The Entrepreneurship Ecosystems

Aims of the chapter

The aims of this chapter are as to:

 Explain the core elements of entrepreneurship

ecosystems
 Show what policies governments can put in place to
foster entrepreneurship
 Distinguish the major types of venture funding
 Demonstrate the value of an entrepreneurship culture

Learning outcomes

By the end of this chapter, and having completed the essential reading
and activities you should be able to:

 Explain why entrepreneurship ecosystems are vital to the

global economy
 Give examples of various government policies put in
place to foster entrepreneurship
 Differentiate between accelerators and incubators
 Identify companies in the secondary and tertiary support
sectors

Introduction

Entrepreneurship ecosystems are a global economic force. They

create jobs, drive innovation, prosperity, and generate tax income for
governments. Therefore, supranational and national governments put
policies in place to foster entrepreneurship.

In this chapter we look into the core elements of entrepreneurship

ecosystems. We analyse the economic and political conditions
required for entrepreneurs to set up businesses and what deters
entrepreneurship. We also consider some of the different policies
governments have successfully implemented in various countries to
foster entrepreneurship. We touch on entrepreneurial culture and take
a look at why venture capital and public sector financing are important
factors. In this chapter we use the term new business, venture, and
start-up interchangeably. They all refer to a newly started business.

The entrepreneurship ecosystem

1. What is an entrepreneurship ecosystem?
An entrepreneurship ecosystem is an economic, social, and cultural
environment comprising multiple stakeholders involved in or
benefitting from concentrated activities related to entrepreneurship.
These stakeholders are individuals, organisations and institutions
across the private and the public sector such as entrepreneurs,
investors, government, military, aid agencies, universities, research
centres, professional services firms, local communities, and many
more. The activities carried out by the stakeholders are largely geared
towards facilitating entrepreneurship in a wider sense. Although these
activities are not following a concerted approach they are interrelated.
Entrepreneurs and investors represent the nucleus of an
entrepreneurship ecosystem around which everything revolves.

2. Stability
Although this is the most obvious one, many people overlook stability
as an important factor for entrepreneurship. A country or a region
needs to provide a certain level of political and economic stability in
order for businesses to grow. For a company the most common
method to evaluate, organize, and track macro-economic factors of an
ecosystem that may impact the business is conducting a PEST
analysis developed by GroupMap Technology Pty (2019). You can
see an example of the GroupMap PEST analysis framework here:

https://www.groupmap.com/map-templates/pest-analysis/

The outcome of the analysis provides more factual data on which

basis strategic planning processes can be designed and informed
decisions can be taken. In short, this tool allows for assessing the
potential risk associated with launching a new venture or a new
branch of an existing business in a new location.

As an example, the referendum in the United Kingdom held on 23

June 2016 where 51.6% of the British voters voted in favour for the
UK to withdraw its membership from the European Union caused a
higher level of uncertainty amongst UK business executives. A
Harvard Business Review article by Nicholas Bloom et al (2019)
titled Brexit Is Already Affecting UK Businesses — Here’s How the
authors present the results of around 7,500 surveyed business
executives across the UK . The executives were surveyed on the
question how they think Brexit would impact their business. The
survey found that Brexit is thought to have a negative impact on sales,
exports, and costs. The study further reveals that businesses
expected Brexit to reduce their sales by around 3% on average. In line
with that the effects on exports were expected to be negative as well,
whilst labour costs, unit costs, and financing costs were expected to
rise. The study confirms that political and economic stability is a major
concern for businesses. The study represents the general sentiment
of business executives across the United Kingdom towards the levels
of political and economic stability in the UK as a result of the
referendum.

