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SCALING up on the EDGE of the RIFT VALLEY: How to Accelerate the Entrepreneurship Ecosystem for Local Scaleup Companies in Nairobi, Kenya a Report From

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SCALING up on the EDGE of the RIFT VALLEY: How to Accelerate the Entrepreneurship Ecosystem for Local Scaleup Companies in Nairobi, Kenya a Report From SCALING UP ON THE EDGE OF THE RIFT VALLEY: How to Accelerate the Entrepreneurship Ecosystem for Local Scaleup Companies in Nairobi, Kenya a report from: supported by: 2 / SCALING UP ON THE EDGE OF THE RIFT VALLEY EXECUTIVE SUMMARY Kenya needs to generate more than 3.9 million new jobs for young people by 2020, and Nairobi must play a leading role in creating these new employment opportunities. Unemployment is very high among young Kenyans and the nation’s labor force is projected to grow by another 3.4 million people between 2014 and 2020, due primarily to new young adults entering the job market. In total, more than 3.9 million new jobs must be created for young Kenyans in the next six years. Assuming that the need for new jobs will mirror the distribution of Kenya’s population, more than 600,000 new jobs will need to be created in the Nairobi area in the next six years. Scaleup companies are some of the most important job creators across the world and have great potential to help reduce unemployment in Nairobi. A significant body of research demonstrates that scaleup firms are the drivers of job creation in cities like Nairobi. The World Bank Enterprise Survey, last conducted in Kenya in 2013, also demonstrates the significant impact that scaleups have on job creation: only 5 percent of Kenyan companies were scaleup firms growing at 20 percent or more each year, but these scaleups created 72 percent of the total new jobs generated during the previous three years. There is a framework for action that leaders in Nairobi can use to foster the development of more scaleup companies by improving the local ecosystem for high-growth businesses. Cities that wish to foster the growth of more scaleup firms and become hubs of entrepreneurship must foster the development of the local entrepreneurship ecosystem – the way individuals, companies, organizations, and governments interact to influence the development of local entrepreneurs and their firms. This is the single most important task a city can undertake to improve its economy. Successful ecosystems for high-growth companies follow a specific cycle of growth, in which entrepreneurs who succeed in building scalable firms go on to reinvest their financial, intellectual, and social capital into the next generation of local entrepreneurs and companies. This increases local access to funding, talent, and customers, which are the three most important resources for growing companies. The combined impact of these improvements creates a virtuous cycle of growth. SCALING UP ON THE EDGE OF THE RIFT VALLEY / 3 Interviews with Nairobi entrepreneurs suggest that the local ecosystem for high-growth companies has four major strengths: excellent access to customers, great access to a skilled workforce, high entrepreneurial ability, and entrepreneurs with a desire to reinvest in the ecosystem. Endeavor conducted interviews with over 30 founders whose companies had achieved high-growth rates consistent with scaleup firms or were designated as high-potential by a local investor or entrepreneurship support organization. Entrepreneurs in both groups shared very similar views regarding the strengths listed above. However, founders in the city noted that the local ecosystem also has three significant challenges: a lack of entrepreneurs promoting entrepreneurship, low levels of mentorship from successful entrepreneurs, and a relatively small number of employee spinouts. These challenges were common among both groups of local founders surveyed for this report. Analysis of stakeholder interviews from the project identified a number of promising ideas to address specific needs of Nairobi. The researchers leading this project identified a number of recommendations for improving specific aspects of the ecosystem for high-growth firms in the city. We draw these recommendations from an analysis of over 1,000 policies and programs from 100 cities, as well as from discussions with leading stakeholders in government and the private sector. 