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Innovation

Demystifying start-ups, or why Snapchat is an outlier

Ganesh Rasagam's picture



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.

 

The secret sauce of a ‘start-up nation’

Anabel Gonzalez's picture

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.

How urban start-up ecosystems help cities adapt to economic transformations

Victor Mulas's picture

Entrepreneurs at mLab East Africa, Nairobi, Kenya. Supported by the World Bank’s infoDev program, this business incubation center provides knowledge and networking opportunities to local digital start-ups. © infoDev / World Bank 



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. 

The start-up bubble: How abundant money is actually not helping

Victor Mulas's picture



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.

How start-ups can turbocharge global productivity growth

Ganesh Rasagam's picture



Attendees at Republica Berlin 2016, an annual conference on digital culture for entrepreneurs from around the world.
Photo Credit: © Victor Mulas/The World Bank


We have witnessed in recent years the emergence of technology start-up ecosystems across the world. New technology trends are reducing the costs as well as the barriers of access to markets and resources for developing technology start-ups. If in the 1990s an entrepreneur needed $2 million and months of work to develop a minimum viable prototype, today she would need less than $50,000 and six weeks of work.

Entrepreneurs are also surging in emerging economies. India hosts major start-up ecosystems in New Delhi and Bangalore, with their start-ups having raised $1.5 billion in funding in 2016, respectively. São Paulo ranks among the top 20 start-up ecosystems with more than 1,500 active start-ups, closely followed in the region by Santiago and Buenos Aires. Warsaw hosts around 700 active start-ups, and Nairobi is the home of leading African start-ups, such as Ushahidi, M-Pesa or Brck.

Tech start-up ecosystems present new opportunities for emerging economies. Local entrepreneurs develop new business solutions that address domestic demands. For instance, in Kenya, M-Kopa is addressing the demand for energy in off-grid locations, a major issue in the country's rural areas. Unicorns, those start-ups that raise more than $1 billion, are no longer a U.S./Europe-only phenomenon. Indian, Chinese and Indonesian start-ups, such as Lu.com, Flipkart or Go-Jek, have reached this valuation, and African Internet Group from Nigeria is poised to be the first African unicorn.

Start-up ecosystems also create new jobs. Data from New York City's ecosystem on employment generated in the tech start-up ecosystem shows that most of the jobs generated by tech start-ups are not in start-ups themselves, but in local traditional industries that either are influenced or disrupted by start-ups. Think about a bank or a retail company that has to react to a mobile app providing finance or retail business and that needs to hire new talent to develop a competing app. More than 40 percent of these new jobs do not require a college degree. These are jobs like building a website, a basic database, a web or mobile app.

How can countries take advantage of the fourth industrial revolution?

Victor Mulas's picture

The economy is in a restructuring process. Technology-led transformations are no longer limited to technology-related sectors and are beginning to affect structural sectors, including manufacturing, retailing, transportation and construction. Disruptions of business models are surging from a fragmented network of entrepreneurs and innovators. Cognitive skills are increasingly being replaced by technology-led productivity, affecting labor supply in both developing and developed countries. In turn, creativity and social skills are becoming more important and more valuable than ever before. This process has been called the Fourth Industrial Revolution.

Countries that are less prepared to adapt to these structural changes will suffer in their competitiveness. As much as 80 percent of the productivity gap between developed and emerging economies can be explained by the lag in transitioning to technology-led changes from previous economic restructuring processes (for example, the 18th-  and 20th-century industrial revolutions). Automation is reducing the cost of traditional labor-intense industries (reducing costs relative to labor by 40 percent to 50 percent since 1990), shifting the cost structures that benefited emerging economies. Trade is shifting increasingly to digital goods and services. Knowledge-intensive flows of trade are already growing about 30 percent faster than capital-  and labor-intensive trade flows. Jobs are also being affected, with routine cognitive functions being affected the most, while providers of intellectual and physical capital benefitting disproportionately. 



There are also opportunities stemming from this widespread diffusion of technology and transformational changes. Entrepreneurship and innovation is becoming affordable and de-localized. The innovation model of large capital-intense laboratories (e.g., Bell Labs) is not the most effective one anymore. Instead, open innovation (the process whereby large firms co-create innovation with entrepreneurs and other actors, instead of having an internal process) and innovation emerging from startups are increasing. Tech startup ecosystems have emerged in cities worldwide, in both emerging and developed economies, disrupting traditional business and creating new industries. This results in local innovation and business models that can be appropriated by the domestic economies. These ecosystems also generate new sources of jobs emerging from the structural changes produced by technology.

