The Spawning Spark

Knowing how startups are born is vital to economic development: Entrepreneurs drive a lot of opportunities.
October 2003
William Fulton
By William Fulton  |  Columnist
Director of the Kinder Institute for Urban Research at Rice University and former mayor of Ventura, Calif.

Lately I've been going around telling people that I'm an entrepreneur. Five years ago, I moved my freelance business out of the house, opened an office and began looking for a secretary. Today, the resulting company has seven employees including myself. This doesn't exactly qualify me for the Silicon Valley or Route 128 Hall of Fame, but I am proud of it. Somehow or other I've created something out of nothing.

As a startup business owner, I never really thought about how or why I became an entrepreneur--or, in the lingo of some folks who study entrepreneurship, how I was spawned in this regard. For me, it was pretty simple. I was busting out of the house, I needed staff help, and as the economy boomed it looked like my business was going to keep growing.

But it turns out that I was not a typical entrepreneur at all. I had spent most of my professional life flying solo as a freelancer. For most entrepreneurs, the spawning process begins at a big company, where skills are learned, contacts are made and the gumption is found to go out on one's own.

Understanding this spawning process is vitally important to economic development: Entrepreneurs still drive a lot of the innovative opportunities in our economy. A new report from the Global Entrepreneurship Monitor, a joint effort of Babson College, the London Business School and the Kauffman Foundation, found that about 10 percent of American workers are employed by entrepreneurial startups less than four years old. That's down from 16 percent in the Internet bubble days of three years ago, but it's still a considerable chunk. Just as important--especially from an economic development perspective--is that, despite all the publicity, entrepreneurial activity is not focused in Silicon Valley and Route 128. It's spread pretty evenly across the nation, for the simple reason that entrepreneurs come in all shapes and sizes and businesses, not just in technology.

This is good news for states and localities outside the high-tech mainstream, which often view themselves as being left behind in the entrepreneurial economy. But there is more to entrepreneurship than these raw numbers, and this makes leveraging business ventures through public policy more difficult. First, true entrepreneurship--as most of us have learned the hard way--requires venture capital, and venture capital is still extremely concentrated in one economic sector (high tech) and two geographical locations (Massachusetts' Route 128 and California's Silicon Valley). And second, the spawning of entrepreneurs requires talented folks sitting at a big company thinking about going off on their own.

But what kinds of folks, and in what kind of big company? This was the subject of a second recent study, this one by Paul Gompers and Josh Lerner of the Harvard Business School and David Scharfstein at MIT's Sloan School. In examining what they call "entrepreneurial spawning," the three authors found--somewhat to their surprise--that entrepreneurs are not smart business executives who are fed up with the bloated and bureaucratic ways of their employer. Rather, they are people who work for companies that have themselves been started by entrepreneurs. In other words, entrepreneurs are spawned by the excitement of working in an entrepreneurial environment.

Of course, the Harvard-MIT study dealt only with venture capital- backed startups, which means it might be too skewed toward the Silicon Valley/Route 128 types. And therein lies one of the difficulties that economic developers face in dealing with startup companies: The rich seem to get richer. Venture capitalists make money off of high-tech startups and therefore seek to recirculate money in places such as Silicon Valley, where budding entrepreneurs can see that their current bosses have gotten rich off the process. Meanwhile, the rest of the country suffers from a lack of venture capital investment, and so would-be entrepreneurs stare at the ceiling while working for stodgy corporations.

At least that's how it seems looking at the data. But there may be a number of ways around this problem for state and local officials. First, many communities have begun to create their own venture capital funds--sometimes with public subsidies but more often by persuading local investors to put their venture capital to work locally rather than in Silicon Valley. Second, a few entrepreneurs are willing to leave Silicon Valley to set up shop in their hometowns, using venture capital startup funds to do so. Doug Burgum of Great Plains Software, located in Fargo, North Dakota, is a great example. And third, communities around the nation can benefit from entrepreneur-driven expansion even if they don't have the entrepreneurs or venture capital locally, simply by understanding how to provide goods and services to the high-growth sectors of the economy.

So the situation for most communities may not be as bleak as it first appears. Of course, localities around the country should also honor and recognize those small entrepreneurs who make an important contribution as well--even if it's only seven jobs. I'm still waiting for my Entrepreneur of the Year Award.