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.
“It’s been a challenge,” admits Manyowa Nong when talking about the 30 or so employees he’s hired in the two years since he set up a start-up that helps minibus taxi owners to track and monitor vehicles via a mobile device.
His app has helped taxi owners become more profitable by curbing the common practice of drivers taking unreported trips and pocketing earnings for themselves. Nong added jobs through a call centre he opened as well as with a number of installers and a sales team.
Yet his company MobifyTracker is likely one of the exceptions when it comes to tech start-ups. Most tech start-ups it seems create very few jobs. In addition a large number of tech companies are likely to destroy many jobs when they disrupt traditional sectors.
Three incubation or business acceleration programmes The Financial Mail sampled create at best between 2.5 and 5.5 jobs per firm a year (see graphic below). A 2015 survey by start-up news site Ventureburn of about 200 SA tech start-ups revealed that just 3% employ over 10 employees.
Tech firms might then be getting smaller. Instagram had just 13 employees when it was bought for $1 billion by Facebook in 2012.
Gideon Potgieter, head of business development at Resolution Circle, a University of Johannesburg technology hub, points out that one doesn’t need more than five or six people to build a multi-million dollar web company.
With more concentrated revenues and lower employment potential, digital companies risk therefore increasing inequality, he says.
It’s why the hub’s incubator doesn’t take on entrepreneurs who have pure web or app-based solutions, he says. The incubator instead favours those that develop or license a physical product which might then be supported by an app or web-based platform.
While the first company moved into the incubator 18 months ago job numbers are still low. Currently 18 companies are based at the incubator, employing 32 people – mostly the founders themselves.
To be fair there are some exceptions. Cape-based fintech company Jumo is only in its second year but employs 240 people, as it expands into the rest of the continent with its mobile app that helps assess unbanked customers who apply for finance.
Founder Andrew Watkins-Ball believes the employment opportunities in tech are expanding rapidly as businesses transition into an increasingly digital environment. “That being said however, the increase in efficiency probably also leads to a loss of manual jobs over time,” he concedes.
A jobs enabler
But Jens Herf, believes small tech entrepreneurs can add jobs – just not in their own company.
He admits that his three-year-old firm Shopster, a platform that offers online stores to small businesses, is not likely to make a substantial number of hires. But he says the company can help enable the small businesses it serves to grow and hire more people.
Brett Commaille, a partner at venture capital fund Angel Hub Ventures, agrees. He says while it’s true that investors look to scale firms with the fewest number of employees as possible, tech firms can enable the creation of new jobs by introducing certain efficiencies.
He singles out the legal sector which he says is ripe for disruption. New start-ups could reduce the fees charged to clients by using technology to strip out the cost of infrastructure such as expensive buildings.
Clients such as small businesses that previously couldn’t afford the high fees, can then afford to use legal services and in so doing perhaps expand.
Llew Claasen (pictured above), managing partner at angel investment and venture capital firm Newtown Partners, backs this up.
Though he was unable to provide job number for those companies his firm has invested in, he points out that on-demand services can help add new jobs in those sectors they serve.
He says one of the firm’s investee companies, SweepSouth, which provides domestic workers on demand, has created 2 500 jobs with 71% of these previously unemployed. Another, SA Florist provides a growing online customer base that enables 280 small florists to collectively employ 1 000 people.
Better education needed
While he agrees with the World Economic Forum’s argument that technology increases wage inequality and doesn’t increase employment, he says the economic impact of a lower number of better-paid jobs would still increase overall income, if not equally.
“We no longer live in a world where the goal can be full employment, if we don’t also invest heavily in education and create knowledge workers,” he adds.
Ian Merrington, the CE of the Cape Innovation and Technology Initiative (Citi), a government and private-sector partnership, believes that the government could intervene, by trying to understand the challenges that businesses are expected to face and by for instance insisting on coding being taught at all schools.
He suggests that perhaps the state should help companies to pay for staff to take three months off to reskills themselves. In addition he says companies need to consider more decentralised decision-making and look at more incentivised compensation for employees.
Business will also need to realign their recruitment and training priorities. “Where companies spent on a sales force, they now need to spend on someone who can write great algorithms that can help them to get to know what’s happening in their sales,” he says.
More specialised IT skills, such as data skills are in demand, as are those with a good understanding of maths and teamwork skills and the ability to be innovative. However he believes schools and universities are not preparing people in these areas.
Acceleration might help
Perhaps when it comes to upping job number at tech companies rigorous business support might help.
Grindstone, a 10-month acceleration programmes run by Knife Capital, has been slightly more successful in helping tech firms create jobs than other tech programmes.
The programme has helped 22 companies create 120 jobs over two years – mostly older companies – the average supported business had been running for six and a half years, employed 12 people and the founders were 36 years old.
Two rounds of the programmes have been concluded. A third is in progress and applications for a fourth are currently open.
Knife Capital partner Andrea Bohmert says the VC fund invested no funding in recipients, only knowledge, networking and time.
“We wanted to prove that you can engineer growth without investment and that investment is just an additional accelerator but not the main catalyst. We are subsequently looking at investing in some of the companies but these job numbers have been achieved without investment,” she says.
Bohmert says there’s a lot of emphasis on selecting the right candidates where the aim is to take on companies with the potential for growth. The cost per job at Grindstone last year was R40,000 per job, which she says is way below the government funded programmes.
“But to scale a Grindstone, funding is required and that’s where either corporate or government support would be required,” she says.
But more support will likely have to come from private investors. Claasen says the tech sector has struggled to convince the government of the importance to support it.
