The prevailing narrative around tech start-ups is a positive one. Ambitious people flock to them hoping to improve the world and make themselves rich. Venture capitalists make bullish bets on hunches over the next big tech company and future profitability.
Policy-makers are in on the hype too. Supporting start-up ecosystems with the aim of stimulating innovation, job creation and economic development, all the while hailing local start-ups valued above $1bn — known as ‘unicorns’ — as major success stories.
But the reality of the social and economic impact of tech start-ups does not always align with this optimism.
“Tech isn’t necessarily good or bad,” says Melanie Hayes, the managing partner of Bethnal Green Ventures, a London-based early-stage ‘tech for good’ venture capital (VC) fund, which backs those aiming to tackle social and environmental problems.
“The biggest challenge in the tech industry is when it lacks positive intent, it can very easily become harmful,” she says. “I don’t think jobs in start-ups are good or bad. But there are definitely good and bad start-ups to work for.”
Stories of start-up failures and excess pervade the media, such as Adam Neumann, the extravagant ousted founder of WeWork, the office rental start-up that fell from grace in 2019. Besides, concerns mount over social media’s impact on democratic societies, environmental damage from tech operations, and the quality of work created by gig-economy platforms. There is a need to bring the tech start-up hype into a practical perspective.
Tilting the dichotomy in favour of the benefits created by start-ups over their unintended consequences will be crucial for these newly founded businesses to align with the environmental, social and governance agenda.
Entrepreneurship above all
Growing numbers of start-up programmes worldwide aim to foster entrepreneurship-based growth by supporting the creation of new firms, particularly in innovative sectors such as ICT. But with start-up failure rates as high as 90%, remuneration offered at early-stage companies often falls short.
A recently published study of Danish registry data between 1992 and 2011 found that, on average, employees hired by start-ups earn roughly 17% less over the next 10 years of their career than those hired by larger, established firms. Those joining start-ups with large numbers of employees earned a slight premium, according to the study.
“Blind enthusiasm for entrepreneurship seems wrong,” Olav Sorenson, professor of strategy at UCLA and a co-author of the Danish study tells fDi in a joint interview with is co-author, Rodrigo Canales. “The question is whether or not it is possible to craft policies that generate more rapidly growing start-ups without having lots of small experiments that fail,” he explains.
Mr Canales, an assistant professor of organisational behaviour at Yale, agrees: “If the main purpose of start-up ecosystems is to create a bunch of good jobs, that is probably the wrong objective.”
While some start-ups may grow to become large firms and create many jobs, Mr Canales believes more common benefits of start-up ecosystems include business model innovation and personal development for workers.
Jeppe Rindom, the co-founder and chief executive of Danish fintech unicorn Pleo, which offers payment cards for employees to buy work-related products, is not surprised by the study’s findings. He notes that start-ups often compensate staff with stock warrants that only pay out if the company is successful, and that some applicants are willing to take a pay cut of 10% to 20% for the learning experience.
“We hire candidates that really take a deliberate choice of having a career in start-ups,” he says. “They value the journey and education from being part of building a business.”
Between June 2017 and 2021, the number of active monthly start-up jobs in Denmark grew from 203,000 to 844,000, according to Danske Bank’s Hub initiative.
Camilla Rygaard-Hjalsted, the chief executive of Digital Hub Denmark, a non-profit that promotes the Danish tech ecosystem, says start-ups have a dual purpose.
“They can either take off and become unicorns, which is huge for the country in terms of job creation and investment,” she explains. “Or start-ups help digital transformation at corporations that are falling behind.”
In a world where industries are being redefined by disruptive technologies, such as blockchain, quantum computing and artificial intelligence (AI), established firms have increasingly made bets on start-ups as a means to foster innovation and stave off competition.
In 2020, corporate venture capital (CVC)-backed funding of start-ups reached an all-time high of $73.1bn, an increase of 24% from 2019, according to a report by CB Insights, even if the number of CVC-backed deals fell marginally by 1.7% over the same period.
The Kauffman Foundation, a private, non-partisan organisation that promotes and tracks US entrepreneurship, has also seen a sharp increase in people starting businesses, as many found themselves unemployed or in part-time jobs during Covid-19 lockdowns.
The Kaufmann indicators of early-stage entrepreneurship found that the rate of new entrepreneurial activity reached its highest level for 25 years in 2020, with an average of 380 of every 100,000 adults becoming entrepreneurs in a given month.
