Academics around the world are encouraged to try and turn their considerable knowledge and expertise into groundbreaking startups. Indeed, the likes of Entrepreneur First revolve very much around this notion that extremely smart researchers can be trained and supported in turning their expertise into successful new ventures.
While it’s a logical sentiment, especially in an age in which technology is becoming ever more sophisticated, new research from Osaka University suggests that PhDs are not actually very good as entrepreneurs.
The paper shows that the rate of startup formation has been on the decline for companies run by PhDs in science and engineering since 1997, which is particularly worrying as this group is regarded as crucial in transferring knowledge from lab to market.
“We link this to an increasing burden of knowledge by documenting a long-term earnings decline by founders, especially less experienced founders, greater work complexity in R&D, and more administrative work,” the researchers explain. “The results suggest that established firms are better positioned to cope with the increasing burden of knowledge, in particular through the design of knowledge hierarchies, explaining why new firm entry has declined for high-tech, high-opportunity startups.”
Declining fortunes
This situation matters, as it’s often believed that the creation of high-tech startups is what leads to the kind of creative destruction that is so often the engine of the economy. The decline in entrepreneurial activity among PhDs is seen across the board, and not confined to particular demographics or even scientific discipline.
The researchers believe that a significant factor is the exponential rise in the amount of scientific knowledge. They argue that, for instance, in medicine the doubling of medical knowledge in 1950 took 50 years, in 1980 this had shrunk to 7 years, and by 2010 it was down to just 3.5 years. Indeed, what students learn in medical school will be just 6% of what they know within a decade of practising.
“We argue and find that an increasing burden of knowledge also leads to fewer hightech high-opportunity startups,” the researchers explain. “We argue and find that it also leads PhDs to amass greater work experience before becoming a founder, to shoulder more R&D tasks as founders, and not being rewarded for that extra work.”
This subsequently makes working for established firms a more attractive option as by the time scientists and engineers are ready to create a startup they already have established a career for themselves. This underlines the decline in entrepreneurship in medicine, for instance, with just 31.4% of physicians operating as independent owners in 2019, versus 48.5% in 2012.
The burden of knowledge
Central to this situation is the increasing burden of knowledge, which in a startup is typically shouldered by the founder themselves. In a corporate environment, by contrast, this burden is typically spread across numerous people, and is therefore more effectively managed.
Firms can deploy a level of specialization and hierarchy that startups simply cannot replicate, and so they struggle to manage the considerable burden of maintaining and capitalizing on their knowledge base.
One possible way out of this conumdrum would be to hire larger teams at the start of the startup’s journey to help share this knowledge burden. Generally speaking, however, it’s not a strategy chosen by many entrepreneurs.
The researchers speculate that this might be because of the inherent uncertainty in startup life, with the unsure viability of their venture encouraging many to start small and test their concept before scaling (or exiting). Coupled with the financial constraints that restrict many new startups and having a larger team may simply not be feasible. What does appear clear, however, is that the growing knowledge burden makes successful entrepreneurship that bit harder.
“Our findings suggest that if the goal is to restore business dynamism in the high-tech sector, alleviating the burden of knowledge should be front and center in the strategy to attain it,” the researchers conclude.
