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Entrepreneurs Speak OutBarometer of entrepreneurship Romania 2012

1 Barometer of entrepreneurship | Romania 2012

Entrepreneurs Speak Out

Foreword

Entrepreneurship is the essence of initiative, of market economy and the fundament of the society we live in. It is the source of leadership, of great family businesses and corporations which have marked the business world and people’s lives in recent history. Every nation that has thrived along the years has risen through the force and tenacity of its entrepreneurs.

We need this internal growth engine, in order to stimulate the sustainable development of the Romanian economy. We need successive generations of entrepreneurs, who can leverage our internal resources and return positive effects in the economy, in education, public administration, and social security.

Ernst & Young stands by entrepreneurs everywhere in the world – we have taken the mission to support them through dedicated competencies and services. We have committed to doing the same thing in Romania.

We have, thus, designed this project to support and promote successful entrepreneurial businesses and the principles which have made their performance in Romania possible. “Entrepreneurs speak out” is a project that becomes reality through entrepreneurs and for entrepreneurs.

I would like to cordially thank the Romanian Business Leaders foundation for their support and collaboration in the preparation of this survey.

In closing, I hope you will find this report both insightful and informative. We will continue the survey in 2013 as well and shall be very glad to show comparative figures in the next report.

Bogdan Ion Country Managing PartnerErnst & Young Romania


2Barometer of entrepreneurship | Romania 2012

A call to action

Entrepreneurs speak out

Romanian entrepreneurship – Next steps in developing our entrepreneurial environment

The conclusion of our barometer is that Romanian entrepreneurs lack relevant information about sources of financing, organizations that support entrepreneurship, specific entrepreneurial education and training. And, most of all, they show reduced self-confidence compared to rapid-growth market entrepreneurs. This is mainly due to the negative image of entrepreneurship and of venture failure in Romania and, also, to the sluggish economic environment.

These weak spots could be tackled by the Romanian government in better ways than before through designing a comprehensive framework to evaluate the effectiveness of existing measures that support entrepreneurship, identifying leading practices, focus on the enablers that will make a difference and increase the impact of incentives.

One key element in establishing such a framework is for governments to identify, observe and analyse key performance indicators (KPIs), which will help to gauge the success of past government measures and to plan future incentives. Of course, a great help for entrepreneurs from governments would be the reduction of red tape pressures and of the fiscal burden.

Equally important, entrepreneurs and all private stakeholders with an interest in developing entrepreneurship in Romania should continue to undertake their own initiatives in order to boost entrepreneurs’ morale, support them in their venture with mentoring and advice, financing alternatives, education and training, networking opportunities, and innovation partnerships between universities and private companies.

50%of respondents think that Romanian culture is encouraging for entrepreneurs

92%of respondents believe that funding is difficult for young entrepreneurs

51%of respondents feel that organizations like business incubators, mentor’s and entrepreneurs clubs, do not offer enough support due to lack of coordination



The perception Barometer of Romanian entrepreneurship

Entrepreneurs Speak Out is a yearly perception barometer that aims to explore and articulate in a direct manner the issues, expectations and needs of Romanian entrepreneurs, based on a qualitative and quantitative analysis of the Romanian entrepreneurship environment.

Our focus on entrepreneurship aims also to emphasize how policy makers could crucially assist entrepreneurs in Romania, as the efforts to reduce budgetary pressures and reform key sectors should be doubled by efforts of new business creation that will have the greatest impact on growth and employment.

This study also goes further and emphasizes not only what the government can do, but what entrepreneurs can do to seize opportunities. In the same time, Romanian entrepreneurs that have created successful businesses comment on their entrepreneurial story, the challenges of the Romanian entrepreneurial environment and measures to be taken for improvement.

Goals:

The analysis is focused on five fundamental enablers: entrepreneurship culture, access to funding, regulation and taxation, education and training, and coordinated support from specialized associations.

• Provide a simple tool to measure Romanian entrepreneurial competitiveness.

• Allow year-on-year comparison to measure progress.

• ►Simple and recommendation-oriented indicators.

Our approach is based on:

The opinions of entrepreneurs on the progress and impact of specific enablers.

Quantitative economic and social indicators.

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Our barometer sums up perception of 95 surveyed entrepreneurs and 12 directly interviewed Romanian entrepreneurs.

This Barometer follows a global initiative of Ernst & Young. Its first edition was published on the occasion of The G20 Young Entrepreneurs Summit (31 October - 2 November 2011) in Nice, France. Our study, called Entrepreneurs Speak Out – A call to action for G20 governments, analyzed individually and jointly the entrepreneurial ecosystem in G20 countries: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Korea, United Kingdom, United States and European Union.



• Low business start-up costs• Successful entrepreneurs willing to share their stories

• Improve communication around entrepreneurs success stories

• Promote the career and personal development opportunities offered by entrepreneurship

• Increase awareness for alternative financing methods (VCs, PEs, business angels)

Strengths Weaknesses

ThreatsOpportunities

High potential – Still some barriers to tackle

Romania presents a challenging environment for entrepreneurs, with only 2.3% of respondents describing the country as the best place for them, while 29% look to United States as the most favorable environment for young entrepreneurs.

Given this very low percentage, compared with the EU average of 33% respondents thinking that EU is the best entrepreneurship environment, authorities, entrepreneurs and pro-entrepreneurship private initiatives have to work very hard towards a more proactive frame of mind and a more friendly environment for Romanian entrepreneurs.

