STANFORD, Calif.--(BUSINESS WIRE)--For just one example of entrepreneurship around the world, take a look at Argentina-based MercadoLibre Inc. It's a top Latin American e-commerce technology company and provides online systems to consumers and merchants doing business over the internet. Its CEO is Marcos Galperin, MBA'99. Operating in 12 Latin American countries plus Portugal, MercadoLibre went public in 2007, listing on the NASDAQ. The icing on the cake: getting on the Credit Suisse Research Institute's list of 27 "Great Brands of Tomorrow."
Governments worldwide should encourage more entrepreneurial ventures, such as MercadoLibre, as they build foundations for economic growth, says a report released by the World Economic Forum in collaboration with the Stanford Graduate School of Business and Endeavor Global, a New York not-for-profit that supports entrepreneurs. Against the backdrop of ongoing turmoil in global finance, successful early-stage companies are forming around the globe and creating jobs and wealth.
Policy makers need to understand how early-stage companies work, what makes them successful, and what kind of local environment — political, regulatory, or otherwise — allows the small companies in their own backyards to thrive. Learning more about entrepreneurship, policy makers can act accordingly to create an entrepreneur friendly setting, or a "hot spot," in their home territory.
"Understanding the elite few in their own ecosystem may prove a far more effective strategy than trying to replicate the success factors of other entrepreneurial hubs such as Silicon Valley," said George Foster, the report's lead academic researcher and the Konosuke Matsushita Professor of Management at the Stanford Graduate School of Business. Antonio Davila, a former GSB professor currently at IESE in Barcelona, also was part of the academic research team for the report, "Global Entrepreneurship and Successful Growth Strategies of Early-Stage Companies." The other researchers include Martin Haemmig, a professor at the Center for Technology and Innovation Management in Germany; Xiaobin He, PhD '10, assistant professor at Huazhong University of Science and Technology, Wuhan, China; and Ning Jia, PhD '07, associate professor at Tsinghua University, Beijing.
Early-stage companies drive economic growth effectively and efficiently, the report says. Researchers found that the top 1% of 380,000 companies studied in 10 countries contribute 44% of total revenue and 40% of total jobs created by early-stage companies in those countries. At the same time, 5% of those companies contribute 72% of total revenue and 67% of total jobs.
The impressive statistics on net revenue and net job creation by startups mask a sizable amount of individual revenue drops and job losses by previously high-growth startups.
A major new finding in the report was the extensive amount of revenue and job destruction that some early high-growth companies experience. The report shows, for instance, the typical annual revenue trends of young companies and finds that "down" years are to be expected. Indeed, 42% of companies between 2 and 5 years old experience 2 "up" years and 1 "down" year, while 31% have 3 "up" years. Analyzing lists of high-growth companies published in 13 different countries, the report found that 75% of the fledgling firms appeared on the list once. A major reason for the company not continuing to appear on such lists is a sizable slowing of their growth rates. Subsequent research is needed to examine whether these setbacks are due to larger established companies entering the new space, other startups capturing the revenues and jobs, or the new product area becoming less important. Interviews with some entrepreneurs stressed the role that self-inflicted wounds, such as very lax recruitment policies, play in the setback situations.
The report aims to aid government policy makers by detailing and illustrating how entrepreneurs around the world think and tackle difficult business problems. It lays out some main paths entrepreneurs tend to pursue. Some, for instance, try to create an entirely new consumer trend or invent a new product. Or, an entrepreneur might form a company to commercialize a basic scientific discovery or to adapt a business idea that's already thriving in another country. The study details some of the many issues that can throw even the savviest entrepreneur for a loop, such as measuring market size, seeking funding, hiring managers, and understanding government regulations and taxation policies.
By analyzing information provided by the CEOs and the CFOs of 110 companies from 17 different countries, the report found that firms with higher growth in headcount and revenues were those that were the earliest to adopt management systems. This finding supported prior research Davila, Foster, and Jia had reported in their study of 78 California early-stage companies. That paper, "Building Sustainable High-Growth Startup Companies: Management Systems as an Accelerator," was published in the California Management Review, Spring 2010, issue. In May, it was named as co-winner of the 2011 Accenture Award as a paper that made an important contribution to the practice of management.
As a highlight, the World Economic Forum study includes lengthy excerpts from interviews with many startup founders and executives, giving readers valuable insight into the challenges of entrepreneurship.
The 380-page report had its foundations in research started at Stanford in the early 2000s by Davila and Foster, who works with both the school's Center for Entrepreneurial Studies and the Center for Global Business and the Economy. Foster also is affiliated with two other Stanford campus initiatives on entrepreneurship: the Stanford Technology Ventures Program and the Stanford Program on Regions of Innovation and Entrepreneurship.
Subsequent to release of the Report at the 2011 meeting in Davos, Foster was appointed chair of the Global Agenda Council of the World Economic Forum on Promoting Entrepreneurship.
(This story reports on research at the Stanford Graduate School of Business and appears in the latest Stanford Knowledgebase, the free monthly information source of thoughts, ideas and research at the Stanford Graduate School of Business. To dig deeper, visit: http://www.gsb.stanford.edu/news/research/foster_young_cos_2011.html)