Startup Ireland: Evidence-based revolution to make a difference
Startup Ireland: In coming weeks there will be a lot of focus on startups with events scheduled across the country on 5-10 Oct as the inaugural of what is called the Startup Gathering 2015 — is "set to be one of the biggest startup events in the world" according to the organisers — while on 3-5 Nov, the Web Summit, which has already earned its superlatives, will bring Silicon Valley to Dublin for almost a week, when cloning the real thing for 52 weeks of the year remains an elusive dream.
Startup Ireland, is a national not-for-profit organisation and it's responsible for the Startup Gathering 2015, with the support of the Bank of Ireland and the Department of Jobs, Enterprise and Innovation.
Eoin Costello, CEO of Startup Ireland, has written in an open letter on why Ireland needs a "Startup Revolution":
"Ireland simply doesn’t have the time for a gradual evolution of our startup industry, the increasing rate of change brought about by technology requires what Brad Feld terms a ‘startup revolution’ if Ireland is to continue to be a high growth economy in the next 10 years."
Startup Ireland says the Startup Gathering is about "driving real change across the startup sector, creating better networks, connections and collaborations with all of the players across the entrepreneurship spectrum — the startup leaders, investors, Government, research centres, universities, large corporates, and multi-nationals — to work collectively to build on Ireland’s strengths, and work towards the shared goal of Ireland becoming a world class startup hub by 2020."
Science Foundation Ireland, the public agency, has a separate target "in which Ireland in 2020 is the best country in the world for scientific research excellence and impact."
Unless targets are built on sound evidence, they become just aspirational. However, credible Irish data on outcomes are patchy.
It's striking how the term 'startup' has become synonymous with high tech while the term 'entrepreneur' can apply across a spectrum from Bill Gates to a small farmer.
Here is a striking item of official data: Permanent full-time employment in public agency-assisted Irish owned ICT (Information, Communication and Computer Services) firms rose from 15,200 in 2005 to 22,900 in 2014 — equivalent to 1.2% of total employment in Dec 2014: See Page 21 here.
The ICT sector as a whole accounted for none of the 120,000 jobs added in the economy in the period Q4 2012-Q2 2015: See here.
It's too narrow a focus to expect miracles from the small high tech sector when the more than half-century underperformance of the indigenous sector as a whole, has yet to be addressed.
We will remain one of the Euro Area's poorer countries with a per capita standard of living below Italy's coupled with the majority of the private sector workforce on low pay and without occupational pension coverage, unless radical action is embraced.
We have covered this topic here:
Can Ireland reduce its reliance on FDI by boosting Irish firms? — 1) Poor indigenous exporting performance: 4,000 export firms vs. Denmark's 30,000; 2) Food & drinks surplus with UK evaporated in 2014; 3) Cost of agricultural land among the highest in world and four times level in France; 4) Low business R&D in common with UK because of reliance on foreign-owned firms — the Government says 54% of IDA Ireland clients are R&D inactive; 5) Poor patenting record; 6) Very poor business support for third level research.
Last week David Plouffe, a board member at Uber and the key architect of Barack Obama's 2008 campaign, told journalists that the drivers of its online ride-hailing service are entrepreneurs, rejecting a June ruling by the California Labor Commissioner’s Office that a Uber driver should be classified as an employee, not an independent contractor. The ruling has been appealed.
The number of self-employed persons in the Irish economy increased by 11,800 to 327,500 or +3.7% over the year to June 2015. The CSO estimated that about 93,600 have at least one employee — the rest are one-person operations.
Given the casualisation of the modern workforce, tracking entrepreneurship is better done using data on employer firms.
Earlier this month the Global Entrepreneurship Monitor (GEM) 2014 annual report for Ireland showed that from a poll survey, of the 20,400 individuals who started a new business in Ireland in 2014, about two thirds are the sole owner of the business. Most of the new business owners (63.5%) did not yet have employees; most are in low or non-tech sectors, with 15% in medium or high-tech sectors. Ireland is ranked 15th of 25 European countries in terms of the rate of new business owners. The rate in Ireland (2.5%), however, is below the European average (3.2%), and down from (3.8%) in 2013.