“Opportunity driven entrepreneurship” is dominated by pull factors such as market opportunities, new products and new sources of profit, versus “necessity driven entrepreneurship”, motivated by factors such as unemployment and work related insecurities. Source: Uhlaner and Thurik, 2007

SWOT

A call to action

Entrepreneurs speak out

However, when looking at new businesses registered, Romania is holding up well, above countries such as Poland and Hungary. This could be explained by the fact that a larger share of entrepreneurs in Romania may have been compelled into starting a business for lack of alternatives on the labor market (according to EC, only 43% in Romania vs. 55% in EU were opportunity-driven entrepreneurship initiatives in 2009).

• Weak entrepreneurial culture• Stigma attached to business failure• Access to funding negatively affected by economic

environment• Low R&D expenditure• Stock market illiquid, therefore IPOs remain

unattractive

• Alternative financing methods could remain unconvincing in the eyes of entrepreneurs

• Without a strong credit rebound, poor access to finance could persist for some time



Source: Ernst & Young Entrepreneurs Speak Out Barometer

Cannot say 4%

Yes 50%

No 46%

Figure 1. Do you think that the Romanian culture encourages entrepreneurship?

A negative view of business failure

Overall, Romanian culture is perceived as supportive of entrepreneurship by 50% of the respondents. In comparison, we rank below the 61% EU respondents of The Ernst & Young Nice Côte d’Azur 2011 Entrepreneurship Barometer that think EU has a supportive entrepreneurship culture.


3025201510

50

It is a career failure

It is a learning opportunity

It is a barrier to future

business projects

Has no impact on future business projects

Indicates the lack of necessary skills

Figure 2. How is business failure perceived in Romania by society, business environment and investors?

Also, a large portion of surveyed entrepreneurs believe that business failure is a barrier to future business projects (32%) and an indicator of lack of necessary skills (24%). The magnitude of these answers shows that Romania is far from becoming a supportive society for entrepreneurs, indicating its tendency to discourage risk-taking in start-ups.

Entrepreneurship culture

Even if 50% of respondent entrepreneurs think that Romanian culture is encouraging for them (below the 61% EU entrepreneurs benchmark), their answers regarding how they think business failure is perceived by investors, business environment and society as a whole are not at all encouraging: only 12% of them answered that it is perceived as a learning opportunity.

Improving the communication around entrepreneurs’ success stories (67% of respondents) and promoting the career and personal development opportunities offered by entrepreneurship (62% of respondents) would have the highest impact on the improvement of the perception of entrepreneurship in the next 3 years.



However, during the last three years, respondents feel that the positive image of entrepreneurs obtained by introducing innovative products in the market have had a great impact. This is despite the low R&D expenditure that Romania incurs compared with the EU (reference year 2009).

Romania is actually a modest innovator in EU27 (according to Innovation Union Scoreboard 2011) in terms of technologies and processes, mainly due to lack of links between businesses and universities and lack of spillovers of talented and technically competent graduates into SMEs.

2,693

973

2,793

1,054

2004

0.00% 0

0.50%

500

1.00%

1,000

1.50%

1,500

2.00%

2,000

2.50%

2,500

3,000

3,500

2005

Researchers (per million of population) in EU

R&D expenditure (% of GDP) EU27 R&D expenditure (% of GDP) Romania

Researchers (per million of population) in Romania

2006 2007 2008 2009 2010

1,83%

0,39%

1,83%

0,41%

1,85%

0,45%

1,85%

0,52%

1,92%

0,58%

2,01%

0,47%

2,00%

0,47%

2,882

945

2,937

869

3,081

898

2,999

895

Source: World Bank

Figure 3. R&D expenditure and number of researchers (Romania vs. EU)



• Investors, business environment and Romanian society as a whole do not see business failure as an opportunity to learn, as compared to economies with stronger entrepreneurial cultures which are more tolerant and understanding of business failure and do not perceive this as a barrier to entry.

• Romanian entrepreneurs identify the promotion of entrepreneurship success stories in the media and universities as key in the next years, in line with the realities of countries with stronger entrepreneurial culture.

• Another effective method to promote entrepreneurship is to emphasize the career opportunities it offers, the creation of new jobs and its social function.

• Innovation is perceived as a key cultural enabler for entrepreneurship in Romania.

For government:

►Promote entrepreneurship in the media, in schools and universities; explain what it means, what it offers and its role in society. Emphasize its role as innovation enabler.

►Support and communicate business sectors ready to generate higher employment.

For entrepreneurs:

Contribute to improvement of your country’s entrepreneurial culture by promoting your own success: take stock of your victories, big or small, and make them known throughout your network. Equally, don’t be ashamed of failure. It is an important learning source for everybody.

Focus on innovation, because it is demonstrated that new innovative products and services developed by entrepreneurs improve the image of entrepreneurship in society.

Key findings: Our recommendations:

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1

2

Before building the health care provider MedLife, Mihai Marcu owned a mill, a bakery, a taxi company and a leather company, followed by ten years in banking.

“I am involved in encouraging more Romanians to become entrepreneurs because entrepreneurship should be cultivated. Unfortunately, the big problem in our country is the image entrepreneurs have. There is a strong misconception regarding them, as they are said in a negative manner to be some kind of ‘wise guys’. However, in Romania there is a large number of entrepreneurs who pay taxes, bring added value, create businesses and jobs every day. Therefore, the entrepreneur’s image is the first thing to be changed. Jean Baptiste Say defined the entrepreneur as ‘a mediator between capital and labour’, not the one who sells and buys land, rents companies or bribes because he works with the state. Entrepreneurs are actually the ones who drive the economy forward, who act and keep their dynamics when most of the surrounding areas become inert. Entrepreneurs are risk-takers and, very important, they not only assume risk, but also failure!”