4 / SCALING UP ON THE EDGE OF THE RIFT VALLEY Kenya needs to generate more than 3.9 million new jobs for young people by 2020 and Nairobi will need to play a leading role in creating these new employment opportunities. The economic turmoil of the last six years has created a global jobs 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. This jobs crisis is apparent almost everywhere in the world, and it affects countries at every level of development.1 In Kenya, unemployment is especially high among young adults. According to the ILO’s most recent estimates, the unemployment rate for Kenyans between the ages of 15 and 24 is 17 percent, which means that over 580,000 young Kenyans in the labor force are out of work.2 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. Kenya’s labor force is projected to increase by 3.4 million workers between 2014 and 2020, due primarily to new young adults entering the job market.3 The number of people in the age cohort of 15 to 64 years will continue to grow until about 2040. When combined with the 580,000 15-24 year olds who are currently unemployed, this suggests that more than 3.9 million jobs need to be created for young Kenyans who will be looking for work in the next six years.4 Nairobi is the nation’s leading center for business and will need to play a leading role in creating jobs for young adults in the country. Assuming that the need for new jobs will mirror the distribution of Kenya’s population, more than 600,000 jobs will need to be created in Nairobi in the next six years.5 SCALING UP ON THE EDGE OF THE RIFT VALLEY / 5 Scaleups are some of the most important job creators across the world. They have great potential to help reduce unemployment and grow the economy in Nairobi and across Kenya. A significant body of research demonstrates that scaleup firms are the drivers of job creation, showing that a small percentage of fast-growing firms account for a disproportionate percentage of job growth. Analysis of data from the World Bank shows that firms that grow at an average of 20 percent or more during a three-year period typically represent 5-10 percent of the businesses in a country, but create more than half of the nation’s new jobs. In this way, scaleups have a direct and measureable impact on the economy. Nurturing these growing firms is an excellent way to reduce unemployment, create high- quality jobs, and catalyze lasting economic growth.6 Impact of Scaleup Companies in Kenya (2013). 100% 90% 80% 70% 60% 50% Scaleups 40% Other firms 30% 20% 10% 0% Total number of firms Total number of jobs created surveyed in previous 3 years Scaleups have great potential to create jobs in Nairobi. Although much attention has been paid to startups and microenterprises, supporting existing entrepreneurs who can scale their businesses is crucial to meeting Kenya’s job needs because scaleups create more jobs than other types of firms. The World Bank Enterprise Survey, last conducted in Kenya in 2013, demonstrates the significant impact that scaleups have on job creation: only 5 percent of Kenyan companies were scaleup firms growing at 20 percent or more each year, but these scaleups created 72 percent of the total new jobs generated during the previous three years. This data serves to highlight the central importance of scaleup firms to the Kenyan economy. That such a small slice of Kenyan businesses can have such an outsized impact on employment is encouraging: it means that by cultivating scaleups, it is possible to spur truly impressive growth.7 Scaleups are also durable. A 2008 study from the U.S. Small Business Administration found that only 3 percent of fast-growing startup firms failed in the four years after they experienced high-growth. A separate study in the journal of Small Business Economics likewise found that scaleups create long-term jobs.8 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.9 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.10 6 / SCALING UP ON THE EDGE OF THE RIFT VALLEY Leaders in Nairobi can look to other successful ecosystems to understand how networks of successful companies develop and grow over time. Cities that wish to spur an increase in scaleup firms and become hubs of entrepreneurship must foster the development of the local entrepreneurship ecosystem that supports high-growth companies. The term “entrepreneurship ecosystem” describes the way individuals, companies, organizations, and governments interact to influence the development of entrepreneurs and their firms in a single metropolitan area or region. Participants in the ecosystem include entrepreneurs, investors, customers, suppliers, employees, and many other individuals and institutions. Healthy ecosystems for high-growth companies enable entrepreneurs to access the resources they need to grow their companies and create jobs and value for their communities. Research suggests that the best ecosystems follow a specific cycle of growth, in which local entrepreneurs who succeed in building scalable firms go on to reinvest their financial, intellectual, and social capital into the next generation of local entrepreneurs and companies.
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