All around the world, from the U.S. to Europe to China to the Middle East, the agenda is identical: Simultaneously saving the middle class against shrinkage while generating tens of millions of new jobs to employ an increasing cadre of well-educated youth that cannot find work. There have been many solutions proposed in many countries: lessening the burden of government regulation – a darling of American fiscal conservatives; permitting very small businesses to avoid taxation – an idea popular in Italy for several decades; and government and private investments in research and development – favored in Western Europe and the venture capital community. More radical ideas, such as giving the poor title to land so they can mortgage it and use the money to form businesses, have also been tried with a mixture of success and failure.
It turns out that “none of the above” might be the answer. The Ewing Kauffman Foundation, which devotes itself to the study of entrepreneurship, says that it is new enterprise startups that generate both the businesses and jobs that are the bedrock of a middle class economy. The Kauffman Index of Entrepreneurial Activity (KIEA) has decades of data for the U.S., but much of it is relevant to the world at large, and provides insight into how and why businesses come into being.
One of the ideas that the KIEA debunks is that regulation is an impediment to entrepreneurial activity. Highly regulated states for businesses, such as California and New York, generate new startups at exactly the same rates as lightly regulated states such as Florida and Texas. In fact, one of the most highly regulated cities, Los Angeles, leads the nation in entrepreneurial activity, with more than 95,000 new businesses being created every year.
Education appears to be no barrier either. Increasingly, venture capitalists and bankers want to see impressive resumes with top schools and years of “domain experience,” and a detailed business plan before they will unleash their checkbooks. Yet the data show that those without a high school education are more likely to start businesses than those with a college degree. That data is borne out in the Forbes “Rich List,” where the highest third of wealth is dominated by people who never went to college.
Age isn’t much of an indicator either. People between the ages of 45 and 54 are 50% more likely to start businesses than those in their 20s. And immigrants, especially illegal Latino immigrants, are more than twice as likely to start businesses as native-born Americans. What does it all add up to? At least in the U.S., the most likely entrepreneurs are middle-aged native-borns who have lost their jobs and illegals who need to survive.
In other words, it is necessity that is the mother of entrepreneurship. If you have nothing and you have to provide for your family, your learning curve can be brutal, but highly beneficial. With little or no margin for failure, people learn to puzzle out the marketplace at lightning speed.
I’m certainly not suggesting that we throw everyone into a kind of Darwinian free- for-all that will produce a large number of new businesses that will then generate employment for all those who either couldn’t or wouldn’t become risk takers, but we should be alert to encouraging reasonable risk-taking when we see it. Entrepreneurs are pretty good at figuring out where the opportunities are. Look at the so-called App Economy. It didn’t even exist until 2007, when Apple introduced the iPhone. Since then, Apple and its imitators have produced billions of smart phones, but far more important, more than a million independently developed applications have been created by entrepreneurs who saw a market opportunity and went for it. In the process, a half million new jobs have been created in the U.S., and the forecast is for many more over the next decade, not just for new applications, but for the entire smart phone environment – cases, mounting stands and a huge variety of other enhancements.
When policy-makers look at the App Economy, their first thought is to say, “Let’s encourage innovation.” Yes, but. There was only one germinal innovation in the entire App Economy – the iPhone itself. Everything else came from recognizing the opportunity inherent in that one product. You could spend billions, as venture capitalists do, in trying to duplicate that one success, and never get it right. Meanwhile, you would have missed out on food trucks, drones, lighter-than-air craft, YouTube movies and a host of other entrepreneurial advances that never saw a VC’s desk.
The trick, really, is in learning how to get out of the way of entrepreneurs. Lessening the burdens on start-ups is certainly one way to do it, but risk takers will generally ignore the hurdles put up by governments and banks and find their own capital and their own path. And in the process, they’ll generate lots of failures, but also lots of successes, lots of jobs, and most importantly, many more paths to the maintenance of the middle class.