Mihai Marcu PresidentMedLife

A negative view of business failure

Entrepreneurship culture




Education and training

The role of education is key to changing cultural bias and fostering a stronger entrepreneurship ecosystem. The Romanian education system and other stakeholders are making efforts towards encouraging entrepreneurship attitudes and changing cultural reflexes in Romania, but efforts should continue and intensify.

All three factors are perceived as having improved during the last three years by Romanian, as well by EU entrepreneurs. The only factor for which improvement is not perceived with the same certainty is entrepreneurial training in high schools and gymnasiums.

Entrepreneurship is intrinsically linked to education and training given the general level of education of the population and the education directly aimed at forming entrepreneurs:

Signs of progress but still long way to go

Figure 4. Evolution of school enrollment (Romania vs. EU)

101

50

82

24

120

100

80

60

40

20

02000 2004 20082001

Secondary school enrollment (% gross) EU Secondary school enrollment (% gross) Romania

Tertiary school enrollment (% gross) EU Tertiary school enrollment (% gross) Romania

2005 20092002 2006 20102003 2007

102

52

83

28

103

54

84

32

104

56

84

38

101

57

83

42

103

59

84

46

103

60

86

52

102

60

88

56

101

61

93

62

104

62

95

64

105

61

97

59

Source: World Bank

Entrepreneurial education and training in Romania is in line with the EU trends in respect of:

1) conferences and seminars in entrepreneurship

2) specific programs in universities/business schools, and

3) mentoring programs for entrepreneurs.



Countries mostly in favor of:

The more educated, the more entrepreneurial

Forming entrepreneurial mindsets & entrepreneurs

In USA 95.1% of small-business owners have bachelor’s degrees or higher. In Romania 53.3% entrepreneurs are college and high school graduates.

The underfunding of the education system is a well-known fact, public expenditure on education in Romania stretching to 3.64% of GDP in 2012, the last in EU27 and far from the EU27 average of 5.5%.

Some good signs could also be spotted in the Romanian education system regarding education on entrepreneurial subjects. Since school year 2010-2011, a new curriculum including entrepreneurial education has been introduced at secondary school (10th grade). This curriculum is expected to raise awareness of entrepreneurship among teenagers as an alternative career path.

All of the above plus the current economic context, when jobs are scarce and unstable, led to a change in the traditional perception of the ideal career valuing stability to an emerging entrepreneurial mindset. Trying something on your own has begun to be considered acceptable.

This trend should be further supported by educating pupils and students about entrepreneurship as a valid career option not only through formal education, but also through internships, conferences and dissemination of success stories. Entrepreneurs have already embraced this path, some of them promoting their entrepreneurship experience in schools, universities and media.

This view is supported by entrepreneurs’ perception on the measure with the highest impact in changing cultural habits regarding entrepreneurship (see page 6).

Also, this approach is supported by respondents from countries with friendly entrepreneurial environments. In USA, the most developed entrepreneurial environment in the world, 48% of respondents endorse peer success and promotion of success stories as the best method to improve outlook on entrepreneurship as a career option (against an average 26% across other G20 countries), while two-thirds do not see dedicated training as crucial.

However, good progress can be identified in bringing secondary school (e.g. high school) enrollment rates towards the EU ones, while in tertiary education (e.g. college) we have already reached the EU level. Nonetheless, apart from the absolute levels, we should consider the quality of Romanian education.

Education and training

Signs of progress but still long way to go

Promoting success stories to students: Brazil, India, United States

Coacing programs for entrepreneurs: Australia, Canada, China, Indonesia, Italy, Japan, Russia, South Africa, South Korea, Turkey

Specific programs at universities/business schools: Argentina, Brazil, European Union, Mexico, Saudi Arabia, United Kingdom

1

2

3



Radu Georgescu, president of IT company Gecad, has been an entrepreneur for 20 years – since college – when he used to write and sell software. Over the years, he has founded 5 very successful companies.

“Entrepreneurial education should start early. I, for example, am involved in a personal project – Journal of entrepreneurs in high schools – where I meet with high school students and discuss subjects related to success and failure, pleasure to do things, meaning of work, ethics, but also music, and sightseeing. The intention is to inspire young people to discover what suits them best, which path of development to choose and whether they have entrepreneur DNA or not. In addition to entrepreneurial education, Romanians should be encouraged to start a business especially through the exemption from certain taxes and by implementing the concept of ‘one-stop-shop’ to help with the formalities of starting a business.”

• ►Entrepreneurship education and training needs to become associated with a wider range of disciplines and with commercial thinking, rather than being viewed as purely a component of business studies .

• Dedicated training in high schools and universities should be supported also by practical, nuts-and-bolts training for people who need education to make the leap from product idea or market innovation to enterprise development.

For government:

Consider non-traditional education approaches that value real-life experiences.

►Provide training assistance for those moving from a corporate or public sector role to entrepreneurship.

For entrepreneurs:

Inspire students by telling your own success story: be constantly involved in education initiatives such as lectures, seminars and speeches.

Undertake specific, dedicated business start-up training when moving from a corporate or public sector role to entrepreneurship.


