These days, who doesn’t like entrepreneurs? After all, they’re the lifeblood of any economy. But our love of enterprise hasn’t always been so strong. At the extreme, Communism and Fascism offered different models – where the economy is directed through the state or large state-backed companies. In both instances, entrepreneurs were seen as irritants to the efficiency.
Although we have learned to appreciate entrepreneurs, we still have a lot to learn about the role of entrepreneurs in economic growth, how best to support them and how to structure government programmes to properly test their effectiveness. But though progress is slow, there are some great academics revealing the benefits and tradeoffs of incentivizing entrepreneurial activity.
A recent debate article by Ross Brown, Suzanne Mawson and Colin Mason caught my eye. Myth-busting and entrepreneurship policy: the case of high growth firms challenges some commonly held beliefs about high growth firms (HGFs):
Myth #1: HGFs are all young and small
Evidence suggests that the majority of HGFs are older and larger than previously believed. The paper cites research from the US which found that HGFs are on average 25 years old and that even smaller HGFs (employing 1–19 employees) exhibited a more advanced average age of 17 years.
Myth #2: HGFs are predominantly high tech
HGFs are not all tech firms. In fact, “only around 15 per cent of HGFs are operating in high tech sectors.” And high tech doesn’t always mean innovative, though HGFs are strongly correlated with innovativeness (measured as patents for R&D spending).
Myth #3: Universities are a major source of HGFs
“The evidence strongly indicates that very few University Spin-offs (USOs) grow and the vast majority remain very small.” In fact, research suggests that in terms of sales growth and survival rates, company spin-offs (CSOs) do much better. The paper raises the concern that “intensive early stage support for embryonic business concepts can effectively result in ‘killing firms with kindness’, preventing them from developing as independent and self-sufficient organizations.”
Myth #4: HGFs are mostly VC-backed
Recent empirical evidence from the UK suggests that only a tiny fraction of UK HGFs are VC-backed, and survey evidence puts the figure at of UK high growth SMEs that have to utilized risk finance such as venture capital or business angel funding at 4.8 per cent.
Myth #5: HGFs undertake steady linear growth
Rapid growth is rarely sustained. “Most firms struggle and encounter severe ‘growing pains’. Despite this, most policy frameworks are driven to promote rapid growth within firms, irrespective of the longer term consequences.”
Myth #6: HGFs grow organically
“A significant number of HGFs emerge from existing firms that are undertaking a period of organizational change such as a management buy-out (MBO) and management buy-in (MBI).”
Myth #7: HGFs are the same irrespective of their location
HGFs can be found in large cities, small towns and rural areas, but they nevertheless tend to cluster around certain geographies. “Whilst there appears to be a predilection to look to other geographies (e.g. Silicon Valley) for programmes and interventions to mimic at home, the empirical evidence base suggests caution in this regard, given the nuances of specific entrepreneurial contexts.”
Across the world, policies have been designed and implemented based on these myths. This paper isn’t the final word, but should serve as a wakeup call for governments to consider whether their interventions are as effective as they could be. The good news for entrepreneurs from this paper is that the stereotypical high-tech start-up burning through a small fortune of VC cash isn’t the only – or even the predominant – way to scale a company.