Saturday, July 25, 2020

Entrepreneurship falls as reliance on high growth firms rises

European startups survival rate

Jan Hoekman, a Data Scientist, estimated the survival rates of European startup firms: After the first year 58% of startups are left, second 41%, 5th 22%, 10th 12.5%.
In Britain, fewer than 4% of startups have 10 or more employees after their first decade.

Reliable data from the United States show a secular decline in employer business startups in the last 40 years. However, the ratio of the small number of mainly young, High Growth Firms (HGF), including high tech, that account for significant job creation, began to fall after 2000 in both the US and other advanced countries.

Wim Naudé, a professor of business at the University of Maastricht, the Netherlands, writes that "the West’s golden entrepreneurial and innovation age is behind it. Since the 1980s entrepreneurship, innovation and, more generally, business dynamics, have been steadily declining – particularly so in the US."

In 1980, 15% of all US firms had been created the year before and that rate has almost halved through demographics, technology and big firm concentration.

In 1997, for the first time in US history, a majority of Americans worked at companies with 250 or more employees. While small businesses do not have a significant impact on job growth, new firms do even though over the years there is high job destruction.

Also in the US, the share of entrepreneurs with higher education dropped from 12.2% in 1985 to 5.3% in 2014.

Prof Naudé in a 2019 paper addresses the decline in entrepreneurship reflecting falls in entrepreneurial entry and exit rates, declines in the shares of young and small firms, and in decreased labour market mobility and innovativeness.

Economists Nicholas Bloom, Charles I. Jones, John Van Reenen, and Michael Webb ask in a paper 'Are Ideas Getting Harder to Find?' and conclude, "Our robust finding is that research productivity is falling sharply everywhere we look. Taking the US aggregate number as representative, research productivity falls in half every 13 years: ideas are getting harder and harder to find. Put differently, just to sustain constant growth in GDP per person, the United States must double the amount of research effort every 13 years to offset the increased difficulty of finding new ideas."

Despite the decline in entrepreneurship, the Kauffman Foundation — the leading entrepreneurship think-tank in the United States — noted in a 2019 report "In 1985, studies indicate there were about 250 entrepreneurship courses offered across all college campuses in the United States. Today, more than 5,000 entrepreneurship courses are now offered in two-year and four-year institutions."

Researchers at the Katholieke Universiteit Leuven, Belgium, in a 2017 paper noted, "While for the US, the decline in high-growth firms is especially evident for young firms, we claim that the decline in Belgian high-growth firms is predominantly driven by the decline of high-growth, small firms. The propensity for large, older firms to become a high-growth firm seems to be trending upwards while the propensity for a small firm to become a high-growth firm is rapidly declining since 2000."

Organisation for Economic Cooperation and Development (OECD) data show that in 2017 Belgium and Ireland had the lowest employer startup rates among 27 countries: Belgium 3.9% (1.0); Ireland 4.2% (5.1); Sweden 10.0% (7.5) and Spain 11.2% (9.10) – death rates are in brackets.

The share of employer startups (0-2-year-old enterprises) among active employer enterprises were: Belgium 9.6%; Ireland 11.4%; Sweden 29.1% and Spain 25.5%.

Also in respect of 2017 Eurostat — the EU statistics office — has reported that Ireland had the highest ratio of HGFs, followed by Spain, based on the low thresholds of the European Commission (see below).

This is the reality distortion of Leprechaun economics at play in respect of Irish data – for example, massive profits shifting reflected in the value of exports from foreign-owned firms being 13 times that of total indigenous exports in 2019.

Enterprise Ireland, the state enterprise agency for indigenous firms, milked the false news "New Eurostat research has found that Ireland has the highest proportion of high-growth enterprises in the EU, ahead of the UK, Portugal, Hungary and Bulgaria."

In 2010 Scottish researchers estimated that 39% of HGFs in Scotland were foreign-owned while the Irish economy has one of Europe's highest levels of reliance on foreign exporting firms.

Source: Wall Street Journal
David Birch (born 1937) in 1979 as a Massachusetts Institute of Technology (MIT) researcher wrote that small businesses create 82% of new US jobs. That estimate was revised down over time and in the 1980s Birch said that a small number of firms nicknamed “gazelles” – contributed disproportionately to the bulk of net new job creation, with the entry criteria for firms' growth of at least 20% a year for four years, from a base of at least $100,000 in revenues in effect, at least doubling in size over that four-year period.

