Winter 2005 International Exchange Preview

Over the years, Beta Gamma Sigma has strived to provide its lifetime members with information about a variety of business topics. A vital tool in that transmission of information has been the BGS International Exchange. From business academics to corporate ethics, each edition of the Exchange has set its focus on an area of interest to the business community. The next print edition of the International Exchange will be no different.

The Winter 2005 Edition of the Exchange is currently in the works, and this edition is being put together with a focus on entrepreneurship. As such, the BGS Central office is seeking tales of entrepreneurship from our lifetime membership.

Did you start your own business? Did you invent a new product? Did you come up with something the world had never seen before (and likely never will again)?

Were your ventures a success? Or perhaps, not so much?

Would you do it again?

Whatever your experience, Beta Gamma Sigma wants to know.

If you have ventured into the world of entrepreneurship, please take a few minutes to share your story with the Central Office. Stories can be emailed to bgshonors@betagammasigma.org. Please include your name and institution of BGS induction with your email.

The following is a speech published in the December 1, 2004 issue of Vital Speeches of the Day. Its topic is the importance of entrepreneurship, which fits well with our upcoming print issue of the BGS International Exchange.

Closing The Enterprise Gap
INTERNATIONAL LESSONS
Address by CARL J. SCHRAMM, President and CEO, Ewing Marion Kauffman Foundation of Kansas City, Missouri. Delivered to the Enterprising Britain Policy Summit, London, England,, November 15, 2004

Good morning ladies and gentlemen of the UK. It’s a great privilege for the Ewing Marion Kauffman Foundation – and for me, personally – to be invited to participate in this important discussion of entrepreneurship and its potential to transform lives and nations.

Carl J. Schramm

I must begin by applauding Chancellor Gordon Brown and the British government, as well as your country’s education and development advocates, for placing such a strong, timely spotlight on entrepreneurship.

It’s a conversation that is in full swing not just here in the British Isles, but in the United States and around the world. And wherever it is taking place the central issue is the same: if entrepreneurship is the key to jump-starting positive trends like job creation, revived infrastructure, and innovation, then what can be done – by governments, by the private sector – to cultivate a healthy environment for enterprise?

The importance of answering this question goes beyond the US and the UK, both of which already enjoy innovation economies. Unlocking some of the secrets of self-sustaining entrepreneurial economies not only helps us with our own challenges, it offers examples and ideas for struggling nations around the world looking to encourage new ventures that better their odds for long-term growth.

In other words, we need to help close the “enterprise gap.”

I’ve come to talk briefly about one specific model for achieving this goal. While this model is based largely on trends organic to the American entrepreneurial experience, we firmly believe that innovation knows no barriers – either political or geographical. In many fundamental ways, the lessons learned from our experience can inform development policies anywhere in the world.

This is especially true for the UK because your nation shares with ours many similar economic trends and challenges. Indeed, Britain and the United States both have the opportunity to stand tall in providing global economic leadership by demonstrating how a nation can cultivate its own enterprises that bring new ideas to market, create value, and drive growth.

Before I share my observations, let me tell you briefly about the Kauffman Foundation and why it promotes entrepreneurship.

We are the only large American foundation with entrepreneurship as a major field of interest. That’s very much a reflection of our founder, the late Kansas City industrialist, Ewing Marion Kauffman. Mr. Kauffman believed that one of the best ways to do good for society was to help other people do what he had done: start their own company.

In keeping with his vision, the Kauffman Foundation is an ideas laboratory that seeks to catalyze an entrepreneurial society. Ultimately, we work to create the most favorable conditions in which individuals can start new businesses and thrive.

Why is entrepreneurship so important? Put simply, no other force has the potential to help nations find their own innovators; bring people together to solve problems and generate wealth; and help nations create their own entrepreneur-based economies. Entrepreneurship is one of the most important components of the engine that is the modern global economy.

For the average American, starting a new enterprise is as commonplace as marriage or childbirth – one in 10 is currently engaged in entrepreneurial activity. An estimated 500,000 new US businesses are formally incorporated every year.

Over the past 15 years, firms less than one year old accounted for more than half of all net new jobs in the US, an average of about three million jobs per year. Firms with fewer than 100 employees accounted for more than 75% of job growth. Over the same 15-year period, employment at “Fortune 500” firms declined by 35%.

In fact, one could argue that in the last five American recessions, it was entrepreneurs who pulled us through.

The British experience is strikingly similar. A recent survey backed by your Department of Trade and Industry found that 13 percent of the population was involved in entrepreneurial activity, while a further 11 percent were considering starting a business. In addition, small- to medium-sized enterprises are the main creators of jobs, accounting for 58.2% of employment.

