How do you empower local entrepreneurs to advance bottom-up solutions to climate change? How do you provide local green entrepreneurs with the technical assistance and market intelligence they need to validate innovative technologies and business models? How do you improve these entrepreneurs' access to capital?
These are some of the questions discussed by the World Bank Group’s Climate Business Innovation Network (CBIN) at its most recent meeting in Pretoria, South Africa earlier this month.
This network of leaders of incubators and accelerators from around the world meets bi-annually to share their experiences supporting green entrepreneurs, brainstorm solutions to common challenges, and learn from business incubation experts in this emerging field.
"In Chad, young people increasingly turn to innovative entrepreneurship but often become demoralized when confronted with the common issue of lack of early-stage financing.” This is how Parfait Djimnade, co-founder of Agro Business Tchad, a leading e-commerce agribusiness and social enterprise in Chad, described the challenge many aspiring entrepreneurs face in securing the necessary capital to fund and grow their start-ups, specifically in the Sahel and West Africa.
The frustration Parfait highlights is common across the Africa region, where more than 40 percent of entrepreneurs cite access to finance as the major factor limiting their growth, according to World Bank Enterprise Surveys. West African start-ups and innovative young SMEs are indeed facing the classic ‘valley of death’ — the space between where the entrepreneur’s own resources from family and friends (“love money”) gets depleted and when the company is financially viable enough to attract later-stage investment and financing available on the market. The shortage of financing in the market starts from the pre-seed stage (US$20,000) to early-venture capital stage (US$1 million).
A new project combining skills across the World Bank Group and IFC is taking advantage of disruptive advances in the energy and finance sectors to address these longstanding challenges for SMEs.
Current access to electricity remains woefully low and is a major impediment to economic growth. More than half of Africa’s population isn’t connected to the energy grid and has no access to reliable power. At the same time, fewer than 50% of adults have an account with a formal financial institution.
In recent years, however, two important developments have made it possible to begin addressing these challenges:
- Off-grid energy solutions—notably solar power—have fallen dramatically in price with new business models working to scale them
- New digital-based financing mechanisms, such as crowdfunding, cryptocurrencies, peer-to-peer lending, psychometric testing, big data, and blockchain have emerged as tools for under-served finance markets.
There are strong parallels in these advances for both sectors. Whereas both energy and finance are traditionally provided by large-scale, centralized service providers—state-owned electricity utilities and large commercial banks, respectively—new solutions have effectively decentralized and democratized the provision of these services. Now a range of smaller,
Start-ups in emerging markets are disadvantaged when it comes to accessing mentors and mentorship programs. The infoDev Climate Technology Program has been working to fix this challenge and recently launched two mentorship pilots in partnership with Climate Innovation Centers in Ghana and the Caribbean.
Successful entrepreneurs from developed technology hubs often engage mentors so that they can learn from experienced industry veterans, solve unfamiliar problems, and navigate blind spots. In emerging economies, great mentors are harder to come by, founders are less familiar with what to expect from a mentor, and support programs and networks are less established.
Start-ups are transforming cities. Entrepreneurs are inspiring creative communities and transforming the social and economic landscape of the neighborhoods where they cluster.
What drives entrepreneurs together and creates these communities? To answer this question, we looked at catalysts of entrepreneurial communities in cities around the world. The team found that a range of spaces — such as innovation hubs, incubators, maker spaces and fab labs — are at the core of these communities. They represent the main link between entrepreneurs and the broader economic and social fabric of the city. We call these “Creative Community Spaces” (CCS).
How are these CCS helping transform our cities? We compiled a set of case studies from around the world and analyzed their impact. There are more details in this report.
The corporate world is at the forefront of the tech-led transformation of the economy. The democratization of technology, whereby exponential cost reductions have allowed almost anyone to produce tech-based innovations, is disrupting core sectors of the economy.
Technology disruption is not confined anymore to the digital world. Data analytics, artificial intelligence, 3-D printing, robotics, sensorization, and an ever-evolving list of technology platforms have blurred the boundaries that once-protected physical ("brick and mortar") sectors, such as the hospitality, automobile, construction and manufacturing sectors.
Business as usual has not served companies in these sectors well. Traditional innovation models to create products and services do not match the pace and agility of competitive disruption from tech actors (e.g., large technology platforms with unbeatable access to data access and capital, such as Google or Amazon, and small and agile local startups). Thus, a new corporate innovation model, “Corporate Innovation 2.0,” is emerging.
The main characteristic of this new model is that it’s open by nature, as opposed to having a closed R&D process. Established companies tend to offer good structures for marketing, distribution, processes, scaling up products, etc., but, compared to start-ups, they often have a weakness in generating and rapidly applying creativity to develop new products and services.
Using open innovation techniques, corporations are trying to address this weakness by absorbing start-up innovation. We have seen three main types of mechanisms in this emerging model: corporate accelerators, competitions to generate new ideas, and co-creation with startups of new products and services.
Start-up ecosystems are emerging in urban areas across the world. Today, a technology-based start-up develops a functioning prototype with as little as $3,000, six weeks of work, and a working Internet connection.
Entrepreneurs are not seeking large investments in hardware or office space. Rather, they look for access to professional networks, mentors, interdisciplinary learning, and diverse talent. Cities are best suited to meet their needs, as they provide diversity and allow for constant interaction and collaboration. Thus, the shift caused by the so-called “fourth industrial revolution” makes cities the new ground for organic innovation.
The urban innovation model can be applied in cities in both developed and developing countries. The same trends are driving the urbanization of organic innovation ecosystems in New York City, London, Stockholm, Mumbai, Buenos Aires and Nairobi. This presents a great opportunity for developing countries to build innovation ecosystems in cities and create communities of entrepreneurs to support the creation of new sectors and businesses.
