Young Entrepreneurs – passion or necessity?

The Global Picture

Globally, young people are pushed towards an entrepreneurial career through necessity, rather than pulled towards it through genuine interest. The result is that young people are most likely to own their own business in “factor-driven” economies rather than more developed ones. The World Economic Forum defines a factor-driven economy as one dominated by subsistence agriculture and extraction with a reliance on unskilled labour and natural resources. The 2016  Global Entrepreneurship Report finds that 15.4% of early-stage businesses are owned by 18-24 years olds in factor-driven economies (such as India, Cameroon and the Russian Federation) are business owners. In “efficiency-driven” economies (such as Saudi Arabia, South Africa, and Poland), the economy has become more competitive with increasingly efficient processes and higher quality products. Here, we see a slight decline in youth entrepreneurs: 12.3% of early-stage businesses are owned by 18-24 year olds. As economies develop further to rely on knowledge and the service sector expands,  “innovation-driven” economies start to appear, such as Australian, South, Korea, or the United States. In these more economically-diverse countries, only 7.6% of early-stage businesses are owned by 18-24 year olds.

Kethi Ngwenya, 26, is CEO of School Media in South Africa http://www.schoolmedia.co.za/

The higher number of young entrepreneurs in factor-driven economies could be due to the higher numbers of young people as a proportion of the population. These economies are also less likely to send young people to higher education, resulting in young people being forced into income-generating activities far younger than in innovation-driven societies. On the positive side, factor-driven societies are more likely to consider entrepreneurship a good career choice than in innovation-driven societies (62% vs 58%) and are also slightly more likely to consider that entrepreneurs are high-status individuals (72% compared to 70%). In factor-driven economies, 56% of people think they have the right skills for entrepreneurship, as opposed to only 44% in innovation-driven societies. This finding reinforces earlier research that higher education reduces entrepreneurial motivations ((Davey et al. 2011))   Innovation-driven societies are more risk-averse: over 40% of those in innovation-driven societies are prevented from starting a new business by the fear of failure, compared to only 33% of those in factor-driven societies. The social stigma and legal complications of business failure in more advanced economies are possibly more of a deterrent than in countries where it is easier to recover from business failure.

The barriers to youth entrepreneurship

Commentators locally and globally have argued that factor-driven countries have a demographic dividend: an in-built advantage due to a young population that is willing and able to engage in entrepreneurial activity. But counter evidence from South Africa and India indicate that young entrepreneurs in these countries are hampered by poor physical infrastructure such as inadequate transport and communication networks, and a legal framework that fails to protect ownership and intellectual property rights .

Yet innovation-driven countries also have barriers for young entrepreneurs: their lack of credit history and assets to serve as collateral for loans mean that they lack funds to start a business, and then find it hard to scale-up their enterprise.

Young entrepreneurs in the UK

The Small Business Survey of 2014 contains the most recent data for the age of small business owners in the UK. Only 1.1% of all small business owners are aged 18-24, an even lower percentage than the 7.6% across all innovation-driven economies, which indicates that young people in the UK are even less entrepreneurially minded than the European average. The most popular types of industry for young entrepreneurs are SIC codes G, H and I: Accommodation and Food Services, Transportation and Storage, and Wholesale and Retail Trade. This finding counters the popular image of young entrepreneurs favouring technology fields, such as apps, social media or gaming, where there are low barriers to entry and the only equipment needed is a mobile device and internet connection.

little simz
Little Simz, 21, is a singer and a Forbes 30-under-30 entrepreneur https://littlesimz.bandcamp.com/

Turning to profitability, 74% of young entrepreneurs turned a profit in the last year, which is only slightly lower than their older peers, at 79%.

78% of young entrepreneurs did not export internationally, very comparable to their older peers, 76% of whom did not export.

The most surprising finding is that young entrepreneurs are more likely to employ staff than their older peers. It might be imagined that most young entrepreneurs have no employees, as their business is also relatively young. In fact, only 7% of businesses have no employees, as opposed to 14% of business owners aged older than 24. 27% of young business owners have 1-9 employees, as opposed to 19% of their older peers. 48% have 10-49 employees, as opposed to 33% of their older peers, and 16% have 50 to 249 employees, which is only slightly lower than the 19% of older business owners.

Young Entrepreneurs – source of growth for Europe?

In summary, young entrepreneurs in the UK need encouragement and confidence in order to achieve their potential. While the European Commission and OECD have largely relegated youth entrepreneurship to being a policy solution  to persistently high youth unemployment in Europe, our findings indicate that young entrepreneurs actually are more likely to be employing other people than their older peers. In fact, young entrepreneurs are source of job creation, which drives regional employment and growth. Business leadership programmes, such the University of Keele’s Mercia Centre for Innovation Leadership and enterprise education, which encourages entrepreneurship skills in schools and universities, have an important role to play in encouraging more young people in “innovation-factor” economies to take the plunge and start their own business. Evidence in the UK shows that they are likely to be successful.

