2011 State of Entrepreneurship Address

8/7/2019 2011 State of Entrepreneurship Address

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STATE OF ENTREPRENEURSHIP ADDRESS | THE RULES FOR GROWTH | FEBRUARY 8, 2011

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So Ill share a few thoughts rst, and then well be joined by a distinguished group of panelists, who will discussthe intersection of regulation, economic policy, andeconomic growth.

New companies are formed, of course, by entrepreneurs,and there are many who have left an indelible imprint onthe American way of life. Many of these names are familiar:Bloomberg, Bezos, Disney, Dell, Gates, Jobs, and Walton. Othersmay not be as well known, but they too played critical roles inshaping this countrypeople like Henry Luce, the founder ofTime magazine; Brian Lamb, the founder of C-SPAN; Ray Krocwho scaled McDonalds; and Willis Carrier, whose inventionair conditioningmarks its centennial this year.

There is someone else you may not know who has

had a considerable entrepreneurial impact on America. Thisindividuals rst job, following service in World War II, was inpharmaceutical sales. Before long, he was selling so muchthat he was making more than the company president. Thecompany responded by reducing the size of his commissions,

and then his sales territory. This young man did the onlysensible thing, which was to resign and launch his ownpharmaceutical business.

What he lacked in nancial capital he made up forwith self-condence, enthusiasm, and creativity. He gave thecompany his middle name because he thought using his lastname would lead his customers to perceive him as a one-manoperation. And he was, but not for long. In his rst year inbusiness, he had sales of $36,000. Less than ten years later, hisannual sales reached $1 million. When the company was soldin 1989, annual sales were touching $1 billion.

The company was Marion Laboratories, and the founderwas a man named Ewing Marion Kauffman. Yes, its the sameKauffman.

I tell you that story, in part, to underscore thatentrepreneurship is deeply embedded in the DNA of theKauffman Foundation. More important, Mr. Kauffman wantedto be sure that entrepreneurship was embedded permanentlyin the fabric of America.

Good afternoon, and thank you all for coming. This is the second year in whichI have had the pleasure and privilege to discuss the state of entrepreneurshipin America. We at the Kauffman Foundation initiated this event because our

research has documented the critical linkage between the formation and growth of newcompanies to the growth of the American economy, or any economy, for that matter.

State of Entrepreneurship AddressThe Rules for Growth

The National Press Club, Washington, DCFebruary 8, 2011

By Carl J. Schramm,President and CEO, Ewing Marion Kauffman Foundation


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stump, but heres the reality: Companies with fewer than500 employeesthe ofcial denition of a small businessaccount for roughly four out of ten jobs. Firms of less than100 employeesa more common sense denition of smallbusinessaccount for less than one-third of American jobs.

These data not only refute the notion that smallbusinesses account for most jobs, they also are static. What weshould care about most is the creation of new jobs. And here

the data are clearnew businesses are the key tonew jobs .Of course, not all new businesses have the same growth

potential. Many will fail, and many more will never have morethan twenty or thirty employees. Yet some will achieve a veryhigh level of ongoing growth. What unites these high-growth

rms is that they bring something new to the marketplace.Rather than simply responding to existing demand, they createa whole new source of demand. Think Google and eBay in thepast decade or so, and Federal Express, Southwest Airlines,Starbucks, and Microsoft before that.

Whats also interesting is that many successful companieswere started during recessions. Recessions tend to be goodincubators of new ideas, for a variety of reasonsstart-up

costs are lower; labor is more abundant; people lose theirsteady jobs and are forced to create a new way to earn a living;and existing companies and consumers may be looking forcheaper alternatives and willing to give new market entrants achance (Figure 2). In fact, one of the hot companies of todayGroupongot its start in November 2008, at the precise

Figure 1: Young Firms Account for Largest Share of Job Creation

P e r c e n

t

Firm Age

15 610 1115 1620 2125 2628

Kauffman Foundation

In 2007, the last pre-recession year, young rms accounted fortwo-thirds of the economys new jobs.


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moment the U.S. banking system, and the broader economy,were teetering on the verge of collapse.