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12

Radu Georgescu PresidentGecad




Walid Abboud graduated from the École Supérieure des Sciences économiques et Commerciales in France,and in 1994 he founded together with other 3 friends in Romania A&D Pharma, a company with entrepreneurial DNA. “Entrepreneurship is a mindset, and if someone is too corporate, he or she has no place in our company”, said Walid.

“It will take an extreme change to encourage entrepreneurship in Romania. From a fiscal point of view, it would take measures with major impact in encouraging entrepreneurs, but with negligible impact for the state budget. For example, when a young person becomes an entrepreneur, he/she could benefit from certain exemptions in the first six months, such as payroll taxes. In addition, it would be helpful if there were more mentors for young entrepreneurs. In my early entrepreneurship ventures, I would have avoided dozens of mistakes if I had had a mentor. A simple office rental agreement becomes complicated if one is inexperienced. There should be people ready to devote two hours each week for pro bono mentoring: in person, by telephone or Skype. In addition to mentoring, discussion forums can be created where 3 to 5 entrepreneurs could discuss and learn from each other.”

Walid Abboud PresidentA&D Pharma




Access to fundingA huge task for all stakeholders

We have a long and difficult path to tackle in order to make funding accessible to entrepreneurs and for them to become sophisticated users of different financing instruments.

An overwhelming 93% of respondents believe that funding is difficult for young entrepreneurs, while none of them believes that access to funding is easy. The numbers speak volumes about the strenuous task of obtaining finance in a start-up or even in a later phase of venture development in Romania.

This is shown by entrepreneurs’ answers, but also by the low volume of bank loans in Romania (2.3% of GDP loans for SMEs in 2011, compared with 5.5% EU average in 2011), while venture funding stands below 0.1% of GDP.

Figure 6. Loans and venture investment in Romania vs. EU (scaled by GDP)

Figure 5. Do you believe that young entrepreneurs have easy access to funding in Romania?

Can’t say 4%

Relatively easy 3%

Relatively difficult

37%Very difficult 56%


Source: European Commission, ECB, EVCA, AECM

2011

0.21

0.22

0.40

0.36

0.20

2.27

2.31

2.01

1.72

2.31

0.03

0.04

0.31

0.27

0.04

5.49

6.03

5.66

5.06

5.662010

0 1 2 3 4 5 6 7

2009

2008

2007

Total venture capital investment (% GDP) EU Total venture capital investment (% GDP) Romania

Total loans volumes to SMEs (% GDP) EU Total loans volumes to SMEs (% GDP) Romania



In order to improve in the next three years entrepreneurship and entrepreneur long-term growth, Romanian entrepreneurs think that European Funds (63% of respondents) and Bank Loans (52%) would have the highest impact, while Private Equity, Business Angels and Venture Capital would have only a medium impact.

These answers do not necessarily show that development of financing instruments like PEs, VCs and Business Angels would not have a great impact on entrepreneurship, but show rather a troubling lack of information.

Apart from bank loans, that are widely considered to have been deteriorating during the last three years (71%), and European funds, considered to have an improved access rate during the last three years (48%), the answer with the largest weight has been that entrepreneurs cannot assess what was the development direction of other types of financing, like venture capital, private equity, business angels and stock market.

The answers show that these types of investors and sources of funds are still unfamiliar for the Romanian market and are little known. For this reality to change, business angels should cluster in networks, while VCs and PEs should be promoted more as alternative funding sources. (See above types of funding matched with the stage of development of the business venture.)

Given the fact that business angels and venture capitalists offer early stage investments, supporting their growth could be an important step in helping entrepreneurship in Romania.

CEE comprises Bosnia and Herzegovina, Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Macedonia, Montenegro, Poland, Romania, Serbia, Slovakia, Slovenia and Ukraine.

Figure 7. Funding matched with the stage of business development

Table 1. Amounts invested in Central and Eastern Europe Central and Eastern Europe (CEE), out of which Romania in 2011 (by PEs and VCs)

Source: Renda et al (2006)

Ente

rpris

e’s

reve

nues

Enterprise’s development stage

Entrepreneur, friends, family

Business angels

Seed/early stage VC funds

Bank loans and guarantees

Formal venture capital funds

Public stock markets

Lower riskHigher risk

“Valley of death”

Pre-seed phase Seed phase Start-up phase Emerging phase Expansion

*Bank leverage not included

Source: European Private Equity and Venture Capital Association

Type of investment* (mil EUR), 2011 CEE Out of which

RomaniaSeed 3,552 -Start-up 28,409 -Later-stage 27,844 4Growth 482,217 32Rescue/Turnaround 4,573 -Replacement capital 37,161 19Buyout 719,720 12Total 1,303,476 67



• ►Access to funding continues to be one of the most significant challenges for the creation, growth and survival of SMEs.

• ►Entrepreneurs increasingly need to be able to understand and tap into a diversity of funding sources as they grow, like business angels, VCs and PE funding.

• State aid schemes are seen as having a medium or low impact on improving entrepreneurs’ long-term growth – one possible explanation is that public aid fails to address the most recent SME challenges and because of the red tape involved in the state aid process.

For government:

Simplify access procedures for the state aid schemes you offer for start-ups.

In order to close the gap between entrepreneurs’ expectations and banks willingness to finance, public credit guarantees could play a greater role. Credit guarantees would mitigate banks’ reluctance to make high risk lending to firms without track record.

For entrepreneurs:

Consider alternative funding sources, such as corporate venturing, microfinance, VCs, PEs and business angels.

