THE ROLE OF STARTUPS IN THE FORMATION OF GLOBAL BUSINESS ECOSYSTEMS - Наукові конференції
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THE ROLE OF STARTUPS IN THE FORMATION OF GLOBAL BUSINESS ECOSYSTEMS

30.11.2022 17:41

[1. Економічні науки]

Автор: Yana Ruslanivna Petrenko, bachelor's degree, State University of Trade and Economics, Kyiv, Ukraine



Over the past two decades, the information technology industry has become the driving force behind the competitiveness of the world economy. The development of information technologies has changed the ways and methods of management, which has led to rethinking approaches to management, acquiring knowledge, introducing innovations, creating new business models of enterprises, etc. With the development of information technologies, startup companies are intensively developing, which are flexible to the needs of the market and offer specific solutions for their target audience.

The establishment of a start-up company is usually implicitly associated to establish itself as an innovative, internationally successful company that seeks to go IPO after a phase of rapid growth (< 10 years). An important milestone is unicorn status, which is associated with a company having a valuation of at least US$1 billion (or Decacorn: US$10 billion) before an IPO or exit. A prerequisite for achieving such an ambitious goal is the development of a product or service that has great potential for international sales. Such products are usually located in consumer markets, as it is easier to achieve a correspondingly large sales potential here. Another prerequisite is access to larger-scale growth finance in the form of venture capital to achieve rapid market penetration and internationalization. In particular, in the case of IT-based offerings, this is often the only way to protect unpatentable ideas (first-mover advantage). 

In most developed countries, the development of startups is institutionally supported by simplifying the legal framework governing their creation and activity, creating a favorable investment environment, and building direct interaction with the educational community and other entities of the entrepreneurial start-up ecosystem. Open innovation is a type of business management strategy for innovation that promotes collaboration with individuals and groups outside the corporation. This is a strategy that allows businesses to further expand their boundaries by collaborating with external specialists and firms.

The startup ecosystem can only thrive when its players work hand in hand. While both the public and private sectors can make a significant impact, there are certain steps that only the public or private sectors can take to improve the startup ecosystem and make it a better place for entrepreneurs and startup founders.

The Startup Ranking service, based on an analysis of the number of startups in 137 countries of the world, developed a rating in which Ukraine took 42nd place in 2018 (215 startups), ahead of Lithuania and Estonia. The first place in the ranking is taken by the USA with 45,004 startups, second place in India with 5,203 startups, and third place in Great Britain with 4,702 startups. (https://www.startupranking.com). To evaluate the startups themselves, the service uses the SR Score indicator. You've probably heard of Grammarly, which attracted a record-high investment last year and became one of the most successful worldwide startups. Other well-known companies include MacPaw, Attendify, People.ai, Ajax Systems, Petcube, Reply.io, etc.

Investment into the startup sector went up 10 times during the past 5 years – from $39 million in 2014 to $509 million .in 2019. More than 146,000 patents and utility models have been registered in Ukraine since 2007.

Moreover, The Cabinet of Ministers of Ukraine officially launched Ukrainian National Startup Fund – a public initiative to support innovation projects, informed the fund’s representatives at a dedicated press conference. It comprises ₴390M of national startup funds, and applicants can get up to $75k. 

In general, more than $571 million were invested in Ukrainian startups, which is $27 million more than a year earlier. Another record in 2020 was funding in the early stages—more than $161 million were raised in the seed and A-rounds, which exceeds more than three times the figures in 2019. At the same time, the number of transactions increased sixfold. The main funds invested in Ukrainian young projects were AVentures Сapital, Genesis Investments, ICU, Dragon Capital, and Horizon Capital.

AVentures Capital's 2020 report mentions that three companies become "unicorns"—companies with a capitalization of more than $1 billion. These are Gitlab, the blockchain project Bitfury, and Grammarly.

One of the most accurate statistical reports on the Ukrainian technological ecosystem state is the 360 Tech Ecosystem Overview, a project of the Ministry of Digital Transformation. According to these data, there are 1,700 product and 533 service companies in Ukraine, 1,233 of which are located in Kyiv.