What’s more, the desire to start a business runs deep in the UK. A survey conducted by Lighthouse Research for Ernst and Young in 2004 found that 80% of the UK workforce would like to start their own business, but more than half that number claim they would never act on it, mainly because they lacked the necessary capital.

Clearly, there is an enterprise gap in the UK. But I believe a study of the American example may provide some answers.

For starters, it’s important to understand that the most vital element of the robust US economy is the ability to support high-impact entrepreneurship.

What do I mean by that? Simply that Americans are prolific starters of what we call “high-impact” firms – businesses that create value and stimulate growth by bringing new ideas to market. These could be new technologies, new business methods, or simply new ways of performing routine tasks faster, better, or more cheaply.

This phenomenon wasn’t planned. It didn’t arise out of one policy or another. Rather, through a gradual, organic evolution, we’ve developed a multi-faceted “system” for nurturing high-impact entrepreneurship and reaping its benefits.

The problem confronting us is this: How do we construct a model that captures all the dynamism of present-day America’s entrepreneurial dimension in a way that is transferable to other economies?

The answer is a holistic model in which entrepreneurship is sustained by a vast, interlocking web of activities. Doing so enables the entire economy to become more “entrepreneurial,” resulting in a virtuous circle of innovation.

The circle of innovation is comprised of four interrelated players: large mature firms, government, universities, and the entrepreneurial sector itself.

First, let’s deal with the entrepreneurial theatre, which is inhabited by new firms. The people behind new ventures are not necessarily scientists or inventors of new products. Henry Ford did not invent the automobile and Michael Dell did not invent the PC. Rather, both built their firms around production and marketing ideas, freely borrowing from existing concepts – the assembly line; selling to order rather than carrying inventory.

These are the general kinds of ideas that a bright and knowledgeable person in any country might have. Remember, Michael Dell was only 19 when he started his company.

Success requires more than ideas, however. Companies need capital and talent. In the U.S., entrepreneurs obtain both from the second player - large mature firms. Contrary to popular business mythology, the nimble newcomer and the lumbering giant are not natural adversaries.
Just as often, there’s a symbiotic relationship at work that sustains both parties.

For one thing, established firms are frequently customers of new firms. US corporations routinely “outsource” research and development to startups rather than take on all the risk of developing an idea internally.

Once a new company has developed a good product, a larger outfit will in many cases simply buy the company. Startup acquisitions have become an integral part of the economic growth process in both the US and the UK.

What I’ve just described is the first two players at work: Entrepreneurial firms and mature firms engaged in fruitful partnerships that bring innovation together with capital. This helps new firms gain a foothold while ensuring that their more-established partners remain competitive in an ever-changing marketplace.

This brings us to the third player in the virtuous circle: government. Governments, of course, can use part of their tax revenues from firms and employees in ways that encourage innovation and entrepreneurship. One way is by funding large programs that traffic in innovation. In the US, for example, the Department of Defense is continually in the market for new systems and technologies, not only for weaponry but for communications, intelligence, logistics, and support. Many new firms get their start from such business.

Government agencies may invest directly in new firms. More fundamentally, however, entrepreneurship is promoted best through a more indirect route – the consistent funding of research in all fields, from information technology to medicine to the physical and human sciences.

Total federal spending on research and development now equals about one percent of the U.S. Gross Domestic Product yearly. And while some of this funding goes to the government’s own laboratories or to private firms and industry consortia, much of it flows into the fourth player in the virtuous circle - universities.

Since the 1960s, in the U.S. there has been a ceaseless expansion of campus research underwritten by both the federal and state governments. The virtuous circle is closed and begins anew each time an invention or discovery moves out of a university into the entrepreneurial sector, where investors and businesspeople help to form a company that commercializes the idea.

The resulting economic growth has been tremendous. It’s estimated that the companies spun out from just one U.S. university, MIT, would now constitute a nation with the 23rd largest GDP in the world. Returns to the universities also have been significant – as high as $1 billion in operating funds from patent rights.

Of course, few nations can come close to emulating all that the US government does to support entrepreneurship. However, economic-aid policies can be tailored to encourage steps in the right direction.

Consider India: In 1951, shortly after gaining independence, that nation launched the Indian Institute of Technology, modeling it on world-class universities like MIT. This may be one of the wisest decisions a newly liberated nation ever made. Alumni have helped to provide India with a formidable and growing professional class (the group from which many high-impact entrepreneurs emerge).

The approach also can benefit older industrial nations whose economies have stalled. As you know, in the 1980s the Irish government invested heavily in higher education, helping to produce the “Irish miracle,” a growth phase with significant new businesses started in industries such as software.

Ultimately, any nation looking to jump-start a stuttering or moribund economy must establish underlying conditions for the entrepreneurial process to flourish. The virtuous circle requires favorable business policies and regulations, access to investment capital and human capital, and an entrepreneurial “culture.”