Philip Gaskin, vice president of entrepreneurship at the Kauffman Foundation, tells fDi that their research indicates business creation increases in economic downturns.
“Entrepreneurship drives economies,” he says. “New entrepreneurs have the ability to take an idea and turn it into a reality, and to create more new jobs than big businesses. But the hurdles they have to jump through to start these businesses need to be reduced.”
While start-up early survival rates in 2020 fell to their lowest level since the Great Recession, the average number of jobs created by US start-ups in their first year stood at 5.03 per capita, according to Kauffman.
Internationally, perceptions of entrepreneurship have been impacted by the pandemic, too. An annual survey across 43 countries, conducted by the Global Entrepreneurship Monitor (GEM), a research consortium, finds that uncertainty has presented more opportunities for entrepreneurs.
Aileen Ionescu-Somers, the executive director of GEM, says that the “chaos” thrown up by Covid-19 —such as big shifts in trade and shopping, changes to behavioural patterns and disruption to business models — has led many to consider pursuing new ventures.
“Early-stage entrepreneurs tended to see more opportunities in the pandemic, perhaps because they had more flexibility to pivot, than those who had been operating their businesses for more than 42 months,” she adds.
But in terms of which start-ups create the most value, Ms Ionescu-Somers notes that capital-intensive and those requiring more skilled workers tend to pay better, and have the most potential to create jobs and wealth in local economies.
“By their nature, tech start-ups have products and services that are very much differentiated from other start-ups, so the barriers to entry are high,” she explains. “Easy entry sectors generally have smaller margins and lower returns.”
But differentiation can come with profound societal effects, as shown by the new workforce models pioneered by gig economy start-ups. Ride-hailing apps, such as Uber and Lyft, and on-demand delivery services, such as Deliveroo and DoorDash, have been heavily criticised over job insecurity, low pay and a lack of rights for workers on their platforms.
A 2021 analysis of 300 Deliveroo riders’ invoices in the UK, conducted by the Bureau of Investigative Journalism, found that a third made on average less than £8.27 per hour, which is less than the current UK national minimum wage of £8.92 per hour for those under the age of 23. Notably, one worker was logged in for 180 hours and was paid the equivalent of just £2 per hour.
“With companies such as Uber and Deliveroo, a major barrier to them being profitable would be if all of their workers are being paid for the hours they are logged onto the app,” explains Alex Wood, a sociologist of work and employment, who has extensively researched the gig economy.
“The tech sector is a very individualised and competitive system,” he continues. “If you don’t have much bargaining power, in theory you might have more flexibility, but really your employer is just determining when you work.”
In several countries, regulators have stepped in to empower platform workers. Deliveroo is reportedly considering pulling out of Spain, which will become the first EU country to amend its laws on August 12 to give gig economy workers employee rights, such as collective bargaining.
Back in 2019, New York became the first US city to pass a minimum wage for Uber and Lyft drivers, with other cities since trying to follow suit.
On the other hand, the gig economy offers attractive employment opportunities in developing countries. Statistical analysis by the International Labour Organisation (ILO) indicates that app-based work tends to pay higher than traditional sectors, ranging from 22% more in Ukraine to 86% more in Ghana.
While the value of the global start-up economy is estimated at almost $3tn, according to Startup Genome, an innovation policy and research firm, about 90% of start-ups will fail in their lifetime. Research suggests that significant revenue and job growth at a few successful start-ups is substantially offset by these losses in other firms.
A 2014 study of more than 158,000 start-ups across 10 countries worldwide found that among those in their fifth year, total job destruction — or the declines in headcount among retrenching companies — accounted for 65% of all the new jobs created in that year.
Mr Canales points out that the well-known rate of start-up failure has broader implications.
“We know that the employees who take personal risks together with the start-up risks, probably need some future support finding their way through the labour market again,” he says.
Others question the whole notion of start-ups and entrepreneurship as isolated forces for prosperity.
Daniel Isenberg, an active angel investor and professor of entrepreneurship at Babson College, points out that economic complexity, rather than a focus on early-stage companies yields more benefits.
“‘Start-up ecosystems’ is a misnomer,” he exclaims. “To look at one particular age of company, one particular financing model or one particular segment is intrinsically a mistake.”
