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Suffering from myths on startup barriers

M. Rokonuzzaman | July 10, 2024 00:00:00

The importance of startups for driving economic growth cannot be overemphasised. The underlying force of the rise of Western Europe and the USA to high-income status has been the startup. In fact, without the role of startups, no natural resource-poor economy can reach a high-income level. Startups drive the next wave of growth and wealth generation through creative destruction-creating a new flow of ideas. Hence, addressing barriers to startups is of high importance. However, what startups are, which are legitimate barriers, and how to address them deserve clarity. More importantly, are we suffering from myths about addressing the obstacles to startup growth?

Startups are not early-stage companies working on new product development through emerging technology integration. In reality, there are numerous such companies in the world. And they have been in existence for decades. Despite this, only a few scaled up, creating new industries, generating wealth, driving economic growth, and, more importantly, becoming global players. Surprisingly, no such startup success story has occurred in South East Asia. Such a reality raises a few vital questions. What are startups? Are all early-stage firms claimed to be startups? Is it worth addressing the barriers to them? If we do, will less developed countries be propelled to high-income status? To clarify these questions, let's look into excellent and not-so-good examples of startups.

Without having many natural resource deposits, Germany has become a rich country. More importantly, it has sustained it over more than a century. One of the significant drivers of prosperity for Germany is the automobile industry. According to Statista, in 2023, the German automobile industry generated revenue of around 564.2 billion euros. In a $4 trillion economy, such a contribution from a single sector is significantly high. Surprisingly, this is a startup success story triggered by Carl Benz.

Similarly, the upswing of the USA over Europe has been due to the rise of a few notable startups, such as Edison's General Electric and Bell's Telephone Company. Over the last 70 years, startups like Intel, Apple, Microsoft, and Nvidia have become the prime movers. On the other hand, Japan has risen due to Sony, Toshiba, Canon, Hitachi, and Sharp startup success stories. Recently, Taiwan has become a highly prosperous economy due to the scaling effect of TSMC and the growing cluster of startups around it.

Although most less developed countries began knowing startups at the dawn of the 21st century, they have been experiencing mushroom growth of startups. It's not uncommon to find more than a thousand of them in most of these countries. Uber, Airbnb, mobile financial service providers, and e-commerce companies are role models for them. Of course, they face barriers. However, if those barriers are removed, will those thousands of startups propel less developed host countries to a high-income status like the way a few dozen did for Germany, the USA, Japan, and Taiwan? Besides, are they suffering from myths?

To proceed further, let's define startups. Not all newborn companies undertaking commercial activities to leverage emerging technologies are startups. According to The Waves (www.the-waves.org), "Startups are defined as early-stage companies pursuing the reinvention of existing products by changing technology cores and showing credible possibilities to unleash disruptive innovation effects on matured products and firms." The underlying force behind unleashing disruptive effects is not due to massive subsidies for creating a market of inferior alternatives and destroying competitors, and breaking all kinds of fair competition governing regulations.

Startups create new wealth by offering better and cheaper alternatives by creating a flow of ideas. Irrespective of the greatness, no idea of emerging technology integration succeeds in creating wealth through creative destruction. There must be a flow of ideas in making alternative products better and cheaper to develop new markets and grow rapidly by taking over the market of matured products from the incumbents. It must happen through the cumulative effect of idea flow instead of giving massive subsidies, bending or breaking regulatory rules, and seeking incentives from the Government. Once we consider the definition this article refers to, most startups, notably in less developed countries, are NOT startups. Many newborn companies have been suffering from incompetence in growing their inferior products out of emerging technologies.

Let's discuss about significant barriers to startups and accompanying myths. First of all, startups must scale up, but how? Obviously, we need to address the obstacles. Here are the most cited five barriers: (i) lack of risk capital, (ii) exit options, (iii) mentoring, (iv) regulatory rules, and (v) stringent loan conditions. Let's look into them further.

LACK OF RISK CAPITAL: In the first place, startups drew attention because they grew from garages as highly profitable, rapidly growing companies. For many successful startups like Daimler, Apple, Microsoft, and HP, tiny seed capital provided by family, friends, and angel investors was good enough. They needed thousands of dollars to take off, as opposed to millions and billions being burned by startups in the present time. It's worth mentioning that the famous Silicon Valley took off without venture capital (VC) funds. Instead, the startup's success forming Silicon Valley created the VC industry cluster around Sand Hill Road, running through Palo Alto and Menlo Park in Western California. Instead of creating a market for inferior alternatives through subsidies and breaking regulations, those startup success stories focused on advancing their innovations through providing risk capital in R&D. Hence, unless startups in less developed countries grow innovations through additional flow of ideas, any amount of risk capital is unjustified.

EXIT OPTION: Due to offering better alternatives at less cost, startups are expected to experience high profit and rapid growth within a few years of formation. Hence, they become highly attractive to investors, notably in the capital market. Unfortunately, in less developed countries, most startups suffer from growing losses due to market expansion through subsidies. Why should the early-stage investors be given an exit option by offloading their non-performing assets to the Government and general investors in the capital market?

MENTORING: Startups, notably in less developed countries, have been complaining about a lack of industry veterans to mentor them. Is it not an irony? Startups should be on a mission to disrupt the incumbent industries managed by "industry veterans." According to the findings of Prof. Clayton and Richard N. Foster, due to decision-making errors of 'industry veterans', creative destruction opportunities are left to startups. Ironically, startup leaders are seeking mentoring from them.

REGULATORY RULES: Instead of making regulatory rules fairer to competition, ironically, they have been pressing them to bend, even to break. If their reinventions are better and cheaper, why cannot they outperform the incumbents' offering of matured products?

STRINGENT LOAN CONDITIONS: Already, non-performing loans have plagued the banking industry of less developed countries. In many cases, the underlying cause has been that once profitable companies have been suffering from loss due to eroding competitive advantage. Against this reality, why should banks extend depositors' money to loss-accumulating startups? Besides, `while early-stage investors are desperate to offload their shares of loss-making startups, why should Banks not avoid lending them?

Less developed countries must find ways to create startup success stories. It's the only option for many of them to reach high-income status. However, the first challenge is to screen numerous early-stage companies to figure out startups that are on a mission to create new wealth through a flow of ideas. In retrospect, in creating wealth and driving prosperity, startups must craft a path to reach profit and grow fast by the advancement of their great ideas through a flow of ideas in making their offerings increasingly better and cheaper, as opposed to burning funds and bending the rules to grab the market and believing in myths. Otherwise, current beliefs about barriers to startups and their prospects of creating new wealth appear to be myths, as they suffer from lack of merits for unleashing creative destruction through a flow of ideas.

M. Rokonuzzaman, Ph.D is academic and researcher on technology, society and policy. [email protected]

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