Entrepreneurship is increasingly becoming a major public policy which aims to accelerate the process of economic development. The Government of India and several philanthropic agencies are experimenting in the realm of entrepreneurship. One of the focuses of these experiments is low-income households and their entrepreneurship, typically with annual turnover of a million rupees or less, or what can be called as nano entrepreneurship. The entrepreneurship programs, catering largely to nano entrepreneurs, have rightly understood the need to consider not only the individual entrepreneur and the enterprise, but the ecosystem as well. Hence, the inputs or constituents of these programs are not limited to finance or training, but also include market linkages and capacity building. 

For the last 3 years, I had an opportunity to witness one such program closely. The program was organized by one of the well-known CSOs in India and it aimed to create an ecosystem of entrepreneurship rather than focusing on individual entrepreneurs. During my study of the program, I understood that there is a difference in performance of pre-existing enterprises that became a part of the program and enterprises that were created newly as a part of the program. The following broad theorization is based on my observations as part of the above-mentioned study.  

Typically, there are two types of individuals who become part of the programs of entrepreneurship: those who have already started their enterprise and those who will form enterprise as a part of the program. It is easy to see that these two groups can have different outcome trajectories. More specifically, the former group, those who already have begun the enterprise can have the advantage of covering a few initial steps and hence are closer to being a well-performing enterprise. It is also possible that the former group has enterprises which have made a wrong start, for example locating themselves in a highly competitive market and are thus less likely to benefit from the program’s inputs. New enterprises formed within the program can have entrepreneurs which are aspirational but have not found support in their network or market due to adverse assessment of the business idea. Since the program is unlikely to have potential based screening, such entrepreneurs will form the enterprise as part of the program, but the enterprise will fail to take off as expected. Comprehensive classification of entrepreneur and enterprise attributes and their trajectories is provided in Table 1. 

Table 1: Typology of entrepreneur and enterprise attributes and program outcome

If we believe that entrepreneurial programs are about enabling those who will be able to do so by themselves, then 1st type should be part of the program. Among the remaining 6, type 3, 5, and 7 require intervention on the preferences, an action often beyond the scope of the entrepreneurship program. Hence, it is type 2, 4, and 6, which should be targeted by the program to serve social interest in the best possible manner. 

This first-best targeting expectation runs into information asymmetry in real-life implementations. Perfect targeting can be achieved if the program can determine eligibility by extensive canvassing of implementation geography or by relying on documentary evidence. Extensive canvassing is an expensive process, in terms of resources and time and it can reduce the resources for the program as well as delay the implementation. NGO programs are often seen as efficient complimentary channels to inefficient bureaucracy. Documentary evidence based verified eligibility can make the program bureaucratic, unwanted perception for NGOs which often pride themselves on being supple and easy to access. Hence, non-governmental entrepreneurship programs cannot be designed to specifically target the entrepreneur groups which most need the assistance.

The lack of targeting means there is potential for adverse selection. But contrary to typical adverse selection resulting in inefficient performance (for example, in case of insurance), here adverse selection will lead to successful program outcomes. This is so because aspiring and well-performing entrepreneurs, who ideally should not be a program recipient, can choose to access the program. Such entrepreneurs can substitute market-based inputs with cheaper program inputs or sometimes can receive inputs or resources through programs which are not available outside, for example networking for market and finance linkage and coalescing with government departments. 

One can argue that there is nothing ‘adverse’ in such a capable entrepreneur seeking to benefit from the program. Obviously, there is nothing ‘adverse’ here in terms of efficient use of resources. The ‘adverse’ aspect arises from alignment of program implementation with the typical expectation from the non-governmental organizations – to enable those who find it difficult to do so on their own. Efficiency perspective, rather than serving the social mandate perspective, dominates the implementation of the program because it aligns with the need to showcase success. Afterall, NGOs run the program with the promise of impact and impact is proportional to capability of the recipient. If targeting is not explicit in program implementation, then the program is likely to gravitate towards enrollment of those participants who are more likely to succeed or are already successful and seeking cheaper inputs or linkages. Serving the social mandate is relatively an arduous route and with less spectacular results in terms of performance of the enterprise. The increasing use of quantitative indicators as a target can incentivize the shift towards easy pickings. It is no one’s fault, but just good old Goodhart’s law striking again.

The purpose of this discussion is not to dissuade nano-entrepreneurship focused programs but to provide an added perspective for evaluating and assessing the impact of such programs. The typology discussed here has two implications. First, there is a possibility that entrepreneurship programs seek impact through greater enrollment of type 1 entrepreneurs. Such programs will be successful, but then they would serve the social mandate less. Second, increasing emphasis on entrepreneurship programs can bring more of type 3, 5, and 7, which will adversely affect both efficiency and social mandate of the programs. The need for better targeting is cliched but nevertheless true for public policy and entrepreneurship programs.