Fostering Productive Entrepreneurship Communities

Key lessons on generating jobs, economic growth and innovation

Entrepreneurs play a critical role in cities and nations as they create new jobs, generate economic growth, and spread the development of new innovations. Nigeria’s entrepreneurship ecosystem is witnessing the transition of technology-driven startups into mature, high-growth scaleups, including companies like Paga, Flutterwave and Filmhouse that have successfully navigated the precarious early startup phase, but still have significant runway for growth.

More than funding, research shows that founders who want to create truly scalable businesses require access to experienced mentors, dynamic capital and commercial markets, and support from key decision-makers in their ecosystem.

This article draws on information from a 2018 report published by Endeavor Insight, the research division of Endeavor. The findings are based on interviews with more than 2,000 technology entrepreneurs in six cities in Africa and Asia, as well as secondary data on over 5,000 tech founders and their companies. Data was also gathered on more than 500 investment firms and local entrepreneurship support organisations. The cities are: Lagos, Nairobi, Kampala, Dar Es Salaam, Bangalore, and Dhaka.

The technology entrepreneurship community in Lagos has a greater level of productivity than the other African cities in this study. It has produced close to 9,500 jobs and its firms have raised an amount of venture capital funding that is similar to those in comparable cities like Nairobi. At the time the data was collected for this study, 18 companies in Lagos had reached the level of 100 or more employees — roughly 2 percent of all companies. This is impressive, but when compared to leading emerging market software communities such as Bangalore, it is clear that tech founders in Lagos can be even more productive.

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Source: Endeavor Insight

LESSON 1: ENTREPRENEURSHIP COMMUNITIES ARE NOT PREDESTINED TO FOLLOW A SINGLE DEVELOPMENT PATH.

Entrepreneurship communities develop a variety of characteristics depending on the choices of local decision-makers. Endeavor Insight analysed local patterns in each city by looking at the traits of the largest companies and the most influential actors, the reasons why founders choose to start their companies, and the major challenges they face when operating there. Many of these lessons can be illustrated by examining two specific ecosystems: Bangalore and Lagos.

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LESSON 2: ENTREPRENEURSHIP COMMUNITIES BECOME PRODUCTIVE BY GENERATING A RELATIVELY SMALL NUMBER OF COMPANIES THAT REACH SCALE.

A very small number of companies that reach significant scale — defined as having 100 or more employees — are responsible for a disproportionate amount of productivity in most entrepreneurship communities. Four productivity trends can be observed in ecosystems across the world.

  1. A large proportion of entrepreneurial companies are low-productivity microbusinesses.
  2. A small number of companies that reach significant scale generate a large share of productivity.
  3. More productive entrepreneurship ecosystems outperform less productive ones by generating more firms that reach scale.
  4. Firms that go on to reach significant scale tend to grow much faster than peers in their startup years.

LESSON 3: ENTREPRENEURS AT THE FASTEST-GROWING COMPANIES ARE MUCH MORE LIKELY TO HAVE RECEIVED EXPERIENCE, SUPPORT AND INVESTMENT FROM LEADERS OF COMPANIES THAT REACHED SCALE.

The founders of the fastest-growing companies observed in this project were much more likely to have built connections with people who had led companies that reached significant scale, i.e., 100 or more employees. These high-value connections came in three forms: experience via previous employment, support through mentorship, or investment, all of which provide knowledge and skills that are critical to the growth of a business. These types of connections can also be found among successful founders around the world.

LESSON 4: PATTERNS OF INFLUENCE SHAPE THE DEVELOPMENT OF ENTREPRENEURSHIP COMMUNITIES.

A number of common principles of network systems can be applied to entrepreneurship communities. For example, the principle of like-attracts-like helps to explain the pattern of specific types of members attracting others like themselves to each community as they become influential. Another principle illustrates how influential network members transmit value signals to others that can shape their behaviour and establish norms. Founders who wish to earn status and influence among their peers respond to signals from influencers that indicate the best behaviours for reaching this goal.

LESSON 5: WHEN FOUNDERS AT SCALE ARE MORE INFLUENTIAL, IT EMPOWERS ENTREPRENEURSHIP COMMUNITIES TO BE MORE PRODUCTIVE.

Ecosystems with higher levels of absolute and average job creation also tend to have a greater proportion of local influence coming from entrepreneurial leaders that have successfully scaled their companies. The prevalence of connectivity in terms of experience, support, and investment coming from leaders of firms that reached scale can explain why some tech entrepreneurship communities become so much more productive than others. Increasing the influence of the best performers in a network should have positive results, while increasing the influence of worse performers and people with no relevant experience should have negative effects.