Mr Isenberg argues in his book, ‘Worthless, Impossible and Stupid: How contrarian entrepreneurs create and capture extraordinary value’, that entrepreneurship is not defined by the age of a company, but rather the value it creates.
“Public leaders have latched onto this notion of unicorns being some proxy for growth. It’s not — it’s a proxy for concentrated shareholder wealth,” he says. Up until July 15 this year, 291 new unicorns were created, according to Crunchbase, which is more than any other full year on record.
Hypergrowth pushes outsourcing
As private investors finance and push start-ups to scale at a rapid pace, many companies look for tech talent outside their locations base. Pleo, like many start-ups, has had to hire software engineers internationally.
“You can build a globally successful company out of Denmark … and I think it is important to have most of the workforce here,” says Mr Rindom. “But as a shareholder, I think we can build the company with a workforce split across 20 different countries.”
Scarcity of software engineers, in particular, means that some jobs and economic benefits created by start-ups are in countries where talent is available, rather than where the company was founded.
A study by the consultancy Korn Ferry found that the US tech sector could lose out on $162bn worth of revenues annually unless it finds more high-tech workers. On the flip side, Korn Ferry predicts India could have a surplus of more than one million high-skilled tech workers by 2030.
Uma Rani, a senior economist at the ILO in Geneva who has researched digital labour platforms, has tracked a rising trend of early-stage tech businesses outsourcing work to developing countries.
“Start-ups sitting in the US or Europe have a lot of their labour coming largely from developing countries in Asia, which are often English-speaking, such as India, the Philippines and others,” she explains.
Workers in India are the largest suppliers of work on digital labour platforms, such as Topcoder, accounting for more than a third of all work completed in 2020, the majority of which was software development, according to ILO data.
While software development and technology are the most sought skills of remote workers on online labour platforms, with its share of total outsourcing increasing from 39% in 2018 to 45% in 2020, the platforms are often used for other more menial tasks.
Start-ups claiming to be powered by AI, for instance, often outsource tasks to humans in developing countries, as they develop machine learning programs to automate the process.
A 2019 study of more than 2800 AI-start-ups in Europe, conducted by London-based MMC Ventures, found that 40% do not, in fact, use any AI.
Ms Rani contends that while tech start-ups can provide opportunities for workers in developing countries through these online-based platforms, there is often a lack of social protections and implementation of labour standards for these workers.
“It is beneficial to have tech start-ups for local economies,” she says. “But tech start-ups should keep in mind that what they are creating should be for the welfare of all and not something that would lead to the worsening of situations for workers.”
Diversification over tech-focus
While some governments often put intense focus on promoting and supporting start-ups and the tech sector, experts believe a more holistic approach is needed.
“At scale, having many entrepreneurs makes a huge societal difference,” says Ms Ionescu-Somers. But a focus on technology alone will not suffice.
“Societies need many entrepreneurs in all viable sectors,” adds Ms Ionescu-Somers. “Governments need to create the optimal environmental conditions for individuals to start and grow a business.”
This sentiment is echoed by Mr Isenberg, who believes that scaling up businesses of all ages and sectors is far better than putting an overt focus on start-ups and technology.
As part of the Babson Entrepreneurship Ecosystem Project (Beep) he set up in 2010, Mr Isenberg has developed methods for using entrepreneurial ecosystems as a tool for regional economic development.
One Beep initiative in the city of Manizales, Colombia, focused on “quick wins”, such as helping existing businesses to grow more rapidly within months, instead of start-ups. This approach has paid off — companies in Manizales that joined the ‘Scalerator’ programme saw an average 55% increase in sales growth within a year of joining and made 703 new hires.
While start-ups and entrepreneurship can lead to the creation of economic and social value, their unintended consequences can also have a pernicious effect. And with venture capitalists making increasingly large investments into tech companies, pushing them to scale rapidly at the expense of the communities they purport to serve, this phenomenon looks likely to stay.
For economic developers looking to start-ups and entrepreneurial ecosystems to stimulate economic growth and local opportunity, an awareness of this infatuation with tech-enabled businesses — and its pitfalls — will be crucial.
For Ms Hayes, the question of whether tech start-ups and VC are forces for good boils down to whether there is social and environmental purpose embedded into their mission from the outset.
“If there was good intention, then ideally that will manifest in how that business grows and scales, and the value it creates for other people,” she says.
This article first appeared in the August/September print edition of fDi Intelligence. View a digital edition of the magazine here.