Before the war, the government and international organizations drew attention to the potential of Ukraine's startup economy, and although resources were relatively scarce, some initiatives were taken to support growth. In 2019, the Ukrainian Startup Fund was created and the Strategic Vision for 2025 was developed. The strategy focused on supporting early-stage startups through funding and facilitating access to support services, as well as strengthening globally competitive incubation and acceleration programs. More than 200 startups became the beneficiaries of this fund.

Due to the consequences of the war, Ukraine fell sharply by 16 positions, but managed to remain in the world top 50, occupying 50th place. It ranks 30th in Europe, dropping 9 positions in the regional ranking.The creation of a competitive startup ecosystem is connected with many political and economic aspects. The formation of an appropriate environment for the development of startups should be part of an integrated long-term strategy of economic development and be based on the strengths and prospects of the Ukrainian economy, scientific environment, and fiscal and educational systems.

Ukraine ranks fourth in the world in terms of the number of certified programmers. At the beginning of 2019, about 184,000 people worked in 4,000 IT companies in Ukraine in the IT sector. The IT sphere grows by an average of 20% per year, for comparison in Europe this indicator is equal to 6%.

According to the IT Market Catalog of Ukraine, more than 100 Fortune 500 companies use the services of Ukrainian developers. According to the same source, Ukraine ranks 24th in the ranking of the most attractive countries for software development.

The country has managed to maintain a strong scientific base, there are many qualified programmers, however, when it comes to launching and developing startups, founders face a number of problems. Thus, Ukrainian startups are forced to focus on the west and look for financing abroad, since it is still not easy to attract financing for a project in the country. Moreover, many Ukrainian programmers find work abroad and try to launch and develop their project there, while some decide to do it in their own country.

Financing is a very important issue for the survival and development of small and medium-sized enterprises. Considering the growing need for expanding and diversifying forms of financing modern engineering in the form of business, especially at the initial stage, it is necessary to pay more attention to the study of business angel investments. For the success of a startup, especially in such science-intensive fields as engineering, it is necessary, at a minimum, to have an original idea with a development perspective, the owner of this brilliant idea, and investors, who can act as business angels. Taking into account that the activities of business angels are not sufficiently disclosed in the scientific literature, this topic is of interest for study and research.

The most important role in the formation of the startup ecosystem belongs to the state. First of all, a regulatory and legal framework must be formed, on the basis on which the ecosystem will function. Innovative and innovative investment activities in Ukraine are generally regulated by a number of laws, in particular: "On innovative activities", "On scientific and scientific and technical activities", "On scientific and scientific and technical expertise", " On investment activity", "On joint investment institutions", etc., the provisions of which are contradictory and fragmentary in themselves. There are no laws regulating startup activity in Ukrainian legislation at all. There is no legally established definition of startup companies, and the legal basis for their functioning remains unsettled.

In particular, in 2017, a law was adopted on canceling the registration of foreign investments and simplifying the employment of foreign highly qualified specialists. The government's plans to create an Innovation Council, which will promote startups and transfer, have announced

innovations in the national economy. In many countries of the world, the state not only forms the legal and legal basis for the functioning of startups, but also acts as an investor, and participates in the creation of innovation centers, and technology parks, that is, it effectively contributes to the development of the startup ecosystem. In Ukraine, the role of the state as an ecosystem entity remains limited. Potential investors of startups can be private and public capital, business angels, venture capital, investment companies and funds, crowdfunding platforms, etc. The characteristic of the domestic investment market of startups is the significant participation of international capital - it accounts for about half of investment deals and the lion's share of the total volume of investments.

Investors invest mainly in startups at the seed stage when relatively small investments are required for the development of startups. Agreements to invest in startups at the growth and maturity stages remain isolated, although the amount of investment is significantly higher than seed stage investments. Investments are made exclusively by private investors. The successes of domestic startups testify to their high commercial potential, competitiveness at the global level, and therefore, the growing attractiveness for business. The state does not participate in its investment.

Several aspects emerge as recommendations for action for Ukraine. Above all, a vision as a founding country is necessary to focus on support measures. The initial phase should be supported by specialized start-up centers for each industry, with coaching for start-ups in the form of MOOCs and staged funding linked to individual business model hypotheses. At the initial stage, a joint development with well-known companies should be promoted as tandem financing measures. At the stage of growth, it is necessary not only to expand state venture capital but also to improve the general conditions for foreign venture capitalists. Some of these measures are already included in the coalition agreement. However, measures need to be fully implemented to harness the growth potential of innovative startups.

