Education and prior work experience (collectively termed human capital) are vital to entrepreneurial success. Many base-of-the-pyramid individuals, however, lack the necessary knowledge and skills to succeed as entrepreneurs owing to poverty, limited opportunity, and discrimination. What role does coaching these individuals play in improving their business performance?
This study evaluates coaching as an intervention during new business incubation and its relationship to entrepreneurial learning of core management skills and concepts and the ability to deploy this knowledge towards improving business scaling (revenue growth) and profitability(profit growth) following the intervention. It also examines the heterogeneity in the effects of coaching and incubation on entrepreneurs with different demographic characteristics, including age, race, gender, ethnicity, nationality, and prior knowledge.
Socially and educationally disadvantaged entrepreneurs often lack the knowledge and prior experience to develop and scale their businesses. Owing to limited educational and employment opportunities, poverty, and discrimination, these entrepreneurs frequently experience low business growth and performance. What factors influence the effectiveness of early-stage venture incubation and mentoring for promoting learning, scaling, and profitability among these entrepreneurs? Two studies in a business incubator serving low-income, underprivileged entrepreneurs in South Africa evaluate this question.
Study 1 uses a matched, two-period case-control design to investigate the effects of incubation on business growth by comparing selected and incubated companies to similar also-selected but not incubated ones. The findings show that incubated companies grew 22% more in revenue and 15% more in employment than not incubated companies over the six months between applying to and graduating from the incubator.
Study 2 uses instrumental-variable models to evaluate the role that mentoring played in improving business performance by analyzing data from seven cohorts of participants in the incubator randomly assigned to mentors. The findings show that participants assigned to high-ability (versus low-ability) mentors had 3.2% higher revenue and 3.5% higher profits one year after incubation.
Further, the benefits of being mentored were more significant for businesses whose entrepreneurs had less pre-entry knowledge and experience, suggesting that mentoring supplemented gaps in human capital. These findings have implications for ways to support disadvantaged entrepreneurs and their businesses through mentoring and early-stage venture incubation.
Existing research at the nexus of institutional theory and entrepreneurship suggests that lowering institutional barriers to forming, growing, and exiting new firms can affect the types of start-ups that entrepreneurs found in a region. These institutional changes could influence entrepreneurs’ perceptions of the value of partnering with venture accelerators and potentially improve these sponsors’ capacity to select high-growth start-ups to fund and develop.
This study evaluates these ideas by developing and testing three hypotheses. First, institutional reforms improve entrepreneurs’ perceived value of venture accelerators for resources that affect new venture development.
Second, they reduce the average probability of being selected for new applicants, due to a surge in the number and heterogeneity of new applicants within accelerators’ local ecosystems.
Third, institutional reforms increase the quality of selected cohorts for accelerator managers due to increases in the average quality and human capital of new applicants. To evaluate these hypotheses, I analyze data from 13,770 applicants to venture accelerators over multiple application cycles between 2016 and 2018 in 170 countries. I use a differences-in-differences design to estimate the effects of institutional changes on start-up selection after regulatory reforms that reduced the time and procedures to start new firms, obtain credit, and resolve bankruptcy for entrepreneurs.
The findings have valuable implications for how governments, especially those in emerging and developing economies, can support high-growth entrepreneurship.