Study state aid schemes in order to find the best fit for your venture.

Open up to international markets as opportunities arise.


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Emi Gal FounderBrainient

Emi Gal, founder of Brainient, has one of the most interesting stories of entrepreneurship. He began working as a freelancer for foreign companies at the age of 16, and at 19 he founded his first company. Emi’s ambition is to list one of his companies on Nasdaq stock exchange.

“The most important financing instrument, especially in the development of the third business – Brainient – was angel investors. This is because, in general, angel investors invest when they know the industry well, and if your company operates in that area, this type of investment can help with a lot of resources and contacts. Venture capitalists and investment funds offer a more generous funding, but are not as involved or as knowledgeable in your domain. In addition, angel investors invest their money, venture capitalists invest the resources of others. If the latter investors change their strategy, venture capitalists suddenly become uncomfortable. An angel investor, as long as he likes the business, likes the industry and the company goes well, will not apply the same pressure a venture capitalist would to recover his money. That is because the angel investor is an entrepreneur and understands the situation.”

Access to fundingA huge task for all stakeholders




Regulation and taxation

Romania does not sound like a start-up paradise, not from a taxation and regulation point of view either. Entrepreneurs describe the regulation and tax environment as inefficient and not providing enough stimulus.

A pessimistic perspective

Regarding taxation and tax incentives for start-ups, they are indeed quite limited, as answers to our survey show. However, start-ups could benefit from tax incentives not specifically related to them, like the additional deductible allowance for research and development expenses of 20%.

Orlando Szasz Co-OwnerRenania

Figure 8. Do you think there is an effective legislation which supports starting a new business in Romania?

Figure 9. Do you think that the fiscal environment (taxation plus tax incentives) favors starting a new business?

Source: Ernst & Young Entrepreneurs Speak Out Barometer Source: Ernst & Young Entrepreneurs Speak Out Barometer

Cannot say 6%

No 58%

Yes 36%

Cannot say 10%

No 73%

Yes 17%

Romanian entrepreneurs are not satisfied with the regulatory and taxation environment as only 36% of them believe that Romania offers an effective legislation for starting a business versus 51% EU entrepreneurs.

Orlando Szasz became an entrepreneur during college, along with his brother, Roland, with whom he founded the company Renania Trade, manufacturer and supplier of work safety equipment.

“You cannot become an entrepreneur by reading books and then applying what you have learned. It is a mindset that you have or you don’t. The important thing is for the state not to prevent you from manifesting it. Regarding this point of view, there are two key elements for the entrepreneur: 1. legislative stability, in order to know that the rules do not change continuously; 2. less bureaucracy. Having ensured these two conditions, there are also specific issues related to infrastructure and other aspects to be dealt with. However, I consider them secondary compared to the first two mentioned.”




For now, four out of six measured factors related to regulatory and taxation environment deteriorated in the last three years, according to respondents.

These answers are partly supported by data of World Bank Doing Business Rankings (see in the table below). However, some factors have improved.

In order to boost long-term growth of entrepreneurship in Romania, entrepreneurs think that increasing tax incentives (87% of respondents), encouraging innovation (65%) and simplifying procedures to start a business (49%) would have the highest impact in the next three years.

Figure 10. Which of the following regulation and taxation aspects do you think have improved in the last 3 years?

Table 2. Indicators of ease of doing business in Romania

Improved Neither improved nor deteriorated Deteriorated

General level of regulation of day-to-day business

Lack of flexibility of the labour market

Ease of starting a business

Intelectual property protection

Innovative incentives

70

50

30

10

-10

Fiscal environment


Source: World Bank

Romania

2012 Change 2012-2007

Positive/negative

movement

Number of procedures to start a business 6 1 -

Time to start a business (days) 10 -1 +

Cost to start a business (% income per capita) 2.8 -1.6 +

Time spent on tax issues (hours per year) 216 18 -

Notice period (weeks) 4 1 -

Severance cost (weeks of salary) 0 -3 +



Ioan Istrate, owner of ice-cream producer Alpine 57 Lux, began as a craftsman providing services in the processing of wool and considers himself a ‘native entrepreneur’ embracing an intuitive style of doing business.

“The first step in entrepreneurship was a continuation of the family business which we have later developed and diversified. My family supported me since the beginning, although my wife would rather have bought household things, while I was investing money in equipment and other production fixed assets. We didn’t consider bank financing until after the post-revolution period of hyperinflation, taking the first loan to develop the business in 1997. To encourage more Romanians in becoming entrepreneurs, we should restrict the unnecessary bureaucracy and the public services and authorities that do not bring value. Also, a helpful measure would be to reduce labor taxation, which, at this time is excessive, and to simplify hiring for occasional jobs, a discouragingly complicated process nowadays.”

• ►The perception of progress made in the ease of starting a business is positive but still unsatisfactory.

• ►Entrepreneurs judge as unsatisfactory tax incentives and taxation for starting a new business.

• Encouraging innovation emerges as one of the top regulatory priorities for Romanian entrepreneurs.

For government:

Maintain the stability of the fiscal and regulatory environment.

Reduce bureaucracy for businesses, in order to decrease administrative pressures and costs on entrepreneurs.

Encourage innovation and start-ups.

For entrepreneurs:

Review the tax position thoroughly to fully utilize available deductions.

Evaluate restructuring options in light of newly modified rules.