The Irish decline may well reflect people using the recovery to move to more stable and higher income, from a job.
In August, the Organisation for Economic Cooperation and Development (OECD) published the Entrepreneurship at a Glance 2015 report and Ireland provided no data on births, survival and deaths of employer enterprises.
The OECD says high-growth firms are important drivers of job and wealth creation. Better knowledge of these firms would allow policy makers to develop appropriate approaches to support growth ambitions of firms.
The think-tank said high-growth enterprises represent on average a small share of the total enterprise population. Typically, when measured on the basis of employment growth, the share ranges between 2% and 6% for most countries, with higher shares (between 5% and 15%) when measured on a turnover basis.
Gazelles form a subset of high-growth enterprises. They are enterprises that have been employers for a period of up to five years. The share of gazelles, as measured by employment (or turnover), corresponds to the number of gazelles as a percentage of the population of enterprises with ten or more employees.
In a majority of countries, less than 2% of firms with ten or more employees are gazelles, i.e. high-growth firms less than five years old, whether the growth measure is based on employment or turnover. In all countries high-growth firms are more prevalent in the services sector than in the rest of the business economy, apart from Brazil, Canada, Latvia and New Zealand where the highest percentage of high-growth firms is in the construction sector.
"While few in numbers, fast-growing firms employ a considerable number of persons. In 2012, 36,0 high-growth enterprises in the United States employed more than 8m persons."
Ireland supplied no data on these firms and in 2012 the Enterprise Department confirmed to Finfacts that longitudinal studies that would track firms through success and failure are not done — after 60 years of public supports.
In 2013 Martina Lawless, a senior economist at the Central Bank who is currently working on secondment at the Economic and Social Research Institute (ESRI) produced a very useful paper confirming a pattern in Ireland that had been observed in the United States.
According to the Kauffman Foundation, the leading US entrepreneurship think-tank, policymakers often think of small business as the employment engine of the economy. But when it comes to job-creating power, it is not the size of the business that matters as much as it is the age. New and young companies are the primary source of job creation in the American economy. Not only that, but these firms also contribute to economic dynamism by injecting competition into markets and spurring innovation.
Martina Lawless used Annual Employment Survey data of employment levels in foreign-owned and indigenous tradeable exporting firms covering the period 1972-2010.
The main finding was that young firms less than 5 years old were on average responsible for 67% of job creation and after accounting for deaths, the young firms were responsible for all net employment creation — we note below that it the high growth firms within the sample that are the main engine.
In the US there has been a secular decline in the number of new firms formed.
The Kauffman Foundation says that new businesses represent a declining share of the business community. According to Census data, new firms represented as much as 16% of all firms in the late 1970s. By 2011, that share had declined to 8%. Not only are there fewer new firms, but those startups that do exist are creating fewer jobs. The gross number of jobs created by new firms fell by more than 2m between 2005 and 2010. Startup activity has been subdued across the country. Firm entry rates were lower between 2009 and 2011 than they were between 1978 and 1980 in every state and Metropolitan Statistical Area except one.
Immigrants were nearly twice as likely as native-born Americans to start businesses in 2014 — See here.
Big tech firms source innovation by acquiring young firms and that is also a problem in Ireland where a venture-capital back startup with potential is typically acquired before there is a scale-up.
The Oxford Dictionary of Quotations 2002 edition in its top 101 sayings of the year, included a remark that President George W. Bush was supposed to have made to Tony Blair, then British prime minister: "The problem with the French is that they have no word for 'entrepreneur'" — the word had for long been used mainly in the music industry in the Anglo-Saxon world and its present popularity dates from the pro-business orientation of the Reagan Administration when "entrepreneur" was seen as a more positive word for new heroes of free enterprise, than capitalist. As "entrepreneur" became a business buzzword, entrepreneurship education courses also grew.
The word entrepreneur was derived from an old French verb entreprendre (undertake) and Richard Cantillon (1680-1734), the Irish-French economist and author of Essai sur la Nature du Commerce en Général, is believed to be the first to use the word 'entrepreneur' in print.
