international perspectives on high growth entrepreneurship
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International Perspectives
on High Growth
Entrepreneurship
September 13, 2012
Nordic Growth Entrepreneurship
Helsinki, Finland
Karen Wilson
Structural Policy Division
Science, Technology & Industry Directorate, OECD
Agenda
• Overview of current OECD work on HGFs
• Importance of High Growth Entrepreneurship
• Framework conditions and selected data
• Financing HGFs
• The Role of Policy?
2
Overview of selected OECD work
• High growth firms and entrepreneurship
– What Drives the Dynamics of Business Growth (Criscuolo and Menon, 2012)
– Role of High-Growth Firms in Catalysing Entrepreneurship and Innovation (Criscuolo and Wilson, 2012)
– Financing High Growth Firms: The Role of Angel Investors (Wilson, 2011)
– Entrepreneurship Indicators Programme (EIP): Entrepreneurship at a Glance, 2012
• Other work related to “New Sources of Growth” agenda – Knowledge-based capital/intangible assets
– Intellectual property rights/patents
– Big data analytics
– OECD Science, Technology and Industry Scoreboard (2011, 2013)
3
High Growth Firms are a small share of the firm
population but contribute a greater proportion of
employment growth
Source: OECD, What Drives the Dynamics of Business Growth (Criscuolo and Menon, 2012)
Dynamism of Young Businesses
No matter their size, young firms are more dynamic than older firms
Source: OECD, What Drives the Dynamics of Business Growth (Criscuolo and Menon, 2012)
Young firms contribute more
proportionally to job creation
Source: OECD, What Drives the Dynamics of Business Growth (Criscuolo and Menon, 2012)
Patenting activity of young firms 2007-2009
Source: OECD STI Scoreboard 2011 based on the Worldwide Patent Statistical Database, EPO, April 2011; and ORBIS©
Database, Bureau van Dijk Electronic Publishing, December 2010; matched using algorithms in the Imalinker system
developed for the OECD by IDENER, Seville, 2011.
0
10
20
30
40
50
%Share of patenting firms under 5 years old Share of patents filed by firms under 5 years old
Economies Differ in their Dynamism
05
1015
20
Sh
are
of
firm
s
1 2 3 4 5 6 7 8 9 10 11Growth interval
(a) European countries average
05
1015
20
Sh
are
of
firm
s
1 2 3 4 5 6 7 8 9 10 11Growth interval
(b) United States
-40
-20
020
40
Rel
ativ
e d
iffe
ren
ce in
%
1 2 3 4 5 6 7 8 9 10 11
Growth interval
(c) Europe-US Gap
Growth distribution in Europe and the US
European Countries vs US gap along the growth distribution
More in European Countries
More in the US
-100 -20 -15 -10 -5 -1 +1 +5 +10 +20 ∞
Fast Shrinking Firms Static firms Fast Growing Firms
Source: Bravo-Biosca, 2010
Policies can be key drivers behind these differences
Framework Conditions
(NGER categories)
• The Nordic countries rank relatively well in most areas, particularly the first two
– Regulatory framework
– Market conditions
– Creation and diffusion of knowledge
– Entrepreneurial culture
– Entrepreneurial capabilities
– Access to finance
9
Regulatory & Administrative Barriers to
Entrepreneurship (2008)
10
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Index Regulatory and administrative opacity Administrative burdens on startups Barriers to competition
Source: OECD, Product Market Regulation Database, May 2011.
(Scale from 0 to 6 from least to most restrictive)
Source: OECD, STI Outlook 2010 based on OECD Main Science and Technology Indicators (MSTI) database, December 2009.
