The Entrepreneurial Imperative

Q & A with Carl Schramm

Carl, why did you feel compelled to write The Entrepreneurial Imperative? Just like many entrepreneurs who, when they come upon a new idea, have no choice but to start a company, once I began to see the transformation in the American economy, I had to write about it. Most policy makers, business leaders, and academics see us in some "post-industrial" age, or, some see us in the "knowledge economy," to use Peter Drucker's term. But, the former is a vacuum term; the latter is too limited. What has happened is a profound transformation of the economy wherein, as never before, entrepreneurial activity defines the future of both growth and the nature of the economy.

Why should we export entrepreneurship across the globe if it means increasing competition for America's goods and services? Economic growth is not a zero-sum game, and entrepreneurship is an effective way to expand the pie, not simply divide up the existing pie. The increased competition of the past 20 years has caused struggles, but has ultimately benefited the United States, in terms of cheaper goods and more markets for American goods. Companies such as Toyota, though ostensibly competing with American companies like GM and Ford, have actually helped sustain the automotive industry in the U.S., and brought high-quality vehicles. In the high-technology industries, we have arguably fostered entrepreneurship in countries such as Taiwan and Singapore through outsourcing and offshoring, largely of manufacturing companies. The iPod was "made" in another country, but was designed here and involved other American companies including Texas Instruments and IDEO.

Why is America so good at entrepreneurship? First, our institutions are congenial to starting companies and taking risks, and our culture actually celebrates this risk-taking. In the U.S., you can start a business in a few hours on the Internet, complete with a state charter and an employer number for the IRS. We have a venture capital industry to fund high-risk ventures that hold the promise of great growth. And, our bankruptcy laws largely protect individuals and their reputations if their businesses fail. We encourage people to "move on," or "pick themselves up and start again." Second, we've always had very entrepreneurial people ready to try "the new." People came here to start a new country, live a new way, try a new government. We have never changed in that regard.

What pitfalls is the nation now facing in terms of continuing to grow its entrepreneurial advantage? America is in one of its moments, and we go through them periodically, where we turn against business. This is the biggest pitfall. On the heels of Enron, this is an easy villain to erect, especially by people who would like to see government as the bright alternative to business (which it can never be). The result is overreaction and over-regulation, such as Sarbanes Oxley, which has done little to contain business fraud (of which there wasn't that much in the first place), but has done a great deal to erode the leadership of Wall Street as the international banking and investment center. Of the 20 biggest IPOs in the last two years, only one has gone to market in New York! This is very worrisome.

Why do you say we have an "entrepreneurial economy" and what does that "entrepreneurial ecosystem" depend upon for growth? We have an entrepreneurial economy, built on an entrepreneurial ecosystem. There is no denying that four parts of our economy - start-ups, large businesses, universities and government - are working hand in hand. This is resulting in record-breaking levels of productivity, very stable prices and great growth. Much of the growth I refer to is due to innovation - developing entrepreneurial ways of doing old things. The productivity surge in U.S. manufacturing results from doing the old things better, cheaper, faster. The consumer is the beneficiary here: new goods (think iPod) and better quality, for less.

What industries do you envision the next generation of entrepreneurs to seize? Maybe the question should be: What industries will entrepreneurs of the future create? Entrepreneurs see needs the rest of us often don't. Did we really think we needed the cell phone or the laptop? I have a hunch that huge advances will come in education. Why shouldn't every kid in high school learn at his or her own speed the subjects of most interest? We will also figure out ways to deliver government services differently. I think our whole notion of how firms are put together will change. We'll make further strides in communication, which will change the way we think about moving from place to place. There will be huge advances in personalized medicine. And, entrepreneurs will open wide new areas of human activity that we never even thought about.

What role does the start-up firm play in corporate America? The start-up firm is more and more important to corporate America. The key is that they are the risk-taking, fast-moving entities that try out the future. They can innovate faster and cheaper with little risk to the big, publicly traded company full of bureaucracies that hate new things. The leaders of big firms can encourage small firms in their experimentation. If they are successful, they are bought in and begin to morph the big firm.

What incentives should the government offer to promote entrepreneurship here? The government doesn't really have to offer incentives for entrepreneurship. It's a fine-sounding idea, but the reality is that every time government tries to help start-ups it begins to see itself making bets on one idea, one firm, over another. How can a civil servant, who chose to work in the government (often to avoid business and certainly to immunize him/herself from risk) make a decision on what business to bet on? The government is not a home to venture capitalists. So, my answer is, government stay home.

Why do you believe business schools are failing us? Business schools are failing the American economy because they continue to prepare people to run the big, old-economy companies. We need more entrepreneurs and many more people ready to manage new, high-growth companies. Business schools do not teach entrepreneurship in many cases. And, in many such schools, there is no one on the faculty who ever started a successful company! Business professors don't practice business like the professors in other professional schools. Can you imagine a medical faculty that didn't practice medicine?

What can our universities do to educate and promote entrepreneurship to non-business majors? First, they can make kids aware that the chances are high that, as college graduates, they will be starting businesses. It's as common as getting married and more common if you've been to college. Second, business as a vocation should be seen as a respectable, legitimate career path. Many universities attempt to steer kids away from business by implicitly saying it's an unworthy pursuit. This was certainly said when I was in university. And, I think it is more common as an ethos today. Finally, universities should prepare students for a life that will have many twists and turns. I believe a great grounding in American history (which, from one perspective is all about an entrepreneurial nation coming into being) is probably the best training for business.