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Ioan IstrateOwnerAlpine 57 Lux

Regulation and taxationA pessimistic perspective




Stefan Gadola, shareholder of EnergoBit Group, active in the power equipment industry, started his first entrepreneurial initiative as early as 1990, among other things due to his frustration of working in the public sector, where the simplest decisions were taken with great difficulty.

“After obtaining operating licenses of the company in April 1990, I have fully embraced entrepreneurship along with my friends and associates, Pal Peter and Ion Socea. Our motivation came from the desire to provide more rapid services than those existing on the market at that time. Regardless of my age at that moment, the decision to take this step was very easy, firstly because it was taken between friends, but also because we were supported by our families and, especially, because we were entering a competition-free market.”

Coordinated supportImproving but not yet integrated

While Romanian entrepreneurs feel support has improved over the last three years in terms of entrepreneurs associations and business incubators, there is still a lot to be tackled in this area, while coordination efforts should really speed up.

Also, the perception of their efforts’ coordination lacks almost entirely (87%). Which means these organizations’ support is offered in a decentralized fashion. If better integrated and streamlined, these resources would be significantly more efficient.

Figure 11. Do young entrepreneurs benefit from tailored support in Romania?

Figure 12. How would you evaluate the coordination between governments, associations and education systems to support entrepreneurship and its long-term growth in your country?



Cannot say 38%

No 51%

Yes 11%

Cannot say 6%

Not coordinated 87%

Coordinated 7%

Ștefan GadolaShareholderEnergoBit Group

Organizations like business incubators, mentors’ and entrepreneurs clubs, and state agencies offer coordinated help to entrepreneurs. When asked about the help they receive, 51% of Romanian entrepreneurs feel these organizations’ effort is not enough.




Looking more closely, when asked of these organizations activity, the Romanian entrepreneurs’ perception is that Government agencies and Chambers of commerce neither improved nor deteriorated their support during the last three years.

However, the most significant segment of answers is represented by entrepreneurs who cannot assess the quality of support offered by Mentoring programs, Entrepreneurs clubs, Business incubators, Governmental agencies and Chambers of commerce, which can indicate, as in the case of financing sources, lack of information for the respondents and lack of visibility of these organizations’ efforts.

In order to improve entrepreneurship long-term growth in the next three years, entrepreneurs think that Government agencies (44% of respondents) and business incubators (43%) would have the highest impact, unlike the G20 study where business incubators enjoy the most positive image of all types of support. More importantly, G20 entrepreneurs expect incubators to have the largest impact in improving the entrepreneurship ecosystem in the future.

Figure 13. In order to improve entrepreneurship and entrepreneurs long-term growth in the next 3 years in Romania, which of the following organisations will have the most impact?


Business incubators

Government agencies

Chamber of commerce

Entrepreneurs clubs

High impact Medium impact Low impact Cannot say

Mentoring programmes

50%

40%

30%

20%

10%

0%



Madeleine Florescu, the entrepreneur behind the luxury brand Madison Perfumeries, began the business in Romania after returning from the United States, where she has accumulated experience in the perfume industry for several years.

“I returned in 2004 and started working at the investment fund Gemisa Investments. Although it was an entrepreneurial environment, I do not consider that the time spent there could be assimilated to the definition of entrepreneurship, because the company was not mine. After two years in which I have adapted to the business environment in Romania, I thought it was the time to take the bull by the horns, because I really wanted to stay here and do something. At the time being, entrepreneurs in Romania are not very supported. The business environment needs a more diverse, yet coordinated support in order to have maximum impact. Entrepreneurs need help to build up a business plan and they need discussions with successful entrepreneurs to better understand this journey and its prevailing risks. We lack business incubators and, of course, better credit facilities. If there were a state financial aid better adapted to the needs of entrepreneurs starting out, surely the entrepreneurship situation in Romania would be better. Also, there should be more television programs on entrepreneurship, such as Arena leilor, and more publicity around the programs that encourage entrepreneurship.”

• ►Entrepreneurs are not aware of the existence of Mentoring programs, Entrepreneurs clubs, Business incubators, Governmental agencies and Chambers of commerce.

• Government agencies and business incubators will have the highest impact on the entrepreneurship ecosystem.

For government:

►Enhance tailored support for young entrepreneurs – who need special attention in their first entrepreneurial initiative.

Develop the government agencies focusing on entrepreneurs and business incubators.

For entrepreneurs:

Cluster in entrepreneurs club programs in order to help yourself and other entrepreneurs in their venture.


12

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Madeleine FlorescuOwnerMadison Perfumeries

Coordinated supportImproving but not yet integrated




The Small Business Act for Romania

Selection of government leading practices – Romania

The new SMEs Law, which plans to render The Small Business Act for Europe (2008) in local terms, is expected to be issued in the near future.

The Small Business Act for Europe has laid 10 principles to be implemented by member states in order to boost entrepreneurial activity in European Union:

Government leading practices already exist in Romania for supporting entrepreneurs’ initiatives:

• Create an environment in which entrepreneurs and family businesses can thrive and entrepreneurship is rewarded

• Ensure that honest entrepreneurs who have faced bankruptcy quickly get a second chance

• Design rules according to the ‘Think Small First’ principle - by taking into account SMEs’ characteristics when designing legislation, and simplify the existing regulatory environment

• Make public administrations responsive to SMEs’ needs • Adapt public policy tools to SME needs: facilitate SMEs’

participation in public procurement and better use State Aid possibilities for SMEs

• Scheme to support young entrepreneurs’ entry on the market by giving them incentives, guarantees and credits to start their own business (2011 – 2012)

