International Perspectives on High Growth Entrepreneurship
International Perspectives on High Growth EntrepreneurshipKaren WilsonStructural Policy DivisionScience, Technology & Industry Directorate, OECD September 13, 2012 Nordic Growth Entrepreneurship Helsinki, Finland
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 firmpopulation but contribute a greater proportion of employment growth Source: OECD, What Drives the Dynamics of Business Growth (Criscuolo and Menon, 2012)
Dynamism of Young BusinessesNo 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 moreproportionally to job creation Source: OECD, What Drives the Dynamics of Business Growth (Criscuolo and Menon, 2012)
5 Economies Differ in their Dynamism 0 Policies can be 3key drivers behind7 these differences11 1 2 4 5 6 8 9 10 Growth interval European Countries vs US gap along the growth distribution 40 (c) Europe-US Gap More inEuropeanCountries 20 0More in the -20 US -40 1 -100 2 -20 3 -15 4 -10 5 -5 -16 7 +1 8 +5 9 +10 10 +20 ∞ 11 Growth interval Fast Shrinking Firms Static firms Fast Growing Firms Source: Bravo-Biosca, 2010
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) (Scale from 0 to 6 from least to most restrictive)Index Regulatory and administrative opacity Administrative burdens on startups Barriers to competition 3.0 2.5 2.0 1.5 1.0 0.5 0.0 10 Source: OECD, Product Market Regulation Database, May 2011.
A university-based, firm-centered innovation system… Public research-centered Firm-centered innovation system innovation system 100 University- centered Switzerland public research 90 Denmark % share of higher education in publicly performed R&D (2008) Austria Sweden 80 Turkey Canada Ireland Netherlands United Kingdom 70 Belgium Greece Portugal Norway Finland Italy 60 Chile Spain Australia New Zealand Iceland 50 Mexico France Germany Japan Poland Hungary United States South Africa Korea Slovak Republic Czech Republic 40 Slovenia China 30 20 Russian Federation Luxembourg Public lab- centered 10 public research 10 20 30 40 50 60 70 80 90 100 % 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 Source: OECD, STI Outlook 2010 based on OECD Main Science and Technology Indicators (MSTI) database, December 2009.
Business investment in intangible and tangible capital, 2009 (% GDP) 25% 20% 15% 10% Tangible KBC 5% 0% Source: Corrado et al. (2012, forthcoming) 12
Change by type of business investment, 2006-2009 (percentage points of GDP) 2.0% 1.5% 1.0% 0.5% 0.0% KBC -0.5% Tangible capital -1.0% -1.5% -2.0% -2.5% -3.0% Source: Corrado et al. (2012, forthcoming) 13
Perceptions of Opportunities vs Capabilities Entrepreneurial perceptions (2011 or latest year) Perceived opportunities Perceived capabilities Fear of failure80706050403020100 Source: OECD Entrepreneurship at a Glance, 2012 14
Facilitating the Entrepreneurial Ecosystem - Strong links between the different types of organizations - People, trusted networks, connectors - Local but connected globally 15
The Role of Financial DevelopmentAccess to finance and financialdevelopment are key for firms that growfast especially in sectors that are moredependent 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)Source: OECD based on industry statistics by EVCA/PEREP Analytics and 19PricewaterhouseCoopers/National Venture Capital Association MoneyTree Report data.
Exits Remain a Key Challenge European Venture Capital Exits in 2010 20 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. Equity Investors at the Seed, Early and Later Stage of Firm Growth INFORMAL INVESTORS FORMAL INVESTORSFounders, Friends and Angel Investors Venture Capital Funds Family (typical investment size: 25- (typical investment size: 3-5M USD) 500K USD) Seed Stage investments Early Stage Investments Later Stage Investments Financing Gap 21
OECD Angel Financing Publication www.oecd.org/sti/angelinvestorsChapter 1: Overview of financing for seed and early-stage companiesChapter 2: Angel investment: Definitions, data and processesChapter 3: Trends and developments in the angel market around the worldChapter 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 CapitalistsBackground Former entrepreneurs Finance, consulting, some from industryInvestment approach Investing own money Managing a fund and/or investing other people’s moneyInvestment stage Seed and early stage Range of seed, early stage and later stage but increasingly later stageInvestment instruments Common shares Preferred sharesDeal Flow Through social networks and/or angel Through social networks as well as groups/networks. proactive outreachDue Diligence Conducted by angel investors based Conducted by staff in VC firm on their own experience. sometimes with the assistance of (more cost efficient) outside firms (law firms, etc.) (more costly)Geographic proximity of Most investments are local (within a Invest nationally and increasinglyinvestments few hours drive). internationally with local partnersPost investment role Active, hands-on Board seat, strategicReturn on Investment Important but not the main reason Critical. The VC fund must provide for angel investing 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
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. Visible Market (BBAA BANs)• Lack of data Rest of Visible – The majority of data available is that Market collected by angel associations from angel groups and networks. – It can be supplemented with additional data obtained through tax and co- investment programmes. Inv isible Market – However, this data only represents a fraction of the market termed the Source: Harrison & Mason 2010 “visible” market. – The “invisible” market, which is estimated to be much greater than the “visible” market, is extremely difficult to measure. 25
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 Estimated size of angel Total VC* market in 2009 (share of total market) in 2009 market in 2009 in USD million in USD million 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 Canadas National Angel Capital Organisation (NACO). VC data based on industry statistics by EVCA/PEREP_Analytics andPricewaterhouseCoopers/National Venture Capital Association MoneyTree Report and Canadas National Angel Capital Organization.
BAN and VC Seed Investments in Europe: 2005-09 (EUR Million) Business angel network VC seed350300250200150100 50 0 2005 2006 2007 2008 2009 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
Equity Financing Cycle What is the role of policy? Institutional Investors (LPs: private and public)Entrepreneurial RegulatoryEcosystem (growth Environment & exit/returns) High growth firms Funds & investors (GPs: (Portfolio VCs, angels) Companies) Financial Instruments
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
For further information or questions contact: Karen Wilson Structural Policy DivisionScience, Technology & Industry Directorate, OECD Karen.Wilson@oecd.org