Peru isn’t exactly a hotbed of innovation. But a new start-ups programme could just be the answer.
The country spends barely 0.15% of gross domestic product (GDP) on research and development (R&D) – miniscule compared to even its lack lustre neighbours (Chile spends 0.38% of GDP on R&D).
Yet since 2013 the government has committed 20 million soles ($6.1m) to backing 287 tech start-ups through StartUp Peru (drawn from over 3,000 applications in five rounds of the programme), Peru’s economic minster Pedro Olaechea (pictured above) said on Thursday.
Of this 11 million soles has been disbursed so far. A further 3.3 million soles has been committed by the start-ups themselves.
Those firms backed so far include a communication app, an online artist network, a supplier of renewable energy to buildings, an online platform for reporting and handling emergencies, an online clothing store and a household cleaning detergents manufacturer.
Olaechae said every year the number of applications increases at an average rate of 35%. In the current cohort 106 start-ups have been selected.
The programme at times runs various themed challenges. Currently it is running at 7m soles challenge aimed at dealing with disasters in Peru. The present call closes on Tuesday (June 20).
The programme was launched in December 2013 initially as a $20-million programme aimed at financing and supporting 200 high-impact entrepreneurs over five years. Subsequently the ministry was able to secure a further 52 million soles, which could enable the initiative to run a total of 10 calls.
Inspired by Start-Up Chile
Peruvian government officials were inspired by the early impact that neighbour Chile made with Start-Up Chile after launching in 2010. In putting together the programmme, Peru’s Ministry of Production also drew on input from entrepreneurs, incubators, accelerators, investors, universities and consultants from several international organisations.
Entrepreneurs that qualify for seed funding are eligible for support from local business incubators (also backed by government funding) for up to 18 months.
There are two funding channels. One funds offers grants up to 137,000 soles to fund high-impact and dynamic enterprises that are no older than five years to develop innovative products or services. Another provides grants of up to 50,000 soles for the development and validation of business models, developed by innovative entrepreneurs.
Foreign entrepreneurs can also apply for support, but are required to open a branch of their business in Peru before are can receive funding.
Seven times return
The programme is expected to produce significant returns for the government, as for each sole that the state invests in an innovative firm, it will be able to get a seven soles return in taxes, estimates StartUp Peru’s head Alejandro Bernaola.
If these come off, Peru would be in for a bonus. Olaechea seems confident it will. In October last year he estimated that the number of start-ups in Peru would rise by 50% in 2017 over 2016.
In the current economic climate it's much needed - the economy is expected to grow at a moderate 2.8% this year before accelerating to 4.2% next year, its central bank said this month.
Yet while Peru remains one of the most entrepreneurial countries in the world (ranked sixth out of 65 economies by the Global Entrepreneurship Monitor in 2016), too much of this is accounted for by unsophisticated micro enterprises, which in 2015 made up 95% of the country's 1.7 million registered businesses, according to a report.
Indeed while the World Economic Forum's (WEF) 2016/17 Competitiveness Report ranks Peru at a favourable 67 place overall, it put it at 119 for innovation.
What the country now needs is more entrepreneurs developing innovative and novel ideas or adapting innovations from other countries to work in local conditions. Betting on tech start-ups might just be the right thing to do.
Timm is a South African who writes on small business. He has not visited Peru yet. Click here to sign up for the monthly Small Business Insight newsletter.
As Brazil begins to recover from a two-year recession its leaders have ordered the country’s much criticised development bank BNDES to ratchet up lending to small firms.
These were the instructions from President Michel Temer, as the bank’s new president, economist Paulo Rabello de Castro (pictured above), assumed the role of head of the institution on June 1, according to a news report.
Big firms, easy money
The development bank, which dominates long-term lending in Brazil because of sky high interest rates at banks, has long been criticised for providing mostly big (many of them politically connected) firms with easy money.
Among the bank’s 145,000 clients, large companies account for fewer than five percent of transactions at the bank, but made up almost 69.1% of disbursements last year, according to the banks 2016 annual report.
In 2012 large firms accounted for 49% of disbursements, reveals a BNDES report, while the bank revealed recently that between January and April just 38% of loans went to small businesses, totalling 8.2 billion reals or 13% less than the same period last year.
In recent months the bank has come under fire for its connections with businesses it helped fund such as Odebrecht, which the state is investigating for corruption.
The bank has also been criticised for relying on the treasury to subsidise cheap credit - something it is seeking to now address. In 2016 the bank also undertook to pay off debt of 100 billion reals ($30bn) to the treasury.
In addition after expanding at 12% per year between 2007 and 2014 reaching 187.8bn, the bank’s total disbursements slumped to 88.3bn reals last year.
As such the bank is now trying to find new ways to ramp up lending to small businesses.
These include simplifying its application processes, the introduction last year of a new venture-capital fund, a new venture debt offering to be rolled out this year and the expansion of its successful Cartão BNDES - a card which allows small firms to get services and goods on credit from approved suppliers.