 

 

 

 

 

 

 

 

 

 

SME Growth and Public Policy

Entrepreneurship research is characterised by the close collaboration between business, policy, and research. My own research would have been impossible without the help from organisations that foster networking. Two of these organisations, the  Institute for Small Business and Entrepreneurship, and the Enterprise Research Centre, organised a policy round-table event  at Coventry University Techology Park last week to discuss SME growth.

The “Start-Up or Scale-Up” event was to ask whether policies in the UK currently support the development of growth-oriented plans by entrepreneurs. Participants came from a range of universities, and support organisations such as Growth Hubs, LEPs, and Chambers of Commerce. Debate amongst the participants was lively.

Research by the ERC on the impact of high-growth firms and job creation in 2015 showed that, over a three year period, high growth firms represent less than 1% of established businesses, but create over 20% of job growth in all established businesses which grow. High-growth firms make a disproportionately huge impact on job creation. Hence the government interest in supporting high-growth firms. An influential report from NESTA (Brown, Mason, & Mawson, 2014) explores the misalignment between public policy and high-growth firms, particularly given the complex and under-researched nature of what growth involves.

Definitional problems around “high-growth” firms

The policy round table was opened by Professor Stephen Roper with a definitional problem: most policy-makers are using a very specific, even restrictive definition of what a “high growth firm”, or scale-up, actually is.

Start Up Scale Up

The Department for Business Energy and Industrial Strategy is using the OECD definition of a high-growth firm:

“All enterprises with average annualized growth greater than twenty percent per annum, over a three-year period, and with ten or more employees at the beginning of the observation period. Growth is thus measured by the number of employees and by turnover.”  (OECD & Eurostat, 2007)

The problem is that this definition excludes the vast majority of SMEs. 82% of SMEs in the UK have fewer than 10 employees (Department for Business Innovation and Skills, 2016). Of these, 76% had no employees. Start-ups generally have no employees, but have huge growth potential, and often require credit finance, leadership development, and support with exporting to achieve that growth.

A further difficulty is spotting firms at the right time, so that they can be offered help when they most need it. Firms spotted “ex ante” have often come out of a growth cycle and no longer require help. Professor Roper has developed a process whereby high growth firms are spotted through HMRC quarterly tax returns. When HMRC notice an unusual increase in pre-growth indicators, perhaps a change in employee numbers or turnover, they would inform the Growth Hub advisors in the firm’s geographical area. The advisors would then visit the firm to offer support for their growth.

Policy Suggestions for Growth

Professor Roper’s process addresses a key problem: only a small fraction of SMEs have heard of support organisations. Indeed, participants noted the fragmented nature of support for SME growth. In 2015, only 13% of SME employers in England had heard of Growth Hubs, the government-sponsored advisory and training service for SMEs. Growth Hubs are currently provided by the 39 LEPs in England. Wales, Scotland, and Northern Ireland have separate arrangements. Participants in the room noisily discussed the need for a joined-up policy on promoting business growth.

In addition to a lack of joined-up support for growth, a previous post argued that most SMEs are neither willing nor capable of growth. Participants then discussed whether government policy should stop subsidizing all SMEs and focus only on those with growth ambitions. This argument has been made by DEMOS , a non-partisan think-tank. A straw poll of the room showed that about 50% of us thought that government policy support should only go to firms with growth ambitions. The other 50% thought that all SMEs, irrespective of whether they have growth ambitions or not, should be supported.

I would also argue that we must support SMEs who appear to lack growth ambitions. We already know that the majority of entrepreneurs do not have higher education (Department for Business Innovation and Skills, 2016). Research shows that those with higher education can get better-paid jobs, and therefore don’t need to start a business. However, entrepreneurs that want to grow their business may be deterred by their lack of education, including knowledge about support organisations. A lack of growth ambition could therefore simply be a lack of confidence. All entrepreneurs should be given the confidence, skills, and knowledge to grow. Government and local policy should explain the benefits of growth to SMEs, and show them how to grow in a productive and sustainable way. Today’s event was a timely reminder of how much more needs to be done in this area.

 

Further Reading

Brown, R., Mason, C., & Mawson, S. (2014). Increasing “The Vital 6 Percent”: Designing Effective Public Policy to Support High Growth Firms. London. Retrieved from http://www.nesta.org.uk/wp14-01

Department for Business Innovation and Skills. (2016). Longitudinal Small Business Survey Year 1: SME employers. Longitudinal Small Business Survey Year. Retrieved from https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/522364/bis-16-227-sme-employer-report.pdf

OECD, & Eurostat. (2007). Eurostat-OECD Manual on Business Demography Statistics. Retrieved from http://www.sourceoecd.org/industrytrade/9789264041875