Jean-Baptiste Say (1767-1832), a businessman who was the first professor of political economy in France, also used the word (’l'entrepreneur d’industrie’). He had bubble-time economist adherents in Ireland for what is known as Say's law: supply creates its own demand.
Modern entrepreneurship is more associated with Say as he was an entrepreneur himself, an admirer of Adam Smith’s ‘Wealth of Nations’ (1776) and was eager to see the English industrial revolution cross the channel.
He defined the boundaries of entrepreneurship that exist today and Joseph Schumpeter (1883-1950), the Austrian-born economist, famous for his concept of creative destruction, acknowledged that a major part of his own contribution was to tell the Anglo-Saxon community about the world of the entrepreneur as described in the writings of Jean-Baptiste Say.
Geoffrey Nunberg, the American linguist, has said that "entrepreneur" came into "English as a fancy name for a theatrical promoter — in French, the word just meant somebody who undertakes something, the same as the Italian 'impresario.'"
Prof Nunberg said: "By the 1980's, 'entrepreneur' was more than ten times as common in newspaper articles as it had been in the 1950's."
Alastair Campbell, Tony Blair's press secretary, had denied that President Bush had made the claimed remark about the French, which was supposed to have related to a discussion on France's lagging economy when Jacques Chirac was the French president.
James Surowiecki in The New Yorker wrote in 2014 that "the fundamental characteristic of entrepreneurs isn’t risk-seeking; it’s self-confidence...A 2009 study of venture-backed firms found that entrepreneurs who had failed in the past were not much more likely to succeed in new ventures than first-time entrepreneurs were — some eighty per cent of those who had failed before failed again. A later study of more than 8,000 German ventures came to an even grimmer conclusion: founders who had previously failed were more likely to fail than novices."
In a 2013 paper, Living Forever: Entrepreneurial Overconfidence at Older Ages, economists at the Erasmus University, Rotterdam said:
"In summary, we find novel evidence for overconfidence among entrepreneurs in a large sample of the US population. Our method overcomes the econometric endogeneity problems that are typical of field studies on overconfidence. Finally, our findings are consistent with the hypothesis that overconfident individuals are more likely to self-select into entrepreneurship in the population studied."
Bart Clarysse, professor of entrepreneurship, at Imperial College London Business School, in a public lecture in February 2009, exploded the myths surrounding the economic importance of high-technology startups to the Europe.
"People think of the big names like Microsoft, Apple, HP, Intel and Xerox as once being new tech-star-ups. Yet most of these highly successful companies did not develop their own ideas. Typically they took existing technologies, developed by pioneering — and sometimes financially unviable — companies. They bought other businesses to help them succeed and appear credible."
The development of PCs, software and the web shows that the big names improved on the work of pioneers.
Prof Scott Shane of Case Western University said in 2009 in a paper: 'Why encouraging more people to become entrepreneurs is bad':
"Policy makers believe a dangerous myth. They think that startup companies are a magic bullet that will transform depressed economic regions, generate innovation, create jobs, and conduct all sorts of other economic wizardry....This is bad public policy...Across the 34 countries in the Global Entrepreneurship Monitor dataset, the typical start-up founded between 1998 and 2003 required $11,400 in capital. So even at the time that SAP, or Google or EasyJet were founded, they weren’t anything like the typical new business. To get more economic growth by having more start-ups, new companies would need to be more productive than existing companies. But they’re not."
In more recent times Prof Shane said the focus should be on high growth firms and an OECD paper supports this position: Most surviving startups do not grow; Tiny number powers jobs engine
The paper highlights that the tiny proportion of small transformational entrepreneurs’ startups that do grow — around 3% on average across all countries — creates a disproportionate amount of jobs, from 21% (in Netherlands) to 52% (in Sweden) of the total job creation by micro startups." This point is extremely relevant for policy making. Without taking this disproportionate contribution of scaleups into account, there is indeed the danger of overlooking the critical importance of young firms as the engine of job creation in light of the fact that the large majority of them do not grow, or grow very slowly," the authors say.