“Seeking to increase low-skill employment in primary industry is a fruitless exercise that is a race to the bottom – government money would be better spent on education, especially retooling via adult education programmes,” he reckons.
As new technologies begin disrupting more sectors, the role of tech companies in creating jobs is likely to remain a complex one.
A shorter version of this story originally appeared in The Financial Mail (go here for the original version). Follow Small Business Insight on Twitter at @Smallbinsight.
Just over half of the 1,309 companies that have graduated from Start-Up Chile in the six years since the programme's launch, are still operating, a report revealed this week.
The report, by Chile’s economic development agency Corfo which runs the programme, revealed that 51% of those companies that have graduated from the programme are still in operation - about a third of which have remained in Chile.
The agency says the 51% figure is similar to that of accelerators such as Y Combinator and Techstars, but higher than the average success rate in Silicon Valley, (not more than 10%).
Launched in 2010, Start-Up Chile provides equity-free funding to early-stage start-ups from around the world. The funding is accompanied by a one-year temporary visa. In exchange, participants must take part in activities that promote entrepreneurship.
Just under quarter of graduate companies (24%) are run by Chileans, with the remainder of from outside Chile – most of them from Argentina, the US, Colombia and India.
Corfo noted that about half of those firms still in operation are run by Chileans. This it says suggests that the cultural link and ability to tap the local network are critical.
Revenue, value exceeds public funds
Corfo says the revenue generated locally by graduate companies still in operation as well as their total value, far exceeds what the government spends on the programme.
Those companies that have graduated and are still in operation generate sales of $276m ($143m in just the last year) and are worth a combined $1.35bn (about 34 times the almost $39.8 million spent by the Chilean government on companies that have graduated, since the programme's launch in 2010).
The figure is likely higher as just 21% have been officially valued. The figure also does not include Spanish ride sharing app Cabify, which is valued at $320m.
Of the sales, a total of $42.6 million were generated in Chile ($26m of this in the last year alone – three times what Corfo spends on the programme per year).
In the last year, firms that graduated from Start-Up Chile calls between 2010-2013 posted incomes up to four times higher than those from 2013-2016 calls. This shows that it takes time before supported firms begin to take off, says Start-Up Chile director Rocío Fonseca.
In the same way, graduates from the first three years of the programme have raised over twice the amount of funds as those from the last three years. About $421m in capital has been raised worldwide, including $30.5m in Chile.
An analysis of 46% of all graduates showed that they have generated 5,162 jobs worldwide, 30% in Chile, with monthly salaries ranging from $1,216 to $1,280.
Following its initial single seed-funding programme, in which participants got grants of $40,000, Start-Up Chile now accelerates 250 companies a year in three programmes, one for female-led start-ups, another for existing start-ups and a follow-on fund for graduates.
Start-Up Chile has long been seen to hold greater social than economic benefits (see this post), but the report reveals that it is now beginning to produce the latter too.
As Chile's economy slows after years of booming growth important will be whether the programme can continue to help foster high-growth firms - and get them to stay in Chile.
Timm is a South African who writes on small business. He last visited Corfo in 2014. Click here to sign up for the monthly Small Business Insight newsletter.
Small businesses should be given more favourable tax treatment to encourage more to use a research and development (R&D) tax incentive, says a task team in South Africa.
The task team, which was set up by Minister of Science and Technology Naledi Pandor (pictured above) in October last year to look at ways of improving the R&D tax incentive. The task team's report was released to the public last month.
SME tax credit
The task team said the Department of Science and Technology should look into offering small businesses that apply for the R&D tax incentive (which has been in existence since 2006), a refundable tax credit (which unlike a non-refundable tax credit, is able to reduce a company's tax balance beyond zero).
The task team said a number of countries provide special treatment to SMEs investing in R&D. It said Australia, France, Canada, Singapore and the UK recognise the limited cash flows and tax liabilities of SMEs and thus allow SMEs a refundable tax credit, while only offering large companies a non-refundable or carry-over tax credit.
The report however says although it appears that the support provided to SMEs in South Africa is low, results from cross-country comparisons should be interpreted with care.
SMEs are taxed under a special regime in South Africa, using graduated rates and additional support is also provided to SMEs via direct instruments such as grants (such as the Support Programme for Industrial Innovation) provided by other government departments.
Review pre-approval system
In addition the task team has recommended that the department look at changing the system of approval of projects as the current pre-approval process has led to bureaucratic delays and put off smaller businesses from applying to the incentive (see this earlier post).
The tax team said in its report that R&D tax deductions peaked at R1.2 billion in 2010/11, but decreased by 70% in 2012/13, and 38% in 2013/14 over 2010/2011. This, while the number of applicants in the programme declined from a peak of 305 applications in October 2012 to 221 in 2014/15.
It attributed the decrease to administrative delays and backlogs associated with the department moving from a retrospective system to a pre-approval system in October 2012.
In the past companies simply went ahead with research and applied for to write off the costs it spent on these. Under the pre-approval system a company had to first seek approval on whether a tax deduction could be claimed before proceeding with any research.
In 2015, 28 of the 34 OECD members had preferential tax treatment to R&D spending businesses. Most of these use the retrospective system.
The task team has recommended that the department immediately simplify and improve administrative processes and that it review the pre-approval system with the possibility of returning to a more refined retrospective method.
When it comes to the total direct and indirect government funding of businesses to carry out R&D as a percentage of GDP, the report says South Africa, with a contribution 0.05%, is among the bottom countries. South Korea and Russia, with figures above 0.4% top the list.
Fixing the R&D tax incentive so that it attracts more SMEs will therefore be crucial.
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