HOW CAN DECISION MAKERS EMPOWER LOCAL ENTREPRENEURSHIP COMMUNITIES?

Today, Nigeria features some of the world’s most exciting startups, but seeing more startups successfully transition into scaleups, requires us to place high-impact entrepreneurs at the centre of our ecosystem. Productive entrepreneurship ecosystems yield outsized benefits for regional and national economies.

Decision-makers should support and elevate the influence of people who have led companies that scaled and incentivize them to assist upcoming founders.

ENTREPRENEUR-LED ECONOMIC DEVELOPMENT: FIVE PRACTICAL STEPS FOR DECISION MAKERS

1. Avoid The Myths Of Quantity

Many decision makers assume that increasing the quantity of startups, support organizations, or connectivity will automatically generate greater productivity in an entrepreneurship community. These assumptions are not supported by the data in this project. Most startups are low-productivity microbusinesses, and increasing the number of support organizations usually involves funding for organizations run by people with no entrepreneurship experience.

Key Question: Who will this be elevating in the local community? What are we telling local founders to value if we support this?

2. Follow Local Founders Who Have Reached Scale

Decision makers should make sure that there is evidence that local entrepreneurs can succeed in a targeted industry before moving forward with programs in new industries or geographies. Many of these programs are designed without input from local founders and often waste large amounts of money as a result by trying to build clusters in industries where no local founder has demonstrated “proof of scale”.

Companies in the tech sector may have higher levels of performance in certain sub-sectors, such as fintech. Decision makers can look to where local founders are reaching scale to identify sectors with the greatest potential. Those that have demonstrated success can be targeted with additional support.

Key question: What evidence is there that local entrepreneurs can succeed in reaching scale in the targeted industry?

3. Listen To The Leaders Of The Fastest-Growing Firms

Since the fastest-growing companies are responsible for a very large share of productivity, addressing the obstacles they face will have the greatest impact on the ecosystem. These obstacles also tend to be different from those faced by other founders. The challenges identified by the best performing founders are useful because they are the best indicator of systemic constraints.

In the cities studied in this project, the founders of the fastest-growing firms frequently reported that their greatest challenge was access to talent. There are currently very few entrepreneurship support organizations addressing challenges with finding, developing, and retaining talent in the market.

Key question: What challenges have the leaders of the fastest-growing local companies identified as major obstacles and are those challenges targeted in this initiative?

4. Expand The Touchpoints Of Scaleup Entrepreneurs To Influence Upcoming Founders

Leaders of entrepreneurial companies that reached scale can improve the performance of local founders by acting as mentors and investors. These mechanisms are often underutilized — the typical entrepreneurs at scale in the cities in this study are only mentoring or investing in a single entrepreneur, if they are providing this type of support at all. Entrepreneurial leaders can mentor founders of two to three companies at a time and have five or more companies in their investment portfolios. A small increase in the number of companies supported by each of these local founders has the potential to make a large impact.

Key question: How can leaders of entrepreneurial companies at scale be encouraged to be more active influencers of upcoming founders?

5. Invite Leaders Of Companies At Scale To Positions Of Influence At ESOs

If established hubs are influential organizations led by people with no entrepreneurial experience, stakeholders should look at this as an opportunity for positive transformation. Most local support organizations in Lagos are still run by people with no entrepreneurial leadership experience.

If founders and executives at companies that have reached scale can be invited to join the leadership of these organizations, they may be able to provide benefits similar to those seen at organizations already run by leaders of companies that reached scale. Leadership positions could include day-to-day roles or board positions. There may be unique opportunities to find leaders among founders who have reached scale in adjacent sectors that may be relevant to tech, like transportation or media. Decision makers considering support for initiatives that are run by people who lack leadership experience at companies that scaled can use two questions to help frame their engagement.

Key question: Where can leaders of companies at scale take on executive or board-level roles at support organizations?

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This article summarises ‘Fostering Productive Entrepreneurship Communities’, a research report by Endeavor Insight. The full report is available here. This research was made possible by funding from the Bill & Melinda Gates Foundation.

This article was originally published in BusinessDay.

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Endeavor is leading the global high-impact entrepreneurship movement. We are accelerating the growth of Nigeria’s high-impact, scaleup & growth-stage companies.

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