Australia
Austria
Belgium
Canada
Chile
Czech Republic
Denmark
Finland
FranceGermany
Greece
Hungary
Iceland
Ireland
Italy
Japan
Korea
Luxembourg
Mexico
Netherlands
New Zealand
Norway
Poland
Portugal
Slovak Republic
Spain
Sweden
Switzerland
Turkey
United Kingdom
United States
China
Russian Federation
Slovenia
South Africa
10
20
30
40
50
60
70
80
90
100
10 20 30 40 50 60 70 80 90 100
% s
har
e o
f h
igh
er e
du
cati
on
in p
ub
licly
pe
rfo
rme
d R
&D
(200
8)
% share of firms in total R&D spending (2008)
In bold are countries that have been already subject of an OECD Review of Innovation Policy
Public research-centeredinnovation system
Firm-centeredinnovation system
University-centered
public research
Public lab-centered
public research
A university-based, firm-centered innovation system…
Business investment in intangible and tangible capital, 2009 (% GDP)
12
0%
5%
10%
15%
20%
25%
Tangible
KBC
Source: Corrado et al. (2012, forthcoming)
Change by type of business investment, 2006-2009 (percentage points of GDP)
13 Source: Corrado et al. (2012, forthcoming)
-3.0%
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
KBC
Tangible capital
Perceptions of Opportunities vs Capabilities
14
0
10
20
30
40
50
60
70
80
Perceived opportunities Perceived capabilities Fear of failure
Source: OECD Entrepreneurship at a Glance, 2012
Entrepreneurial perceptions (2011 or latest year)
Facilitating the Entrepreneurial
Ecosystem
15
- Strong links between the different types of organizations
- People, trusted networks, connectors
- Local but connected globally
The Role of Financial Development
Access to finance and financial development are key for firms that grow fast especially in sectors that are more dependent on external finance
– A developed financial market is associated with higher growth at the top of the employment distribution and an increase in the share of high growth firms in the economy.
Source: OECD, What Drives the Dynamics of Business Growth (Criscuolo and Menon, 2012)
Venture Capital: Not for all Firms
• VC is an important source of financing for high growth firms, however, it is only appropriate for a small proportion of start-ups
– High growth firms which are usually technology or science based companies with scalable, high growth business models.
• VCs invest in a portfolio of firms, knowing that a large percentage of young high growth firms fail.
– On average 65% of a VC investment portfolio generates 3.8% of the returns, while 4% of the portfolio generates more than 60% of the returns (Nanda 2010).
17
Venture Capital differs Significantly
across and within Countries
• Differences still exist between the US and European VC industries (experience, investment amounts, etc.)
• Tends to cluster in entrepreneurial ecosystems (Silicon Valley, Cambridge, London, Munich, etc.)
• Very sensitive to market cycles not only in terms of the amounts invested but also in terms of the stages of investment (Lerner 2010).
– In the current market environment, most venture capital funds are investing in the later stages rather than seed and early stages where profit expectations are less clear and investment risk is much higher.
18
Venture Capital Investments U.S., Canada and Europe in 2009
(USD million)
19 Source: OECD based on industry statistics by EVCA/PEREP Analytics and
PricewaterhouseCoopers/National Venture Capital Association MoneyTree Report data.
Exits Remain a Key Challenge
20
European Venture Capital Exits in 2010
Source: EVCA/PEREP Analytics 2011
Why Angel Investment is Important
• In the U.S. and Europe, currently the largest markets for both VC and angel investment, the estimated amount of angel investment is significantly larger than seed and early stage VC.
– Existing government programs, however, focus on VC.
• While VCs have moved to later stages of financing, angel investors have been filling the growing seed & early stage funding gap through the creation of syndicates, groups and networks.
21 Financing Gap
INFORMAL INVESTORS FORMAL INVESTORS
Founders, Friends and Family
Angel Investors
(typical investment size: 25-500K USD)
Venture Capital Funds
(typical investment size: 3-5M USD)
Seed Stage investments Early Stage Investments Later Stage Investments
Equity Investors at the Seed, Early and Later Stage of Firm Growth
OECD Angel Financing Publication
www.oecd.org/sti/angelinvestors
Chapter 1: Overview of financing for seed and early-stage companies
Chapter 2: Angel investment: Definitions, data and processes
Chapter 3: Trends and developments in the angel market around the world
Chapter 4: The role of policy in facilitating angel investment
22
Benefits of Angel Finance
• In addition to the money provided, angel investors play a key role in providing strategic and operational expertise for new ventures as well as social capital.
• Angel investors traditionally invest locally (within a few hours’ drive) and in a wider range of sectors than venture capitalists. This means there is broader investment coverage than for venture capital investment.
• Companies backed by angel investments have been important contributors to jobs and economic growth.
– In the US, estimates suggest that approximately 250 000 new jobs were created in 2009 by firms supported by angel investment, representing 5% of new jobs in the United States. (Sohl 2010).
– Young firms in the US with angel financing have an increased probability of survival and improved performance and growth of 30 to 50% on average (Kerr, Lerner and Schoar, 2010).