The OECD-Eurostat Manual on Business Demography Statistics (2007) defines ― a high-growth enterprise: "All enterprises with average annualized growth greater than 20% per annum, over a 3-year period, and with 10 or more employees at the beginning of the observation period. Growth is thus measured by the number of employees and by turnover."

Based on this definition, the OECD found that high growth firms constitute between 3% and 6% of all employer firms.

However, in 2014 the European Commission cut the 20% threshold to 10% which means that OECD data and EU statistics on HGFs differ.

It's difficult to predict in advance which firms may become high growth while the high growth phase fizzles out and seldom returns.

“Young people are just smarter,” Mark Zuckerberg, founder of Facebook/ “The cutoff in investors’ heads is 32…after 32, they start to be a little skeptical,” Paul Graham, venture capitalist and founder of Y Combinator.

Zuckerberg was 23 when he made the comment at a Y Combinator Startup School event at Stanford University in 2007.

In 2019 economists Pierre Azoulay of MIT, Ben Jones of Northwestern University, J. Daniel Kim of the University of Pennsylvania and Javier Miranda of the United States Census Bureau, used public data to calculate the ages of the founders of high-growth firms in the United States.

After stripping out identifying information, the researchers had a public dataset including 2.7m business founders. The researchers calculated that the founders’ average age was 42. And for the founders of the 0.1% fastest-growing firms, the average age was 45. Paper

A lot of innovation requires experience and the young entrepreneurs such as Bill Gates, Steve Jobs, Google's founders, Mark Zuckerberg and others were not pioneers but they improved on existing products/ services. Jeff Bezos launched Amazon (see screenshot; it resembled Yahoo!) 15 years after Sir Tim Berners-Lee developed the World Wide Web see the first website!

A unit of the US Defense Department developed the internet from 1969.

The Joint Research Centre (JRC) of the European Commission has noted:

1. Growth rates distributions are heavy-tailed;
2. Small number of high-growth firms create a large share of new jobs;
3. High-growth firms tend to be young but are not necessarily small;
4. High-growth firms are not more common in high-tech industries;
5. High growth is not persistent over time;
6. Difficult to predict which firms are going to grow;
7. The use of different growth indicators selects a different set of firms.

This year the JRC issued a report: 'High Growth Enterprises: demographics, finance & policy measures.'

"The growth in the number of HGEs (High Growth Enterprises) has outpaced overall growth in the number of enterprises. The average share of HGEs among the EU firm population increased from 9.2% to 10.7% between 2014 and 2016. Since the number of HGEs in the EU grew during the aforementioned period, this indicates that HGE growth outperformed general enterprise growth.

HGEs are responsible for most net employment growth in the EU. Despite data limitations, from 2015 to 2016 HGEs accounted for a large share of net employment growth. HGEs were responsible for 53% of net employment growth (between 2014 and 2015 the figure was 90%!) though they only make up 11% of enterprises in the business economy. Hence, HGEs by definition — substantially contribute to net employment growth.

VC backed companies are mostly high-tech. The highest shares of VC-backed companies are found in publishing (mostly software), electronics and pharmaceuticals with the UK, Germany, France, Spain and Sweden accounting for over 75% of the total number of VC-backed EU firms. Most VC in the EU goes to startup stage firms rather than seed or later stage."

EU lags US and China in high tech HGFs

Less than 12% of all high-growth enterprises in the EU are in high-tech, medium-high-tech manufacturing and high-tech knowledge-intensive services, although there has been an increase in recent years, according to the Directorate-General for Research and Innovation at the European Commission.

The Directorate acknowledged this year that Europe lags considerably behind the United States on the rate of tech scaleups, defined as a tech firm that has raised more than €1m in funding. "Europe has a lower number of tech scaleups than the United States and China and, when standardised by population, it still lags behind the United States. As of 2018, there were 1.3 scaleups per 100,000 inhabitants in Europe compared to 7 scaleups in the United States."

France, Germany and Sweden represent half of all tech scaleups in the EU and just 5 EU member
states — France, Germany, Sweden, Spain and the Netherlands — account for nearly two-thirds of all scaleups identified in the EU.

