Role of startups in an economy. Why must every government promote small business & startup in their country?
Every transformation in the world begins with an idea. When an idea — big or small, acts as a catalyst for change it becomes an innovation. Precisely, startups are nothing but innovative ideas to solve problems and transform lives.
An abstract definition of a ‘startup’ will describe it as a state of mind to forgo stability and combat uncertainty in exchange for tremendous growth opportunities and a steep learning curve.
A simple and more pragmatic definition would describe a ‘startup’ as an enterprise that has recently commenced operations. Commonly used synonymous phrases for startups are ‘fledgling business organizations/enterprises’ or ‘budding companies/firms’.
However, in recent times, rapid technological advancements and an increase in the number of STEM (Systems-Technology-Engineering-Mathematics) graduates have led to a proliferation of technology entrepreneurs or tech-startups. Thus, startups are now largely attributed to budding technology companies.
Many countries in the world including India have experienced massive growth in the number of startups launched every year. While it is difficult to ignore an increasing number of startup businesses going kaput every year, the indispensable role of startups in shaping an economy cannot be denied.
Now let us examine how startups drive economic growth.
Role of Startups in an economy
There are primarily two types of startups. They are :-
Subsistence startups: Startups that want to achieve a decent level of financial independence while enjoying their work but do not aspire to make it big. These companies are also known as lifestyle businesses.
Transformational startups: Startups that significantly impact the economy and aspire to continually expand their client base within their country of origin and abroad. The last few years have witnessed a rapid expansion in the number of transformational startups being launched each year. These are the startups that create ripples in an economy.
They impact the economy in the following ways:-
Drive technological growth
- These days almost all companies invest in Research and Development (R&D) to improvise their existing systems, technologies, and solutions. But startups focus more on introducing newer technologies in the market and providing cutting-edge solutions to clients’ issues.
- Agility is one of the strengths of startups as they eliminate complex multi-layered organizational hierarchies. Consequently, they are able to turn innovative ideas into state-of-the-art products or technologies within a minimal time frame. However, not all ideas culminate into a stand out product or solution.
- Many times big technology giants like Microsoft, Apple, Google, etc acquire these startups thereby giving them the necessary boost to expand. However, as per some business stalwarts, technological innovation is achieved in the real sense when startups resort to seed financing. Seed funding is a process by which a budding firm raises capital for its initial operations from friends and relatives or angel investors. Many big companies these days are engaged in angel investing.
- However, some innovative technologies are disruptive causing significant disturbances in the economy. Disruptive technologies have to be adopted widely before society can adapt to them. Moreover, every breakthrough innovation will be met with stiff opposition from established players and society’s general resistance to change.
- The growth rate of technology has a direct correlation with the production/output of goods and services. Therefore, startups play a crucial role in increasing the GDP (Gross Domestic Product) of an economy.
- Thus, startups facilitate rapid market penetration of new technologies and are at the forefront of technology innovation.
Create new markets
- As startups revolutionize technology, they create new target markets. Big players which were once upon a time small ambitious fledglings, are now able to create global markets.
- The Silicon Valley, an abode for some of the most successful technology companies in the US, has become a household name as technology innovations from this valley have permeated into every nook and corner of the globe. Notable examples are Oracle, Facebook, Intel, Cisco, eBay, etc all of which began as a small idea with a global vision. In the years to come, more innovations with global spillover effects are likely to be born here.
- Startup friendly policies adopted by many countries will give birth to more Silicon Valleys all over the world, thereby leading to a proliferation of new markets.
- The Government of India has initiated a flagship program called ‘Startup India’ to encourage entrepreneurship in the country. The three pillars of this initiative are as follows:-
- Incubation support.
- Financial incentives and funding programs/schemes.
- Hand Holding during entry and exit.
Increase employment opportunities
- Startups play a prominent role in generating a high employment rate. An economy with abundant employment opportunities embarks on the path of full-fledged economic development.