23
Differences between Angels and VCs Characteristics Angel Investors Venture Capitalists
Background Former entrepreneurs Finance, consulting, some from industry
Investment approach Investing own money Managing a fund and/or investing other people’s money
Investment stage Seed and early stage Range of seed, early stage and later stage but increasingly later stage
Investment instruments Common shares Preferred shares
Deal Flow Through social networks and/or angel groups/networks.
Through social networks as well as proactive outreach
Due Diligence Conducted by angel investors based on their own experience.
(more cost efficient)
Conducted by staff in VC firm sometimes with the assistance of outside firms (law firms, etc.)
(more costly)
Geographic proximity of investments
Most investments are local (within a few hours drive).
Invest nationally and increasingly internationally with local partners
Post investment role Active, hands-on Board seat, strategic
Return on Investment Important but not the main reason for angel investing
Critical. The VC fund must provide decent returns to existing investors to enable them to raise a new fund (and therefore stay in business)
Source: OECD, adapted from EBAN 2006 referencing Wong 2002 and Ibrahim 2010 24
25
Data Issues & Market Size Estimates
• Definitions – Definitions of angel investors can vary,
which complicates data analysis.
– It is generally understood that angel investment excludes investments made by family and friends.
• Lack of data – The majority of data available is that
collected by angel associations from angel groups and networks.
– It can be supplemented with additional data obtained through tax and co-investment programmes.
– However, this data only represents a fraction of the market termed the “visible” market.
– The “invisible” market, which is estimated to be much greater than the “visible” market, is extremely difficult to measure.
Visible Market
(BBAA BANs)
Rest of Visible
Market
Inv isible Market
Source: Harrison & Mason 2010
Market Estimates vs “Visible” Data
• This table is meant to demonstrate the magnitude of difference between
total estimated market size and what is currently measurable.
• Methods for estimating total market size vary tremendously and currently are
more art than science.
“Visible” angel market size
(share of total market) in 2009
in USD million
Estimated size of angel
market in 2009
in USD million
Total VC* market in 2009
in USD million
United States 469 (3%) 17 700 18 275
Europe 383 (7%) 5 557 5 309
United Kingdom 74 (12%) 624 1 087
Canada 34 (9%) 388 393
*Note: VC market size includes VC investments in all stages: i) seed, ii) start-up, iii) early, iv) expansion, and v) later stage.
Source: OECD based on estimates by the Centre for Venture Research (CVR), EBAN (The European Trade Association for Business Angels, Seed Funds,
and other Early Stage Market Players), and Canada's National Angel Capital Organisation (NACO). VC data based on industry statistics by EVCA/
PEREP_Analytics andPricewaterhouseCoopers/National Venture Capital Association MoneyTree Report and Canada's National Angel Capital Organization.
BAN and VC Seed Investments in
Europe: 2005-09 (EUR Million)
Source: OECD based on industry statistics by EVCA/PEREP Analytics for 2007-2009; EVCA/Thomson Reuters/PwC for previous years; and business networks surveyed by EBAN (The European Trade Association for Business Angels, Seed Funds, and other Early Stage Market Players)
27
0
50
100
150
200
250
300
350
2005 2006 2007 2008 2009
Business angel network VC seed
Equity Financing Cycle
Institutional Investors
(LPs: private and public)
Funds & investors (GPs:
VCs, angels)
High growth firms
(Portfolio Companies)
Entrepreneurial Ecosystem (growth
& exit/returns)
Regulatory Environment
Financial Instruments
What is the role of policy?
Range of Policy Financing
Instruments
• Grants, Loans and Guarantees – Grants (including SBIR type) – Loans – Guarantee schemes
• Fiscal/tax incentives – Young innovation company schemes (YIC) – Tax incentives on investment (“front-end”) – Tax incentives on capital gains (“back-end”)
• Equity funds (VC and angel) – Public – Fund of funds – Public/private co-investment funds
Financing Policy Caveats
• Often the issue is the demand side, not the supply side. – Yet most government action is focused on supplying finance.
• Policy should focus on leveraging (not replacing) private funding.
– Creating incentives for institutional investors, funds, firms and individuals to invest in high growth firms.
– Ensuring that investment decisions are made by experienced professional investors.
– Public money should never be more than 50%.
• Policy financing instruments are difficult to structure appropriately.
– Creating the proper incentives (and avoiding unintended consequences) and for the targeted stage of investment.
– Time lags 30
The OECD is conducting further work on financing instruments
Karen Wilson Structural Policy Division
Science, Technology & Industry Directorate, OECD
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