation ecosystems in cities and create communities of entrepreneurs to support the creation of new sectors and businesses.
But while some cities have organically developed urban innovation ecosystems, nurturing a sustainable and scalable ecosystem usually requires determined action. Moreover, not all cities are building their innovation ecosystems at the same pace.
To support a local innovation ecosystem and accelerate its growth cities can promote collaboration through creative spaces and support networks, while also hosting competitions to solve local problems.
A start-up office in New York.
Photo Credit: © Victor Mulas
We are in the grip of start-up hype. Today, every large city in the world aspires to become a start-up hub. New York City became a start-up role model; Berlin and London were the “go to” start-up hubs in Europe two or three years ago; Nairobi is the start-up darling in Africa; and Dubai promoted itself as start-up destination.
Start-ups are seen as the new solution for job creation in the emerging economy of the so-called “fourth industrial revolution.” Indeed, they can help produce the jobs of the future — those new employment opportunities that are created in brand-new industries or technology categories. For instance, this has already happened in New York City, where the connection with local industries has resulted in new jobs, new industries, and greater competitiveness for traditional sectors. And it is has not been only about jobs. Solutions for critical development challenges, such as online payments and access to energy in off-grid areas, have emerged from Nairobi and India’s ingenious start-up scenes.
As I visit these cities, however, I wonder if the actual — and potential — impact of these emerging start-up ecosystems is being exaggerated and if we are all collectively witnessing an overflow of attention and resources that cannot translate into “magic” solutions to unemployment and other global challenges.
Indeed, many of the ecosystems I visited and studied seem to be overinflated. Not many start-ups become sustainable businesses, and the few successful examples are cited over and over again. Start-ups are disconnected from local industries and there is little absorption of start-up innovation by the economy.
In some cases, the result is a massive, large-scale training program where a new generation of aspiring entrepreneurs can learn technical and management skills (this is a good outcome). On fewer occasions, the ecosystem becomes sustainable, producing successful new businesses that reinvest in new talent and connect with the local industry base (this is a better outcome).
But these seem to be a handful of cases, and it’s not easy to get there. I suspect this is the result of a lack of maturity of the infrastructure supporting the ecosystem, as well as the poor understanding of what we need to translate the energy of new entrepreneurs and innovators into productivity and business success.