Every thriving start-up ecosystem is unique, but they all find new and better ways of bringing the right people together.
If dark clouds have been gathering ominously over the global economy of late, one chink of sunlight continues to break through the gloom. According to a recent research study by UHY, many countries are experiencing a boom in new business creation.
That’s even true of China, where economic slowdown has spread panic through boardrooms from Beijing to Berlin. In fact, it’s especially true of China, UHY’s research confirms. The world’s most populous country is outpacing the world in new business formations. Nearly 1,610,000 new companies were established in China in 2014, almost double the number created in 2010. [Data correct to end of 2014].
Second in the league table of start-up success was the UK, which registered a 51% increase in business births in 2014 compared to 2010, while other winners included India, Australia, Italy and Germany. Brazil created 22% more businesses in 2014 than 2010, but started from the highest base of any nation in the UHY survey. Over one and a half million new companies were established in Brazil in 2010.
Some of this activity is the direct result of central intervention, with governments acting to kickstart economies left reeling by the financial crisis. Lower tax rates and reduced SME bureaucracy are the most obvious manifestations of government efforts. According to UHY International chairman Bernard Fay, these efforts must continue.
“The next few years are not going to be without their own challenges, and governments globally need to find ways to help these new start-ups grow into successful businesses and even the next generation of multinationals,” he says. “In many European countries there is still a long way to go in cutting down on bureaucracy.”
Reducing business bureaucracy is one way to encourage new start-ups, but there are others. Every start-up ecosystem is shaped by its peculiar local circumstances, and experts believe the best initiatives for encouraging business creation are homegrown and pragmatic. Nevertheless, successful start-up hubs, from Paris and London to Tel Aviv and Toronto, tend to share similar core components.
Peace and prosperity
At the most basic level, start-ups need peace, political stability and a culture that promotes entrepreneurship as a worthy life choice. All three are present in Indonesia, where entrepreneurs – as the Global Entrepreneurship Monitor (GEM) reports – exhibit ‘a low fear of failure’ which results in high levels of ‘early-stage entrepreneurial activity’.
If companies are to grow, entrepreneurs need access to finance and in some economies new funding avenues are rejuvenating start-up ecosystems. Peer-to-peer lending, crowdfunding and angel investing are filling the gap left by more risk averse institutions like banks and venture capital firms. The Association for Financial Markets in Europe calculates that 30% of finance available to European companies is now non-bank funding.
Meanwhile, GEM reports that physical infrastructure is considered the most valued component of a start-up hub by the start-up companies themselves. Good transport links and high speed internet is often essential to new business in a globalised world, wherever a start-up happens to blink into life. At the same time, many new businesses need access to an educated workforce and a set of core professional services.
But while the presence of these factors is clearly advantageous, experts warn that different start-up ecosystems have different priorities, and that no ‘one size fits all’ global model exists. Slavica Singer, professor of economics at the J.J. Strossmayer University of Osijek in Croatia and co-author of the GEM Global Report, argues that what ecosystems need most of all, regardless of the speed of local broadband services, is the flexibility to change and the wisdom to do so sensibly.
“Healthy start-up environments share the ability to change quickly, but without rushing into trendy solutions without sufficient thought,” she says.
“Solutions must be contextualised, and checked for harmonisation with other components of the entrepreneurial ecosystem. For example, enriching financial markets with entrepreneurial financial instruments (such as angel investing) won’t contribute to a healthy entrepreneurial ecosystem if you don’t first teach entrepreneurs how to use them properly.”
Local initiatives, global significance
Professor Singer believes that every healthy entrepreneurial ecosystem is in some way unique and the best examples of start-up friendly initiatives are local ones. She pinpoints the BA Emprende programme in Buenos Aires, Argentina, which offers short-term training for entrepreneurs and access to new avenues for finance, helping to overcome any traditional limitations to Argentinian entrepreneurship.
“We are lucky in Buenos Aires,” says Roberto Macho, managing partner, UHY Macho & Asociados, Buenos Aires. “Not only do we have accelerator initiatives such as BA Emprende but it’s relatively inexpensive to start up a business, we have a highly educated workforce and our community is naturally entrepreneurial, collaborative and resilient.”
Across the border in Brazil, the city of São Paulo has become a high-spending customer for its own SMEs, giving small businesses preferential treatment when bidding for public sector contracts. In fact, São Paulo is a good example of a city trying to best exploit natural advantages, says Marcello Reis, business development manager, UHY Moreira-Auditores, UHY’s Brazilian member firm.
“São Paulo is absolutely massive – roughly 21 million people,” he says. “With so many people, it opens the door for many smaller companies to cater to a local market. Moreover, due to a very restricted capital market, in the past ten years many angel seeds and crowdfunding companies have been created to boost local start-ups.”
Those factors, plus the city’s large and diverse immigrant population, mean São Paulo is now among the best 20 in the world (according to Compass, which publishes the Global Start-up Ecosystem Ranking study) for starting a business.
