How Can Entrepreneurship Support Organizations Best Contribute to Productivity?
Endeavor Insight recently published a report that identified key factors affecting the productivity of developing entrepreneurship communities. Productivity was measured by job creation, which has been shown to correlate with other economic measures.
One of the key lessons identified in the report is that the majority of companies in any entrepreneurship ecosystem are small microbusinesses (firms with fewer than three employees that received no venture capital investment) that make little to no contribution to local productivity, while the greatest share of job creation comes from a select few that have reached significant scale.
The study combined data collected by Endeavor Insight and data from the Global Accelerator Learning Initiative (GALI) to apply these lessons to the work of entrepreneurship support organizations (ESOs), including accelerators, incubators, and programs like business plan competitions, worldwide. The analysis revealed several interesting findings:
- Most ESOs target early stage and low-productivity microbusinesses.
Data from GALI shows that half the companies entering accelerators worldwide had no revenues in the prior year and nearly 40 percent had no employees. These companies look very similar to the low-productivity microbusinesses mentioned above.
- The magnitude of growth in supported microbusinesses tends to be extremely small.
While programs targeting early stage startups may generate some growth in the microbusinesses they support, the magnitude of these improvements tends to be extremely small. Data from GALI shows that companies participating in accelerators only grow by an average of 1.3 new employees and US$6,000 in sales after completing these programs.
- ESOs may also have difficulty recognizing when young companies have the potential to reach scale.
In 2017, researchers analyzed the fastest-growing entrepreneurial firms that had applied to programs in the GALI study. These were companies that grew by more than US$500,000 in sales or 18 employees in the year after their application. They found that the majority of these businesses were actually rejected from the accelerators they applied to.
- Very few ESOs are run by people with former experience leading a company to scale.
Data collected by Endeavor Insight in this study shows that very few ESOs are led by people with experience as a founder or C-level executive at a firm with 100 or more employees, and many ESOs are run by people with no founder or C-level experience at all.
The lack of scale found among many companies participating in ESOs and other related programs is likely due, at least in part, to this last point. The report shows that the fastest-growing companies were roughly twice as likely as their peers to have built some kind of experience, mentorship, or investment relationship with another founder who had led a company that reached the scale of 100 or more employees.
This means that ESOs can significantly improve their performance by inviting these founders and executives of companies at scale to positions of influence at the organization, and focusing on building connections between their companies and these types of entrepreneurs.
The full Endeavor Insight report can be accessed here.
Contributed by Maha AbdelAzim.