• ►START Programme – to develop young entrepreneurs and facilitate financing (2010 – 2012)

• ►Mihail Kogalniceanu Programme – to facilitate financing of SMEs (2010 – 2012)

• ►National Programme for developing business and technological incubators (2010 – 2011)

• Facilitate SMEs’ access to finance and develop a legal and business environment supportive to timely payments in commercial transactions

• Help SMEs to benefit more from the opportunities offered by the Single Market - The European Market

• Promote the upgrading of skills in SMEs and all forms of innovation

• Enable SMEs to turn environmental challenges into opportunities

• Encourage and support SMEs to benefit from the growth of markets

• ►National Programme to support women entrepreneurs (2005 – 2012)

• ►Supporting entrepreneurship of innovation (2012 – 2014)• The Romanian Counter Guarantee Fund became

operational in 2010 in order to help SMEs improve financing access

Source http://www.aippimm.ro/categorie/programe/programe-2012



Selection of government leading practices – Other countries

Launch date Country

Erasmus for Young Entrepreneurs

Project initiated by the European Union, aimed at helping new entrepreneurs to acquire relevant skills for managing an SME by spending time in an enterprise in another European Union country. It contributes to improving their know-how and fosters cross-border transfers of knowledge and experience between entrepreneurs. Launch date: 2009, European Union.

2009 European Union

Innovative Regional Growth Cores

The Innovative Regional Growth Cores programme (German: Innovative regionale Wachstumskerne) started in 2001 with the aim of effectively using and developing existent competencies and potential in the New German Länder. It supports alliances of businesses, universities and research institutes, which either already possess a joint, specific platform technology in their region, or have the potential to develop one.

2001 Germany

Summer Company

The Ontario-based Summer Company programme allows students, from 15 to 29 years old, who want to start and run their own summer businesses, to obtain hands-on business coaching, training and mentoring as well as CAN$1,500 to put toward start-up costs and up to CAN$1,500 upon successful completion of the program.

2002 Canada

Japan Entrepreneurship Education Network for Higher Education

The Japan Entrepreneurship Education Network for Higher Education was established in May 2009. The network promotes a model lecture programme, a visiting lecturers programme, national entrepreneurship education events and visits to observe lectures at leading schools. Most of the programs and events are provided for teachers who give lectures at colleges and graduate schools in Japan. Some of them are provided in English or in Chinese. The network matches universities with ex-entrepreneurs and makes innovative lectures on entrepreneurial education available to teaching professionals.

2009 Japan

The Impact Microcredit Competition

The Impact Microcredit competition is a unique, action-oriented competition that gives secondary school students all across Canada the chance to be entrepreneurs, while raising money for charity. With just one week to do so, teams of three to five attempt to increase CAN$100 of seed funding, provided by Impact Microcredit, as much as possible, with all of the proceeds being donated to the team’s charity of choice. This is a chance for students to prove themselves, be bold and win over CAN$10,000 for themselves and their school.

2004 Canada

EXIST

EXIST is a government funding programme (co-financed by the European Social Fund) that seeks to improve the start-up climate at universities and non–university research facilities in Germany, as well as to increase the number of start-ups that are technology — or knowledge based.

1998 Germany



Launch date Country

EXIST

EXIST is based on three pillars:

− EXIST start-up climate: supports universities in formulating a holistic and university-wide strategy regarding start-up climate and entrepreneurial spirit, and in implementing it in a sustainable and visible way

− EXIST start-up funding: supports the preparation of innovative, technology oriented and knowledge-based start-up projects by students, graduates and scientists

− EXIST research transfer: promotes development projects for proving technical feasibility of research-based start-up ideas, and assists with preparations for implementation.

1998 Germany

BizPaL (Business Permits and Licenses)

BizPaL is an online service that simplifies the business permit and license process for entrepreneurs, businesses, governments and third-party business service providers. Users simply answer a series of questions on their type of business, and BizPaL will automatically generate a list of permits and licenses from all levels of government (federal, provincial, territorial and municipal), with basic information on each, as well as links to government sites where users can learn more and, in some cases, apply online.

2005 Canada

R&D super-deductions

This programme has been in place since 2000, with two updates, in 2006 and 2008. It provides tax benefits to companies engaged in R&D activity. The super-deduction is separated into two brackets. The first bracket, applying to large companies, allows a 130% deduction on qualifying costs related to R&D. The second bracket, applying to SMEs, allows a 175% deduction of qualifying costs and a provision for SMEs in a loss position to claim up to 24.5% of qualified expenditures as a cash credit. These deductions are not limited to any particular industry; however, there are some limitations regarding categories of qualified expenses.

2000 United Kingdom

Small Business Act for Europe

During the Spring Council of 2006, national governments agreed to a series of simplifications, to make starting up a company faster and cheaper anywhere in Europe. These simplifications called for cheaper and faster procedures and the implementation of a one-stop shop for all administrative procedures when starting up a company. This commitment has been renewed in the Small Business Act for Europe, in which European Union countries have also committed themselves to shortening the time required to obtain business licenses.

2006 European Union

Local Enterprise Partnerships

Local Enterprise Partnerships are locally owned partnerships between local authorities and businesses, and play a central role in determining local economic priorities and undertaking activities to drive economic growth and the creation of local jobs. Local Enterprise Partnerships are better placed to determine the needs of the local economy and also have a greater ability to identify barriers to local economic growth.

