THE CRITICAL 5 PERCENTWhy Scaleup Companies are Vital for Job Creation in Kenya

“ Scaleups growing at 20 percent or more per year represented only 5 percent of Kenyan firms, but they created over 70 percent of the total new jobs.”

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EXECUTIVE SUMMARY

The key findings of this report are as follows:

• Kenya needs to create more than 3.9 million new jobs for young people by 2020. According to recent estimates, over 1.5 million people are unemployed in Kenya, and over a third of them are young people between the ages of 15 and 24.1 In addition, Kenya’s workforce is projected to grow by 3.4 million people between 2014 and 2020, due primarily to new young adults entering the job market.2

• Scaleups3 are some of the largest job creators in Kenya and can help to reduce youth unemployment. A 2013 World Bank survey found that only 5 percent of Kenyan companies were scaleups, but these companies created 72 percent of all new jobs generated during the previous three years.4

• Scaleups need access to markets, talent, and funding in order to succeed. According to a survey of more than 1,000 entrepreneurial leaders from around the world, these three factors are the most important contributors to a firm’s growth and success. Contrary to the prevailing wisdom among many policymakers, respondents did not mention other factors such as regulatory frameworks or low taxes.5

1 World Bank World Development Indicators (2012) & ILO, Economically Active Population, Estimates and Projections (6th edition, October 2011).2 Ibid.3 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.4 World Bank Enterprise Surveys (2013) http://www.enterprisesurveys.org5 WEF Entrepreneurial Ecosystems Report (2013): Exhibit 3-1

The data in this report is drawn primarily from the most recent World Bank Enterprise Survey (2013) of 713 Kenyan companies. This report analyzes job creation by firm type: startups up to three years old, scaleups greater than three years old that have 20 percent or more average annual employment growth, and other companies greater than three years old that have less than 20 percent average annual employment growth. More information on the methodology underpinning this analysis can be found on page eight.

This report was created by Edward Kong and Rhett Morris with assistance from Michael Goodwin and Matt Lerner.

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Kenya needs to create over 3.9 million new jobs for young people by 2020.

• 580,000 young Kenyans between the ages of 15 and 24 are unemployed.

• Kenya needs to create an additional 3.4 million jobs by 2020.

The economic turmoil of the last six 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.6 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 Kenya, especially 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.7 Economists note that unemployment among young adults has an adverse impact on skill development and future earnings for years to come.

This challenge is recognized by the nations leaders. “The young people of this nation remain its great hope, but their circumstances are also its most pressing challenge,” according to President Uhuru Kenyatta. “The immediate problem is finding them dignified work; their unemployment jeopardises any hope of common prosperity.”8

As more young people enter the labor force, demand for jobs will continue to grow. Kenya’s workforce is projected to increase by almost 3.4 million workers between 2014 and 2020, due primarily to new young adults entering the job market.9 When combined with the more than 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.

6 International Labor organization, Global Employment Trends 20127 World Development Indicators, The World Bank & ILO, Economically Active Population, Estimates and Projections (6th edition, October 2011)8 State of the Nation Address (http://www.president.go.ke/state-at-the-nation-address-at-parliament-by-h-e-president-uhuru-kenyatta/)9 ILO, Economically Active Population, Estimates and Projections (6th edition, October 2011)

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

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Scaleups are some of the most important job creators in Kenya and can help to reduce unemployment.

Although much attention has been given to startups and microenterprises, supporting existing entrepreneurs who can scale their businesses is crucial to meeting Kenya’s job needs. Scaleups create more jobs than other types of firms. The World Bank Enterprise Survey, which was last conducted in Kenya in 2013, provides comprehensive company-level data about firms in emerging economies.10 The Enterprise Survey demonstrates the significant impact that scaleups have on job creation: scaleups growing at 20 percent or more per year represented only 5 percent of Kenyan firms, but they created over 70 percent of the total new jobs generated during the previous three years.11

A significant body of research on North American firms confirms that scaleups are the drivers of job creation, demonstrating that a small percentage of fast-growing companies 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 percent of firms account for almost all U.S. private sector job growth.12

• Scaleups represent 5 percent of Kenyan firms, but create 72 percent of new jobs.

• Jobs created by scaleups are durable and of high quality.

10 The World Bank, Enterprise Surveys (http://www.enterprisesurveys.org)11 Ibid.12 Acs, Zoltan, William Parsons and Spencer Tracy. “High-Impact Firms: Gazelles Revisited.” Small Business Administration Office of Advocacy, (2008).

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6 / The Critical 5 Percent: Why Scaleup Companies are Vital for Job Creation in Kenya

Scaleups are also durable. The same study found that only 3 percent of fast-growing firms failed in the four years after they experienced high-growth.13 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.14

These statistics may actually underestimate the full job creation impact of scaleups, which can strengthen value chains and generate positive spillovers for other firms. Research has shown that successful innovation-driven enterprises, which have similar growth characteristics to scaleups, create about five auxiliary jobs for each direct job.15

Finally, scaleups promote their employees’ professional development. As these companies grow and add new employees, workers who started in entry-level positions often move into middle management, developing project management and governance skills along the way. These skills add value to the company and allow workers to increase their earnings.

13 Ibid.14 Henrekson, Magnus and Dan Johansson. “Gazelles as job creators: a survey and interpretation of the evidence.” Small Bus Econ, (2010) 35:227–24415 Ibid.

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

The World Economic Forum, in partnership with Stanford University and Endeavor Insight, recently conducted a survey of more than 1,000 leaders at entrepreneurial companies around the world in order to identify factors that helped their companies to grow.14 Contrary to the prevailing wisdom among many policymakers, these respondents rarely mentioned regulatory frameworks and taxes, lack of coordination with major universities, and low-quality entrepreneurship education as barriers to the growth of their companies. These leaders instead highlighted the importance of the following three factors:

• Human Capital (mentioned by 62 percent of entrepreneurs surveyed): 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 in our survey.

• Accessible Markets (60 percent): This includes public- and private-sector customers in domestic and foreign markets. Respondents frequently cited domestic, private-sector customers as most critical to their growth.

• Funding and Finance (59 percent): This includes all types of debt and equity capital available to entrepreneurs. Various forms of equity capital, such as seed investments by family and friends, angel capital and venture capital, were rated most highly by respondents.

• A group of over 1,000 leading entrepreneurs identified access to talent, markets, and funding as the most important factors that helped their companies grow

14 WEF Entrepreneurial Ecosystems Report (2013): Exhibit 3-1

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Methodology

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 1,200-1,800 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.”15

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 job figures using sampling weights. Therefore, findings should be considered valid at the economy level.

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

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Endeavor is leading the global high-impact entrepreneurship movement to catalyze long-term economic growth. Over the past fifteen 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 900+ individuals leading 600+ high-impact companies. These entrepreneurs represent over 400,000 jobs and over $6.5 billion in revenues in 2013 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 on how to accelerate entrepreneurs’ success and support the development of strong entrepreneurship ecosystems. In 2013, Endeavor Insight joined with the Kauffman Foundation and the World Bank to launch the Global Entrepreneurship Research Network.

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