3. Activity 3.1

Read the article Bloom, N. et al. Brexit Is Already Affecting UK

Businesses — Here’s How. (Harvard: Harvard Business Review, 2019
and:

1. Search for local venture capital firms in your home area and list
the top 5
2. What public grants and funds are available for entrepreneurship
on national level and on municipality level in your country?
 3. Students are asked to listed the top 5 venture capital firms in
their area/city. For example: “Nigeria: Ventures platforms,
EchoVC, Spark, Microtraction, IFC Capital”.

4. Students are asked to provide an overview about public funds

available in their location on municipality level and municipality
level. Example: “Malaysia: Temanita Financing Scheme, Tekun
Nasional, National Entrepreneurship Institute (INSKEN), Global
Accelerator Programme, MAGIC, Cradle Investment
Programme, Cradle Fund Sdn Bhd”

5. Entrepreneurs

Entrepreneurs are at the very core of any entrepreneurship

ecosystem. They create value, provide jobs, pay taxes, and take risks.
Entrepreneurs innovate and disrupt. They are the reason why
entrepreneurship ecosystems exist.

Funding and market access in The Entrepreneurship Ecosystem

1. Venture capital
Access to capital is a main concern for entrepreneurs. Starting and
scaling a business requires capital. Especially in the technology space
where competition is fierce one needs to capture market share as fast
as possible. In many cases, during the first years of its existence a
tech businesses is more concerned about expansion and market
domination rather than profitability. Therefore, it is paramount that the
market provides liquidity through a healthy venture capital sector.
When it comes to raising capital for a new or an existing venture, there
are usually multiple sources available depending on the stage of the
venture. However, we will look into this in more detail in a different
Chapter. At this point, we look into venture capital as a global industry
and as a vital element of an entrepreneurship ecosystem. Many global
venture capital firms provide a wide range of support to entrepreneurs.
Access to capital, knowledge, expertise, industries, and other
geographies are only some of the additional benefits that come with
venture capital. Venture capital is equity-based financing. That means
the entrepreneur receives financing from a venture capital firm through
the sales of shares of his company. This makes the venture capital
firm legally a co-owner of the firm. In addition to the shares
representatives of venture capital firms also receive a seat on the
board and in some cases also get involved in the business’
operations. Naturally, venture capital firms have a vested interest in
the companies’ health as they ‘bought’ a part of it, thus, they want to
create a return on their investment.

A founder starts a business in the German startup hotspot Berlin and

is able to capture the entire DACH region (Deutschland, Austria,
Switzerland) covering about 100 Million German speaking people.
Now he is looking to scale his business into the US market with a
population of about 327 Million. As scaling requires capital, he decides
to raise venture capital in Berlin through a German branch of a US-
based venture capital firm. The firm provides him with capital,
expertise, access to senior-level executives, access to their partner
network, and, most importantly, an entry point into the US market.

In areas with no venture capital available entrepreneurs have to rely

either on revenues or on public funding sources if available. Relying
on revenues inhibits fast scaling and leaves them with the only option
of growing organically. In Europe, some Central Eastern European
(CEE) and Balkan-based entrepreneurs move their businesses to
European venture capital hotspots such as London and Berlin
because there is a lack of local venture capital.

According to KPMG International (2019) the global venture capital

industry has evolved over the past decade since the recession in
2008. In 2018 global venture capital reached its peak with $254 billion
raised globally. A significant increase from 2017 where $174 billion
was raised. The USA is leading the global industry and Asia comes in
second. Despite the uncertainty around Brexit, Europe is still going
strong with London being the European hotspot for venture capital.
Globally, transportation, autonomous driving, ride hailing, and
alternative energy vehicles were the market’s hottest investment
sectors during 2018 (KPMG International 2019). In 2019, the global
venture capital industry has been rising for the sixth straight year.