The number of UK and Israeli tech scaleups is higher than in any EU member state.

The Directorate also acknowledges in respect of transformational entrepreneurship with global outreach, that the EU trails behind the United States and China.

"As of January 2020, there are 439 companies worldwide with private unicorn status — having a valuation of at least $1bn. Of those, nearly half (or 215) are in in the United States; around a quarter in China (or 101), and 7 % (or 29) are in the EU. This gap is also evident when looking into the geographical distribution of the total valuation of private unicorns: US unicorns account for 49%; Chinese unicorns for 29%, and EU unicorns are only 4% of the total. When standardising the number of unicorns per million population, the gap relative to both the United States and China remains although the EU’s performance comes very close to China." 

Mature firms reclaim high ground

In 1963, Clark Kerr (1911-2003), in a lecture at Harvard University, highlighted the eternal constancy of higher education. Kerr, who was president of the University of California at the time, noted that "about 85 institutions in the Western World established by 1520 still exist in recognizable form" — the Catholic Church, the parliaments of Iceland and the Isle of Man, a few Swiss cantons, and 70 universities. "Everything else changes," he noted, "but the university mostly endures."

The Japanese construction firm, Kongō Gumi Co., Ltd, was founded in 578 CE (Common Era) and survived for 1,428 years.

In 2006 high debt forced it into liquidation.

Italy's Banca Monte dei Paschi di Siena — founded in 1492, the world's oldest surviving bank — required a state bailout in the past decade.

There are several pharmaceutical and food/beverage companies that are more than a century old while Ireland still produces the old brands, Guinness and Jameson, even though they are both owned by foreign firms.

Being old is not always a virtue!

According to the Joint Research Centre (JRC) of the European Commission, over 50% of all US firms in the Top 1,000 global R&D spenders in 2009, were founded after 1975, in Europe, the figure was 18% and in Japan just 2%. One of Japan’s longtime strengths was in electronics, for example, but its share of the world’s export value of electronic goods has fallen from 30% in 1990 to less than 15% in recent years, according to the Japanese Ministry of Economy, Trade, and Industry.

The Austrian-born economist, Joseph Schumpeter (1883-1950), in 1942 in his book 'Capitalism, Socialism and Democracy,' discussed the concept of “creative destruction”: “Capitalism … incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism.”

Clayton Christensen (1952-2020), a Harvard professor in his celebrated 1997 book, 'The Innovator’s Dilemma,' introduced the concept of “disruptive innovation” at the height of the Information Technology revolution.

In 2011 The Economist listed the 6 best English language business books and Christensen's book was among them. It noted, "Christensen showed that great companies can fail despite doing everything right: even as they listen to their customers and invest heavily in their most productive technologies, their markets can be destroyed by radical new technologies."

  • My Years with General Motors,
    Alfred Sloan, 1964
  • The Organisation Man,
    William Whyte, 1956
  • Management: Tasks, Responsibilities, Practices,
    Peter Drucker, 1973
  • In Search of Excellence: Lessons from America's Best-run Companies,
    Tom Peters & Robert Waterman, 1982
  • The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits,
    C.K. Prahalad, 2004
  • The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail,
    Professor Clayton Christensen, 1997

Some of the disrupters have become big beasts while big mature companies have become more adept at innovation including acquiring young firms with interesting technology.

In an August 2019 Harvard Business Review article researchers reported "that large corporations are more and more likely to maintain their dominant positions, while small corporations are less and less likely to become big and profitable. And part of the reason for this growing corporate divide between big and small firms is the growing R&D expenditures of large firms. Our results support Lou Gerstner’s thesis (Gerstner born 1942 was IBM chief in 1993-2002) that the elephants are not basking in their past glory, but can indeed dance and are even becoming nimbler."

Data from Federal Reserve economists in November 2019 highlight the rise in concentration via outlets/markets of big firms.

"The blue line represents firms with more than 10,000 employees. The number of establishments operated by each of these large firms has increased by roughly 60% since the early 1980s. By contrast, the number of establishments for medium-sized firms (red line) grew slightly in the latter part of the sample, while the number of establishments for small firms (green line) remained stable throughout this period."

