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10 key insights into the world’s start-ups

Friday, 29 April 2011 | By Oliver Milman

If you fancy a piece of post-Easter light reading, you could do worse than to tackle the monster 380-page World Economic Forum report into global entrepreneurship that was recently released.

 

As we reported this week, the WEF report states that there are eight key growth strategies for early-stage companies. Given that the report involved the study of 380,000 companies in 10 countries, it provides an impressive insight into how start-ups operate around the world.

 

There’s plenty to chew over in the report, but we’ve picked over the carcass to pick out 10 of the tastiest morsels.

 

1. Elite start-ups are well ahead of the pack

 

Overall, the top 1% of start-ups in the world create 44% of the jobs. As the report puts it: “The steeper the mountain ascent, the more narrow the base of companies that contribute most to creation.” In other words, an elite level of start-ups are employing a disproportionally large amount of people.

 

The top companies also create the majority of the revenue growth, but only in the fourth and fifth years of their existence. In the UK, for example, the top 1% create 63% of all revenue growth.

 

2. Business ideas can come from unusual places

 

The WEF report outlines 10 key factors that almost always inspire the launch of most new businesses. These include a deficit or problem in the market, a new market niche, an idea rejected by an existing employer and the desire to spend more time with family and friends.

 

But there are also more unusual reasons, like the ‘accidental opportunity’, such as Pierre Omidyar’s experiment of setting up Auction Web, which turned into eBay.

 

Or odd brainstorming sessions, such as the founders of UK smoothie giant Innocent, who gave themselves a deadline to come up with a business idea and weighed up a marketing consultancy and, rather dangerously, an electronically-controlled bath, before settling on their winning idea.

 

3. Growth is patchy for most businesses

 

According to the WEF report, the most successful companies have a nice, steady level of growth well into their lifespans. Baidu and eBay, for example, continued to grow consistently between the fifth and tenth years following their creation.

 

Most businesses – 69% to be exact – experience what the report calls ‘snakes and ladders’ growth. Between years two and five, four in 10 companies have two years of growth and one year of regression. The report states: “This finding highlights that down years are to be expected and that managing through these years so that a subsequent downward spiral does not occur is a key aspect of early-stage company management.”

4. Year three is a danger zone

 

Conventional wisdom has it that starting up a business is an incredibly arduous process, with the following two years, when the company has to establish itself and survive, even tougher.

 

However, the WEF report concludes that it’s from the third year onwards that entrepreneurs should be most concerned about things going wrong, even if they’ve had a strong start.

 

The report says: “There is a low probability that companies with high growth rates in their early years will sustain those high growth rates over even a subsequent two to three year period.”

 

“Being labelled a high-growth company in a published ranking is really being labelled as a ‘likely very short-run, high-growth company.’”

 

5. External influences matter

 

The WEF report outlines six determinants to growth among early-stage companies. Only one – ‘individual company factors and activities’ – is solely concerned with how a business actually runs itself.

 

Other factors are largely beyond individual entrepreneurs’ control, such as the ‘golden opportunity’ period before established market players provide competition, or major economic downturns, as seen in the wake of the September 11 attacks and more recently in 2008.

 

Some external factors can be influenced and beneficial, however. As the report states: “Different market spaces or industries can have dramatically different growth rates.”

 

“An early-stage company in a rapidly growing market space can sustain continued high growth rates over time, even if new competitors arrive and take market share.”

 

“Some online gaming and social networking companies that had initial high growth rates were able to avoid dramatic slowdowns in their growth rates due to the overall gaming and social networking market sizes dramatically increasing.”

6. Management systems are key

 

WEF analysed 110 companies in different markets and found that those that implemented management processes outperformed those that didn’t.

 

Management processes are defined by WEF as something that “has a documented process and periodically and purposely executes on that process.”

 

Of the companies that implemented such processes early on, staff numbers quadrupled and revenues rose by nearly 500% in the first five years.

 

7. The US is the unrivalled VC king

 

Its economy may have tanked since 2008, but the venture capital market is alive and well in the US. While VCs in Europe retreated, investment into start-ups remained healthy in the US between 2008 and 2010.

 

In fact, it has grown; $US130 billion in private investment was made in 2007, rising to $US154 billion last year. Most of the money was ploughed into the IT and healthcare sectors, so if you’re starting an innovative business in this area, it could be worth jumping on a US-bound plane at some point.

 

8. Australian punches above its weight in tech

 

It’s official – Australian tech start-ups punch above their weight. Drawing upon Deloitte’s Technology Fast 50 Rankings, the WEF report shows that between 2002 and 2009, Australia has 207 companies represented in the top 50 at least once.

 

This figure is higher than that of Germany, Japan, China, India and marginally lower than France. Given that Australia has a population a tiny fraction of many of these countries, our performance in the tech space is something to be proud of.

 

9. There are common obstacles to growth

 

Common factors negatively impact businesses, according to the WEF research. Asked to name the key growth challenges to their businesses, 25% of bosses cite HR and people. A further 13% mention market opportunity and competitors, with 10% identifying company financing.

 

Operations, management, product issues, government regulation and marketing also made the top 10. If you manage to get on top of all of these issues, your business will be one of the few in the world without any barriers to growth.

 

10. Even successful entrepreneurs freak out

 

It may be comforting for budding entrepreneurs to read some of the comments made by top CEOs in the report. Moments of dark despair are common in the early stages of every business, even those that go on to become international success stories. Here are a select few quotes:

 

Natalya Kaspersky, co-founder and chairwomen of Kaspersky: “The early years were the real ‘dark years.’”

 

“We needed everything from an office to international business expertise. In addition to this, in 1998, Russia went through a major economic crisis.”

“Most of our customers focused on covering their basic needs rather than spending on other goods.”

“There was nearly no demand for our product and nearly no chance for a small IT company to survive.”

 

Sir Martin Sorrell, founder and CEO of WPP: “The period from 1990 to 1992 presented the biggest challenge. People would say we nearly went bankrupt.”

Mark Jung, co-founder, CEO and president of IGN Entertainment: “Laying off the majority of your employees, especially those that you have personally recruited, is not a task that I would wish on anyone.”

 

“I will never forget the words of an employee who said to me when I gave him layoff notification: ‘I’ve stuck with you through thick and thin, have always been a believer and in return, you shred me, and toss me into the street. Is this how you repay loyalty’?” Ouch.

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