Entrepreneur, Author, Professor, Global CEO

July 13, 2015

The Two Faces of Entrepreneurship

First it was The Social Network, the frenetic film about the birth of Facebook. Then The Internship, a cinematic valentine to Google with Vince Vaughn and Owen Wilson. Then a biopic of Steve Jobs starring Ashton Kutcher, then the sitcom Betas from Amazon. Lately, it’s HBO’s Silicon Valley, a very funnysend-up of the Bay Area start-up world from the creator of Beavis and Butt-head.

Meanwhile, in the real Silicon Valley, the unicorns are multiplying. (Unicorns are the breakout stars of the technology start-up world that investors have bid up to valuations of $1 billion or more.) The New York Times reports that over the past 15 months the number of unicorns has doubled to 102. Ten are valued at over $10 billion: Uber, at $40 billion, leads the pack. Other notables: Airbnb, $20 billion; Snapchat, $15 billion. No wonder Hollywood has taken notice.

But beyond the breathless media accounts of overnight billionaires and the Hollywood depictions of entrepreneurship – both admiring and satirical – lie the surprising facts about entrepreneurship and two radically different models to which they point.

The Silicon Valley/venture capital model might be put this way: “aim high, fail fast, and use other people’s money.” The entrepreneurs who successfully pursue this formula create bigger companies, faster, than their counterparts. They account for around 10% of all the new economic value created by startups. Call them the “heroic entrepreneurs.” They’re the ones we read about. And without them and the fuel supplied by venture capital, the US wouldn’t have nearly as strong an economy as it does.

But the heroic entrepreneurs we spend a great deal of time reading about represent less than 1 in 10,000of the entrepreneurs in the US. Most people are startled to learn that there are around 700,000 new businesses incorporated in the US every year. Even that number grossly understates entrepreneurial activity. Most entrepreneurs never spend the money to incorporate. The Kauffman Foundation estimates the number of people in the process of starting their own business at any time in the US at overfour million. In fact, there is around a50/50 chance that any one of us will try to start a business at some point, and it is almost certain that each of us will be asked to invest in a startup in our lifetimes.

Out of all these millions of entrepreneurs, several hundred thousand a year start companies that become valuable, self-sustainable, and help the economy by hiring lots of people. These are the entrepreneurs that grow our economy. I call them “bedrock founders.” Their model: “pursue steady profitable growth to create the greatest personal wealth with the least personal risk.”

Businesses started by the heroic entrepreneurs do indeed hire more people than businesses started by bedrock founders, and they grow faster. But their impact is small relative to all the economic value created by bedrock founders. Our economy needs and relies upon the large numbers of these highly motivated entrepreneurs who create profitable companies. These enterprises are large and small, fast-growing and slow-growing, tech and non-tech. We value the companies they create and care about the employment they provide. But it is critically important that we understand how bedrock entrepreneurs create the vast majority of the world’s economic growth and how they become successful. That is the focus of my research.

Previously, I’ve written about “valuation sensations”–the endlessly chronicled unicorns that can have a distorting effect on would-be entrepreneurs and investors alike. Luring people who are not cut out for it into the heroic model of entrepreneurship sets them up for failure and discourages them from starting enterprises that are more modest and more likely to succeed. Naive investors, only some of which are rich, greatly underestimate entrepreneurial risks and waste time and money on ventures that are destined to fail.

If you are brilliant, innovative, aggressive, independent, and technically savvy, then by all means take the heroic path. (Unfortunately, it also helps greatly if you are male). But if you want to be like the several hundred thousand people a year who start companies that become valuable, self-sustainable, and help the economy by hiring lots of people, you would be well advised to follow a different formula.

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