Each year INSEAD produces the Global Innovation Index, in which countries are ranked based upon the support they provide to innovators. Some of the criteria used in the production of the index revolve around things such as the ease of creating a business or raising capital.
It’s perhaps fitting, therefore, that despite these things not being the sexiest aspect of innovation, that a new paper from Wharton highlights their importance in startup creation and growth. Indeed, the paper suggests that if countries are able to implement reforms to make entrepreneurship easier, it can increase activity by up to 17 times.
The researchers suggest that much of the literature around entrepreneurship suffers from “survivorship bias”, as the companies that make it are relatively small and are outliers in terms of the overall startup sample. Failure is far and away the most expected outcome, and the researchers wanted to look into these earlier, unpredictable stages of a startup’s life.
“The aim of this study was to understand how institutional changes in entrepreneurs’ external environments influenced early-stage start-up selection, and thereby the pipeline of companies that become candidates for further growth and scaling in a region over time,” the researchers say. “The findings showed that reforms that reduced the barriers to entry, growth, and exit for new firms lowered start-ups’ average probability of being selected into venture accelerators.”
On the fast track
The researchers chose acceptance onto a venture accelerator as the proxy through which they would view the topic, as they believe that acceptance onto such a program often plays a significant role in the outcome for any startup, especially in terms of the funding and resources they secure to grow and develop.
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Regulatory support is important, especially in terms of ease of starting, growing, and exiting new firms. For instance, many countries have minimum paid-in capital requirements, while regulations and processes for establishing (and ending) companies vary considerably.
Accelerators play a crucial role in selecting startups of particular promise, and scaling without accelerator membership is often considerably harder. The success rate of applicants to the most prestigious accelerators is extremely low, with over 90% of applicants turned away.
The researchers gathered data on nearly 14,000 applicants to accelerators across 170 countries. This data was compared with the regulatory environment, and any reforms to it, in each country to understand whether these reforms may have influenced the nature of the startups that were selected.
The data revealed that institutional reforms resulted in not only a larger pool of applicants, but also a higher quality cohort. For instance, reform was linked to growth in applicants of around 17 times.
These reforms then created a more fertile environment for growing the firms that had been created, which resulted in a higher quality of the startups that were ultimately selected by the accelerators. Perhaps unsurprisingly, there was also growth in the perceived value entrepreneurs saw in partnering with an accelerator, whether in terms of new knowledge gained, access to networks, or the securing of vital capital.
Rough with the smooth
Of course, this rise in the quality of applicants also resulted in much greater competition for those coveted spots in the best accelerators. This resulted in a great many entrepreneurs being rejected by the accelerators, with the probability of acceptance falling by up to 10% in countries where reforms had been implemented.
The higher quality of startups was clearly visible in terms of the number of employees, the revenue they were generating, the patents they had secured, and the equity they planned to raise.
The data revealed quite evident disparities between countries, as indeed is reflected in the Global Innovation Index. There are often discrepancies depending on the stage of the startup’s journey, however. For instance, various developed countries are relatively relaxed in terms of establishing a new business, but it’s nowhere near as easy to recover the value of initial investments if things go badly.
The researchers reveal that there has been a degree of reform of bankruptcy processes, and this nearly always resulted in an upsurge in new applicants to the accelerators. Such reforms are seldom at the sexier end of things when it comes to supporting innovation, but the data clearly shows how effective they can be in encouraging entrepreneurship to flourish.
“The direct implication of these findings is that governments can support high growth entrepreneurship by reducing these barriers,” the researchers conclude. “Creating more favorable policies and regulations can help channel accelerators’ resources toward more promising early-stage start-ups. Thus, institutional reforms can stimulate higher economic and societal value creation through new venture acceleration, generating more significant employment, higher wages, and greater innovation through early-stage companies”