Small start-ups are as vital as the stars

First published in the Financial Times on 27th August 2013.

In the 19th and 20th centuries, Britain and the UK were dynamic and open to novelty

Are entrepreneurs freaks of nature? Jim Clifton thinks so. He is the boss of research firm Gallup, and recently wrote about studies it is undertaking to find those especially talented individuals who can build the next Google, Ryanair or Bloomberg.

Gallup estimated that such “super-entrepreneurs” number just three out of 1,000 across a sample population. These are the risk-takers capable of founding so-called gazelle companies: the fastest-growing breakthrough organisations that create a high proportion of the new jobs and genuine innovation in an economy.

Identifying these prime movers is incredibly difficult. It is not like spotting brilliant footballers or pianists, where there are exams, courses, teachers and systems to discover and cultivate rare prowess. However, the skills displayed by the next Steve Jobs or Sir James Dyson are more complex and less well understood. They involve an ability to organise and promote a business, make a commercial idea concrete, hire and lead a team, generate sales and add value. There can be no academic qualification for attributes such as inventiveness or a spirit of enterprise.

It is a tragedy that the economics profession almost ignores this subject, and that business schools have done so little useful work to identify key character traits of the vital few. Venture capitalists would have much to gain by undertaking serious scientific studies into the personalities of winners in business. But they seem resigned to the idea that there are few rules or systems for finding the right ones to back.

Scott Shane, a prolific writer on entrepreneurship, postulates that genetic factors are powerful determinants of whether someone will develop a successful business. His book Born Entrepreneurs, Born Leaders suggests innate, inheritable predispositions really matter.

A survey of entrepreneurs at Northeastern University supports his view: 61 per cent of respondents said innate drive was the main reason they started a business: only 1 per cent said their higher education was a significant factor.

Not everyone buys the idea that a small number of extraordinary risk-takers are the ones who make a difference, however. Mass Flourishing , an important new book by Nobel prizewinner Edmund Phelps, suggests individuals matter much less than overall culture and social values. The subtitle of his text is “How grassroots innovation created jobs, challenge, and change”. His thesis is that most industrial discoveries were not pioneered by a few isolated visionaries, such as Henry Ford. Instead, he argues that progress was driven by huge numbers of citizens empowered to create and sell thousands of incremental improvements, from craftsmen and farmers to traders and factory workers. Together they generated an extraordinary period of prosperity, starting in the 1820s in Britain and petering out in the 1970s in the US.

Now, in the west, Professor Phelps believes there is a sense that the “glorious history of desire and dreams” has run out of steam. Unquestionably, there is an unholy alliance of conservatism and socialism that impedes economic and technological advances by resisting innovation.

In Britain, for instance, whether it is fracking, immigration, reforming the state or genetically modified foods, we suffer from neurotic environmentalists and Nimby elements who object to change and are deaf to rational arguments. They defy modernity, and seek to embrace what they imagine are “traditional” values. So they resent wealth creation, cling to bloated welfare and pension systems, resist new developments and so forth. By contrast, Prof Phelps shows how in the 19th and 20th centuries Britain and the US, among other nations, were dynamic and open to novelty – and that the good life was surprisingly inclusive then.

I agree with him that all entrepreneurship is important, not just the famous names. I also think that government, industry, regulators and institutions must be more venturesome if a nation is to compete successfully in a global marketplace. Meanwhile, educators, mentors, universities and philanthropists should explore much more deeply why certain entrepreneurs have such an impact, how to breed more of them, and how to encourage surroundings that will enable them to flourish.