Natural selection

15 August 2008

It’s not often that the letters page of the Financial Times gets hot and bothered about entrepreneurs, but the suggestion that large numbers of small companies are all but irrelevant seems to have generated a bit of a tizz.

Luke Johnson, who made his name growing Pizza Express and now chairs Channel 4 and runs a private equity firm, kicked the whole thing off last week when he reviewed The Illusions of Entrepreneurship, a book by Scott A. Shane. Apparently, the thrust of the book is that the entrepreneurs who matter economically are the small number who start innovative, highly-successful firms. Not surprisingly, these tend to be well-capitalised and are set up by teams of professionals, not sole operators. Everything else is “pretty irrelevant in terms of job creation and value added”.

As Johnson puts it, “the thousands of jobbing builders, hairdressers and car mechanics who start their own companies may be brave, but in terms of economic growth, even their combined impact is pretty negligible. Most new enterprises are in mundane industries, offer little that is new and provide mediocre returns to their owners and society.”

He adds – just in case you didn’t already know it – that “the average new enterprise lasts less than five years, and often provides a standard of living worse than the entrepreneur was enjoying as an employee.”

If Shane’s theories are to be believed, Johnson suggests, then government agencies should stop encouraging so many people to set up their own companies and focus on “supporting the small handful of early-stage companies that could become the next Google or Dyson”.

Leaving aside the fact that it’s not exactly easy to spot the next Google or Dyson – if it was, I wouldn’t be writing this and you wouldn’t be reading it – that theory hasn’t gone down well elsewhere. Graham Ross Russell, chairman of Birmingham-based UK Business Incubation, wrote to the FT to point out that “in terms of employment creation, small companies in aggregate are an important part of the economy”.

Meanwhile Raj Patel, Director of Policy at the ‘Make Your Mark Campaign’, pointed to a US study of ‘high-impact’ companies that accounted for nearly all private sector job and revenue growth – and found that the average age of these companies was 25 years and 93.8 per cent of them had fewer than 20 employees. “It is arguable whether Google or Virgin, when conceptualizing their ideas and getting off the ground, could have foreseen where their talent and the market opportunity might take them,” he wrote. “It is critical to raise the level of ambition and enhance the quality of would-be and existing entrepreneurs who exhibit growth-oriented behaviour.”

One part of the debate that didn’t get aired is what all this means for individual entrepreneurs. If, as Johnson says, your company offers little that’s new, provides mediocre returns for you and doesn’t look like it’s going anywhere any time soon, it’s probably time for a rethink. On the other hand, if you really believe you have an idea or product that can make it big time – and there’s some validation that suggests you’re right – then frankly, who cares about your impact on the wider economy?

By Keith Rodgers, Webster Buchanan Research