Launching a Startup in Non-Business Friendly Environments

“Icebreakers” are entrepreneurs that defied the odds of extraordinary difficult contexts to become many times, pioneers’ of entrepreneurship in “non-business friendly” environments where private endeavor is discouraged or even prosecuted.

Entrepreneurs like Ivo Boscarol from Slovenia, who wrote himself, in the 80’s, the first regulations of the industry in his country to become the CEO the first private ultralight aircraft manufacturer in the former Yugoslavia, called Pipistrel. Or Boris Beylin, a Russian entrepreneur that started his company “Big Filter” in 1988, to produce fuel filters, buying land and an old factory from a former state-owned transport company in an abandoned area that was in ruins and then the transport company sued him to recover everything restored… He went back to the right track and expanded internationally to the point of being able to compete against Bosch, among others.

Unfortunately, many entrepreneurs continue to find great difficulties that humper their initiatives and end up limiting the creation of jobs and economic growth, which in turn, mean less or no tax revenues for governments and decreasing social welfare.

In our research, we have identified some factors that, combined, can become the “perfect storm” for companies, old and new:

• Weak institutional frameworks: excessive and unpredictable taxation, policy uncertainty, arbitrary bureaucratic interventions and corruption are the main constrains to develop an effective institutional infrastructure. For instance, the “bribe tax” impose a severe burden on enterprises that could range from 2% of annual revenues to a high of 8% according to the European Bank for Reconstruction and Development (EBRD) during the post-Soviet Easter Europe.
• Weak property rights: entrepreneurs cannot rely on courts to enforce their contracts, there is little legal provision for shareholding, little protection of private property rights and employment restrictions.
• Limited access to financial capital: unobtainable private investment and bank loans. Consequently, many times entrepreneurs have to start their businesses with limited access to capital and rely on profit reinvestment for growing. In addition, market capitalization on stock exchanges of some countries or regions can also be low, with rare Initial Public Offerings (IPOs) and capital increases through the stock market. This also compounds the financial constrains that new firms can face, hampering investment and growth.
• Societal views: In societies with traditional state-dominance or with group-oriented cultures, people can be extremely risk-adverse and critical of failure. They can also often consider success a source of envy rather than a cause for celebration. In some cases, the negative perceptions of the press can magnify such effects.
• Well-educated employees without market competences: there can also exist a lack of skilled labor in business, management and accounting. The education system can be unsuited to the requirements of a market economy, either because it has low quality or has an excessive allocation of resources to fundamental research but not problem solving and social sciences, business law, economics or business administration.

So, how can entrepreneurs thrive in non-entrepreneurial contexts?

Based on our field research, we found the following common trends to succeed in such difficult environments, that can also apply to more stable economies:

• Adaptability or “Tack“: this term borrowed from sailing shows us that sailors wishing to navigate directly into the wind must move in a zigzag pattern, to make gains by constantly changing direction and cutting forward a different way each time. What this can teach us is that entrepreneurs, especially in difficult contexts, must jump from one opportunity to another to keep the forward momentum, accumulating experiences and developing skills and business knowledge “on the go” to thrive. For instance, a Czech flower business began making semi-finished iron products and ended up as one of the world’s largest hospital bed producers. Instead of focusing on what you are passionate about only, you can take advantage of whatever opportunity you found on your path. But watch out! As the risk of capsizing when changing tack is high.

• Cognitive approach: once one of the tracks turned out to hold true potential and business became substantial, entrepreneurs became more cognitive in their opportunity-related processes.

• Dealing with ambiguity: they dealt with the complex environment of lack of market data and transparency for understanding real consumer needs, and absence of general business information and scarce business training with an approach of making things happen. They applied a wide range of approaches from “official” to “grass-root/guerrilla” methods and from “reactive” to “proactive” to help their companies overcome such challenges.

• Capture value: combine internal mechanisms like the design and fine-tuning of the right economic model with external mechanisms that include right to use an asset and freely transfer its ownership. These mechanisms were not optimum and there were threats such as profit privatization or high taxation percentages. But even if property rights were not secured, profits were usually reinvested, against the odds, in the firm to make it grow, like the case of the Czech flower business mentioned before.

• Growth: spend the minimum to get started. You can start with low-commitment models toward potential clients and partners and subsequently increase the mode of collaboration which would allow access to more resources (investments, capabilities infrastructure, etc). In some of the real cases analyzed, entrepreneurs explored ways such as common joint ventures to expand, acquisitions to access existing infrastructure or macro-educational projects to train prospective employees.

Prats, Mª Julia; Sosna, Marc; Sysko-Romanczuk, Sylwia, “Entrepreneurial Icebreakers: Insights and Case Studies from Internationally Successful Central and Eastern European Entrepreneurs”, UK: Palgrave Macmillan, 2014. Buy the book here.