How high-growth firms can reshape the economy

Denis Medvedev's picture

Productivity. Growth. Jobs. These are the outcomes that are at the top of many of our clients’ agendas, and they form a core part of most of our private sector development projects. But where do they come from? Who creates them?

Evidence from high-income countries suggests that the answer might be found in a group of small, young and fast-growing firms that contributes disproportionately to these outcomes at the national level. In the United States, about 50 percent of new firms will have gone out of business before the age of five (Haltiwanger et al, 2013). Among those that do survive, just 12 percent experience output growth in excess of 25 percent, but they account for 50 percent of overall increase in output. Similarly, only 17 percent of surviving firms (less than 10 percent of all that entered) experience employment growth above 25 percent – but they create close 60 percent of new jobs in the U.S. economy (Haltiwanger et al, 2016). There is undoubtedly something special about these few high-growth firms (HGFs).

One key reason that HGFs are able to perform so well is their high productivity. Firms in the 90th percentile of the U.S. productivity distribution create almost twice as much output with the same inputs as firms in the 10th percentile (Syverson, 2004). In developing countries, the gap between firms at the top and bottom ends of the productivity distribution is even larger – up to five times! (Hsieh and Klenow, 2009)



Beyond their own high productivity, HGFs raise national efficiency in several important ways. Their “pull factor” facilitates the convergence of less productive firms to the national frontier (Bartelsman et al, 2008). And when markets for production inputs are competitive, HGFs are able to lift overall efficiency by pulling resources from less productive firms. This is what accounts for their disproportionate contribution to productivity, jobs, and output growth (Haltiwanger et al, 2016).

‘Smartest Places’ via smarter strategies: Sharpening competitiveness requires ingenuity, not inertia

Christopher Colford's picture

Seeking an antidote to the gloom-and-doom bombast of this election year? Try a dose of optimism about urban“hotspot hustle and cutting-edge cool” – with a book that champions smart public policy, delivered through a shrewd approach to Competitiveness Strategy.

Gazing into the rear-view mirror is a mighty reckless way to try to drive an economy forward. Yet backward-looking nostalgia for a supposedly safer economic past – with voters' anxiety being stoked by snide sloganeering about “taking back our sovereignty” and “making the country great again” – has infected the policy debate throughout this dispiriting election year, in many of the world’s advanced economies. Scapegoating globalization and inflaming fears of job losses and wage stagnation, populists have harangued all too many voters into a state of passivity, lamenting the loss of a long-ago era (if ever it actually existed) when inward-looking economies were, allegedly, insulated from global competition.


Optimism has been in short supply lately, but an energetic new book – co-authored by a prominent World Bank Group alumnus – offers a hopeful perspective on how imaginative economies can become pacesetters in the fast-forward Knowledge Economy. Advanced industries are thriving and productivity is strengthening, argue Antoine Van Agtmael and Fred Bakker, now that many once-declining manufacturing regions have reinvented their industries and reawakened their entrepreneurial energies.

Welcome to the brainbelt,” declares “The Smartest Places On Earth: Why Rustbelts Are the Emerging Hotspots of Global Innovation” (published by Public Affairs books). Now that brainpower has replaced muscle-power as the basis of prosperity in an ever-more-competitive global economy, the key factor for success is "the sharing of knowledge." Longlisted for the Financial Times/McKinsey Business Book of the Year Award, “Smartest Places” is receiving well-deserved attention among corporate leaders and financial strategists – and it ought to be required reading for every would-be policymaker.

The era of “making things smart” has replaced the era of “making things cheap” – meaning that industries no longer face a “race to the bottom” of competing on costs but a “race to the top” of competing on creativity. Knowledge-intensive industries, and the innovation ecosystems that generate them, create the “Smartest Places” that combine hotspot hustle and cutting-edge cool.





Those optimistic themes may sound unusual to election-year audiences in struggling regions, which are easy prey for demagogues manipulating populist fears. Yet those ideas are certainly familiar to readers at the World Bank Group, where teams working on innovation, entrepreneurship and competitiveness have long helped their clients shape innovation ecosystems through well-targeted policy interventions that strengthen growth and job creation.

