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One Adult in Eleven is an Entrepreneur: Entrepreneurs Supply 65% of Start-Up Capital
The Definitive Study of Entrepreneurship in 2004: London Business School and Babson College launch 2004's Global Entrepreneurship Monitor and GEM Financing Report
January 2005 (Newstream) -- 73 million people across the globe are either nascent entrepreneurs, or own or manage a young business, according to the sixth annual Global Entrepreneurship Monitor. Directed by London Business School and Babson College and released today, the report is the largest annual measure of entrepreneurial activity worldwide, spanning 34 countries and a total labour force of 784 million people.
New this year, the GEM Global Report demonstrates a U-shaped relationship between Total Entrepreneurship Activity (TEA) and per capita Gross Domestic Product (GDP). Entrepreneurial activity declines as countries attain higher national income, reaching its lowest point at about US $30,000 per capita GDP. Beyond that level, TEA begins rising slowly and steadily as GDP continues to rise. For example, Uganda, Peru and Ecuador have high TEA rates but low national incomes whereas the United States and Iceland have both high TEA rates and high national incomes. A key implication of these results is that when it comes to entrepreneurship, one size does not fit all. Policies must be adapted to fit prevailing national circumstances.
Furthermore, the GEM Financing Report reveals that it is self-funding and informal investment that is the lifeblood of an entrepreneurial society. 99.9 percent of nascent entrepreneurs launch new ventures without formal venture capital or business angel investments. Entrepreneurs themselves provide 65.8 percent of the start-up capital; hence others, principally informal investors, provide the remaining 34.2 percent. An overwhelming 88 percent of America's 500 fastest growing private companies never received financing from business angels. In contrast, 33 percent of the same 500 companies raised start-up capital 'by tapping the assets of family and friends'.
William D Bygrave, Frederic C Hamilton Professor for Free Enterprise, Babson College and lead researcher of the GEM Financing Report said, "Entrepreneurs seeking capital to start a business must first use their own savings, then turn to family members, next friends, work colleagues, and neighbours and finally strangers for informal investment. They should forget about formal venture capital."
Michael Hay, Deputy Dean and Secretary of London Business School and Co-Director of the GEM Global Project said, "This year's GEM Global report has developed an even better understanding of the place of entrepreneurship in driving the performance of countries across the world. We can say with certainty that entrepreneurship, while different from country to country, is just as important in the developing countries as in the developed ones. Given the current focus on rebuilding and regenerating the tsunami-struck nations and many African nations, we cannot afford to ignore the role of entrepreneurship in driving inclusive economic development for all."
KEY FINDINGS FROM THE GEM FINANCING REPORT
Informal investors and entrepreneurs
Self-funding by entrepreneurs and funding from informal investors (family, friends, colleagues, neighbours and strangers) are the lifeblood of an entrepreneurial society. Informal investors are first and foremost close family relatives of the entrepreneurs (49.4%). Friends and neighbours provide 26.4 percent of informal investment, followed by other relatives (9.4%), work colleagues (7.9%), and strangers (6.9%).
Entrepreneurs should look to themselves or seek other entrepreneurs for funding. Aside from providing 65.8 percent of the start-up capital for their own companies they are four times as likely as non-entrepreneurs to be informal investors in another entrepreneur's business. Entrepreneurs are wasting valuable time by prematurely seeking seed capital from business angels and even from formal venture capitalists - searches that come up empty-handed almost every time.
Informal investors supply more than the external capital needs of entrepreneurs. The average informal investment is $24,202 - more than the average amount of external financing necessary ($18,678).
Entrepreneurs' ambitions, countries of origin and type of businesses will determine how much capital they need. For all GEM nations, the average capital needed to start a business is $53,673. More is needed for an opportunity-pulled venture ($58,179 for venture created from opportunity) than a necessity-pushed one ($24,467 for venture started where options for work are absent or poor). Start-ups in the business-services sector also require more funding than those in the consumer-oriented sector.