- With tech geeks willing to take risks and preferring passion to high remuneration, startups are hot employment avenues for them. Startups give them the right platform to harness their entrepreneurial orientation and access to ample challenging projects.
- Moreover, the startup culture nurtures strong bonds among employees, which is an attractive aspect of tech freshers. However, like every other company, a startup, too requires a good mix of experienced and inexperienced talent to grow and sustain. Experienced employees will invariably expect higher perks and salary which startups may not be able to offer. But they can compensate for it by providing non-monetary benefits and financial incentives.
- In India, the Department for Industrial Policy and Promotion (DIPP) estimated that startups have created 80,000 jobs in the country since 2016. However, there is no conclusive evidence to affirm these numbers.
- But with a plethora of startups going bust every year, sudden job losses and salary cuts cannot be ruled out. Every government should create a favorable environment to foster entrepreneurship and offer adequate physical and financial support infrastructure to fledgling enterprises.
- Nevertheless, a strong vision backed by an adaptive growth-oriented work culture makes startups a sought-after source of employment.
Create localized impact
- The birthplace of a successful startup venture undergoes significant transformations due to a surge in employment opportunities, higher pay scales, and improved lifestyles. Some prominent examples are Infosys which changed the face of Bangalore city, Alibaba which positively impacted the city of Hangzhou or Microsoft which made the city of Redmond an Information Technology (IT) hub, etc.
- However, these employment hotspots will lead to large scale talent migration from other parts of the country or the world. If demand for services is unable to keep pace with the large supply of talent, it will exert downward pressure on remunerations in the long run. It will also lead to related economic problems like population explosion, high real estate prices, inflation, underemployment, etc in these places.
Make an impact at multiple levels
- Increase shareholder’s wealth: When startups become big established players in the market they are eligible for listing themselves on stock exchanges. As of January 2020, Transpect Enterprises, Alphalogic Techsis, and Valencia Nutrition are three Indian startups successfully listed on the Bombay Stock Exchange (BSE) startup platform. Thus, startups can become investment avenues for wealth creation.
- Facilitates Economic Revival Post Recession: It is widely believed that the US accelerated job growth rate post ‘The Great Depression’ by encouraging a startup ecosystem. This statement is affirmed by the technology giants that grew and flourished on its soil. It still fosters the startup culture with a lot of companies springing up each year with a staff strength of less than 50.
- Increase market competitiveness: Contrary to common belief, startups exposed to intense competition in the initial stages of their business thrive and sustain in the long run. Competition forces you to have a customer-centric approach and limit costs. Venture capitalists too can help in developing frugal managerial instincts by controlling over financing. Market competitiveness thereby leads to the high quality of services and job creation.
Thus, we can rightfully say that startups are engines of economic prosperity and growth.
So if you are contemplating launching your own firm, then you are contributing to your country’s growth in the best possible way. But since 80% of the startups go kaput with many failing at the idea stage itself, it is recommended to take mentorship support from industry experts right from idea conception to the launch stage.
FAQ – Startups and Economic Growth
Q: What is a startup? A: A startup is an enterprise that has recently commenced operations and is characterized by innovative ideas aimed at solving problems and transforming lives. It is a state of mind that embraces uncertainty and seeks tremendous growth opportunities.
Q: What is the role of startups in driving economic growth? A: Startups play a vital role in driving economic growth in several ways:
- Technological Growth: Startups focus on introducing newer technologies and cutting-edge solutions to the market, driving technological advancements and innovation. Their agility allows them to transform innovative ideas into state-of-the-art products within a short period, contributing to GDP growth.
- Creating New Markets: Startups revolutionize technology and create new target markets. They have the potential to transform small ideas into global innovations, as seen in the success stories of companies like Oracle, Facebook, and Intel. Startup-friendly policies and initiatives foster the birth of new markets, stimulating economic growth.
- Employment Opportunities: Startups generate employment opportunities, particularly in the technology sector. They attract individuals with a passion for innovation and entrepreneurship, providing a platform for them to work on challenging projects. Startups also foster a strong bond among employees, creating an attractive work culture.
