UNDERSTAND | March 24, 2018

The Best Economic Development Strategy is Scale Up

Photo Credit: Global Entrepreneurship Network

If you take care of scaling up, the startups will (more or less) take care of themselves.

“Shouldn’t you foster both scale ups and startups?”  is one of the most frequent questions I get challenged with. In theory, yes, of course. But in practice, you1 have to very smartly allocate very scarce resources. I believe there is growing evidence (and logic) that investing resources in ventures’ scaling up,  if done smartly, can have more short-term and long-term social-economic impact than any other regional economic development strategy, whether it is business creation, business attraction or business retention.


Promoting scaling up meets the multiple tests of speed, spillover and affordable sustainability.

“What, then, is scaling up?” At the firm level, a simple way of thinking about scaling up is to profitably increase the rate of growth of sales revenues.  If the current rate of growth is zero, then getting to 5% is scaling up.  If it is 5%, then getting to 10% is scaling up. If growth is already at a high rate, then maintaining that rate is scaling up3. In terms of social-economic impact, it doesn’t matter a priori if the venture is old or young, first generation or third, innovative or copycat, or has raised equity capital or bootstrapped. What matters is that the venture enters into a relatively rapid growth trajectory.

“Can regions scale up?” When referred to regions, scaling up means “more local ventures scaling up,” or put simply, more and more local firms growing more and more rapidly. Consistent with the best research, it is better socio-economically when scaling up at the firm level is spread across a broad base of firms. All else being equal, ten ventures growing to 100 is likely better for a local economy than one local venture growing to 10004; and in any event, some of the ten will naturally continue growing towards 1000.


Ten workhorses are probably more socially and economically beneficial than one unicorn.

“Don’t you need more startups in order to have a few scale ups?” Again, in theory, yes, but in practice, not really. The historical records of entrepreneurship in Israel, India, Boulder, Boston, and Silicon Valley suggests that large companies were essential early elements in the later emergence of entrepreneurship ecosystems. In Boulder it was (among others) IBM and Norad, in Israel, Tadiran and Israel Aircraft; in Boston it was Raytheon, Mitre and Lincoln Labs. In India, IBM’s exit in 1977 was catalytic in the formation of the BPOs that emerged shortly thereafter.

“But we are told that startups are the big job creators.” Statements about startups and job creation have contributed to confusion because they (unintentionally) confuse several more specific questions. One is, are a lot of young (i.e. new) jobs found in young (i.e. newly registered) companies? If measured by census data, the answer is “Probably yes.”  Do newly registered firms create good jobs? Here, the answer is, “Not so much.” The research that we have suggests that most of those startup jobs are low level service jobs, contrary to the now-conventional wisdom. Many of these jobs disappear soon after they are created.

Third, does that mean that encouraging startups will lead to job creation? Here the answer is “Almost certainly not,” an issue I address in more detail here. As Scott Shane writes, “we have no evidence that firm formation causes economic growth.”

The mantra “Startups create jobs” has unwittingly misled policy makers. Good jobs are created when firms grow, not when they start.

“So is Scale Up anti-startup?”  Absolutely not5. Startups are one essential element in any well-functioning regional economy, but for economic development purposes, they are better treated as by-products of local scale ups.  After more local ventures start accelerating growth, it is possible to systematically feedback that growth so that the startup entrepreneurs have good role models, mentors, business partners, and most essentially, a growth template in their minds. In Manizales-Mas, for example, we launched two startup programs, AddVenture-Mas and Startup-Mas, but only after we had helped a critical mass of the “post-revenue” companies to scale up.

“Is there a method for scaling up our region?” Fortunately, scaling up is its own reward and its outcomes are relatively easily – both naturally and with a little help – fed back to benefit a broad range of stakeholders. When your entire region is scaling up, for example, local banks benefit from better loan books, public sector actors gain popularity from more jobs and generate taxes for public investment, and incumbent corporations have better access to talent and local supply chains. Of course, entrepreneurs and their investors also benefit. Because growth is largely its own reward, hard incentives (tax breaks, angel credits, small business loan guarantees) are both expensive and unnecessary and, indeed, often lead to perverse outcomes. “Soft incentives” (convening, celebrating, communicating, training) are more important. Using our experiences in Manizales, Colombia, Milwaukee, Wisconsin, North East Ohio and other regions, we find it useful to think about intervening at four levels:

  • Level 1 – Quickly demonstrating new growth by entrepreneurs
  • Level 2 – Broadly communicating that new growth to the region
  • Level 3 – Engaging non-entrepreneur stakeholders to invest various resources in growth
  • Level 4 – Building the governance, execution, and professional capacities to sustain Scale Up

More about those four levels of Scale Up intervention here.

Let’s not be confused: Scale Up is only a simple metaphor. But it is a metaphor that evokes growth, and by doing so, puts growth back into the center of the entrepreneurship dialog. Without growth, there is no real entrepreneurship. As a result of a growing body of practice on how to realistically foster Scale Up ecosystems, Scale Up is attracting increasing amounts of attention and, more importantly action. Today there are over two dozen Scale Up projects we are aware of in Denmark, Colombia, Switzerland, Russia, Norway, Brazil, England, Scotland, Panama and the United States, all based more or less on the ideas put forth above, each with its local interpretations and innovations.  This practice is still in its infancy, and we look forward to continuing to engage with professional colleagues in scaling up Scale Up.

 

[1] “You” means public sector actors, economic development specialists, actors with regional development mandates, and so on.

[2] There is no particularly meaningful 20% threshold – the 20% over three years is a convention that was established for research and measurement, but even its architects understand that it skews results to over-represent smaller firms among scale ups.

[3] With Sherry Coutu of the Scale Up Institute and Anders Hoffman, formally of the OECD and DBA, we are in the process of developing an index that will reflect broad-based scaling up.

[4] From a purely personal perspective, I have made over 50 investments in over 20 startups in Europe, the US, Israel, China and Africa.

 

Daniel Isenberg (@danisen) is founding executive director of the Babson Entrepreneurship Ecosystem Platform, Associate at the Harvard Kennedy… About the author