US high-tech entrepreneurship, symbolised by the endurance of California's Silicon Valley "get rich or die trying spirit" continues to flourish.
A report published on Wednesday by Deutsche Bank research and authored by economist, Thomas Meyer, says demand for high-tech entrepreneurship is likely to increase in the future. With millions of engineers in countries such as China or India, the production of new ideas and research will globalise. But the US economy excels in the creativity, audacity and pragmatism that is needed to seize the opportunities that arise from global research and to turn them into successful ventures. The report says if anything, the recent financial crisis and economic recession underscores the case for entrepreneurship. Innovative startups may even thrive during turbulent times because otherwise almighty incumbents are in tatters. It is no accident that well over half of the current Fortune 500 companies began during a bear market. It is this ability to re-invent itself that will help the US to master the crisis and secure its position as a high-technology powerhouse.
Founding a new firm is an inherently risky venture. Typically, less than 30% of the startups in the United States survive to see their 10th anniversary, with the first years being the most dangerous ones.
When Finfacts was told last summer by Enterprise Ireland that in a 10-year period, the survival rate of commercial spin-outs from Irish university research, was 90%, we said it was rubbish.
Brave new firms: High-tech entrepreneurship in the United States
With each failure in high-tech, jobs are lost and business equipment is put out of use. True, sacked employees will find new jobs and other businesses will buy the equipment, but that is not a seamless process. The DBR report says while an entrepreneurial economy is better on balance, it is important not to ignore the fact that more dynamism results in less of the stability that many Europeans crave.
Germans cite high income as a low factor in a start-up motivation.
Thomas Meyer asks: What will be the next big thing? Another media revolution? Electric cars? Biotechnology? Nobody really knows, he says, and it is quite likely that the next big thing will be something completely different from what we imagine today. It is the entrepreneurs, who thrive in such an environment because they try, fail and eventually succeed in finding a business application.
Meyer says that over the last decade, the share of high-tech entrepreneurs in the US adult population has trended upwards. In 2006, more than 200,000 high-tech businesses were founded. This is a good sign. Looking at differences between US states, he found that high-tech entrepreneurship thrives where many new ideas emerge and where there are entrepreneurs who bring those ideas to the market.
He says the key difference between the US and Europe is not so much in knowledge creation but in entrepreneurial spirit. This raises the question of what motivates people in the US to become entrepreneurs in the first place. An analysis of close to 700,000 individuals in the US shows that skills, risk-tolerance and aspiration to climb the social ladder motivate many prospective entrepreneurs. Such characteristics are typically found in the middle class: education provides skills, back-up resources encourage risk-taking and there is potential and desire for upward mobility. This combination of traits is often found among well-educated immigrants who are behind many high-tech startups, particularly in IT and software.
The report says the US rate of nascent and early business owners (TEA) tops that of any European country (see chart 14). The IT revolution has produced a number of new, globally dominant high-tech firms, but most come from the US. Why is there no European equivalent to, say, Google, and what could Europe do to get it?
Meyer says it is not that Europe lags behind in all respects. On the contrary, many European countries have more patent applications than the US, suggesting that knowledge creation is not a key problem. By the same token, Great Britain, Sweden and Denmark even have a higher share of venture-capital investments (as a percentage of GDP) than the US. Furthermore, few Europeans shy away from starting a business for fear of losing health insurance. Europe does have a knowledge based economy and it does have many business founders, but it is not as good as the US in bringing the two together.
The US scores with more business friendly regulation: for instance, it takes fewer days to register a company than in any European country, as evidence from the World Bank’s Doing Business database shows. By the same token, the costs of starting a business are often higher in Europe than in the US and that appears to discourage potential startups (see chart 15). The treatment in case of failure is often more forgiving in the US than in Europe. This encourages risk-taking among the would-be entrepreneurs. A smaller tax burden also increases the reward to successful entrepreneurs. The report says knowledge transfer between firms and universities plays a big role in the US. In fact, almost 20% of innovative high-technology startups in a Kauffman Firm Survey (KFS) survey say that they derive a competitive advantage from teaming up with a university, another firm or a government research centre (see chart 16).
Meyer says the preferred partner is in most cases another firm. This highlights the importance of regional clusters such as Silicon Valley and the Greater Boston Area. Universities come second, yet that may understate the full impact of university research. After all, many high-tech startups that are founded out of academia might not maintain formal links to their alma mater henceforth. Research at American universities is often geared towards commercial application. Business incubators encourage students and professors to bring new research from the laboratories to the market. Government research only plays a minor role for most startups. Less than 1% of all, and only around 4% of innovative high-tech startups derive a competitive advantage from teaming up with Uncle Sam.