What Makes Entrepreneurship Attractive?

Policymakers across the world desperately desire to increase the levels of entrepreneurship within their borders. Whether it is the United States increasing funds for STEM education in the Educate to Innovate program, the extensive programs for new business formation in South Korea, or building one of the most well-endowed science and technology universities in Saudi Arabia (KAUST), governments are putting new venture formation, entrepreneurs, and science and technology on an ever greater pedestal. They are the panacea to all of our economic problems.

Despite the grand visions of politicians, few policymakers have successfully guided their economies to reach this entrepreneurial target. Saudi Arabia is hardly a paragon of innovation today, despite KAUST’s existence for the past few years. The Research Triangle in North Carolina, while not a failure, has never reached its full potential to become a major innovation hub. Today, the only region that looks promising is New York City, where a start-up ecosystem has grown in the ashes of the Wall Street financial collapse and the city government is devoting significant resources to grow and sustain a technical workforce.

Why is it so difficult to build these kinds of regions? I can think of a couple of answers:

  • Policymakers aren’t entrepreneurs.
    This not only means that it is difficult to build good policies, but it also means that the implementation of the policies can be extraordinarily hard as well.
  • Policy often lacks focus.
    I don’t believe that building an entrepreneurial region is hard, but what is your price? It’s not just about money here, but also attention and time. Are you willing to change every policy (labor law, patents, taxes, etc.) to support such an environment, or do such changes get mired in politics?
  • Policy often lacks geographic focus.
    Most entrepreneurship happens in very well-defined regions. In the US, movies are made in LA, tech in SF, media/advertising in NYC. Trying to spread the benefits widely (a common policy goal) is the antithesis of building a concentrated innovation hub.

Ultimately, building these types of regions require people to start and grow companies. And while there is a great number of items to be considered, I believe all of entrepreneurship can be summarized as “rewards”. What are you going to get at the end of the train ride? This is usually put in monetary terms, although start-ups like Wikipedia and Khan Academy are also legitimate approaches.

The basic equation of entrepreneurship is Benefit = Probability of Success X Size of Reward. Larger rewards and better chances of success both increase the likelihood of entrepreneurship. This is why exit opportunities are so critical to the development of new ventures. In countries like the United States, there are a myriad of ways to attain your reward, from mergers and acquisitions to going public. Such opportunities don’t often exist in other countries, where the legal framework or business culture may not really provide any good outs.

I want to really emphasize this point. If there are strong exit opportunities, entrepreneurship will happen. There can be a bad regulatory framework, a poor justice system, a lack of talent, etc., but new companies will form if their founders think there is a non-miniscule chance of success and the exit potential is decent. Policymakers need to start here and solve problems related to exits before any other policy consideration.

Once exit opportunities exist, the second and in some ways final issue is about reward balance. To make a well-functioning entrepreneurship hub, the ecosystem has to support the sharing of the spoils of venture formation. Entrepreneurs, employees, investors, and even society all need to get a share of the rewards if the ecosystem is to function. When these are unbalanced, the ecosystem fails. For instance, South Korea’s venture capital industry is likely to take a much greater chunk of equity with an investment than a similar deal in the US. Founders thus start fewer companies because the rewards are smaller, and the ecosystem suffers.

Free markets are crucial to this success, but the balancing act required between the various actors can be challenging if they are completely unfettered. Silicon Valley is one of the only regions that have mastered this balance, but it is not impossible to believe that another region couldn’t reach the same point. What is required is a dexterous and responsive policy process that is willing to listen to all members of the debate. Or more plainly, the investors can’t be the only people politicians listen to.

Entrepreneurship is attractive because it allows one to win a greater reward, broadly defined. When policymakers start focusing on the outcomes instead of the inputs like engineers and capital, we may start to see other venture regions begin.