The Kauffman Foundation, where you are the CEO, is the nation's largest foundation to promote entrepreneurship. How does the Foundation go about doing this? The Kauffman Foundation promotes entrepreneurship through research that helps policy makers make the economy safer and more congenial for entrepreneurs to be successful. We also communicate about the importance of entrepreneurship. People have to know that they might be an entrepreneur, and if they are one, what they should know to become successful. We develop and support what we believe is entrepreneurial programming to transform institutions, such as universities, so they do a better job of preparing more entrepreneurs. We also support entrepreneurs with advice and educational resources, such as our eVenturing Web site. Finally, we see the preparation of youngsters for an increasingly technological economy as critical to the success of entrepreneurial capitalism. Here we are doing everything we can to support a revolution in the way we ready kids for math and science careers.

What suggestions would you give to the Small Business Association to assist entrepreneurs? I would suggest that SBA stop thinking of itself as a bank, making small loans to start-up businesses. This is an ancient and probably never very successful strategy. It is from the old economy. The SBA ought to be totally reformed into a government agency doing many of the things the Kauffman Foundation does. It should be the instigating agency that pushes the whole federal government into being conscious of how important entrepreneurship is in our emerging economy.

Do you believe anyone can be an entrepreneur? Some people abhor risk; they want to find secure employment. I don't think there is any such thing, but if someone can find it, more power to him. But, with a great idea and money, I believe that almost anyone can be an entrepreneur. And, it could happen anytime in their careers. There are lots of stories of people who worked in government, who avoided private-sector employment as risky, and then, later in life, started a business after retirement. The trick is to have the education and resources to support them at just the right time. We need "just in time" practical education for nascent entrepreneurs. It's one of the things Kauffman does.

Can our economy afford everyone to be an entrepreneur? Not everyone will become an entrepreneur. But, our economy could absorb many hundreds of thousands more. If the new businesses they started were successful, our economy would have growth rates of six or seven percent per year.

Is being an entrepreneur something that people naturally gravitate to, if smart or resourceful enough, or do you believe a lot more people need to be encouraged, nurtured, and shown how to reduce fears or risks associated with it? This is the old nurture/nature question, and I think it's the wrong one. We don't know who becomes an entrepreneur. I think it's wrong to suggest that entrepreneurs are "smarter" than other people. Lots of fortunes have been made in oil-changing businesses and in restaurant businesses by entrepreneurs who are not "book smart." Rather, I think when someone gets on the entrepreneurial path, almost anyone can become more successful if they have good information and advice available.

Most new businesses fail by an astounding percentage. Why? New businesses fail at astounding rates because many entrepreneurs don't know what they are doing. They just jump in. They think it's like buying a house or getting married. It will all be "on the job" training. Most of the time it is, but, if you can know just a bit more on any given day about how other entrepreneurs faced a similar problem, you might avoid a mistake. This is the issue of getting just in time information to the entrepreneur, effectively and for free.

Why and how should entrepreneurship be the key to our foreign policy? Entrepreneurship holds great hope for our foreign policy. Traditionally, foreign policy has been built around two considerations: politics and military power. The dimensions of economics and markets have not played a central role. When it has, it is usually in relation to giving aid to developing countries, IF they promise to build economic institutions that look like ours. But, building stock exchanges, central banks and regulatory agencies is not the institution we should be exporting. Rather, we should be exporting the social/cultural institution of entrepreneurship. Economies that have much wider business ownership, and much more entrepreneurial activity widely spread, are expressing the strongest pre-conditions of democracy.

Are big corporations looking to start-ups for their research and development? Is this a good thing? Big companies are looking for start-ups as a way of becoming more efficient at R&D. Start-ups can turn on a dime, focus on one technology, remain zeroed in on one goal and, thus, outperform many bureaucratic internal laboratory situations. More and more big companies are rolling back their internal R&D in favor of 'yeasting" new companies through strategic investments. Often they support their own employees leaving to create a company to exploit a new technology with the view that, if successful, they will buy the start-up back into the company.

Our economy is transitioning from one run by big business, big labor, big government. Where is our new economy heading? Our new economy is headed toward being run by many more decision makers. We have emerging many thousands of very fast-growing businesses that are not part of the old covenant among big business, big labor and big government. Most of these firms are not unionized. Most are not built on the bureaucratic models of older, bigger businesses. And most do not look to government for subsidies. They are freer to act in their own interest. Taken together, these firms will "push" the economy to grow faster than the old triumvirate of interest did. In the old days the Big Three sought predictability or planned growth. Today's start-ups don't understand that concept. They are doing well using what would look like chaotic principles to most big businesses.

How is an expansion of entrepreneurial capitalism vital to the growth of democracy? Democracy flourishes in open capitalist economies. Increasingly, we are seeing that democracy is spreading and becoming deeply rooted in entrepreneurial economies. In the older, planned economies (e.g., France, Germany) democracy seems to be at increased risk. One wonders what democracy means in the world of the E.U. Bureaucracy, which has been view by many for decades as inimitable to democracy, does not go well together with entrepreneurial capitalism.