- Localized Impact: Successful startup ventures transform their birthplaces by creating employment opportunities, improving lifestyles, and boosting local economies. This can be observed in cities like Bangalore, Hangzhou, and Redmond, which experienced significant transformations due to the presence of successful startups.
- Multiple Impact Levels: Startups can have an impact at various levels, including increasing shareholders’ wealth when they become established players and are listed on stock exchanges. They also contribute to economic revival after recessions by creating jobs. Furthermore, startups foster market competitiveness, leading to the provision of high-quality services and job creation.
Q: How do startups drive technological growth? A: Startups drive technological growth through their focus on innovation and introducing new technologies. They have the agility to eliminate complex hierarchies and quickly turn innovative ideas into state-of-the-art products or solutions. Startups often attract investments and partnerships from big technology companies, enabling them to expand and further drive technological advancements.
Q: What is the impact of startups on creating new markets? A: Startups have the ability to create new target markets through their innovative ideas and solutions. Many successful global companies, such as Oracle, Facebook, and Intel, started as small startups with a vision for global impact. Startup-friendly policies and initiatives, like India’s “Startup India” program, encourage entrepreneurship and lead to the birth of new markets, fostering economic growth.
Q: How do startups contribute to employment opportunities? A: Startups play a prominent role in generating employment opportunities, particularly in the technology sector. They attract individuals with a passion for innovation and entrepreneurship, providing them with platforms to work on challenging projects. The startup culture also fosters strong bonds among employees, making startups attractive employment avenues.
Q: How do startups create localized impact? A: Successful startup ventures can create significant transformations in their birthplaces. They generate employment opportunities, higher pay scales, and improved lifestyles. Cities like Bangalore, Hangzhou, and Redmond have experienced positive changes due to the presence of successful startups. However, large-scale talent migration to these areas can lead to challenges such as population explosion, high real estate prices, and underemployment.
Q: How do startups contribute to economic revival and market competitiveness? A: Startups can contribute to economic revival after recessions by creating jobs and fostering innovation. They bring fresh ideas and entrepreneurial spirit to the market, which can stimulate growth. Startups thrive in competitive environments, as competition forces them to adopt a customer-centric approach and limit costs. This drive for market competitiveness encourages startups to provide high-quality services, which in turn leads to job creation and economic growth. Venture capitalists also play a role in developing frugal managerial instincts by controlling over-financing and encouraging efficient resource allocation.
Q: How do startups increase shareholder’s wealth? A: When startups become successful and established players in the market, they have the opportunity to list themselves on stock exchanges. By going public, startups become investment avenues for wealth creation. Shareholders who have invested in these startups can benefit from the company’s growth and success, potentially leading to increased wealth.
Q: How do startups contribute to economic growth during and after recessions? A: Startups can contribute to economic growth during and after recessions by creating jobs and fostering innovation. In many cases, a startup ecosystem has been instrumental in accelerating job growth rates, as seen in the US post the Great Depression. Startups bring fresh ideas, entrepreneurial spirit, and the potential for disruptive innovations that can revitalize the economy.
Q: Why is it important for governments to promote startups? A: Governments play a crucial role in promoting startups due to their significant impact on economic growth. By creating a favorable environment for entrepreneurship, governments can encourage the birth and success of startups. This includes providing support infrastructure, financial incentives, funding programs, and policies that foster innovation and ease regulatory burdens. Promoting startups can lead to job creation, technological advancements, and the overall prosperity of the economy.
Q: How can individuals contribute to their country’s growth through startups? A: By launching their own startup ventures, individuals can contribute to their country’s growth by fostering innovation, creating employment opportunities, and driving economic development. However, since startups face high failure rates, it is recommended to seek mentorship and support from industry experts throughout the journey, from idea conception to the launch stage. Taking advantage of programs and initiatives offered by governments and participating in incubation support, funding programs, and networking opportunities can increase the chances of success for aspiring entrepreneurs.
