European Entrepreneurship: Don’t Forget to Scale Up

| 23/10/2014

muhlfeit
Today, entrepreneurs are tackling the global economy and not just the local market. They face unprecedented challenges and threats, as well as remarkable opportunities. Today, innovation and entrepreneurship are about being fast enough. These are just some key points to keep in mind when reading the World Economic Forum’s (WEF) new report “Fostering Innovation-Driven Entrepreneurship in Europe” (2014). With the launch of the WEF report, I took part in a panel discussion on Open Innovation. The event was held at Microsoft Atrium in Berlin, where together with Sabine Brunswicker, Strategic Advisor at the Fraunhofer Institute for Industrial Engineering and Organization IAO in Germany, I discussed innovation and entrepreneurship. The WEF report examines the challenges faced by Europe’s high-growth start-ups. It also sets out an agenda to help serial entrepreneurs achieve the critical mass needed to scale and compete internationally.

Stand up, Start up, then Scale up!

The analysis in the report, which was produced in collaboration with A.T. Kearney, comes from a survey of over 1,000 European entrepreneurs as well as interviews and workshops with policy-makers and other key decision-makers and experts in Europe and globally. The results indicated that the ecosystem for developing, and especially for growing start-ups in Europe is substantially less favorable than that in North America across all three phases of the entrepreneurial life cycle. These three phases are part of a new model for understanding how stakeholders such as leaders from government, business and civil society, as well as others, can better support serial entrepreneurs in Europe:

1. Stand up

    – This first phase of the entrepreneurial life cycle is about mobilizing Europeans to rise among the entrepreneurial lines. ‘Stand up’ is about promoting the attitudes and skills required by Europeans with the desire and the ability to create scalable entrepreneurial ventures.

2. Start up

    – After arming Europeans with motivation and capabilities, we must enable them with capital. This second phase is based on gathering the resources to ‘Start up’ a business, with particular focus on access to capital for entrepreneurs across the European Union.

3. Scale up

    – Skills and capital are vital for the success of an entrepreneur, but the key added ingredient is synergistic partnerships. Our entrepreneurs must ‘Scale up’ their micro ventures. This third phase stresses the need to enable ventures to scale, with particular focus on collaborations between entrepreneurs and large corporations. I cannot emphasize enough how important this phase is. Partnerships between entrepreneurs and large corporations that simultaneously improve the innovation capacity of both partners to create growth and jobs across the region, benefits the entire economic ecosystem. As important as this phase is, it is also one of the most challenging to master.

Ring the alarm!

The report reminds us of the importance of entrepreneurs to the health of the European economies: small and medium size enterprises (SMEs) account for over 99% of all firms, two-thirds of jobs, and 8 out of 10 jobs net generated since 2008, as well as more than half of the total added value created by businesses. With this in mind, the report also shares some alarming statistics gathered by the European Commission and WEF. 45% of Europeans say it never crossed their mind to start a business. If a bit less than half of Europe’s working population does not even think about entrepreneurship, yet SMEs account for two-thirds of jobs, then we have a gap in motivation, attitude and skills. If we want SMEs to account for two-thirds and rising, then we must close this gap and we must assess what drives individuals to have the desire and believe in their capability to start an innovative company or join a start-up.

Also according to the report, 79% of Europeans say it is difficult to start one’s own business due to a lack of financial support. However, this second phase is not just about access to funds, it is about making a start-up into a viable venture that creates value. If it creates value, the funds will come and it will be able to secure the required financial capital it needs, and thus increase the likelihood for the business to break even. Even though it is estimated that only 50% of European start-ups survive the first five years or the ‘Start up’ phase of breaking even, fewer SMEs are able to ‘Scale up.’ Indeed, the ‘Scale up’ phase poses the real challenge. While the statistics above are alarming enough, here is another one: even though the number of start-ups in the European Union increased by 370,000 between 2008 and 2013, the same number of SMEs and large companies registered no net growth. This shows that SMEs are disconnected and face difficulties in scaling up and thus making a significant difference to growth and employment across Europe.

