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News : Innovation Last Updated: Apr 21, 2015 - 7:49 AM

The dangers of romanticising entrepreneurs despite key role
By Michael Hennigan, Finfacts founder and editor
Apr 20, 2015 - 7:53 AM

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Kauffman Policy Digest

In the US new businesses account for nearly all net new job creation and almost 20% of gross job creation, whereas small businesses do not have a significant impact on job growth when age is accounted for. Last September, Schumpeter, The Economist columnist, wrote: "It is fashionable to romanticise entrepreneurs. Business professors celebrate the geniuses who break the rules and change the world. Politicians praise them as wealth creators. Glossy magazines drool over Richard Branson’s villa on Lake Como. But the reality can be as romantic as chewing glass: first-time founders have the job security of zero-hour contract workers, the money worries of chronic gamblers and the social life of hermits."

Companies less than one year old have created an average of 1.5m jobs per year in the US over the past three decades, according to the Kauffman Foundation — America's leading entrepreneurship think-tank.

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.

However, the think-tank warns 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 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.

Kauffman Policy Digest September 2014

Adrian Wooldridge, the management editor and Schumpeter columnist for The Economist, writes that over half of American startups fail within five years while most of the survivors barely stumble along. Shikhar Ghosh of Harvard Business School (HBS) found that three-quarters of startups backed by venture capital failed to return the capital invested in them, let alone generate a positive return. while in 2000 Barton Hamilton of Washington University in St Louis compared the income distributions of American employees and entrepreneurs, and concluded that the latter earned 35% less over a ten-year period than those in paid jobs.

Instead of failure being heroic, it can trigger an emotional crisis.

Schumpeter concludes:

The paradox of the current, romantic view of entrepreneurs is that it leads us to undervalue their achievements. It is easy to envy people if you focus on a handful of success stories. It is easy to say, as Barack Obama did, that 'If you’ve got a business — you didn’t build that. Somebody else made that happen,' while ignoring all the edifices that have fallen down and crushed those who devoted their lives to building them. Would-be entrepreneurs need to have a more measured view of the risks involved before they start a business. But society also needs to have more respect for people who put their lives on the line to build something from nothing.

Startup founders can learn the same skills that the creators of game-changing companies such as Chipotle [last week Hillary Clinton made news by stopping at a outlet in Ohio without anyone recognising her; VOX says Chipotle is the best-known and most successful exemplar of a dining trend in the United States that's typically called fast-casual by the business press. The idea, more or less, is that a fast-casual restaurant features the style of service associated with traditional fast food chains (McDonald's, Burger King, Wendy's, Taco Bell, KFC, etc.) but offers a higher quality of food at a higher price point. According to some leading business journalists, the company's innovations in the culinary sector should be recognized alongside those of Apple and other high-tech firms], Dropbox and eBay have used to build their enterprises.

These skills are the focus of what Amy Wilkinson, author of The Creator's Code, who is a lecturer at Stanford's Graduate School of Business, shares in the latest installment of the Kauffman Sketchbook video series released today by the Kauffman Foundation.

The three-minute animated video is narrated by Wilkinson, who conducted extensive research, funded by the Kauffman Foundation, to determine the fundamental skills of today's leading entrepreneurs that can be learned, practiced and passed on to others.

Throughout the past five years, her analysis was based on personally interviewing 200 high-impact entrepreneurs, including the founders of Airbnb, Gilt Groupe, LinkedIn, Jetblue, PayPal, SpaceX, Spanx, Tesla Motors, Theranos and Under Armour.

"All of us can learn to be more entrepreneurial," Wilkinson states. "We need to pattern ourselves after people who have done well. Across all of the research, I figured out that there are six essential skills." The Sketchbook illustrates each one:

  • Find the gap;
  • Drive for daylight;
    Fly the OODA loop — an acronym for “observe, orient, decide, and act,” this framework for rapid decision-making in fast-changing environments was created by Col. John Boyd, a US Air Force fighter pilot, during the Korean War. For entrepreneurs, Wilkinson says, this means continually updating their assumptions and moving quickly from one decision and iteration to the next. David Sacks, PayPal’s first COO, told Wilkinson that PayPal’s team would look at new features that competitors were building and quickly iterate. When Dotbank.com, for example, gave a $10 bonus to those who signed friends up for its service, PayPal rolled out a similar offer within a week, and added a $10 bonus for the new customer, too;
  • Fail wisely;
  • Network minds;
    Gift small goods.

In the sketchbook, Wilkinson presents founder insights, such as how to stay ahead of competitors, how generosity leads to productivity, and how to manage speed and complexity like a race car driver.

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