The venture capital fund-of-funds offering, Criatec 3 - the bank's third since 2007 - was launched in February last year.
The fund will invest in private funds that will then invest in firms in innovative sectors such as IT and biotechnology with an annual revenue of up to 12 million reals ($3.6m). The 22m reals fund is managed by a private sector company Inseed.
Last year almost 1,000 applications were evaluated and in April BNDES announced the first investee - Chip Inside, a software firm that performs real-time monitoring of the gestation period of dairy cows.
Also in April BNDES announced that it would support small innovative businesses through a new venture debt instrument whereby it will launch a 20-million reals fund that would see it invest alongside private investors.
The fund will be managed by a private investor, which will be announced in August following a public call.
In addition the bank in March doubled the maximum limit for disbursements under its BNDES card, to 2 million reals,
Under the card small firms can buy goods and services from approved service providers on credit (see this earlier post). The interest rate is lower than the banks (on 31 December last year it stood at 1.19% a month).
The bank’s director of indirect operations Ricardo Ramos said in December last year that the bank also intends to create a version of the card for agribusiness.
Lending under Cartão BNDES halved last year to just over 5.6 billion reals through over 422,000 transactions, from 11.2 billion the year before through 571,000 transactions.
The card has made some impact. A 2011 BNDES study revealed that companies that used the card were able to increase employment by 8% at the end of year for those that used the card in 2008 and an increase of almost 10% in late 2009, in relation to the companies that were issued the card in 2008 but did not use it.
But an accounting trick – the bank in December increased the annual revenue threshold for firms that qualify as small businesses from 90 million reals to 300 millions reals – might help the bank to increase disbursements to small businesses by about 20%, according to the bank’s director of indirect operations Ricardo Ramos.
It will mean about 1,500 new businesses will be labelled as small businesses in 2017.
However the bank’s simplification of certain procedures has lowered the average application period from 30 to just two working days, he said.
Yet though the economy grew by one percent in the first quarter, unemployment has worsened – expanding from 12.6% in the quarter to end of January, to 13.6% in the quarter to end of April.
Above all Brazil badly needs to become more innovative. It has slipped from 40th place in 2009 on the International Insitute of Management Development’s competitiveness ranking to 61st of three worst, this year.
Expanding funding to small firms, particularly those developing innovative solutions, may be one way Brazil could boost its lagging competitiveness, while adding new jobs.
Timm is a South African who writes on small business. He has not visited Russia before. Click here to sign up for the monthly Small Business Insight newsletter.
Major Russian companies must co-operate more with startups by setting up special venture funds to finance their projects, Russian President Vladimir Putin has said.
“I hope these will not remain empty words. I ask you to make this happen, and as soon as possible,” he is reported by Sputnik News as saying at the St. Petersburg International Economic Forum on Friday (2 June),
Putin also urged the government and Russia's parliament to approve legislation that will define the ways big companies could acquire shares in startups.
“Big business, in its turn, must have a clear legal mechanism of buying small investment companies and acquiring shares in their capital," said Putin.
Russia needs start-ups to diversify its energy-based economy. The country is recovering from a nearly two-year recession in which the economy shrunk. Last month the IMF said it expects the economy to grow 1.4% this year.
There is reason to channel more financing to start-ups. Ernst & Young survey data in a 2014 roundtable discussion reveals that 20% of SMEs in Russia cited access to finance as a key obstacle, with half of these attributing this to the high cost of borrowing.
Figures from the Russian Venture Capital Association's 2016 yearbook reveal that the number of seed and startup investments backed by venture capital (VC) funds fell from 172, or two thirds of all VC and private equity investments in 2014 to 123 (57%) last year.
The amount in funding also fell from $43 million or 4.8% of all investments in 2014, to $16m or two percent of total invested capital.
Worrying is that funding for start-ups has also fallen in those deals in which the state has been involved in largely through a fund-of-funds - the Russian Venture Company - set up in 2006.
It fell from over 40 deals in 2014, to 27 (of the 56 in total it funded) in 2016. The volume of investments also fell in successive years since 2014 – to $8.3m in 2016, almost a third of what it was in 2014.
In addition the value of exits has fallen greatly between 2013 when it was at $4.8bn from 20 deals, to last year when it was $595m from 46 deals
Corporate acceleration programme
The Russian Venture Company is already working with big companies, through its Generation S accelerator initiative.
Last year there were eight such accelerators which are carried out in partnership with major Russian companies which use the accelerator to hunt for new innovation ideas. Russian companies are then pooled together and work with the accelerator and start-ups.
Each accelerator works on a specific “track” or area such as a the creative technology track which includes solutions for education, advertising and gaming. The Generation S programme is now in its fourth year, but it's only in its second year involving corporates.
About 120 startups have been selected this year with each big company taking on between 10 and 15 of these.
Last year a quarter of participants were able to attract funding. Graduates include robotics firm Promobot, medical startup Motorika, NanoServ which offers cleaning services for heating systems.