Indeed, of the three life cycle phases, “Scaling up” is seen as the most challenging for European start-ups, with almost 40% of survey respondents believing that conditions were unfavorable in their country. “Europe has a strong track record in establishing innovation-driven start-ups. However, its weakness lies in helping these businesses grow in and beyond fragmented European markets,” said Philipp Rösler, Managing Director, Head of Centre for Regional Strategies, World Economic Forum.

We need to ring the alarm and raise awareness of the entrepreneurship situation Europe is facing, because the current situation is due to a disconnect in the ecosystem but not due to a lack of willingness on the part of policy-makers or actors in the private sector – 87% of survey respondents said that they are personally willing to support initiatives in their countries, while forum interviews and workshops identified a large number of multi-nationals seeking to incorporate start-ups in their business activities. Many senior policy-makers at both the European and Member State levels, including a number of heads of state and government, are highly motivated to improve conditions for innovative ventures.

It’s not productivity. It’s not information. It’s about self-awareness.

The first two phases of the entrepreneurial life cycle ‘Stand up’ and ‘Start up’ are the straightforward bridges that must be crossed for an SME to start and survive. However, it is the development and maturity of a business that can contribute even more to European economies, and it is the ‘Scale up’ phase that is also more challenging than the rest. But why is that? The answer has to do with navigating unstable change, attracting the right human capital to support the growth, developing the talent, and other reasons. However, at the core of all these areas of high importance there is one underlying factor that can act as the igniting success factor for SMEs in ‘Scaling up.’ Although important, that factor is not what a lot of people would argue, which is a lack of productivity, and is also not having access to up-to-date market information. I believe it is improving self-awareness.

Entrepreneurs need to look inwards to themselves and their team because success is not only related to starting up and surviving as a company. Having the capacity to understand personal abilities, motivations, strengths and passions in relation to others, will help in understanding other players in the market and identifying innovative and synergistic partnerships. Indeed, self-awareness is key to personal growth, and to the growth of the start-up. Capacity for introspection is crucial in two key ways. Firstly, if entrepreneurs are aware and in touch with their own strengths and passions, and they leverage these in the marketplace, they will be able to tap into the opportunities that reside in the surrounding environment. This in turn will highlight the competitive advantage of the start-up in comparison with other enterprises. Secondly, if entrepreneurs know their own and their start-ups’ uniqueness in the marketplace, they can relate better to other innovators and other businesses, and better form working relationships that yield value and growth. There is accounting, finance, even entrepreneurship taught in business schools, but I think drawing attention to self-awareness should also be a focus in the business school curriculum.

Speed it up Czech Republic!

The government and policy-makers have formulated a good strategy to support innovation-driven entrepreneurship in the Czech Republic economy. We have several strategic initiatives such as the Innovation Strategy and International Competitiveness Strategy, which reflect the awareness of policy-makers that entrepreneurship is an important driver of our economy. I also agree with the “3i vision” that forwards innovation, infrastructure and institutions as priorities for the enhancement of the competitiveness of the Czech Republic. However, the Czech Republic economy is relatively small, which means it needs to be more aggressive or it risks lagging behind bigger players. Our economic strategy is well enough, but the government needs to speed up its implementation. We need to be more aggressive with exports, attract foreign investment, develop and train a flexible workforce, educate more engineers, and of course focus on innovation, infrastructure and quality of institutions. Part of creating innovation-driven entrepreneurship in the Czech Republic is also promoting strategic and long-term partnerships between companies and research institutions, and between the private and public sector. This is also a point mentioned by Bohuslav Sobotka, Prime Minister of the Czech Republic, in the WEF report. We need to keep in mind that big companies have already mastered the art and science of ‘Scaling up’ and can take a proactive role in sharing best practices and in raising SMEs through the ranks.

I was very proud to be part of the Project Advisory Committee in producing this report, as I believe the analysis and the recommendations made will help unlock European Entrepreneurship Spirit. You can read all recommendations by downloading the entire report on WEF website.

By Jan Muhlfeit, Global Strategist / Coach / Mentor / Ret. Chairman of Microsoft Europe

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Category: CONTRIBUTORS, Jan Mühlfeit