Entrepreneurship has seldom been sexier, with the press overwhelmed with stories of technological disruption and the tremendous changes emerging across society as a result of the bold and courageous innovators that are bucking the norm.
Indeed, research suggests we’re in the midst of an ‘entrepreneurial economy’, which has prompted governments and corporations to lend their heft to the entrepreneurial wave, with incubators and accelerators popping up left, right and center.
It’s hard not to make the link between all of this investment in entrepreneurship, and the apparent disruption that we’re seeing across society, but does the actual data support this image or is it more a case of smoke and mirrors?
Are we all entrepreneurs now?
We already know that innovation is largely in decline, with breakthroughs today not only less frequent and less revolutionary than in the past, but also considerably more expensive to achieve, both in terms of money and manpower.
The notion of the footloose and entrepreneurial workforce is also something of a myth however. As Tyler Cowen has highlighted, we are now less likely to either switch jobs or move location to find work than we were in the past. Indeed, there’s much to suggest that many of those who do embark on a gigging lifestyle or create their own business do so as a result of redundancy rather than a Eureka moment.
Indeed, in the United States, data reveals that entrepreneurship has declined by around half between 1978 and 2011, with this especially pronounced among the share of young firms, as employment at young firms fell from nearly half of the workforce in the 1980s to just 39% by 2006. By contrast, employment at big firms rose from 51% to 57% of the overall workforce in the same timeframe.
What’s more, the proportion of entrepreneurs with high levels of education has also been declining, with data showing a fall from 12.2% in 1985 to just 5.3% in 2014, suggesting that the startups that are emerging are not the high-tech disrupters we think they are.
A decline in disruption
There is also evidence to suggest that the entrepreneurs that are in operation are less creative and innovative than their forebears. For instance, the ratio of patents to GDP has been in decline in the United States for years, while the cost for each patent is on the rise. What’s more, the age of those who register their first patent is also increasing, which underlines the increasing complexity of many patents today.
It’s no surprise that the percentage of startups that are profitable when they list on the stock market is at its lowest point since the dotcom bubble of the 1990s. Indeed, companies such as Uber and WeWork have wracked up higher annual losses than any other startups in history. This is despite the average startup today remaining private twice as long as was the norm in the past.
It’s a phenomenon so aptly captured by Stanford’s Nicholas Bloom in recent research that highlighted the growing costs associated with innovation. Indeed, his data shows that research productivity has declined by a factor of 41 since the 1930s, which equates to over 5% per year on average. This is a problem across the developed world, and is far from confined to the United States.
So why is the entrepreneurial image more myth than reality? A number of factors probably lie beneath it. An ageing population is certainly a factor, as is the growing market concentration that sees a growing amount of market power focused on a small number of incumbent firms that prevent startups from disrupting the market.
Hype run wild
Perhaps more pernicious however is the exaggerated levels of hype associated both with new technologies and the startups that are attempting to exploit them. It’s creating an environment Alan Greenspan famously described as one of ‘irrational exuberance’ when describing the dot com bubble.
Yet despite the hoopla around AI, big data, the Internet of Things, autonomous vehicles or blockchain, we have yet to see any real rise in productivity, or the mass unemployment the more pessimistic exponents of technology predict.
Instead, markets have become stodgy and increasingly immune to competition. A popular meme of the dot-com and post dot-com era posited that the lifecycle of big firms today was getting ever shorter. It was evidence of the rapid disruption of the economy, but that is in decline as large firms take defensive positions and either block out or acquire startups from entering their domain. Entrepreneurs and venture capitalists talk about the forcefield around their markets that destroy any startup that ventures too close.
Alas, rectifying the hurdles to entrepreneurship may not be as easy as we think, and indeed recent research suggests that many of the difficulties we see today are simply a reflection of the inherent complexities of modern economies, with emerging markets seeing few of the problems we see in the west.
It undoubtedly becomes harder to sustain entrepreneurship as economies scale, but the benefits of an entrepreneurial society are such that we must do more to support it, even in the face of opponents who argue that the decline in entrepreneurship has coincided with higher employment, greater job stability and even better job matching.
It’s easy to be taken in by the headlines that paint a picture of entrepreneurial nirvana, but the reality is that it’s a sector that is in dire straits, and needs better support if it is to truly thrive.