Gender matters when it comes to capital. Businesses started by men require more than those started by women ($65,010 vs. $33,201), partially because women start more consumer-oriented businesses that need less initial capital.
Entrepreneurs are overly optimistic about their ROIs. 51 percent of informal investors expect a negative or zero return and only 22 percent expect a return of 100 percent or more; in contrast, only 13 percent of entrepreneurs expect a negative or zero return but 53 percent expect a return of 100 percent or more.
Venture capital and entrepreneurs
By far the rarest source of capital for nascent entrepreneurs is classic venture capital. So rare is it, that even in the US, which has more than two-thirds of the total venture capital in the entire world (74% VC among G7 nations in 2003), far fewer than one in ten thousand new ventures receive their initial financing from VC firms. US companies received $8.1 million VC funding compared to an average of $1.2 million per company in other G7 nations in 2003.
Advantage in the global market place? US companies own it. High-level VC funding accelerates the commercialization of their new products and services; and eventual initial public offerings in the stock markets. Ninety-one percent of VC invested in the US finances high technology companies, in contrast to only 29 percent in other G7 nations.
There is an upward trend in VC backing of superstar companies. Recent VC backing of IPOs combined with Google's spectacular IPO in the third quarter of 2004 has boosted the confidence of the venture capital industry. In 2005, industry leaders predict a new cycle of VC spending with more money targeted to seed, start-up, and early-stage businesses.
Research into informal investment should be encouraged. Before the GEM studies, almost all research on informal investments focused on business angels who invest comparatively large sums of money in entrepreneurial ventures with the potential to become substantial companies. It is probable that studies of investments by business angels miss not only, as expected, micro-companies that are destined to stay tiny, but also many, perhaps most, companies that grow to become superstars.
KEY FINDINGS FROM THE GEM GLOBAL REPORT
Scope of entrepreneurial activity
GEM 2004 shows that many people around the world are involved in starting a business. Total Entrepreneurship Activity (TEA) reported in 2004 varied from a low of 1.5 percent of the adult population to a high of 40 percent with Uganda, Peru, Ecuador and Brazil emerging as the countries with the highest TEA. Necessity entrepreneurship in these countries is high: in Peru and Uganda, as many as one in seven working adults are active entrepreneurs by necessity. Japan, Belgium, Italy, Sweden and Finland have the lowest levels of overall TEA. The level of entrepreneurship activity reflects differences in countries' national income, increasing or decreasing depending on their per capita income level and living standards.
Characteristics of the active entrepreneur
Most entrepreneurs are opportunity driven (they perceive a real business opportunity). Three in five (65%) are opportunity entrepreneurs versus two in five (35%) who operate out of necessity (they have no other employment options, or options are unsatisfactory). Opportunity entrepreneurs are more dominant in high-income countries while necessity entrepreneurship is more prevalent in low-income countries.
Young people tend to be more involved in entrepreneurial activity in every country regardless of the level of GDP per capita. The younger generation typically spur new business. Most entrepreneurial activity is carried out by 25-34 year olds, regardless of the level of income in their countries. Low-income countries have the highest level of entrepreneurial activity across all age groups, followed by high-income countries and finally middle-income countries.
The gender gap continues. The large gender gap around the world remains, with almost two-thirds of entrepreneurial activity reported by men. In middle-income countries, men are 75 percent more likely to be active entrepreneurs than women while in Ecuador, Hungary, Peru and South Africa (low-income) and Finland, Japan and the United States (high-income), male and female participation rates are statistically identical. In no country are there more female entrepreneurs than male.
The relationship between entrepreneurial activity and education tends to be positive in high-income countries and negative in low-income countries. In low-income countries, those with lower levels of education start businesses. In high-income countries those with higher levels of education start businesses. This suggests that the more educated entrepreneurs are pursuing more opportunity-based ventures, while less educated entrepreneurs are involved out of necessity, and that most people who have a secondary level education are more inclined to work for wages than become entrepreneurs.