You can read the article here, paying particular attention to page 10.
2. Public sector financing
In contrast to venture capital, public sector funding is not equity-based
financing which means the organisation that provides the funding does
not receive any shares in return and does not become a co-owner of
the venture. The key objective is fostering the entrepreneurship
ecosystem which is called private sector development. Grants are
typically made available for early-stage startups, innovative projects,
university-based research projects, community-focussed projects,
development aid, procuring, or for calls for tenders. The capital is
usually being ‘granted’ on the basis of competitive bidding or by direct
application. Public funds are not presents but bound to certain legal
terms and conditions so that the proceeds create a measurable
impact. Due to the public sector’s objectives they usually take a more
holistic and long-term view.

In Europe, there are a multitude of funding options available ranging

from EU-level to national level down to municipality level. For the sake
of this course we look only into a few examples on EU-level.

Name Description
The EU programme for the Competitiveness of Small and

Medium-Sized Enterprises (SMEs).

COSME
It runs from 2014 to 2020 with a planned budget of €2.3 Billion

(COSME 2019).
 The SME Instrument is part of the European Innovation Council (EIC) pilo
top class innovators, entrepreneurs and small companies with funding op
EIC SME
acceleration services. The main focus of the SME Instrument is on m
Instrument
innovations that shape new markets and generate jobs, growth and high
living. Entrepreneurs can apply for about €2.5 Million (EIC SME Instrument
EASME -
Blockchain and A consortium can receive grants of up to €1.5 Million to increase the uptak
distributed ledger technologies by SMEs. In addition, as part of a consortium, you c
ledger from collaborating with international partners and from international aud
technologies for project (EASME INNOSUP 2019).
SMEs
Western
Balkans WB EDIF was launched in December 2012 by the European Commissio
Enterprise European Bank for Reconstruction and Development (EBRD), and
Development & Investment Bank (EIB), acting as co-lead international financial instituti
Million of initial capital pulled together under WB EDIF translates to about
Innovation finance benefitting SMEs based in the Western Balkan countries. (Europe
Facility (WB Fund 2019).
EDIF)
(Figure 4: Public funding options on EU-level. Source: European
Commission, European Investment Fund)

4. Market access
Market access is the ability for businesses to sell services and goods
across borders. All international trade is reliant on cross-border trade.
In most cases, cross-border trade is accompanied by customs, tariffs,
restrictions or quotas. Market access is often times a result of trade
policies and foreign policies. Sanctions and embargoes imposed on
certain goods or on countries altogether such as Iran, Cuba, or North
Korea are products of international trade policies. Market access can
also be restricted due to cultural or language barriers. Pork-based
food products don’t sell well in countries with a majority Muslim
population. Heaters and radiators would see little demand in countries
along the equator. Alongside the movement of physical goods, online
services can also be restricted. In China, the so-called Great Firewall
of China (GFW) blocks access to foreign information and services
such as Facebook and Google. Iran also blocks US-based services
such as Facebook and some Western news outlets. These measures
are based on legislative actions to regulate access to information
which in turn restricts access to customers. The 2018 National Trade
Estimate Report on Foreign Trade Barriers by the Office of the United
States Trade Representative (Lightizer 2019) lists 63 countries and
markets with trade barriers of any kind for US-based companies. Free
trade means cross-border trade without these restrictions. Although
many governments act still very territorial and view the flow of goods
across their borders as a source of revenue they increasingly realise
there is also an economic trade-off. Businesses and economies need
free access to markets. And not only businesses but also people and
money. Everyday millions of people cross borders to go to work. For
example, the Johor Causeway, the land crossing between Malaysia
and Singapore, is one of the busiest borders in the world. According to
Channel News Asia about 250,000 commuters cross the border each
day (Leng 2017). With an average waiting time of 1.5 hours each way,
that’s 750,000 hours of human life spent in queues every single day
(Leng 2017). Popular examples of governments opening up market
access are the African Union and the European Union.

