Monday, November 28, 2011

Britain and US bank on entrepreneurs on road to economic recovery

The road to economic recovery has been bumpy so far and looks endless at times. Unemployment in the US has historically averaged around 5.7% and jobless rates haven't been this high since the 1980s, a generation-long record that won't make the trophy cabinet. Although the UK's jobless total is slightly less, at 8.3%, putting pay cheques into the hands of the 1.6m people without work is a pressing concern.
Although Spain trumps both, with an unemployment rate of 22%.
As George Osborne announces an additional £5bn towards the £30bn National Infrastructure Plan and extra funds to electrify the Manchester to Leeds railway line, the inability of US Congress to cut the budget deficit is another example of the dysfunction of federal politics, along with opposition to public works such as High Speed Rail and Barack Obama's proposals for $60bn for essential infrastructure.
But both sides of the Atlantic, hopes are harboured that encouraging entreprenuers and new businesses to flourish will come to the aid of the flagging American and British economies.
At a recent breakfast with the Philip Barton, deputy head of the British mission in Washington DC said that developing and maintaining trade relations with the US was more important than ever, even though global economic focus has shifted to China.
The UK's coalition government wants to slash its 26% corporation tax still further, even though it is lower than the US, to make Britain an even more compelling place for businesses to locate.
That's one way to encourage business. But when you're talking about job creation, it's better to encourage entrepreneurs, according to the National Venture Capital Association.
The NVCA claims that US-based venture-backed startup companies created more than 37,000 new jobs up until October this year in a variety of industries including software, IT, and clean tech/energy.
But the Kauffmann Foundation, which does a lot to train VCs and advocate for their economic impact, goes further and argues that entrepreneurs are the drivers of the economy. New firms create around 3m new jobs a year in the US, it says.
That would be a rate of growth from entrepreneurship that would delight David Cameron, the UK's prime minister. But other than slashing taxes, how does a country like the UK encourage startups?
It's time to go back to college for some pointers from the US. The symbiotic relationship between the venture capitalists on Sand Hill Road and the bright minds at Stanford University is difficult to emulate.
While researching a story on the state of VC funding today, I spoke to Paul Kedrosky senior fellow at the Kauffmann Foundation. He said: "Young companies are the largest net creator of jobs in the United States and have been that way for a long time. There’s no other way it can work – young companies can hardly destroy jobs because they don’t have any! By definition they are walking away from a wall of zero. Companies that have 1000 employees can go either way. It’s a mathematical fact rather than deep economics."
But Silicon Valley's ecosystem is a unique blend of capital, historical accident & design, policy & legislation… and a state of mind.
Kedrosky also took the time to tell me about the coalescence of investment hubs around US universities to create the special ecosystem we see today in Silicon Valley.
The Morrill Land-Grant Act of 1862 created the colleges that were critical in driving the creation of some of these entrepreneurially minded higher learning institutes, such as Stanford University which opened in 1891.
Leland Stanford wanted to create an upscale trade school that would be of use beyond purely academic learning as a counterpoint to the classical learning in Britain, he said.
"Stanford was trying to create something that would teach the practical arts. And that was in response to what he saw going on in the UK and elsewhere: 'This sort of esoteric learning would have been no use to me I’m a practical monopolist and I want something that would have been of use to me'."
This attitude didn't really change until years later, he says.
"People forget that it wasn't meant to be a classical higher education institution because of what happened in the 50 and 60s when it became a recipient of Department of Defense largesse from the semiconductor industry. The reason why Stanford was almost biologically speaking was so receptive to that relationship with industry and had such a permeable barrier with industry which led to so much entrepreneurship is because by design it was a very practically minded institution.
"The institution has become more metastasized within the Silicon Valley ecosystem to the point that now it’s inextricable. There’s a constant flow back and forth and many of the largest and successful companies have links in a meaningful way whether it’s graduates or IP at the back of the institution."
Kedrosky is one of the many who identifies academic contributions in industry and the easy two-way cross-pollination as the factor that encourages Phd alumni to try their luck by spinning out their innovation. While a warm welcome awaits them if they choose to return to academia.
"Stanford has deep in its DNA a consistent ongoing relationship with industry and a path to [academic] tenure could credibly include trips back and forth to the dark side of the private sector and back into the institution. And not only that was that not seen as a bad thing it was seen as something that would add to your capacity to get tenure.
"It’s very rare at HE institutions that you attract the best faculty and create the permeable barrier. You never get the synergies except at places like Stanford in the US."
But is that "permeable barrier" the missing link in encouraging more entrepreneurship from UK universities? No, targeting universities in this way is the wrong approach, says Kedrosky.
"Universities aren’t particularly important in terms of driving entrepreneurship in the US there’s a whole lot of mythology that’s attached to it at certain times. But it kind of becomes a public works project when you say well we want to have an entrepreneurial cluster in cities so we need to put more money into our universities. That’s very much the drunks at the lamppost problem: I get why that’s appealing to policymakers because it’s better than looking for your keys out in the field. It’s much brighter under the lamppost but it’s not directly addressing the problem. It's the classic policy problem – we’d much rather put money into our universities because entrepreneurs are objectionable people."
Read tomorrow's blog for more on policy approaches to entrepreneurship…

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