Most entrepreneurs are already employed. The overwhelming majority of people starting businesses in all national income groups were employed while developing their business. In middle-income countries 91 percent have jobs. In high-income countries the figure is 81 percent and in low-income countries it is 77 percent.
Characteristics of new businesses
'Consumer' businesses outnumber businesses in the services sector. At all levels of per capita GDP, the largest numbers of start-ups are in the consumer services sector. As national incomes increase, so does proportion of start-ups in the services sector. Almost no entrepreneurial activity exists in the healthcare sector.
Opportunity start-ups are exporting more products. A link exists between exports and necessity/opportunity entrepreneurship. As the level of necessity entrepreneurship (more common in low-income countries) falls, so does the proportion of start-ups that do not expect to export products.
Over 50 percent of start-ups do not expect to export any products. Exporting companies are more prevalent in high-income countries. Low-income countries record the highest level of non-exporting start-ups and this reduces as nations become wealthier.
High-potential start-ups are on the decline. Only 3 percent of all start-ups qualify as businesses with high potential, that is businesses that expect to have few competitors, intend to bring innovations to the market and use state-of-the-art technology.
Two thirds of start-ups expect to create either no jobs or, at most, up to two jobs within five years. The expectations of entrepreneurs in the low and high-income countries are similar with roughly 30 percent of respondents expecting to employ between three and 10 people and 9 percent expecting to employ more than 10. By contrast, the expectations of entrepreneurs in the middle-income nations are about 30 percent lower.
ENTREPRENEURIAL ACTIVITY BY REGION
Asia-Oceania: Australia, Hong Kong, Japan, New Zealand and Singapore
Asia-Oceania performs poorly when looking at new businesses seeking new market expansion, introducing new products, or using new technologies. GEM research suggests that new entrepreneurial businesses in the region are driven more by high growth in market opportunities for existing services, and less by the introduction of new services or innovative products. The region is more influenced by developments in the West than their Asian neighbours. The Oceanic countries tend to be dominated by the services sector. Greater focus is needed on research and development and the commercialization of innovations.
European Union: Belgium, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Netherlands, Poland, Portugal, Slovenia, Spain, Sweden and the United Kingdom
The entrepreneurial mindset needs refuelling. Among European countries, cultural support is positively linked with the amount of entrepreneurial activity. The European Union has identified a need to enhance positive attitudes about entrepreneurship to further encourage entrepreneurial activity. Generous employment protection and unemployment benefits reflect the low TEA rates of many EU countries. Greater attention must be paid to entrepreneurship opportunities for people aged 50 and above. Much remains to be done to deregulate and liberalize markets and to commercialize research.
Latin America: Argentina, Brazil, Ecuador and Peru
Volatile economic conditions yield modest growth and income. Government policies are not supportive and do not promote entrepreneurship activity. Regulatory constraints, labour costs, and legal regulations place a high burden on entrepreneurs, and intellectual property rights protection is inadequate. Access to technologies and international markets is difficult. There is a strong need for improved management skills and better consulting services. Still, there is a shift toward more open, market-based economies in democratic settings and the private sector has opened to new players.
G7 nations:Canada, France, Germany, Italy, Japan, United Kingdom and United States
Economic confidence declined in 2004. When asked about regional start-up opportunities in the near future, respondents' optimism fell about 8 percent compared to the level recorded in 2003. Less than half of the G7 nations are positive in their assessment of the skills possessed for entrepreneurial endeavours. Cultural perception of entrepreneurs also fell. GEM found a small reduction with about 2 percent less of the G7 population believing that entrepreneurship is a good choice.
GEM Global Report
Policy must be adapted to prevailing national circumstances. Maria A Minniti, Associate Professor, Economics and Entrepreneurship, Babson College and lead researcher of this year's report said, "the findings suggest the quality and quantity of entrepreneurial efforts varies depending on a nation's income levels. Thus, policies that may succeed in a specific context, for example one characterized by monetary stability, competition and a well-developed physical infrastructure, may not be successful in an environment characterized by financial instability, low levels of literacy and lack of entitlement. Policies and best practices must be rooted in the context of the country in which they are applied."
