THE 8-45 REPORT Why Scaleup Companies are Critical for Job Creation in Colombia

“ Scaleups growing at 20% or more per year represented only 8% of Colombian firms, but they created 45% of the total new jobs in Colombia during the previous three years.”

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EXECUTIVE SUMMARY

The key findings of this report are as follows:

• Colombia needs to create more than two million new jobs for young people by 2020. According to recent estimates, more than 1.1 million Colombians between the ages of 14 and 28 are unemployed. Furthermore, Colombia’s workforce is projected to grow by more than one million people between 2012 and 2020 due primarily to new young adults entering the job market.

• Scaleups1 are some of the largest job creators in Colombia. A 2010 World Bank survey found that only 8% of Colombian companies were scaleups but they created 45% of the total new jobs generated during the previous three years.

• Many Colombian companies do not produce any new jobs. Only 50% of Colombian firms in the survey created any net new jobs during the previous three years. Thirty-one percent of the companies surveyed reduced the number of people they employed and 19% of companies neither added nor subtracted employees.

• Scaleups need access to markets, talent, funding and support systems in order to succeed. According to a survey of more than 900 entrepreneurial leaders from around the world, these four factors are the most important contributors to a firm’s growth and success.

1 For the purposes of this report, a scaleup company is defined as a firm that is more than three years old with an average annual employment growth rate greater than or equal to 20% during the previous three years.

The data in this report is drawn primarily from the most recent World Bank Enterprise Survey data from 2010 of 925 Colombian companies. This report analyzes job creation by firm type—startups that are up to three years old, scaleups that are greater than three years old and have 20% or more average annual employment growth, and other companies that are also greater than three years old, but have less than 20% average annual employment growth. More information on the methodology underpinning this analysis can be found on page nine.

This report was created by Mariana Costa Checa, Michael Goodwin, Rhett Morris, and Andrea Vasquez in July 2013.

4 / The 8-45 Report: Why Scaleup Companies are Critical for Job Creation in Colombia

The economic turmoil of the last five years has created a global job crisis. The International Labor Organization (ILO) estimates that the world’s economies need hundreds of millions of new jobs to create opportunities for two groups: those currently unemployed and the growing population of young people entering the workforce during the next decade.2 This jobs crisis is apparent almost everywhere in the world, and it affects countries at every level of development.

The need for job creation also exists in Colombia, especially among young adults. According to most recent estimates of the National Administrative Department of Statistics in the first quarter of 2013 unemployment rate among Colombians between 14 and 28 years old was 16.5%.3 This means that more than 1.1 million young Colombians in the labor force are out of work. High unemployment is an issue with both immediate and long-term implications. Economists note that unemployment among young adults has an adverse impact on skill development and future earnings for years to come.

As more young people enter the labor force, demand for jobs will continue to grow. Colombia’s workforce is projected to increase by more than one million workers between 2012 and 2020 due primarily to new young adults entering the job market.4 When combined with the 1.1 million 14–28 year olds who are currently unemployed, this suggests that more than two million jobs need to be created for young Colombians who will be looking for work in the next seven years.

2 International Labor Organization, Global Employment Trends 2012.3 National Administrative Department of Statistics, Boletín de Prensa Mercado Laboral de La Juventud, August 12, 2013.4 International Labor Organization, Economically Active Population, Estimates and Projections (6th edition, October 2011).

Colombia needs to create more than two million new jobs for young people by 2020.

Total number of firms surveyed

0%

40%Other firms

10%

50% Scaleups

80%

20%

60%

90%

30%

70%

100%

Total number of jobs created in previous 3 years

The 8-45 Report: Why Scaleup Companies are Critical for Job Creation in Colombia / 5

Scaleups—which this report defines as companies more than three years old with a minimum of 20% average annual employment growth—are crucial to meeting Colombia’s jobs needs because they create jobs more quickly than other types of firms. The World Bank Enterprise Survey, which was last conducted in Colombia in 2010, provides comprehensive company-level data about firms in emerging economies.5 The Enterprise Survey demonstrates just how vital scaleups were to the creation of new jobs. Scaleups growing at 20% or more per year represented only 8% of Colombian firms, but they created 45% of the country’s net new jobs during the previous three years.6 This trend is also apparent elsewhere across the globe: in Peru, scaleups represent 13% of firms but generate 32% of the total new jobs and in Vietnam they represent 11% of firms but generate 58% of total new jobs.7

A significant body of research focused on North American firms confirms that scaleups are the drivers of job creation, demonstrating that a small percentage of fast growing firms account for a disproportionate percentage of job growth. For example, a 2008 study from the U.S. Small Business Administration found that the fastest growing 2-3% of firms account for almost all U.S. private sector job growth.8

Scaleups are also durable. The same study found that only 3% of fast-growing startup firms failed in the four years after they experienced high-growth.9 A separate study in the journal of Small Business Economics likewise found that scaleups create long-term jobs. The authors examined Canadian firms with the fastest employment growth from 1985 to 1999 and found these firms to be resistant to job losses during periods of recession.10

5 The World Bank, Enterprise Surveys (http://www.enterprisesurveys.org).6 Ibid.7 Ibid.8 Acs, Zoltan, William Parsons and Spencer Tracy. “High-Impact Firms: Gazelles Revisited.” Small Business Administration Office of Advocacy, (2008).9 Ibid.10 Henrekson, Magnus and Dan Johansson. “Gazelles as job creators: a survey and interpretation of the evidence.” Small Bus Econ, (2010) 35:227–244.

