Nothing That's Worth Having Comes Easy
In a fall 2014 Schumpeter article in The Economist magazine, (which really is a must-read if you care about entrepreneurs, innovation, and productivity) the author wrote about how the perception and reality of what goes into being an entrepreneur are not aligned. Here on Growthology, my coauthors have talked about how entrepreneurship is glamorized in pop culture and isn’t what you see on TV and in the movies. I want to build on those articles with two distinct but related points.
First, it is important to know that entrepreneurship is hard. Really hard. Writers everywhere will tell you about how entrepreneurship wreaks havoc on your personal life, your family life, your mental health, your relationships with friends, and that’s all before talking about how difficult it is to succeed financially with your new business. Only two out three new companies survive to reach their second birthday, and less than half survive five years. All these factors combine to form the cadre of risks for would-be entrepreneurs.
But young firms founded by entrepreneurs are still disproportionately important drivers of economic growth, compared to their relative percentage of the business population. Whether through increased economic dynamism, steady job creation, or as a source of innovation, the new firms that entrepreneurs found are invaluable cogs in the engine of national economic growth. It is because entrepreneurs themselves and society as a whole benefits so much from a culture of entrepreneurship that it seems vital to me for society to provide resources for potential entrepreneurs.
Both these facts in combination, that entrepreneurship is both difficult and valuable, are why is it important that society provides the support services that allow new businesses the opportunity to grow and reach their potential. Services like mentoring and business skill training provide inexperienced but promising entrepreneurs (especially low-income and immigrant entrepreneurs) with the type of developed networks that experienced and savvy entrepreneurs routinely utilize. These types of services are where philanthropy and other private actors can make an impact on an individual entrepreneur. Government can also aid an entrepreneur’s quest, as social safety nets like unemployment insurance have been shown to encourage job creation and efficiently reallocate talent and resources.
The second point that I want to make about the difficulties of entrepreneurship is that from an economy-wide perspective, we arguably need both the high flying successes and the disappointing failures to develop a dynamic economy that allocates resources most efficiently. The sudden failure of a business is often personally and professionally crushing for an entrepreneur. Yet, the economy as a whole can benefit from such an exit, compared to a long, drawn-out process. A slow failure ties up valuable physical and human capital that can be put to more productive uses when the business churn in the economy is high. The other important point to know about entrepreneurial success is that it’s rarely an instantaneous thing. Entrepreneurs will iterate time and time again until finally the combination of their idea, their execution, and market forces create something people call a success.
The distortion between how hard entrepreneurship is and how it is portrayed warps how we think about entrepreneurs that aren’t massive successes. Many, many entrepreneurs fail. While the economy benefits from the churn that rewards the most productive firms, it is these “marginal” entrepreneurs, on the fine margin between success and failure that can benefit most from support services aimed at entrepreneurs. Because the rewards of entrepreneurship can be so great, the incentive to see these marginal firms break through and succeed is present. Now we just need to capitalize.
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