However, policy implications can be divided into three broad categories:
Low-income countries (those that are neither innovating at home nor adopting foreign technologies): There is a need to strengthen small and medium-sized sectors and reduce the number of necessity entrepreneurs before focusing on developing overall entrepreneurial conditions. A strong commitment to education and training is necessary. Labour market flexibility, infrastructure improvements, management skills and financial market efficiency must also be developed to attract major investments.
Middle-income countries (those adopting technologies in production and consumption): These countries must strengthen entrepreneurial conditions to move from being technology-adopting countries to technology-creating countries. They need to continue their commitment to entrepreneurial education including the fundamental aspects of the entrepreneurial mindset, and focus on the development of informal investors.
High-income countries (those who produce the world's technology innovations): High-income countries should focus on strengthening technology transfer; making early stage funding available; and supporting entrepreneurial activity at the state, corporate and university level. Higher education must take a greater role in research and development, technology commercialization and scientific education. Entrepreneurs need more commercial-skills training and team building programs made available to them.
FOUNDING AND SPONSORING INSTITUTIONS: GEM 2004
London Business School's Vision is to be the pre-eminent global business school, nurturing talent and advancing knowledge in a multinational, multi-cultural environment. Founded in 1965, the School graduated over 800 MBAs, Executive MBAs, Masters in Finance, Sloan Fellows and PhDs from over 70 countries last year. The School's executive education department serves 6,000 executives and 60 corporate clients on its programmes every year. London Business School is based in the most accessible and international city in the world and is one of only two business schools in the UK to be awarded a six-star (6*) rating by the Higher Education Funding Council for England (HEFCE), confirming the School as a centre of world-class research in business and management. For information, visit www.london.edu
Babson College, Wellesley, Mass., USA, is recognised internationally as a leader in entrepreneurial management education. Babson grants BS degrees through its innovative undergraduate programme and grants MBA and custom MS and MBA degrees through the F.W. Olin Graduate School of Business at Babson College. Babson Executive Education offers executive development programmes to experienced managers worldwide. For information, visit www.babson.edu.
The GEM report: This is the sixth annual Global Entrepreneurship Monitor (GEM) cross-national assessment of entrepreneurship. Started in 1999 with 10 participating countries, the project has expanded to include 34 countries in 2004, representing a total labour force of 784 million.
The GEM programme is a major effort aimed at describing and analyzing entrepreneurial processes within a wide range of countries. The programme has three main objectives:
- To measure differences in the level of entrepreneurial activity between countries
- To uncover factors leading to appropriate levels of entrepreneurship
- To suggest policies that may enhance the national level of entrepreneurial activity
New developments, and all national reports, can be found at www.gemconsortium.org. The programme is sponsored by London Business School and Babson College.
Copies of GEM 2004 Financing and GEM 2004 Global reports are available at www.gemconsortium.org
GEM Lead Researchers: Zoltan J Acs, Pia Arenius, William D Bygrave, Michael Hay, Maria Minniti, Babson College and London Business School.
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The Entrepreneurial Process: Economic Growth, Men, Women, and Minoritiesby Paul D. Reynolds, Sammis B. White Entrepreneurship is an extremely important, but little understood, component of the U.S. economy. This book aids that understanding by exploring the challenges and outcomes of the start-up phases of new firms. This is the first detailed, large-scale, longitudinally-based analysis of the entrepreneurial process. Three representative samples of new firms and two representative samples of nascent entrepreneurs (those attempting to start new firms) are used to consider a variety of factors that affect successful completion of the major transitions in the life of new businesses: conception, birth, and early development (survival and growth). Surprisingly, a substantial minority of start-ups become operational new firms. Among the many lessons the authors learn are that although new firm growth appears to reflect many factors, initial size is of special consequence. Not only are many general insights for entrepreneurs revealed, but the authors also pay special attention to the involvement of women and minorities in entrepreneurship and suggest effective government policy for different stages in the entrepreneurial process.
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