Scaleup companies growing at 20%+ per year are the largest job creators in Chile, according to a World Bank survey.

6 / The 8-45 Report: Why Scaleup Companies are Critical for Job Creation in Colombia

These statistics may actually underestimate the full job-creation impact of scaleups, which can strengthen value chains and generate positive externalities for other firms. Research has shown that successful innovation-driven enterprises (IDEs), which have similar characteristics to scaleups, create about five auxiliary jobs for every one direct IDE job.11

Finally, scaleups promote their employees’ professional development. As these companies grow and add new employees, workers who started in entry level positions move into middle management, developing project management and governance skills along the way. These skills add value to the company and allow workers to improve their compensation. A recent Ernst and Young report found that companies that are able to develop an “internal talent pipeline” will enjoy a competitive advantage.12 Scaleups are best positioned to create this pipeline and improve the broader economy’s human capital base.

11 Ibid.12 Ernst and Young. Managing today’s Global Workforce: Elevating Talent Management to Improve Business, May 2010.

The 8-45 Report: Why Scaleup Companies are Critical for Job Creation in Colombia / 7

Many people assume that job creation is spread evenly across all or almost all companies. This is not the case. In Colombia, only 50% of firms surveyed by the World Bank created any new jobs during the previous three years.13 Thirty-one percent of the companies surveyed reduced the number of people they employed and 19% of companies neither added nor subtracted employees.14

Becoming a job creator is not easy, particularly for small businesses (5-19 employees). A recent study in the United States found that the vast majority of small businesses stay small and do not want to grow.15 Sixty percent of these small businesses did not add an employee during the previous four years.16 In this sense, most small businesses remain small—some because they have no interest in growing, and others because they face obstacles to growth.

It is important to implement measures to support the small number of startups that will become scaleups. These are the firms that will have the greatest impact on job growth, and will create jobs that are both high-quality and sustainable.

13 The World Bank, Enterprise Surveys (http://www.enterprisesurveys.org).14 Ibid.15 Hurst, Erik and Benjamin Wild Pugsley. “What Do Small Businesses Do?” Brookings. August 2011.16 Ibid.

The World Bank survey also found that many Colombian companies do not produce any new jobs.

8 / The 8-45 Report: Why Scaleup Companies are Critical for Job Creation in Colombia

The World Economic Forum, in partnership with Stanford University and Endeavor, recently conducted a survey of more than 900 leaders at entrepreneurial companies around the world in order to identify factors that help their companies to grow. Contrary to the prevailing wisdom among many policymakers, these respondents did not mention regulatory frameworks, lack of coordination with major universities, or low-quality entrepreneurship education as barriers to the growth of their companies. These leaders instead highlighted the importance of the following four factors:

• Accessible Markets: This includes public- and private-sector customers in domestic and foreign markets. Respondents frequently cited domestic customers in the private sector as most critical to their growth.

• Human Capital: This includes the various sources of talent available to entrepreneurs as they staff their companies. Management and technical talent were the most important resources cited by those who were surveyed.

• Funding and Finance: This includes all types of debt and equity capital available to entrepreneurs. In general, various forms of equity capital, such as seed investments by family and friends, angel capital and venture capital, were rated most highly by respondents.

• Support Systems: This includes mentors and advisors as well as professional service providers and networks of peer entrepreneurs. Mentors, advisors and peers were the most highly ranked in terms of importance.

Scaleups need access to markets, talent, funding and support systems in order to succeed.

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The World Bank Enterprise Survey is a representative sample of firms in an economy’s private sector. The World Bank typically interviews 150 firms in small economies, 360 in medium-size ones, and 1200-1800 in larger economies. The sample is constructed using a stratified random sample based on firm size, business sector, and geographic region within a country. According to the World Bank, “Enterprise Surveys tend to oversample large firms since larger firms tend to be engines of job creation.”17

The analysis contained in this report is based on the following three survey questions:

• “In what year did this establishment begin operations in this country?”

• “At the end of fiscal year [insert last complete fiscal year], how many permanent, full-time employees did this establishment employ?”

• “Three fiscal years ago, in the year [insert three complete fiscal years ago], how many permanent, full-time employees did this establishment employ?”

Using firms’ responses to these questions, we construct an employment compound annual growth rate (CAGR). We summarize jobs figures using sampling weights. Therefore, findings should be considered valid at the economy-level. However, given the weighting towards larger firms and the small sample of startup firms, section three on page seven should be considered valid at the sample-level only.

17 “Methodology.” Enterprise Surveys. http://www.enterprisesurveys.org/Methodology.

Methodology

10 / The 8-45 Report: Why Scaleup Companies are Critical for Job Creation in Colombia

Endeavor is leading the global high-impact entrepreneurship movement to catalyze long-term economic growth. Over the past ten years, Endeavor has selected, mentored and accelerated the best high-impact entrepreneurs around the world. To date, Endeavor has screened more than 30,000 entrepreneurs and selected 800+ individuals leading 500+ high-impact companies. These entrepreneurs represent over 225,000 jobs and over $6 billion in revenues in 2012 and inspired future generations to innovate and become entrepreneurs too.

Endeavor Insight, Endeavor’s research arm, studies high-impact entrepreneurs and their contribution to job creation and economic growth. Its research educates policy makers and practitioners and helps them to accelerate entrepreneurs’ success and the development of entrepreneurship ecosystems around the world.

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