Entrepreneurship May Work Like A Clock, But It Still Needs Winding: Exploring the Kauffman Study on New Firm Formation
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a permanent reduction in new firm starts, or maybe a permanent increase as people decide not to go back to big firms,” says Stangler. “That’s a question that won’t be answered for a long time.”
And here’s an even bigger caveat: The fact that new firm formation is so consistent may be irrelevant to the nation’s overall economic health. If other research going on at the Kauffman Foundation is correct, then what really matters for economic growth is how many of the firms spawned each year mature into “high-growth” companies that hire lots of people and change their industries. In any given year, just 5 percent of companies account for two-thirds of the new jobs created, Stangler and Bob Litan, the Kauffman Foundation’s vice president of research and policy, found in a 2009 paper. For an example of this kind of stratification, you need look no further than the search-engine business: Silicon Valley entrepreneurs started scores of search-related startups back in the 1990s, but today only one, Google, really counts. In other words, it could be that “the process rather than the input is what matters,” as Kedrosky and Stangler write.
If all this is true, and if the number of new firms competing to become high-growth firms stays constant no matter what, then how should we answer my original question? (Which was, roughly, whether we really need to sweat the details—things like quarterly swings in venture activity, or the resources going toward the promotion of entrepreneurship on college campuses or through incubator programs like TechStars.) If you want my opinion—and Stangler’s—the answer is yes.
Look at it this way: the United States is doing something right, even though we’re not exactly sure what it is. Year in and year out, in good times and bad, Americans start 700,000 new companies, which, if you think about it, is sort of amazing. It may testify to a certain level of resilience and drive in the American character, or it may have more to do with social policies and cultural factors that encourage and reward risk-taking. Whatever the answer, this is one tendency we don’t want to mess with.
As Stangler puts it, “It’s difficult to prospectively tell which companies will succeed/survive or which ones will be high-growth, so it’s highly important that we have thousands of people trying to do it each year.” So until we understand entrepreneurship better, we can’t afford to stop obsessing over it.