It is these enterprises that eventually generate a billiondollars or more in revenue that will fuel economic growth and job creation for many years, and ultimately spawn the nextgeneration of entrepreneurs and innovators. My colleagueBob Litan, Kauffmans vice president of research and policy,has researched the link between these billion-dollar companiesand broad economic growth. He gures that about fteen ofthese companies arise, on average, yearly. But if that numberrose to somewhere between forty-ve and seventy-ve, wedpermanently increase the economys growth rate by one fullpercentage point. Taking the economy from an annual growthrate of three percent to four percent, for example, woulddouble GDP in eighteen years versus twenty-four. Incomeswould rise commensurately. And the gains wouldnt just bemeasured in dollars and cents. Billion-dollar companies arelikely to give rise to technologies that improve health care,energy efciency, the environment, work standards, and otherfacets of daily life (Figure 3).

Launching so many more billion-dollar companies is abold vision. But we believe its possible because we start witha good foundation: Every year, Americans launch 600,000 newbusinesses. That number has held remarkably constant year

after year, in good times and bad. There are a lot of people withthe gumption to take a chance. But the real need is to lift theentrepreneurial batting average so that there are morehighly successful entrepreneurs.

Figure 2:Employment in Firms Started in Recession Years

Source: Business Dynamics Statistics, NBERRecession Startups Non-Recession Startups

Year Since Birth

Kauffman Foundation P r o p o r t

i o n o

f I n i t i a l E m p

l o y m e n

t

13

18

23

28

33

38

43

G D P ( i n t r i

l l i o n s o

f $ )

GDP Triples

GDP Doubles

Y e a r

0

1 8

Y e a r s

L a

t e r

2 4

Y e a r s

L a

t e r

2 9

Y e a r s

L a

t e r

3% GDP Growth4% GDP Growth

GDP Doubles

Figure 3:Difference in Potential GDP Growth

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Rules for GrowthThats where policymakers can help, and it is the entre

to my second area of focus. To create an environment in whichhigh-growth entrepreneurs can ourish, there is a clear needto modernize select laws and rules that affect whether rmsform and whether they can scale. Such an effort will require athoughtful re-examination of how laws and institutions affecteconomic growth and what types of adjustments can help toincubate high-growth rms.

Amid all of the bitter debate over taxes and spending,stimulus and austerity, and doubts about the Feds ongoingexperiment in quantitative easing, it seems to me that attimes we are so deep in the economic forest that we miss theproverbial trees. Getting scal and monetary policy rightis vitally important, but it is not the whole story.

Last July, the Kauffman Foundation convened leadinglegal scholars and social scientists from across the UnitedStates to identify changes that would remove barriers toentrepreneurship and open new pathways for growth. Weasked them to focus on low- or no-cost ways to promote

innovation and accelerate U.S. economic growth, emphasizingchanges in law and legal institutions rather than costlyeconomic stimulus packages and nancial bailouts. Thisdiscussion led to the publication of the book we have justreleased in hard copy and on our website,Rules for Growth.

One rule, which is a perennial issue we raise at theFoundation, is to reform U.S. immigration laws so thatmore high-skilled immigrants can launch businesses in theUnited States. Kauffman research shows that immigrants aredisproportionately likely to start a businessindeed, roughly25 percent of successful high-tech startups over the lastdecade were founded or co-founded by immigrants (Figure4). Highly educated immigrants want to come to the UnitedStates because ours is a nation in which science can ourishand ingenuity can be rewarded. But today the worlds buddingentrepreneurs have more options when choosing a homeasIndia, China, Brazil, and others catch up to the United States interms of available capital, labor, and opportunity.

Immigration restrictions that limit the number of highlyskilled people permitted to enter the United States to work orstart a business serve no purpose other than to stie growth.

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

SOURCE: Robert W. Fairlie, University of California,Santa Cruz, using the Current Population Survey.

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Figure 4:Kauffman Index of Entrepreneurial Activity

by Nativity (19962009)

Native Born Immigrant

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And high costs of entry for innovators and entrepreneurs onlydrive them elsewhere. We have proposed a new EntrepreneursVisa, not tied to how much money entrepreneurs raise butthe jobs they create for Americans, that would make it easierfor people who drive economic growth to come to the UnitedStates and establish a business. This is just the start of whatshould be a comprehensive effort to make immigration lawsmore welcoming to highly educated and motivated foreigninnovators.

A second rule of growth is that university technologylicensing practices should be improved so that university-generated innovation, typically funded by the federalgovernment, is more quickly and efciently commercialized.At too many universities, overly centralized and bureaucraticprocesses are clogging the innovation pipeline and making itharder to commercialize discoveries. Taking innovations fromthe laboratory to the marketplace is essential to unleashing theeconomic power of these innovations. Improving the licensingand commercialization process would cost nothing, but wouldhave enormous potential to stimulate the creation of high-

growth companies.A third rule of growth is to reform our tax system.