Funding and market access in The Entrepreneurship Ecosystem

4. Market access
4.1. African Union | Continental Free Trade Area (CFTA)
One of the cornerstones of the African Union are the creation of the
Continental Free Trade Area (CFTA) with the following objectives
(taken from https://au.int/en/ti/cfta/about ):

 Create a single continental market for goods and services, with

free movement of business persons and investments, thus, pave
the way for accelerating the establishment of the Continental
Customs Union and the African customs union.
 Expand intra-African trade through better harmonisation and
coordination of trade liberalisation and facilitation regimes and
instruments across RECs and across Africa in general.
  Resolve the challenges of multiple and overlapping
memberships and expedite the regional and continental
integration processes.
 Enhance competitiveness at industry and enterprise level
through exploiting opportunities for scale production, continental
market access and better reallocation of resources (African
Union 2019).

Following H.E. Albert Muchanga (2019), Commissioner for Trade and

Industry of the African Union Commission, the decision to establish
the CFTA was adopted in January 2012. As of April 2019, 22
countries had ratified the agreement after Gambia became the 22nd
country to ratify it. With a minimum of 22 ratifications required for the
agreement to enter into force the process is well underway. Africa is a
continent on the rise and will become the next continental economic
powerhouse.

Funding and market access in The Entrepreneurship Ecosystem

4. Market access
4.2. European Union | European Single Market
The Single Market of the European Union (EU) refers to the combined
territory of all 28 EU member states (with Great Britain expected to
leave in 2019) without any internal borders or other regulatory
obstacles the EU allows the free movement of people, goods, and
services between its member states. The Single Market is based on
the four freedoms of the EU to guarantee the free movement of goods,
capital, services, and labour (Internal Market, Industry,
Entrepreneurship and SMEs. (a) 2019). Any EU citizen can travel to,
move to, work in, live in, buy from, or sell to any EU member state with
no restrictions. The European Single Market is one of the EU’s
greatest achievements. It has fuelled economic growth, maintained
peace for over 70 years (on continent level) and made the everyday
life of European businesses and consumers easier. With the Euro
being the official currency of the EU and used by 19 of the 28 member
states it is used by 343 million EU citizens as of 2019.
Funding and market access in The Entrepreneurship Ecosystem
5. Activity 3.3
Read: CFTA - Continental Free Trade Area. (Addis Ababa, African
Union Headquarters, 2019, https://au.int/en/ti/cfta/about

Answer the following questions:

 Why is free trade important?

 With what countries does your home country have free trade
agreements?

Human capital

1. Human capital and entrepreneurship education

Human capital is a further important factor when it comes to
entrepreneurship ecosystems. Companies are founded by people and
run by people. And people need to be trained in entrepreneurship.
Although there is an ongoing debate whether entrepreneurship can be
taught or not, people can certainly be trained in entrepreneurship.
Following the economic downturn in 2008, many business schools
and universities adopted entrepreneurship education as part of their
curriculum. Also, many supranational organisations such as the
European Commission made entrepreneurship education part of their
policy in the form of The Entrepreneurship 2020 Action Plan (Internal
Market, Industry, Entrepreneurship and SMEs.)

(b) 2019). According to the European Commission, up to 20% of

young people who received entrepreneurship education through a
“mini-company programme” in secondary school are going to start
their own business. This is five times more than people who did not
receive any entrepreneurship education.

Prof Paschal Anosike from the University of Wolverhampton, UK,

conducted a study in Nigeria that looked into the question whether the
provision of entrepreneurship education at secondary education level
could help to facilitate human capital development and assist efforts to
curb youth unemployment (2018). The findings confirm the
assumption that entrepreneurship education increases the ability to
identify and exploit opportunities, particularly for young people. This
also resulted in reducing their vulnerability to poverty and involvement
in armed conflicts.

Globally, there is a myriad of educational programmes available. In

addition to public sector education many private sector organisations
such as accelerators, private training providers, consultancies, and
private entrepreneurship schools also provide training. These
providers fulfil a very important role in educating people about the
opportunities of entrepreneurship and are therefore elementary to an
ecosystem.