Part of the idea, says Deputy General Director, Development Director of the Russian Venture Company Gulnara Bikkulova is to provide VC investees with an easier way to exit to big companies.
“Indeed, we know that there is a big problem in the Russian venture market — the one with exits. The venture investors hope that at some point Russian corporations will be so interested in Russian technologies that they will make up a large share of strategic investments in the market. But the pace of it, unfortunately, is very slow,” says Bikkulva.
The percentage Russians involved in starting and running a firm of less than 3.5 years old was at its highest last year since the Global Entrepreneurship Monitor (GEM) began tracking the country in 2002.
But at just 6.3% of working-age adults, according to the 2016/17 GEM report, it’s still among the lowest for any emerging economy in the world, putting it 56 out of 65 countries. The rate may worsen – just 2.1% of adults plan on starting a business in the next three years.
WayRay founder Vitaly Ponomarev, told Reuters last year that he had about 500 meetings before landing venture capital. Ponomarev puts it this way: “There are people who have money in Russia, but they don't want to be involved in anything complicated”.
Timm is a South African who writes on small business. He has not visited Russia before. Click here to sign up for the monthly Small Business Insight newsletter.
South Africa's Department of Economic Development plans to amend the Competition Act to give new entrants easier market access. But how exactly will the state do it?
The announcement is contained in a briefing note released on Thursday May 25, by the Economic Development Minister Ebrahim Patel.
In the note Patel says the proposed amendments will seek to incentivise firms to develop relationships and adopt strategies that would "reduce concentrations by encouraging entry of historically disadvantaged South Africans", lower barriers to entry, and expand business ownership to more South Africans.
It follows an announcement by President Jacob Zuma in his State of the Nation Address in February that the economic development department will introduce legislation to amend the Competition Act.
An advisory panel has been established to develop the draft amendments. The panel members are: Advocate Michelle Le Roux, Law partner Doris Tshepe, Competition Commission chief economist Liberty Mncube, Academic Professor Imraan Valodia.
Patel expects the panel will submit a report within the next six weeks to his ministry.
More than 20 years since the end of apartheid, South Africa's economy continues to be dominated by a few, mostly white-owned firms.
In his State of the Nation Address Zuma said only 10% of the top 100 firms on the Johannesburg Stock Exchange (JSE) are owned by black South Africans, directly.
While it’s difficult to get a gauge of real black business ownership, figures from the Finscope 2010 Small Business Survey suggest that while the overwhelming majority of business owners are black (92%), most of these firms are unsophisticated, employ few people and have few assets.
Where almost 14% of businesses owned by white people employ five or more people, just two percent of black-owned firms have five or more employees.
South Africa's competition authorities have been relatively active in prosecuting cartels and other market misdemeanours.
Of late competition authorities have stepped up investigations of alleged cartels in various market sectors. They have also ordered that part of the fines levied on firms found to have been in breach of Competition Act must be used to support the entry of new black firms.
The latest is satellite channel DSTV which must spend R8 million ($600,00) over three years on helping black media firms.
In May last year a measure to criminalise cartels came into force (see this post).
Some argue however that the measure will limit the ability of authorities to investigate market collusion as the competition authorities rely on whistle blowers coming forward. Few will do so if they risk facing criminal prosecution.
In addition a 2003 report by the OECD (at a time when about half a dozen countries had criminal penalties against individuals) said there was no evidence proving the deterrent effects of criminal or monetary sanctions on individuals.
'Focus on inputs'
Regulation should perhaps focus on opening up access for entrants to key inputs and facilities that companies need to compete successfully, argues a 2015 review paper by the Centre for Competition, Regulation and Economic Development.
The centre, which has since 2015 been running a research project for The National Treasury on barriers to entry for firms, also notes in the review that industrial policy support tends to favour certain companies and can therefore entrench incumbents, which may impose barriers to entry.
In this way the government's current controversial programme to fund black industrialists, (see this post) may simply result in the creation of a few large incumbents that could risk shutting other competitors out too.
Better would be to improve the quality of overall support and funding initiatives to all firms, mainly small businesses.
BEE let down
Yet the state's Black Economic Empowerment (BEE) policy, aimed at fostering more black managers and entrepreneurs has arguably failed to open the market to more black firms.
In many instances BEE has created a rent seeking black shareholder class who take equity in large firms, instead of doing more to aid new black firms to enter the market.
The government however might begin to see some improvements. New BEE codes of practice, which came into effect in May 2015, incentivise private sector companies to support and fund black suppliers.
A set-aside encouraging government departments, municipalities and state entities to set aside 30% of large contracts over R30m ($2.2m) in size to small businesses (see this post), might also free up the market. This may be a start.
More difficult will be to help more black entrepreneurs to grow their firms and innovate so that they can take on the few existing firms that dominate the market.
This may go someway to combat the concentrated markets, which Patel says "feed a growing resentment among black South Africans of the "failure to realise the promises made by the Competition Act".
Timm is a South African who writes on small business. Click here to sign up for the monthly Small Business Insight newsletter.
Stephen Timm is a