2010 United Kingdom

Selection of government leading practices – Other countries



Methodology

For this first edition of the Entrepreneurs Speak Out Barometer, our analysis of the entrepreneurial environment in Romania was articulated around five enablers: access to funding, regulation and taxation, education and training, entrepreneurship culture, coordinated support, defined by the G20 Young Entrepreneurs’ Alliance in Toronto, Canada (20-22 June 2010).

Our analysis is based on four building blocks: macroeconomic indicators, a perception survey conducted with 95 Romanian entrepreneurs (between 1 June – 15 August 2012), qualitative interviews of emblematic entrepreneurs and an analysis of Government’s leading practices.

Definitions

Abbreviations

• Business angel – Person with significant wealth, usually an existing or former entrepreneur, who invests his personal funds in an early development stage company started by another entrepreneur

• R&D expenditure (% of GDP) – Expenditures for research and development are current and capital expenditures (both public and private) on creative work undertaken systematically, to increase knowledge, including knowledge of humanity, culture and society, and the use of knowledge for new applications. R&D covers basic research, applied research and experimental development. (World Bank)

• Rapid growth markets – Argentina, Brazil, China, India, Indonesia, Mexico, Russia, Saudi Arabia, South Africa, Turkey

• EC – European Commission• EU – European Union• GDP – Gross domestic product• PE – A private equity firm is an institutional investor who

provides financing in the mature stages of the life cycle of a firm, in order to obtain a good return on investment when exiting

• School enrollment, secondary – Gross enrollment ratio is the ratio of total enrollment, regardless of age, to the population of the age group that officially corresponds to the level of education shown. Secondary education completes the provision of basic education that began at the primary level, and aims at laying the foundations for lifelong learning, and human development, by offering more subject- or skill-oriented instruction, using more specialized teachers. (World Bank)

• School enrollment, tertiary – Gross enrollment ratio is the ratio of total enrollment, regardless of age, to the population of the age group that officially corresponds to the level of education shown. Tertiary education, whether or not to an advanced research qualification, normally requires, as a minimum condition of admission, the successful completion of education at the secondary level. (World Bank)

• R&D – Research and development• SME – Small and medium enterprise• VC – A venture capital firm is an institutional investor who

provides financing in the early stages of development of a company with a high potential of growth, but also a high risk attached; the investor expects a high return on investment when exiting



Ernst & Young’s programs for entrepreneurs

Over the past three decades, we have been working with entrepreneurs, adapting our experience, industry capabilities and resources to work for entrepreneurial, fast-growth companies.

• ►Ernst & Young Entrepreneur Of The Year® (EOY) is the world’s most prestigious business award for entrepreneurs. This award encourages entrepreneurial activity among those with potential, and recognizes the contribution of people who inspire others with their vision, leadership and achievement. The programme is held in140 cities in more than 50 countries.

• ►The Ernst & Young Strategic Growth Forum (SGF) convenes global business leaders and provides an opportunity to meet valuable contacts — potential customers, and acquisition targets and buyers — and to network, learn and hear inspiring stories from some of the world’s most successful business people. SGF delivers leading business advice on sustaining and turbo-charging company growth and presents keynotes from some of the world’s most recognizable CEOs in a relaxed setting where CEOs can confer with peers.

• ►With the Ernst & Young Entrepreneurial Winning Women program, we channel our resources to help women entrepreneurs achieve the potential they envision for their companies. The programme identifies high-potential female entrepreneurs and provides them with personalized one-on-one business insights and advice as well as insider access to strategic networks of established entrepreneurs, executives, advisors and investors. Unlike many programs that are focused on helping women to start a business, Ernst & Young’s Entrepreneurial Winning Women program supports women with existing enterprises to scale up and become market leaders.

• Ernst & Young also has a sponsorship agreement with Endeavor, a not-for-profit organisation that works with high-impact entrepreneurs in emerging markets to improve and grow their businesses, with the goal of transforming emerging economies and establishing entrepreneurship as a leading force for sustainable economic development.

• Ernst & Young has extended its commitment to young entrepreneurs by announcing the expansion of its relationship with the Network for Teaching Entrepreneurship (NFTE), to include nine countries around the world. Ernst & Young already provides a series of scholarships for every one of NFTE’s 16 programs in the US. NFTE teaches entrepreneurial skills to high school students from low-income communities. It is the only global not-for-profit organisation solely focused on bringing entrepreneurship education to low-income youth, and has already worked with nearly 350,000 young people around the world.

• ►The Exceptional Enterprise model is the culmination of the research Ernst & Young has conducted to answer the question we have been asked for many years: “What do the market leaders do to become successful?” Through our global EOY programme, we have had the privilege of working with some of the world’s best business leaders, who have progressed rapidly on their journey from small business to major global corporation. By surveying this unique group, we have been able to clarify the common challenges and opportunities that they face, together with the secrets to their success in responding to or exploiting them.



Bogdan Ion Country Managing Partner

Our leaders at Ernst & Young Romania

Garry CollinsPartnerHead of Assurance

Florin Vasilică PartnerHead of Transaction Advisory

Dragoș Radu Partner Head of Legal

Saulius Adomaitis PartnerHead of Advisory

Venkatesh Srinivasan PartnerHead of Tax and Legal

Thank you!

We would like to thank all the entrepreneurs who responded to our survey, those who shared with us their thoughts in the interviews, as well as Wall-Street.ro for their support.

Project team

Bogdan Tenu Senior ManagerTransaction Advisory Services

Mihaela Matei Senior CosultantTransaction Advisory Services

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