In Berlin, entrepreneurs from outside the city once struggled to gain a foothold in its populous, relatively expensive central districts. The city now offers a ‘Business Welcome’ package that includes cheap office space and a number of hours of free legal and financial advice.
Money and mentoring
That advice is key, according to Compass. It argues that ‘knowledgeable and start-up-adapted service providers such as lawyers, accountants and other specialised consultants,’ are crucial to a thriving start-up ecosystem.
To that end, UHY member firm, UHY Advisors, Michigan, US uses local knowledge to connect start-up and early stage companies to new sources of finance. The firm sponsors the ‘Great Lakes Angels’, an angel investment group, is an active board member and hosts its pitching nights.
“It fills a gap between friends and family funding,” says Bradford Southern, UHY Advisor’s principal for valuation and transaction services. “Typically these early-stage companies have exhausted these monies but are not yet ready for venture capital. That’s the angel investment segment and that’s what we focus on with the Great Lakes Angels.”
UHY Advisors hosts quarterly company pitching nights where several early-stage companies present the unique attributes of their company, the investment opportunity and their funding needs from accredited angel investors in the audience. These meetings double as networking events for UHY Advisors to mingle with up-and-coming business owners, third party advisors and high-net-worth individuals. In addition, the firm offers educational seminars aimed at potential accredited investors. Taken together, this activity has made UHY Advisors a key player in its local start-up ecosystem.
Similarly, two years ago a team of partners in the UHY LLP, Albany office, in New York State, formed a joint venture to invest in the Eastern New York Angels (ENYA), helping to give the region’s start-ups access to both early-stage finance and professional mentoring.
Again, this local initiative addresses a local issue. The New York Capital District area is home to a large population of science and technology students who typically graduate and move to large cities like New York and Boston to garner support for their fledgling companies. “By providing the funding and mentorship locally, we are looking to keep those businesses local, in the hope that someday they blossom into successful companies,” says F. Michael Zovistoski, a partner in UHY LLP, Albany.
Incubate and accelerate
These local initiatives address local priorities, and they are being joined in modern start-up hubs by increasing numbers of business incubators and accelerators, which have similar aims. These institutions offer fledgling businesses a mix of cheap office space, practical education, networking opportunities and mentoring. Many mould their offer to local circumstance, focusing (for example) on high-tech industry, finance, retail or fashion.
Incubators have become something of a phenomenon everywhere, from the US and Europe to China, Brazil and India, highlighting a universal requirement for advice, mentoring and cheap facilities, right from the outset.
“In the UK our business creation hotspots show how influential clusters of expertise can attract more businesses to set up in various developing areas. Identifying the industries and sectors that a particular area should target for growth is clearly bearing fruit. Nationally all of the top five postcodes for business generation are in London – specifically Silicon Roundabout, City Road, Borough & Bankside, North Finchley & Woodside Park and Covent Garden & Leicester Square – but Warrington, Nottingham, Leeds and Hove also appear in the top 20 hotspots,” says Colin Jones, head of London audit, UHY Hacker Young, London, UK.
In Hove, the Sussex Innovation Centre, part of the University of Sussex in the UK, aims to guide new businesses through their difficult first few years, and has an enviable record. Around 85% of members are profitable at three years from start-up, compared to a national UK average of just 15%.
“One of the most valuable things our members get from us are the introductions and connections to a network of people who can help their business as it develops,” says Mike Herd, executive director of Sussex Innovation.
They include the local entrepreneurial community, an in-house support team, and a wider network of corporates and public bodies, investors, professional service providers, academics and specialists. “Because we’ve built up great relationships with these people, they know we’re not wasting their time and that we will always make relevant introductions that give them an opportunity to add real value to a business,” says Mike.
Incubators are now a significant ingredient in many healthy entrepreneurial environments, but they should not be seen as a magic bullet, experts warn. Despite the success of Sussex Innovation and others, Professor Singer says that no component of an entrepreneurial ecosystem exists in isolation, and that the connections between components are more important than any individual element.
“All forms of supporting organisations can contribute to building a successful start-up ecosystem,” she says. “But both the media and policy makers should understand that a successful start-up ecosystem depends on the quality of relationships among its components.”
Ever more important
Facilitating these relationships is what a successful start-up ecosystem does. It brings relevant people together and lets them communicate in a way that best suits local circumstances.
Once established, a good start-up hub should be self-sustaining. From Silicon Valley to São Paulo, the chief draw for any new generation of entrepreneurs is the living, breathing, thriving example of the entrepreneurs who came before.
That example, and the new entrepreneurial activity it sparks, will only become more important. Despite UHY’s upbeat assessment of its start-up sector, China’s wider economy continues to lose momentum. In February 2016 its once unstoppable manufacturing sector shrank for the seventh consecutive month, dragging the global economy – and major industries like oil and metals – down with it. With that in mind, the central position of SMEs in the global economy, and the vibrant and vital entrepreneurial ecosystems which nurture them, will become ever more important.
For more on UHY’s study of new business formations, visit www.uhy.com/category/news
Notes for Editors
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