The U.S. has laws and policies that make it relatively easy to start, fund, grow, and sell a company. Within an afternoon – in less time than it takes to get a driver’s license – an American citizen can incorporate a new business. Tax laws encourage private investment in new firms, while bankruptcy laws reduce the risk for creditors and allow entrepreneurs to start anew. There has been encouraging movement in the UK to streamline the process of obtaining patents and reduce the regulatory burden on new entrepreneurs.

But governments must do more than cut the red tape. They must level the playing field for new firms.

The U.S. tries to achieve this by protecting intellectual property and by discouraging monopolies and unfair trade practices. Similarly, nations must resist pressures from existing businesses to preserve markets and prevent innovation. The “treaty” between large and small firms must be built on an understanding that large firms benefit from entrepreneurial activity.

A positive environment for entrepreneurship also has to include access to capital.

Entrepreneurs in the US get early-stage capital from a variety of other sources. Many take second mortgages on their homes. Others make liberal use of credit cards for short-term operating funds. Virtually all solicit investments or personal loans from family and friends. Some find angels — wealthy individuals, often successful entrepreneurs themselves, who provide advice and contacts along with money, much like venture capitalists.

In countries where personal wealth is not as widespread as in the US and the UK, emulating this diversity of financial resources may be difficult. The process may have to begin with encouraging upper and middle-income people to put more assets into new ventures.

But the true American lesson is that entrepreneurship requires many forms of capital. Money alone will not trigger innovation. Globally, money will gravitate to places where good ideas are being generated and the conditions are right for building companies around them.

In the end, the U.S. experience provides us with a tremendous amount of insight into what makes a viable entrepreneurial environment: a virtuous circle consisting of 1) large mature firms that are willing to seek innovation thru collaboration with new, smaller firms; 2) a supportive government that works to minimize red tape and excessive restrictions; 3) institutes of higher learning that are breeding grounds for talent and ideas; and 4) a community of new and potential entrepreneurs – people with big ideas and innovative concepts who need only a supportive environment in which to thrive.

At the Kauffman Foundation, we are pursuing a variety of initiatives to help catalyze and support America’s entrepreneurial environment. Much is aimed at universities, where knowledge, ideas, and cultural values are transferred from one generation to the next. For one, we are devoting substantial resources to scholarly research in entrepreneurship because we believe it’s the first and most important step to legitimizing this relatively young field. We’ve also initiated a multi-million-dollar program to make entrepreneurship education available across eight university campuses so that any student, not just business majors, can take advantage of entrepreneurial learning experiences.

And, to help improve how entrepreneurship is taught, we are bringing together national experts to create a model curriculum for the nation that will identify the core components of an entrepreneurship education. Finally, we’re working with universities and others to identify current best practices in technology transfer – that little understood process of moving innovations and discoveries into the commercial market. Ultimately, we seek to pilot new systems to maximize innovation flow and deal flow, which involves focusing “upstream” of the tech-transfer offices on the work that most of them are least able to support: the identification and early development of promising research.

The Foundation is also doing some innovative work in other areas such as improving access to capital. The cornerstone of our efforts is the recently established Angel Capital Association (ACA), funded by the Foundation and designed to assemble best practices for starting and operating angel investing organizations in North America. Through this type of association, the first of its kind in the world, the Foundation aims to formalize this critical segment of private equity funding for start-up entrepreneurs.

Here in the UK, your “Enterprise Insight Campaign” is focusing on many of the right areas – education at all levels, business training and coaching, tax reform, tech-transfer, and greater participation among women and minorities. Rather than simply replicating America’s evolutionary steps – which I wouldn’t recommend that any country do — you’re working to emulate those practical features of American culture that encourage entrepreneurship, customizing them to meet your country’s unique circumstances.

The obstacles to building and sustaining an entrepreneurial economy are many – but we live in encouraging times for the UK, the US, and the world. The Kauffman Foundation is heartened by your renewed commitment to creating a healthy environment for entrepreneurship at all levels, and we wish you great success in your efforts.

Of course, we realize this approach may seem radical to some. Those who are used to planned economies may find the chaos of new business development unsettling. Chaotic, it certainly is! But those who are accepting of the risk and unpredictability that come with a strong entrepreneurial sector will be the ones to reap the benefits. New businesses, even those formed with subsidies from the state, must be allowed to go where the market takes them.

In the final analysis, building economies around entrepreneurial behavior will produce results that are generative and self-renewing. Moreover, as individuals step into the market, assume risk, and work to turn their aspirations into business firms, they will expect and insist on stability around them – political stability, economic stability, and cultural stability.

Imagine! Entrepreneurs – agents of change by nature – may prove to be among the most critical forces for global stability, democracy, and peace. Thank you.