Specic suggestions include taxing consumption rather thanincome, because consumption taxes lead to more favorabletreatment of capital accumulation, they are more supportiveof innovation, and unlike income taxation, they do not punishsaving. There also is a need to reform the research anddevelopment tax credit so it better fosters innovation, and tomake it permanent, which will mean greater predictability forrms. President Obama commendably has expressed supportfor making the tax credit permanent.

I wont go through all of the rules here. You can nd moreinRules for Growth, which we hope can serve as a roadmapfor policymakers who want to help create the conditionsthat will contribute to higher rates of innovation and growth,improved living standards, and better lives for people in theUnited States and throughout the world.

Ecosystems forEntrepreneurship

While getting the rules right is important, governmentpolicy by itself will not deliver the high-growth businesses weneed, or even the lions share of them. Our best hope lies withthe private sector to take the lead in building entrepreneurialecosystems that will enable new companies to take rootand thrive.

One way to do that is to surround budding entrepreneurswith mentors and resources to enhance their chances ofsuccess. That means support networks that draw on mentors

personal and business relationships to unlock doors, guidenew entrepreneurs to the best opportunities, teach themthe mechanics of commercialization, and provide them withintroductions to possible nancing, sponsors, suppliers, andother partners.

This neednt be done in geographical clusters, such asSilicon Valley or North Carolinas Research Triangle Park. Inan age of instant communications and virtual businesses,entrepreneurial ecosystems are best dened by subject area orindustries, not by geographical location. What matters most isconnecting entrepreneurs and mentors who work and think in

Roughly 25 percent of successful high-tech startups over the last decadewere founded or co-founded by immigrants.

Taking innovations from the laboratory to the marketplace is essential tounleashing the economic power of these innovations.


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the same realm of ideas no matter where theyre located. Inthis way, entrepreneurs gain access to the broadest possiblecircle of experts.

These types of entrepreneurial ecosystems areincreasingly commonthink of The Foundry in medical

devices and YCombinator in Web-based businesses andsoftware. Im excited to tell you that the Kauffman Foundationhas established its own version. We call it Kauffman Labsfor Enterprise Creation, and it provides highly talentedand motivated budding entrepreneurs, who are chosencompetitively, with intense training by world-class mentors andcoaches who already have achieved entrepreneurial success.Training is customized to the specic business ideas of eachparticipant and focuses on solving real-world challenges,including pitching ideas, rening business strategies, andmanaging growth. While it is too early to boast of any billion-dollar companies, I am pleased to say that ten of our rst

thirteen entrants had established new businesses by the timetheir year at Kauffman Labs was over.

Creating an ecosystem thats conducive to entrepreneurialventureswhether in a small, directed group, or throughoutthe U.S. economyis absolutely essential to building afoundation for long-term growth, job creation, and innovation.

ConclusionIf we look back over economic history, its sometimes easy

to forget that the inventions that have enabled the forwardmarch of human progressthe steam engine, the light bulb,the automobile, airplane, telephone, and computerbeganwith an idea and an individual or group of entrepreneurswho found a way to develop that idea and move it to themarketplace. That process drives growth and improves lives.To keep the virtuous cycle moving, to rise out of our currenteconomic difculties, and to build a stronger and betterAmerica, we need entrepreneurs to innovate and take risks.Not all of them will succeed, of course. But we need more of

them to realize big-bang success, and we need a climate thatwill, at the very least, not interfere with their ability to achievethis success.

For that to happen, there must be a greater appreciationfor the role played by entrepreneurs in the U.S. economy.

This will help give rise to the right rulesand the rightecosystemthat can foster the creation of world-classcompanies and accelerate the growth rate of the U.S. economy.In sum, we want a deeper understanding of one of Mr.Kauffmans many timeless pearls of wisdommake a job,dont take a job.

Thank you.

Creating an ecosystem thats conducive to entrepreneurial ventureswhether in a small, directed group, or throughout the U.S. economyis

absolutely essential to building a foundation for long-term growth, job creation, and innovation.


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4801 ROCKHILL ROADKANSAS CITY, MISSOURI 64110

816-932-1000

www.kauffman.org

2011 State of Entrepreneurship Address

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