Carl Schramm, a professor at Syracuse University, who until 2013 was CEO of the Kauffman Foundation, wrote in The Wall Street Journal last year: "Entrepreneurship is apparently an occupational category now, yet when it comes to judging the value of what they teach, its practitioners are flying blind."
He said that there were 1,957 full-time professors of entrepreneurship in the US, according to 2014 membership data from the Academy of Management and "the teaching approach, cobbled together from strategic-planning and venture-finance insights, is more prescriptive than objective, telling entrepreneurs what they should do instead of teaching business basics."
Prof Schramm said that there is now a narrative about how a new business should begin. Success, it is taught, hinges on writing a business plan. But most of history's exemplary businesses didn't have a plan when they began.
"Most guides to entrepreneurship presume new businesses will need venture capital. Yet venture financing is important to a very small percentage of startups. Everyone knows, the textbooks say, that college-aged students are the progenitors of all great startups. (That may explain why it's an undergraduate course.) In reality, the nation's fastest-growing businesses are started by 40-year-olds. Nearly 75% of new entrepreneurs are over 35, according to a 2012 report on entrepreneurial activity by the Kauffman Foundation (an organization I used to run). And while Silicon Valley gurus believe a startup must begin in California, the same Kauffman Foundation report showed that in 2012 there were more startups per capita in Montana, Vermont and Nevada than all other states."
He concluded that as in the days before evidence-based medicine, "there are no significant data to confirm that graduates of entrepreneurship programs go on to start successful businesses. It is time for an evidence-based revolution."
In Ireland the evidence-based revolution should precede the startup revolution.
As regards tech startups, in a 2010 report the 28-strong body of "experts" known as the Innovation Taskforce speculated that Ireland could become a European Silicon Valley, adding a net 215,000 science and technology jobs by 2020 — yes again that date — more than what had been added by mainly US firms in Ireland in 50 years. The Field of Dreams turned to mud as they ignored more than a detail. With an tiny local market and limits on public spending, firms introducing new products or services would have to learn to export would having any domestic experience.
Five years forward and the groundhog day movie is back in the cinemas!
Less than 4% of UK startups have 10 or more employees 10 years after their creation and the question that begs an answer as regards scaleups is what is going to change from the Irish pattern of the past 14 years? IPOs; more public funds for venture capital firms, private equity etc.?
Since 2001, US companies have had an average age of 11 at the time of their US IPOs (initial public offerings), compared with 5 at the peak of the dot-com bubble in 1999-2000 and 7 to 9 in the previous two decades.
In July 2015 the Department of Jobs, Enterprise and Innovation published a report 'Evaluations of State Supports for Enterprise Synthesis - Report and Conclusions.'
It says: "Because of the differing evaluation time periods it is not possible to merely combine the inputs, outputs and outcomes to provide an aggregate picture of return on investment. Even if this were possible, such analysis would underestimate the complexity and value of an enterprise policy 'systems' approach and of the very different roles that each intervention plays within this system."
What it calls a "helicopter view" causes no offence to any vested interest and even though the Irish Government in recent years has provided about 40% of venture capital funds, there is no information on performance.
The word "patents" gets one mention and it's a positive one: "The Commercialisation Fund was initiated in 2003. The evidence shows that the programme delivered to its objectives in terms of patents, licences and spinouts; that additional investments in R&D were made by firms to further develop licensed technologies; and that a number of research staff moved into the private sector."
Whatever that means, the patenting record remains poor.
In Jan 2014 The Sunday Independent reported on internal Enterprise Ireland documents on write-offs of investments — some write-offs are inevitable — which is information that should together with other performance indicators, be published in the annual report.
Picture on top shows from left Iseult Ward, founder, Foodcloud; Richard Bruton, enterprise minister, Eoin Costello, co-founder of Startup Ireland; Ged Nash, minister of state for business and employment, Liam Mcloughlin, chief executive, Bank of Ireland Retail; and Gerry Prizeman head of enterprise development, Bank of Ireland, at the launch of The Startup Gathering, Dublin, 8 Sept, 2015. Pic: Naoise Culhane