I just finished The Illusions of Entrepreneurship: The Costly Myths That Entrepreneurs, Investors, and Policy Makers Live By by Scott A. Shane a Professor of Economics and the A. Malachi Mixon III Professor of Entrepreneurial Studies at the Weatherhead School of Management at Case Western Reserve University (my undergraduate alma mater). The book received great publicity in Business Week, the Wall Street Journal, and elsewhere.
It’s a terrific scholarly work that shattered some of my illusions of entrepreneurship. Scott crushes 67 myths or shares 67 truths depending on your perspective.
Let’s start with #1: America is NOT becoming more entrepreneurial. The rate of start-up creation has been declining over the last 20 years. This ties to #2 – there are many countries that are much more entrepreneurial than the USA.
A few things surprised (and depressed) me:
- immigrants are not more likely to start their own businesses (#18)
- networking skill does not matter (#19)
- venture capitalists fund less than one-tenth of one percent of all start-ups and account for less than two percent of all small business financing (#35)
- the typical entrepreneur earns less money than he would have earned had he worked for someone else (#39)
- compared to start-ups led by men, new businesses led by women have lower sales, fewer employees, less productivity, lower profits, and worse survival rates (#54)
- blacks create new businesses at only one-third the rate of whites and this pattern has persisted for decades (#56)
- encouraging start-ups is lousy public policy because … we have a lot of evidence that these policies lead people to start marginal businesses that are likely to fail, have little economic impact, and generate little employment (#62)
All this painted a pretty bleak picture of entrepreneurship in America for me. Unless you are a job hopping, now unemployed, 40 year old white male who is sick of working for others (yep that stereotype is true) you might as well give up your dream. Sigh.
But the book smartly ended with some recommendations. What businesses are likely to succeed and drive economic growth? More importantly, what should we do? Scott’s advice is somewhat like Castor oil – good for you but hard to swallow. Here is a snippet:
A strategy that revolves around increasing the number of new businesses created every year is flawed. Increasing the number of people founding construction firms and hair salons and taxi services that don’t do anything innovative isn’t going to do us much good. In fact, it might hinder our economic growth because new businesses are, on average, less productive than existing ones.
Instead of believing naively that all entrepreneurship is good, we need to recognize that only a select entrepreneurs will create the businesses that will take people out of poverty, encourage innovation, create jobs, reduce unemployment, make markets more competitive, and enhance economic growth. Therefore, as unfair as it may sound, we need to “stop spreading the peanut butter so thin.” We need to recognize that all entrepreneurs are not created equal. We need to think like venture capitalists and concentrate our time and money on extraordinary entrepreneurs and worry less about the typical ones.
There is more, much more. Importantly, all of these recommendations tie to decades of data. Get your own copy: The Illusions of Entrepreneurship: The Costly Myths That Entrepreneurs, Investors, and Policy Makers Live By