Can ‘seed funding’ help African ideas grow? The value of start-up investment for young entrepreneurs in Ethiopia, Tanzania and Zambia

New Resources

R4D database

A Portal to DFID Funded Research ... Read more>

R4D logo


Research question

The creation of new companies by young entrepreneurs forms an important mechanism by which new ideas are encouraged and developed.  This is obviously true of information technologies (whether in Africa or elsewhere), but is also true in many other sectors; new business opportunities are often developed not by established market players but by new firms with young entrepreneurs.  However, the problem of credit constraints looms particularly large for this group; there are many reasons that young entrepreneurs in Africa may struggle to obtain ‘seed funding’ for their business ideas, even if those ideas would ultimately be a successful source of employment and growth.  Some recent high quality research on microcredit to microenterprises suggests that microcredit does not have high returns, and may be too blunt an instrument to effectively reach entrepreneurs. At least the marginal returns to relatively small capital increases do not seem high, and are unlikely to bring in potentially ambitious enterpreneurs. Are there alternatives to general microcredit or grant-giving, focused on identifying potentially successful entrepreneurs? Can one pick winners? Does it help more than proportionately to give relatively larger grants? In this project, we propose to award small seed grants to young male and female entrepreneurs in Ethiopia, Tanzania and Zambia, in order to study the value of such grants for development and implementation of new business ideas.

Project

We gave US$1,000 cash prizes to winners of a business plan competition in Africa. The competition, entitled 'Aspire', was intended to attract young individuals aspiring to become entrepreneurs. Participants were ranked by committees of judges composed of established entrepreneurs. Each committee selected one winner among twelve candidates; that winner was awarded a prize of US$1,000 to spend at his or her discretion. Our experiment is novel in two respects. First, we choose our recipients by competition, rather than randomization; we therefore estimate the effect of seed grants on high-potential recipients. Second, no previous research has provided sums of this magnitude to aspiring entrepreneurs. Six months after the competition, we compare winners with the two runners-up in each committee: winners are about 33 percentage points more likely to be self-employed. We estimate an average effect on monthly profits of about US$150: an annual profit of 80% on initial investment. Our findings imply that access to start-up capital constitutes a sizeable barrier to entry into entrepreneurship for the kind of young motivated individual most likely to succeed in business.

Output

  • Marcel Fafchamps, Simon Quinn. "Aspire" CSAE working paper WPS/2014-34, Dec 2014

  • Dataset for: "Aspire" (Zip-compressed archive containing: 'read me' text file, Stata data file, questionnaire, variable guide, working paper)

Researchers

Marcel Fafchamps (CSAE), Simon Quinn (CSAE)