But while some cities have organically developed urban innovation ecosystems, nurturing a sustainable and scalable ecosystem usually requires determined action. Moreover, not all cities are building their innovation ecosystems at the same pace.
To support a local innovation ecosystem and accelerate its growth cities can promote collaboration through creative spaces and support networks, while also hosting competitions to solve local problems.
A start-up office in New York.
Photo Credit: © Victor Mulas
We are in the grip of start-up hype. Today, every large city in the world aspires to become a start-up hub. New York City became a start-up role model; Berlin and London were the “go to” start-up hubs in Europe two or three years ago; Nairobi is the start-up darling in Africa; and Dubai promoted itself as start-up destination.
Start-ups are seen as the new solution for job creation in the emerging economy of the so-called “fourth industrial revolution.” Indeed, they can help produce the jobs of the future — those new employment opportunities that are created in brand-new industries or technology categories. For instance, this has already happened in New York City, where the connection with local industries has resulted in new jobs, new industries, and greater competitiveness for traditional sectors. And it is has not been only about jobs. Solutions for critical development challenges, such as online payments and access to energy in off-grid areas, have emerged from Nairobi and India’s ingenious start-up scenes.
As I visit these cities, however, I wonder if the actual — and potential — impact of these emerging start-up ecosystems is being exaggerated and if we are all collectively witnessing an overflow of attention and resources that cannot translate into “magic” solutions to unemployment and other global challenges.
Indeed, many of the ecosystems I visited and studied seem to be overinflated. Not many start-ups become sustainable businesses, and the few successful examples are cited over and over again. Start-ups are disconnected from local industries and there is little absorption of start-up innovation by the economy.
In some cases, the result is a massive, large-scale training program where a new generation of aspiring entrepreneurs can learn technical and management skills (this is a good outcome). On fewer occasions, the ecosystem becomes sustainable, producing successful new businesses that reinvest in new talent and connect with the local industry base (this is a better outcome).
But these seem to be a handful of cases, and it’s not easy to get there. I suspect this is the result of a lack of maturity of the infrastructure supporting the ecosystem, as well as the poor understanding of what we need to translate the energy of new entrepreneurs and innovators into productivity and business success.
Attendees at Republica Berlin 2016, an annual conference on digital culture for entrepreneurs from around the world.
Photo Credit: © Victor Mulas/The World Bank
We have witnessed in recent years the emergence of technology start-up ecosystems across the world. New technology trends are reducing the costs as well as the barriers of access to markets and resources for developing technology start-ups. If in the 1990s an entrepreneur needed $2 million and months of work to develop a minimum viable prototype, today she would need less than $50,000 and six weeks of work.
Entrepreneurs are also surging in emerging economies. India hosts major start-up ecosystems in New Delhi and Bangalore, with their start-ups having raised $1.5 billion in funding in 2016, respectively. São Paulo ranks among the top 20 start-up ecosystems with more than 1,500 active start-ups, closely followed in the region by Santiago and Buenos Aires. Warsaw hosts around 700 active start-ups, and Nairobi is the home of leading African start-ups, such as Ushahidi, M-Pesa or Brck.
Tech start-up ecosystems present new opportunities for emerging economies. Local entrepreneurs develop new business solutions that address domestic demands. For instance, in Kenya, M-Kopa is addressing the demand for energy in off-grid locations, a major issue in the country's rural areas. Unicorns, those start-ups that raise more than $1 billion, are no longer a U.S./Europe-only phenomenon. Indian, Chinese and Indonesian start-ups, such as Lu.com, Flipkart or Go-Jek, have reached this valuation, and African Internet Group from Nigeria is poised to be the first African unicorn.
Start-up ecosystems also create new jobs. Data from New York City's ecosystem on employment generated in the tech start-up ecosystem shows that most of the jobs generated by tech start-ups are not in start-ups themselves, but in local traditional industries that either are influenced or disrupted by start-ups. Think about a bank or a retail company that has to react to a mobile app providing finance or retail business and that needs to hire new talent to develop a competing app. More than 40 percent of these new jobs do not require a college degree. These are jobs like building a website, a basic database, a web or mobile app.
Maybe it's just easier to think that the keys to economic growth lie at the national level of governance – where monetary and fiscal policies, national law and development strategies are conceived and debated. Certainly national policy is important, but it is rarely where entrepreneurs have their first experience interacting with law and policy.
The city is where people’s ideas create business, where people work and where the bustle of the economy comes alive. The city is where an entrepreneur will first interact with systems that are ostensibly created to attract and support business investment and growth.
Cities can and do engage in reforms to help improve their economic competitiveness. Often this includes the identification of a business sector deemed competitive and some strategy on how to do it better. Improved competitiveness also can include investment in more efficient transportation systems, better access to utilities and services, improved tax policies, better zoning, infrastructure investment and investment in skilled labor. While working on these complex policy and investment opportunities is rational, it often takes time to do the analysis necessary to identify the best opportunities – and it takes much longer to actually see the rewards.
Fortunately, there is a reform that cities can do almost immeduiately, and at low cost, to help support business development and improve the business environment: business entry simplification.
The Philippine Experience & Lessons Learned
In decentralized economies like the Philippines, cities play an important role in business registration. In fact, almost of one-third of the country’s business registration steps fall under the responsibility of city-level leadership.
In working with Philippine cities to reform dated, cumbersome, and confusing business registration requirements, a World Bank Group team was able to help its clients reduce registration steps from an average of 41 to just three. Cities also saw an average spike in new business registration of around 20 percent in the first year after the implementation of reform.