Innovation Entrepreneurship Myths: Incubators useless? Peak age to start? Cloning Silicon Valley?
By Michael Hennigan, Finfacts founder and editor
Sep 26, 2014 - 6:16 AM
Entrepreneurship Myths: When myths take hold it's difficult to get attention for the facts as the cocktail of the self-interested, starry-eyed politicains and technology journalists, perpetuate them.
In September 2009, Brian Cowen, taoiseach (Irish prime minister), in a speech at the inaugural meeting of the Global Economic Forum, an Irish diaspora group, asked for help to create a "European Silicon Valley" in Ireland that would be bigger than the original!
Cowen was treading on a well-worn path.
According to the San José Mercury News, in 1959, Nikita Khrushchev, Soviet Union leader, visited IBM's San José's Cottle Road plant to see "a typical American plant in action," as Thomas Watson Jr., IBM president, said. "We have hundreds of such people," Watson told Khrushchev, who wanted to talk to production people, "average Americans in an average American company."
Russia is currently making a second attempt to clone Silicon Valley and $10bn is due to be invested by 2020 in the Skolkovo Innovation Center outside Moscow. It is the brainchild of Viktor Vekselberg, an oligarch said to be worth $17bn.
Conor Lenihan, ex-Irish minister of innovation, is an adviser.
Brian Cowen's plan was a brave or delusional aspiration. However, in March 2010, an official 28-strong group of mainly policy insiders, university presidents and managers of multinational operations in Ireland (Irish governments do not appoint conventional wisdom dissenters to official bodies), endorsed the goal.
The Innovation Taskforce reported [pdf] that there was potential for "net job creation in high-tech firms of the order of between 117,000 and 215,000 between now and 2020."
"More realistically, Ireland might aspire to be a leader in Europe and aim to have 15% of employment concentrated in high-tech firms. This would result in almost 346,000 people being employed in high-tech firms by 2020 - - a net increase of 215,000 jobs over the period."
The report said in respect of Silicon Valley: "It is estimated that 320,000 people are employed in 5,500 high-technology firms."
The analysis was seriously in need of a reality check in a country with a tiny local market.
One inconvenient truth was that the oldest technology cluster in Europe, in the area around Cambridge University, had managed to grow to only 48,000 jobs after 50 years and 40% of firms employed just up to 5 people.
So cloning Silicon Valley has been tried by many and Dane Stangler, Kauffman Foundation vice president of Research & Policy, discusses it and three other persistent myths about entrepreneurship in the latest installment of the Kauffman Sketchbook video series by the Kauffman Foundation, America's leading entrepreneurship think-tank.
"There are several areas in which I think our research and the research of those we fund has been making headway in, if not disproving, at least pushing back against conventional wisdom or what turn out to be myths," Stangler says in the three-minute animated video.
"Myth-busting Entrepreneurship," notes four commonly held beliefs and attempts to set the record straight.
Challenging the notion that small business plays the most important role in growing the economy, Stangler notes that the age of the firm is a more important variable than the size of the firm. "It's new and young companies that create most jobs and innovations, not necessarily small companies," he says.
He cites multiple studies that refute the popular stereotype that most entrepreneurs are 23-year-olds starting tech companies in their local coffee shop or their bedroom. "By and large," he says, "the 'peak age' for starting a company is in the mid to late 30s, early 40s."
Stangler warns against efforts to recreate Silicon Valley in the hopes of creating a hotbed of high-tech startups. "Silicon Valley is a very unique place that's never going to be replicated. We all need to stop trying to be a Silicon fill-in-the-blank, not just in the US, but anywhere around the world," he says.
More recently, Stangler and the research team at Kauffman have been examining the role of business incubators to launch early-stage companies. "Most research shows that incubators are not effective at all for actually producing companies," he says.
Stangler concludes by acknowledging the importance of harvesting more research to uncover myths and propose constructive alternatives.
According to an Entrepreneurship Policy Digest released Thursday by the Kauffman Foundation, new businesses account for nearly all net new job creation and almost 20% of gross job creation.
While existing small and large businesses are important to overall economic strength, neither group contributes to new job creation the way new firms do.
The Policy Digest [pdf] explains that startup activity is on the decline in the United States, and proposes strategies for policymakers to help reverse that trend.
"Especially with the declining startup rate, there is an opportunity for lawmakers at the federal, state and local level to improve conditions for business creation," said Jason Wiens, policy director at the Kauffman Foundation. "From advancing education at the local level to creating visas for immigrant entrepreneurs at the federal level, our new Policy Digest offers several strategies that could help spur job growth via entrepreneurship."
Companies less than one year old have created an average of 1.5m jobs per year over the past three decades
Many young firms exhibit an "up or out" dynamic, in which innovative and successful firms grow rapidly and become a wellspring of job and economic growth, or quickly fail and exit the market, allowing capital to be put to more productive uses.
Young firms were hit hard during the Great Recession. Even still, from 2006 to 2009, young and small firms (fewer than five years old and twenty employees) remained a positive source of net employment growth (8.6%), whereas older and larger firms shed more jobs than they created.
Declining US startup rates threaten growth
New businesses represent a declining share of the US 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 two million 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.