Madhur Jha, guest blogger, is a Senior Economist, Thematic Research at Standard Chartered in London.
What makes some entrepreneurs grow their businesses and employ hundreds, or even thousands, of people? Knowing this is crucial for all governments keen to drive economic growth.
Not all entrepreneurs go on to make it big. In fact, nearly one in ten (or as many as three in ten in some emerging markets) start businesses out of necessity, because they are unable to find work.
Subsistence entrepreneurship is typically low on productivity and innovation. While valuable to individuals, these types of operations – such as roadside stalls – are unlikely to expand or employ many people beside immediate family.
For economic development, it is important to focus on ‘opportunity entrepreneurs’ instead. These are people who start businesses to exploit a potential opportunity. They are likely to grow their business faster, employ more people, and introduce innovation that could help fill important gaps in the market, while boosting productivity in the economy.
The only problem is that opportunity entrepreneurs form a very small proportion of those starting up businesses in any economy. According to one UK study, they made up only 6 per cent of entrepreneurs, but accounted for over 50 per cent of net job creation in the UK between 2002 and 2008.
So how can you tell if someone is an opportunity entrepreneur?
The image that springs to mind for most people is someone like a Mark Zuckerberg or a young Bill Gates. We typically think of someone young, involved with technology or service sector start-ups.
However, our survey of 62 opportunity entrepreneurs in Singapore, India and Kenya challenges this stereotype. Most of these business starters are actually slightly older (aged between 30 and 50) and highly educated, with over 85 per cent of them having completed a degree.
The business of an opportunity entrepreneur is not a start-up, but a company that has been around for three to five years, and is relatively small, with close to 10 employees. What makes them different is their strong growth in the past three years, and their confidence that their business will expand significantly over the next two years.
Technology is not the only show in town for opportunity entrepreneurs. Our survey shows that these entrepreneurs are involved in a wide range of sectors, including manufacturing (around 25 per cent), wholesale and retail trade (around 27 per cent), and construction and real estate (around 9 per cent).
Contrary to popular belief, opportunity entrepreneurs don’t rely heavily on financial support from venture capitalists or angel investors. Our survey shows that venture capital or angel funds account for a meagre 2 per cent of total funding needs of these entrepreneurs. Instead, they tend to rely on their own or family savings, and reinvest more than 70 per cent of profits back into the business.
Knowing who these job-creating entrepreneurs are is one thing – but how do we help them realise their potential?
The three most important success ingredients for opportunity entrepreneurs are business friendly government regulations and policies, ample finance options and access to a skilled workforce. Other conducive factors are – not surprisingly – strong demand and a stable political system.
Government policies in many countries so far have largely failed to distinguish between opportunity and subsistence entrepreneurs. Policies have been too focused on providing financial support to start-ups, largely in the technology or services sectors.
Our survey suggests that what is required is a change in tack from piecemeal support for entrepreneurs to a more holistic approach. This needs to include not just financial assistance, but also more general support for entrepreneurs, such as forums for network building, and management advice from executives in more established firms.
There is also a growing consensus that policies to support entrepreneurship should be made at a local or regional level rather than nationally, in order to address the more specific concerns of entrepreneurs.
Our survey suggests that policies should promote entrepreneurship not just in technology and services, but in those sectors that are already dominant in the economy, so that opportunity entrepreneurs can benefit from links to established businesses, and learn from their management.
The message to government is simple: to grow your economies, it is critical to identify and support opportunity entrepreneurs.
This blog is based on an original research report by Standard Chartered Bank PLC. To see the original report please click here .
Not all entrepreneurs go on to make it big. In fact, nearly one in ten (or as many as three in ten in some emerging markets) start businesses out of necessity, because they are unable to find work.
Subsistence entrepreneurship is typically low on productivity and innovation. While valuable to individuals, these types of operations – such as roadside stalls – are unlikely to expand or employ many people beside immediate family.
For economic development, it is important to focus on ‘opportunity entrepreneurs’ instead. These are people who start businesses to exploit a potential opportunity. They are likely to grow their business faster, employ more people, and introduce innovation that could help fill important gaps in the market, while boosting productivity in the economy.
The only problem is that opportunity entrepreneurs form a very small proportion of those starting up businesses in any economy. According to one UK study, they made up only 6 per cent of entrepreneurs, but accounted for over 50 per cent of net job creation in the UK between 2002 and 2008.
So how can you tell if someone is an opportunity entrepreneur?
The image that springs to mind for most people is someone like a Mark Zuckerberg or a young Bill Gates. We typically think of someone young, involved with technology or service sector start-ups.
However, our survey of 62 opportunity entrepreneurs in Singapore, India and Kenya challenges this stereotype. Most of these business starters are actually slightly older (aged between 30 and 50) and highly educated, with over 85 per cent of them having completed a degree.
The business of an opportunity entrepreneur is not a start-up, but a company that has been around for three to five years, and is relatively small, with close to 10 employees. What makes them different is their strong growth in the past three years, and their confidence that their business will expand significantly over the next two years.
Technology is not the only show in town for opportunity entrepreneurs. Our survey shows that these entrepreneurs are involved in a wide range of sectors, including manufacturing (around 25 per cent), wholesale and retail trade (around 27 per cent), and construction and real estate (around 9 per cent).
Contrary to popular belief, opportunity entrepreneurs don’t rely heavily on financial support from venture capitalists or angel investors. Our survey shows that venture capital or angel funds account for a meagre 2 per cent of total funding needs of these entrepreneurs. Instead, they tend to rely on their own or family savings, and reinvest more than 70 per cent of profits back into the business.
Knowing who these job-creating entrepreneurs are is one thing – but how do we help them realise their potential?
The three most important success ingredients for opportunity entrepreneurs are business friendly government regulations and policies, ample finance options and access to a skilled workforce. Other conducive factors are – not surprisingly – strong demand and a stable political system.
Government policies in many countries so far have largely failed to distinguish between opportunity and subsistence entrepreneurs. Policies have been too focused on providing financial support to start-ups, largely in the technology or services sectors.
Our survey suggests that what is required is a change in tack from piecemeal support for entrepreneurs to a more holistic approach. This needs to include not just financial assistance, but also more general support for entrepreneurs, such as forums for network building, and management advice from executives in more established firms.
There is also a growing consensus that policies to support entrepreneurship should be made at a local or regional level rather than nationally, in order to address the more specific concerns of entrepreneurs.
Our survey suggests that policies should promote entrepreneurship not just in technology and services, but in those sectors that are already dominant in the economy, so that opportunity entrepreneurs can benefit from links to established businesses, and learn from their management.
The message to government is simple: to grow your economies, it is critical to identify and support opportunity entrepreneurs.
This blog is based on an original research report by Standard Chartered Bank PLC. To see the original report please click here .
Join the Conversation