2. Accommodative policy and regulations

Entrepreneurship is reliant on accommodative policies and
entrepreneurship friendly regulations. These can range from passive
support such as certain policies, visa regulations, tax breaks for
entrepreneurs and investors, as well as regulatory frameworks as
discussed in Chapter 2. As Steven Koltai highlights (2016), public
policy must be conducive to entrepreneurship and startups need to be
enabled rather than hindered by the regulatory environment.

In order to measure how easy it is to conduct business in a country

the Ease of doing Business Index has been created by Simeon
Djankov at the World Bank Group. The former Deputy Prime Minister
and Minister of Finance of Bulgaria who is now the policy director of
the Financial Markets Group at the London School of Economics
developed the framework in collaboration with professors Oliver Hart
and Andrei Shleifer both from Harvard University. The 2019 World
Bank Group flagship publication is the 16th in a series of annual
reports. It measures the regulations that enhance business activity
and those that constrain it (The World Bank Group 2019). Doing
Business measures regulations affecting 11 areas of the life of a
business of which 10 are included in the 2019 edition:

 Starting a business
  Dealing with construction permits
 Getting electricity
 Registering property
 Getting credit
 Protecting minority investors
 Paying taxes
 Trading across borders
 Enforcing contracts
 Resolving insolvency

The Doing Business 2019 report captured 314 regulatory reforms

between June 2, 2017 and May 1, 2018. Globally, 128 economies
introduced substantial regulatory improvements making it easier to do
business in all areas listed above. According to the Global Startup
Ecosystem Report 2019 (Startup Genome) countries with higher
startup policy adoption rates tend to have higher performing startup
ecosystems.

2.1. United Kingdom | Seed Enterprise Investment Scheme (SEIS)

Following the economic downturn in 2008 and as part of its policy to

foster entrepreneurship and to encourage investors to finance
qualifying startups the UK Government launched the Seed Enterprise
Investment Scheme (SEIS) back in 2012 (HM Revenue & Customs
2019). SEIS provides UK-based investors with significant tax breaks
on returns generated from investing into startups. This resulted in an
increased amount of startup investment by private investors. A report
issued by Her Majesty's Revenue and Customs (HM Revenue &
Customs 2018) highlights that since SEIS was launched 8,440
individual companies have received investment through the scheme
and £799 Million in investment has been raised (up to the tax year
2017).
3. Accommodative policy and regulations
3.2. Estonia | E-Residency Scheme
Over the last 20 years, Estonia moved most of its public services
online. One of the main objectives of the action was to allow people to
access public services from anywhere in the world. Services such as
voting, filing tax returns, authentication, registering a car, and dozens
of other services are now available online. By using a unique digital
identifier people can further access a growing number of private sector
services such as banking, accounting and similar. This is not only cost
efficient but also time efficient.

In addition to that, Estonia launched an E-Residency scheme in 2014.

The scheme allows people from anywhere in the world to obtain a
digital form of citizenship as a prerequisite for setting up a business
entirely online under Estonian law. After picking up the E-
Residency card from any Estonian Embassy in the world, there is no
need to travel to Estonia for setting up the business or for opening up
a business bank account. Everything can be managed online. Further,
documents can be signed digitally online, tax returns can be made
online, etc. The company is a fully legitimate entity based in the
Eurozone with the Euro being the principal currency.

