Early-Stage Venture Incubation and Mentoring Promote Learning, Scaling, and Profitability Among Disadvantaged Entrepreneurs

Abstract

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.

Creating Extraordinary From Ordinary: High Resource Efficiency of Underdog Entrepreneurs and Its Mechanism

“…They are usually forced to start a business because they have no better job options ( Miller and Breton-Miller, 2017 ). As a result of their underdog status, these entrepreneurs face multiple obstacles in the entrepreneurial process, and they are more likely to experience low entrepreneurial performance than other entrepreneurs ( Mühlböck et al, 2017 ; Assenova, 2020 ). However, underdog status may also be a source of power, allowing underdog entrepreneurs to attain unexpectedly high levels of success.…”

“…Studies on entrepreneurial performance typically emphasize firm-level outcomes, such as growth and performance ( Wiklund et al, 2019a ). These studies did not consider the background of entrepreneurs and differences in resource input since businesses operated by underdog entrepreneurs are often considered to have low growth, low innovation, and low performance ( Faggio and Silva, 2014 ; Mühlböck et al, 2017 ; Nikiforou et al, 2019 ; Assenova, 2020 ). Our research focuses on exploring the positive aspects that a disadvantaged background brings to entrepreneurs, and we conduct a fairer and more comprehensive evaluation of the value of underdog entrepreneurs by evaluating entrepreneurial resource efficiency, which is a comprehensive measure of entrepreneurial performance.…”

“…Start-ups generally face strong resource constraints, and underdog entrepreneurs face additional obstacles. Their savings and education levels are low, they lack specific industry knowledge and experience ( Assenova, 2020 ), they are often discriminated against by resource gatekeepers, and they have difficulty obtaining resources ( Baron et al, 2018 ; Jammaers and Zanoni, 2020b ). Some underdog entrepreneurs are forced to use bribery and other informal means to obtain resources ( Baron et al, 2018 ).…”

“…Although there is no lack of inspiring counterattack stories of underdog entrepreneurs in the media, they are more likely to experience entrepreneurial failure, and their organizations often experience low growth, limited innovation, and poor performance ( Faggio and Silva, 2014 ; Mühlböck et al, 2017 ; Nikiforou et al, 2019 ; Assenova, 2020 ; Wierenga, 2020 ). On the surface, the underdogs may not be suitable for entrepreneurship because their contribution to economic growth and job creation is minimal ( Wennekers et al, 2005 ), and they may experience more significant life setbacks due to entrepreneurial failure ( Caliendo and Kritikos, 2010 ; Mühlböck et al, 2017 ).…”

Entrepreneurship as the safe option: Evidence from India

“…Many entrepreneurs open informal organizations, due to the cost and effort required for registration (Assenova and Sorenson, 2017). Despite growing interest in entrepreneurship in these places (e.g., Assenova, 2020;Carlson, 2021;Delecourt and Fitzpatrick, 2021), little research has investigated the returns to entrepreneurship outside of wealthy, Western countries.…”