Beyond disruption: Policy action to grow digital entrepreneurship

In March 2017, the G20 Young Entrepreneurs’ Alliance (G20 YEA) and EY conducted a survey of the G20 YEA network of young entrepreneurs. The survey was distributed through G20 YEA country sherpas to the global G20 YEA network, through an online platform. A total of 243 young entrepreneurs provided responses to the survey.

Read the full report here.

Excerpt: Digital business environment

In this year’s survey, the importance of foundational, framework policies were at the forefront of young entrepreneurs’ minds as they sought to push beyond disruption and drive new innovation. In fact, the top legal and regulatory challenges young entrepreneurs in the survey identified are uncompetitive tax rules (19%), prohibitive business regulations (18.6%) and policy uncertainty (18%). These are considered far more of a concern than privacy (6.6%) or data governance (4.4%).

The results may also be an acknowledgement that digital is in everything. Young entrepreneurs are not looking for specific support for digital, but for a more effective overall business, legal and regulatory environment, which by default includes digital. In any case, the resounding message from the survey is that conditions on the ground are still creating some headaches for growth, even if, on paper, laws and regulations have become more favorable. For example, one respondent stated that, while the time to start a new business in their country had come down 10-fold in the last decade, the operational processes to maintain a business nonetheless remain burdensome.

Labor laws

“Young entrepreneurs in our market are lucky to be the beneficiaries of a relatively modern and digitalized legal and regulatory system. Young entrepreneurs struggle most with the education side, not understanding the key requirements of each type of entity and how to be compliant. An important role of government in supporting young entrepreneurs is updating the requirements of employment law to reflect the changing nature of labor markets from full time to gig based. The current requirements for new employers can make it difficult to make the first crucial hires in a business’s growth phase.”

Nathan Murphy – Founder and Director, JobHack, Australia

Headwinds can be self-perpetuating. For example, our survey results show that, among the young entrepreneurs trying to scale and access new sources of capital, nearly 80% reporting prohibitive business regulations as a barrier also report difficulty accessing foreign capital; more than 80% reporting lack of policy certainty also struggle to access foreign capital; and 70% of those reporting uncompetitive tax rules also have difficulty tapping foreign investment. The survey also suggests that clarity on regulation and taxation is critical on the entrepreneurs’ side, and on the investor side, for access to capital more broadly. For example, for those respondents finding later-stage VC financing moderately inaccessible, 28% report tax rules as a headwind, and more than 20% report issues with policy uncertainty and red tape.

Digital is an important counterbalance to keep business growing even where headwinds remain. For example, all respondents who thought that foreign investors can scale up or integrate digital or data-focused businesses with other investments in their portfolio also saw policy uncertainty as a big barrier. At the same time, all respondents who thought global benchmarks (such as user engagement) are available for digital-first businesses also reported that prohibitive business regulations are a challenge in their market. And all those who thought that digital businesses are global businesses, and that the value proposition is easy to understand across borders, saw uncompetitive tax rules as a headwind.

Young digital entrepreneurs are also turning to digital to work around their business and tax headwinds, which gives government some hints on where to take action. For example, all respondents who agreed that digital-enabled financing platforms make it easier to access very early-stage capital view uncompetitive tax rules as their major barrier. Through digital, young entrepreneurs also indicate working to adapt to lack of policy clarity by establishing solid networks. All of those who thought entrepreneurs can connect better with angels and VCs through digital platforms also agreed that lack of policy certainty is a major legal or regulatory barrier.

Turning these headwinds into tailwinds for young entrepreneurs is a matter of getting the policy basics right. Taking an on-the-ground perspective on regulation and legislation, through the eyes of young entrepreneurs, seems important. The key will be to drill down into what this means in a digital-first environment. For example, young entrepreneurs’ demand for a streamlined business start-up process could look quite different for a young, digital-first firm than for a more conventional small- or medium-sized enterprise. The other major observation is that it is not necessarily about less regulation, but more effective rules. For example, the top-rated regulatory change recommended in the survey is the introduction of a mobility visa for young entrepreneurs in the G20, suggesting a priority set for young people that policy will need to meet. There are nuances specific to each market that governments will need to understand.

Also see: EY Labor and Employment Law Guide.

EY Legal Services Contacts:

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Peter Katko – Global Digital Law Leader

 

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Roselyn Sands – Global Labor and Employment Law Leader