“Smartest Places,” it strikes me, reads like an evidence-filled validation of the Bank Group’s recent research on “Competitive Cities for Jobs and Growth.” That report, published last year, offers policymakers (especially at the city and metropolitan levels) an array of practical and proven steps that can help jump-start job creation by spurring productivity growth.

The changing face of entrepreneurship

Ganesh Rasagam's picture


Members of the World Bank Group’s Innovation & Entrepreneurship team – along with two of the entrepreneurs supported by the team (with their affiliations in parentheses) – at the Global Entrepreneurship Summit. From left to right: Temitayo Oluremi Akinyemi, Loren Garcia Nadres, Natasha Kapil, Kenia Mattis (ListenMi Caribbean), Ganesh Rasagam, Charity Wanjiku (Strauss Energy), Komal Mohindra, Ellen Olafsen.


What do you picture when you hear of new technologies and hot startups? Perhaps a trendy office space overlooking the Golden Gate Bridge and tech moguls from San Francisco? Well, think again.

At the recent Global Entrepreneurship Summit (GES) in Silicon Valley — an annual event hosted by President Barack Obama and attended by nearly 700 entrepreneurs — one message came across clearly: Great ideas come from anywhere. And, increasingly, they’re coming from talented entrepreneurs who are overcoming the odds in cities like Nairobi, Kenya or Kingston, Jamaica.

Increasing internet and mobile-phone access is bringing new opportunities to young entrepreneurs from developing countries. More than 40 percent of the world’s population now has access to the internet and, among the poorest 20 percent of households, nearly 7 out of 10 have a mobile phone.

Businesses that can take advantage of the widespread use of digital technologies are growing at double-digit rates — in Silicon Valley, as well as in emerging markets. Ground-breaking technologies and business ideas are flourishing across the world, and a new, more global generation of tech entrepreneurs is on the rise.
 
The potential impact — economic and social — is significant. Entrepreneurs have a powerful ability to create jobs, drive innovation and solve challenges, particularly in developing economies, where technology can address old inefficiencies in key sectors like energy, transport and education.
 
“[I]n our era, everybody here understands that new ideas can evolve anywhere, at any time. And they can have an impact anywhere,” said John Kerry, the U.S. Secretary of State. “In my travels as Secretary, I have been absolutely amazed by the groundbreaking designs I’ve seen, by the ideas being brought to life everywhere — sometimes where you least expect it.  By the men and women striking out to create new firms with an idea of both turning a profit as well as improving their communities.”
 
But for many of the brightest minds in developing countries, entrepreneurship is not an easy path.

As President Obama said during the Summit: “It turns out that starting your own business is not easy. You have to have access to capital. You have to meet the right people. You have to have mentors who can guide you as you get your idea off the ground. And that can be especially difficult for women and young people and minorities, and others who haven’t always had access to the same networks and opportunities.”


President Barack Obama on stage at the Global Entrepreneurship Summit with Mark Zuckerberg and entrepreneurs.
 

Keeping pace with digital disruption: Regulating the sharing economy

Cecile Fruman's picture
Globalization in the 21st century is increasingly driven by digitization, as is described in new research by the McKinsey Global Institute. MGI's recent report notes that, since 2007, trade flows have slowed and financial flows have not fully recovered while digital information flows have soared. [See Footnote 1.]

The World Economic Forum describes this transformation as the “Fourth Industrial Revolution,” because the speed and extent of disruption is unprecedented.

A key trend of this revolution is the emergence of technology-enabled, peer-to-peer and business-to-peer platforms that facilitate commerce. These platforms – most commonly referred to as the “sharing economy” or the “collaborative consumption economy” – have grown exponentially in recent years, disrupting existing industry structures and value chains in developed and emerging markets.

Notably, growing internet and mobile penetration catalyzed the growth of disruptive firms and innovations, such as Uber and Airbnb, in a number of middle-  and low-income countries. However, as highlighted by the 2016 World Development Report, for this digital revolution to be inclusive, and for it produce dividends for the poor, its “analog complements” – such as the institutions that are accountable to citizens and the regulations that enable workers to access and leverage this new economy – should also be in place.

The global proliferation of these collaborative platforms poses new challenges for regulators trying to keep pace with rapidly evolving business models. This issue was at the heart of discussions between former Head of Public Policy at Facebook, Uber and DJI, Corey Owens, and Professor of Law at Howard University and former regulator at the Federal Trade Commission, Andy Gavil, at the 2016 Business Environment Forum that took place in Washington from May 17 to 19.
 




 

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