The E-Residency scheme proved to be a massive success. Since its

conception the scheme has added approximately 48,000 e-residents
who created around 6,000 companies. This proved to be profitable for
the Estonian government as the government spent €7.4 Million on
costs for setting up the scheme whilst generating a tax revenue of
€17.8 Million (E-Residency 2018).
4. Accelerators and incubators
There are a lot of businesses supporting the inception and growth of
other businesses. The most popular forms are accelerators and
incubators. Following a study by Jonathan Bone et al from Nesta
(2017) the UK has 205 incubators and 163 accelerators. More than
half of the accelerators are based in London whilst the incubators are
spread evenly throughout the UK. Both organisations provide
business support and office space. One of the key differences is that
accelerators are mainly privately owned and for-profit organisations
whereas incubators are publicly held or associated with a public sector
organisation such as a university. Although the models vary, Bone
suggests the following definition of an incubator:

 Open-ended duration (exit based on the stage of the company)

 Typically rent/fee-based
 Focus on physical space over services
 Admissions on ad-hoc basis (not cohort-based)
 Provision of services including mentorship, entrepreneurial
training
 Provision of technical facilities such as laboratories
 Selective admission (but less than accelerators)

Accelerators are a more recent phenomenon. They initially have been

founded and funded by venture capital firms as almost all accelerators
provide venture capital in the form of seed funding in return for shares
of a company. In contrast with incubators, accelerators are highly
selective and provide numerous business acceleration services to
early stage businesses during a cohort-based programme. These last
three to nine months on average. Services include support for early
stage ventures or startups, developing the business model, legal and
accounting, sales, market validation, and introduction to other
investors, and fundraising support. In his article How to build a Seed
Accelerator startup consultant Matt Kuppers (2016) argues that
accelerators are nothing more than investment vehicles.

Most accelerator programmes culminate in a final pitch day where the

startups present their businesses to an audience comprising investors
and potential partners. The goal for the startups is to secure follow-up
investment from third party investors. After a couple of years, the
accelerator sells the shares they collected initially from the startups
and turn a profit. Bone (2017) characterizes an accelerator as follows :

 Fixed duration programmes (time frame varies)

 Typically growth-based
 Often provide seed funding
 Focus on services over physical space
 Admission in cohorts (usually about 10 startups at one time)
  Provision of startup services
 Highly selective

The most famous accelerator programme is Y Combinator in the US

started in 2005 by Paul Graham and his colleagues. The startup
acceleration programme is a pioneer and led the way for the startup
accelerator industry. Since inception Y Combinator helped over 2,000
startups. According to their Top Companies List - 2018 the top 100
companies have a cumulative valuation of over $100 Billion and
created over 28,000 jobs. 93 of these companies are valued at $100
Million (2019). Further prominent accelerators are Techstars, 500
Startups, AngelPad, Seedcamp, Founders Factory, and
Startupbootcamp. A portfolio overview presented on the website of
Startupbootcamp (2019) unveils the survival rates of their startups
across all global programmes. In total, there are 727 startups in their
portfolio of which 70% are listed as still being active. In total, they
created 2,960 jobs and received a total of €501 Million in venture
capital. There is no doubt accelerators add tremendous value to
entrepreneurship ecosystems.

Secondary ecosystem

1. Introduction
Alongside the many aforementioned organisations and measures
there is an entire secondary ecosystem of organisations that benefit
from an entrepreneurship ecosystem. These organisations are
consultancies, accounting firms, law firms, app developers,
programmers, graphic designers, co-working and event space
providers, and many more. “There is an entire shadow economy
supplementing the global entrepreneurship ecosystem. Without these
firms the ecosystem would not exist.” opines Letitia Seglah, COO of
the London-based startup consulting firm Startup Manufactory Ltd
(2019). The company provides consulting to early-stage startups and
SMEs in London and has been nicknamed McKinsey for Startups by
the University of Oxford (Enterprising Oxford 2017). Another example
is the co-working space provider WeWork who built their entire
business model on early-stage entrepreneurs, freelancers, and the
self-employed. A WeWork membership makes people part of a global
and loosely connected peer group of entrepreneurs and freelancers.
The company provides access to over 290 stylish decorated co-
working spaces globally. In addition to that they created a new form of
an independent work culture as a lifestyle. Co-working and freelancing
has become the new norm for many as discussed by Gideon Lewis-
Kraus in his New York Times article The Rise of The WeWorking
Class (2019).