Consequently, startups have become one of the key drivers of the country's growth, as the number of startups has grown significantly in recent years while contributing to regional development by encouraging innovation, accelerating institutional and structural change, improving productivity, and introducing new products and services to the market.

Conclusions from this study and prospects for further research in this direction. The peculiarities of the formation of the Ukrainian ecosystem of startups are determined by the action of multidirectional factors. On the one hand, the development of the domestic ecosystem is restrained by the lack of state support, limited financial resources, so far little experience in creating world-class start-up companies, and unfavorable conditions for doing business in Ukraine. It is necessary to improve the current legislation and harmonize its provisions. Adaptation of the world's leading experience and development of international cooperation in the field of innovative entrepreneurship should become parallel directions. Borrowing the experience of countries that have high competence in matters of innovative development will help both at the stage of forming the appropriate regulatory and legislative environment for startups and in the subsequent stages of their operation.

On the other hand, the high intellectual potential of the Ukrainian information technology sector and the international experience accumulated in it, the increase in the total number of Ukrainian startups and their economic value, the positive dynamics of the participation of international and Ukrainian private business in the financing of startups, and the creation of new generation infrastructure organizations contribute to the effectiveness of the formation of the startup ecosystem. , promotion of startups to society, etc. The trends of recent years give grounds for optimistic forecasts of the development of the domestic ecosystem of startups. 

Today, fostering and encouraging start-up entrepreneurship is even more important given the impact of the recent economic crisis. In general, it was emphasized that startups contribute to higher employment levels, as new jobs are created. Moreover, the analysis highlighted the disproportionate contribution of startups to employment compared to established companies. [9;10]

Research conducted on the ecosystem of start-up projects and the structural factors that make up the landscape of start-up entrepreneurship has shown that it is based primarily on innovative ideas and effective cooperation between founding members and the most important institutional bodies.

References:

1. Eufordigital (2020), “Innovation ecosystems for start-ups: the key ingredients of success”, at: https://eufordigital.eu/ru/innovation-ecosystems-for-start-ups-highlighting-the-key-ingredients- for-success/ (accessed April 10, 2021)

2. Gaskell A. (2019), “Where is the best place for startup development in Europe?”, at: www.forbes.com/sites/adigaskell/2019/04/05/where-is-the-best-place- to-create-a-startup-ineurope/?sh=82bdca95c525 (accessed 5 April 2021) 6. Yorday E. (2020), “The best countries in Europe for startups 2020”, at: www.nimblefins.co.uk/ business-insurance/best-countries-europe-startups-2020#nogo

3. "Legal aspects of legislative regulation of startup companies in Ukraine", at: www.businesslaw.org.ua/pravovi-aspekty-startup/ (accessed April 4, 2021)

4. I.V. Lytvyn, A.V. Melnyk (2018), "Formation of innovative start-up ecosystems on the example of higher educational institutions in Germany", "Young Scientist" No. 4 (56), art. 799-805

5. Ministry of Economic Development, Trade and Agriculture of Ukraine (2020), Information on doing business in Great Britain, Department of Interaction with Exporters and Export Promotion, Ukraine.

6. Okashin R. (2018), "How Sweden became a "unicorn factory" in 10 years", at: https://hightech.plus/2018/09/11/kak-shveciya-za-10-let-stala -fabrikoi-edinorogov (accessed April 11, 2021)

7. SGE (2019), “The venture market in Switzerland in five questions and answers”, available at: www.sge.com/ru/article/poslednie-novosti/20193-venture-explained (accessed 2 April 2021)

8. Startup Jedi (2019), “Startup Ecosystem of Estonia”, at: https://startupjedi.vc/ru/content/startapekosistema-estonii (accessed 07 April 2021)

9. Sytnyk N.I. (2017), "Current state and prospects for the development of the startup ecosystem in Ukraine", Scientific Bulletin of Kherson State University, Issue 27. Part 2, at: www.ej.kherson.ua/journal/economic_27/ 2/30.pdf 2. Machusky V. (2017),

10. Sytnyk N.I. (2017), "Startup ecosystem as a component of innovation policy", at: https://cyberleninka.ru/article/n/ekosistema-startapiv-yak-skladova-innovatsiynoyi-ekosistemi/viewer




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