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Evolving thoughts on innovation, entrepreneurship and economic growth

Entrepreneurs create new businesses, and new businesses in turn create jobs. New businesses intensify competition for existing larger businesses. Increased competition forces small and large entreprises alike to innovate and be more efficient in creating value for customers. Efficient value creation results in a more productive economy hence economic growth. 

Arguably, many large entreprises in East Africa do not face much competition, enough to give research and development the priority place required for innovation to grow. Furthermore, many of the larger entreprises within East Africa are multinationals whose research and development initiatives are controlled by their parent entities abroad. Therefore innovation for such multinationals is more likely to target global markets and not local markets in developing countries where revenue streams are comparatively insignificant. The other significant proportion of large entreprises in East Africa is comprised of parastatals and government entities which are by their very design incapable of being innovative. Generally, government related corporations are so stuck in public sector dynamics that innovation and value optimization for customers is rarely a real intention among their top executives.

The role of value optimization and innovation in East Africa's economies is therefore by default delegated to smaller enterprises, start-up firms and entrepreneurs driven by the opportunities or necessities created in the market place. In a 2006 paper titled "Is entrepreneurship good for economic growth?" Zoltan Acs used Global Entrepreneurship Monitoring (GEM) data from over 20 countries to argue that not all such entrepreneurial activity contributes to economic growth. The case is more apparent in developing countries where individuals are forced into entrepreneurship by necessity (lack of jobs) rather than primarily to pursue perceived market opportunities.

Very often, independent startup ventures in developing economies are likely to fail at some point for the following reasons :-
  • Derailment by alternative opportunities - Founders can get derailed easily by employment opportunities emerging with larger companies, NGOs and government institutions promising to afford them financial comfort - albeit for the medium term. Besides formal employment opportunities for founders, start-up firms often find themselves derailed by opportunities to service contracts that are not related to their core mission. This way their 'flagship products' suffer stunted growth  as the firm evolves into a "general consulting" outfit.
  • Start-up firms easily get locked into a sub-optimal operating state where they lack finances to increase awareness of their new otherwise viable products. They lack marketing funds to acquire critical numbers of customers to break-even in their operatons. Such startups end up not growing or closing down as they find it very difficult to penetrate the market. 
  • Individuals forced into entrepreneurship by necessity are likely to lack technical or managerial skills to grow their business beyond certain levels unless they raise funds to employ the people with the right skill sets. Startups are often unable to acquire the right human resources for growing their businesses beyond the vulnerable start up phase. As a startup begins to move beyond their minimum viable product, they rapidly require to shift focus on marketing, working capital management and project management among other aspects of business management without which sustainability is not assured.
The common thread the above reasons for startup failure is "access to capital". A strong case exists therefore for entrepreneurs in East Africa to prioritize their fund raising efforts for sustainable growth. Given that debt financing for young startups is rarely an option in East Africa, entrepreneurs need to focus on other forms of financing such as grants and equity investment. That is not to forget the option of participating in entrepreneurship competition with significant prize monies such as Pivot East.

That grant financing would be preferable to entrepreneurs is a no brainer. However, although grants are accessible if one is lucky, equity based investments present better opportunities for serious startups raising funds for growth. Equity based fund raising ensures that founders think through their business seriously as investors will only touch them if they can validate their business models for significant returns on investment. Equity based investment also ensures that the founders have a better sense of business accountability by virtue of other people having a stake in the business. Equity based financing often comes with opportunities for business mentorship and networking linkages from the financing parties. The temptation among entrepreneurs often is to resist dilution of their equity ownership by introduction of investors. That mentality begs the question "would you rather own 100% of a $10k company destined for stagnation or  would you rather own 70% of a $10k company on a solid growth path to $10m?"

In conclusion, there is need for the entrepreneurs to take equity investment options more seriously for growth and sustainability of their businesses. That way the economies in East Africa can benefit from innovations and value optimizations expected from entrepreneurs and smaller businesses while the bigger corporates evolve to create value to customers more efficiently at a much slower pace.

Comments

  1. I agree with you John, the whole question of fundraising can be a big issue during the start up phase. Maybe another way a start up needs to look at things is bootstrapping. This basically means use the least means available, if you don't need an office work from home, get your brother/sister/friend to work on your business cards or site etc. Look for options on how not to spend money. I find that most entrepreneurs in E.A go for expensive ways of doing business while in actual sense they should be looking for the cheapest alternatives. We all know of how many start-up companies were born out of garages!

    Another big thing is for the entrepreneur to do their homework before they start. No point starting then two months on realising that you are not in good financial shape to continue... in most cases you can figure this out at the beginning... KNOW THE LENGTH OF YOUR RUNWAY!

    SG

    ReplyDelete
  2. Good points there Stephen on bootstrapping. More entrepreneurs should do that for a starting point. Arguably it works best for younger people who are not married, no children and not much of financial entanglements other than their own lifestyles.

    There will always be the stage where the startup needs to ramp up, scale up to acquire more clients and revenues. Thats the point where they need external financing.

    ReplyDelete
  3. External financing sounds fairly risky these days though. I've seen some cases where a startup eventually ended up calling in bankruptcy attorneys after getting external funding.

    ReplyDelete

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