The Economist noted in 2016, "The share of GDP generated by America’s 100 biggest companies rose from about 33% in 1994 to 46% in 2013. The five largest banks account for 45% of banking assets, up from 25% in 2000. In the home of the entrepreneur, the number of startups is lower than it has been at any time since the 1970s. More firms are dying than being born. Founders dream of selling their firms to one of the giants rather than of building their own titans."

In 2018 The Economist wrote of a "kill zone" and if the big firms cannot acquire promising technology by acquiring young firms, they can copy features and make life difficult for the upstarts.

The EU’s top 20 most valuable brands only include two technology companies. Statista (2019) shows that besides the automotive and oil industries only Bosch and Siemens of Germany have tech operations among the select group. The top 30 global brands are mainly found in the United States and China.

Since 1999, US tech giants have bought 750 companies and in the past decade, they have been the top acquirers in the world.

FT rankings of fast-growing firms 2020


Top 1,000 companies

Broad tech including ecommerce and fintech accounted for 25% of the companies.

The top 10 sectors are Tech; Support Services; Construction; Retail; Industrial Goods; Ecommerce; Energy; Management Consulting; Financial Services and Advertising.

The compound annual growth rate for 2015-2018 ranged from 88.8% for Tech to 74.7% for Advertising.

Only one of the top 3 companies is among the 268 on the list to have also appeared on 2019’s ranking. A total of 90 companies have ranked in 3 consecutive years.

Germany (193 firms); Italy (191); UK (172) and France (185) accounted for about 70% of the overall ranking. London retains its top city rankings followed by Paris and Milan, while Warsaw and Vilnius are in the top 10 for the first time.

Spain (70); Finland (18); Sweden (16); Portugal (15); Netherlands (13); Estonia (8) and Ireland ZERO.

  • Revenue of at least €100,000 generated in 2015 (average of fiscal year)
  • Revenue of at least €1.5m in 2018 (or currency equivalent)
  • The company is not a subsidiary or branch office of any kind
  • The revenue growth between 2015 and 2018 was mainly organic (ie “internally” stimulated)
  • If a company is listed on a stock exchange, its share price has not fallen 50% or more since 2018.

Same criteria for the Americas and Asia-Pacific.

Countries: Austria, Belgium, Bosnia & Herzegovina, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Monaco, Netherlands, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, Switzerland, United Kingdom.


Top 500 companies

Almost 9 in 10 on the overall list are from the US 356 and Canada 79 alone.

Colombia has 32 entries; Brazil 20; Mexico and Argentina 5 each, Ecuador 2 and Uruguay 1.

Unicorns such as Tesla, Netflix, Uber (became a listed company in 2019) and PayPal rise to the top based on revenues. These businesses are also among a group of 36 of 500 that are listed on an exchange.

Tech accounts for a quarter of the 500, followed by support services (9%) and financial services (7%).

Countries: Argentina, Belize, Bolivia, Brazil, Canada, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, the US, Uruguay, Venezuela.


Top 500 companies

However, China (ex-Hong Kong) has no entries.

All companies from these countries are included: Japan, South Korea, India, Australia, Hong Kong, Taiwan, Singapore, New Zealand, Malaysia, Indonesia and the Philippines.

Tech leads with about a quarter of all the companies and is followed by industrial goods (7%) and health (5%).

India has 140 entries: Japan 95; Australia 79; Singapore 74; South Korea 34; Malaysia 19 and Hong Kong 8.


The Financial Times data on high growth firms for Europe, the Americas and Asia (ex-China) show that high tech accounts for about a quarter of the firms.

In the US analysis of Inc. 5000 firms for the Brookings Institution, by Ian Hathaway, a business consultant, show that high tech (including the Health sector) accounted for 29% of America's fastest-growing private companies.

High tech is important but in Ireland, policymakers' main focus is on this sector and Trinity College, Dublin has the aspiration to develop a 'world-class' Innovation District in Dublin.

Ireland has no firm entry in the FT's 2020 list of fastest-growing firms.

There have been many false dawns and as emphasised above, ex-ante selection of high growth firms is not reliable while high growth is not persistent.

Experience of founders including in overseas markets can matter.

Dutch food innovation lessons for Ireland


Top global 2500 R&D firms- 4 Irish include 2 banks — Amazon in 2019 spent almost as much on R&D as all the French business sector

When 600-year old French word entrepreneur replaced capitalist