Is the High Tech Sector Becoming Less Entrepreneurial?

There was always a strong element of wishful thinking in tech's foundation myth: the prototypical three guys in a garage somewhere south of San Francisco, driven by a desire to make the world a better place through their iconoclastic pursuit of scientific purity and civilizational scale.

Research my colleagues and I did on US IPOs from the 1980s through the end of the dotcom boom - tech's first 'Golden Age' - demonstrated that most of the companies going public then had been in existence longer, had more employees and significantly greater revenues than the popular image would suggest. In fact, the successful ones, those whose stock price actually increased for a couple of years after they went public so that they had a chance of surviving, were overwhelmingly of that description, despite the attention lathered on the younger, newer and riskier. It became something of a wink-wink among the venture capital cognoscenti that Winston Churchill's resounding encomium to the fighter pilots of the RAF during the dark days of the Battle of Britain - 'never was so much owed by so many to so few' - might well apply to the beneficiaries of the dotcom boom.

So it is not entirely surprising to learn, as the following article explains, that the high tech sector is again becoming less entrepreneurial, or perhaps more accurately, increasingly corporate. Before we begin beating our breasts and rending our garments in despair, however, it is worth examining why this is happening and whether it really signifies anything momentous.

The latest revolution, driven by an insatiable demand for mobility and sociability, would appear to be a perfect opportunity for letting the proverbial thousand flowers bloom. Everyone just out of college wants to join a start-up. Entire neighborhoods, from San Francisco to Brooklyn on to Berlin, Beijing and beyond teem with hopefuls beavering away at new schemes. And all to the good, we might add. 'There's an app for that,' has come to be the societal shorthand for solving any problem, however obscure and lacking in urgency.

But then there is the matter of getting paid, let alone getting rich. The twin towers of financialization and technological innovation have not yet collapsed, in part because the structural foundation has become far more imposing. Investors are demanding greater returns - and considerably greater certainty before they will unlock the vault. This means that those seeking funding must demonstrate a capacity to get to scale and requisite profitability in less time with greater assurance. Inevitably, this means that those bigger, older, more established enterprises are more likely to dominate.

This does not necessarily mean that the entrepreneurial fires are ebbing or that we are about to enter a dark age of technological sloth. But it does imply that the shape-shifting for which this economy has become noted is once again demanding new forms, new channels and new processes. Innovation and those who drive it grow in number, but the ways in which their concepts reach maturity and then markets must reflect the extant reality. It remains to be seen whether the reduction in risk appetite reflects a contraction in creativity or merely another hurdle to jump. JL

Ian Hathaway reports in Harvard Business Review:

America’s high-tech sector has become less dynamic and less entrepreneurial in the last decade.
Despite the fanfare this vital segment of the economy and its start-ups have received in recent years, the high-tech sector is experiencing a consolidation of activity away from young firms into more mature ones, and the pace of job creation has been on a persistent decline. While it’s true that high-tech companies have been well-represented among the fastest growing firms in the past few years, the high-tech sector–like the rest of the economy–is less dynamic overall.
What do I mean by “dynamic”? The study of business dynamism involves measuring the flows of firms and workers underlying the private economy. Businesses are constantly being formed, growing, shrinking, and closing. Labor markets reflect this churning: some jobs are created while others are destroyed, and some workers move into new roles as others seek to replace them. New and superior ideas replace existing and inferior ones, while more productive firms usurp less productive ones.
A particularly important component of this dynamic process is the entrepreneur, who starts a venture to create a new market or to replace incumbents in an existing one. Entrepreneurs also play an outsized role in new job creation. While older and larger firms account for the substantial majority of employment levels, new and growing young firms drive net new job creation overall.
The process of business and labor market churning is a messy one. But it’s also fundamental to modern economies. Research has firmly established that this process of “creative destruction” fuels productivity growth, making it indispensable to our sustained economic prosperity. In other words, a more dynamic economy is a key to higher growth.
But business dynamism is breaking down.
Forthcoming research from economists at the University of Maryland and the Census Bureau shows that business dynamism has been declining across a broad range of sectors during the last few decades–and the single biggest contributor is a declining rate of entrepreneurship. A host of indicators point to a workforce that has become more risk-averse, and therefore less likely to change jobs or start a new venture.
I recently teamed up with two authors of the aforementioned research to produce the Kauffman report, John Haltiwanger of the University of Maryland, and Javier Miranda of the Census Bureau. We surveyed how these trends might apply to the high-tech sector, looking at data through 2011 and using a broader definition for high-tech that stretches beyond software and Internet companies to include things like computer hardware, life sciences, aerospace, and scientific research. What we found surprised me.

Though the high-tech sector was particularly dynamic and entrepreneurial during the 1980s and 1990s–a period when the same was not true across the economy–all that changed in the 2000s. The job creation rate (representing expanding firms) has been on a sharp decline since the beginning of the last decade, while the job destruction rate (representing contracting firms) has held about steady–squeezing net job growth in the process. By 2011, the rate of overall labor market churning in high-tech had converged with the rate for the total private sector.
Even more striking was the declining entrepreneurship. Young firms that I’ll call “start-ups”– those aged five years or less–comprised 60% of all high-tech firms in 1982. That figure fell to 38% by 2011. About half of this decline took place after the dot-com bust dissipated. The decline in both entrepreneurship levels and rates during the period associated with the Great Recession were sharper in high-tech than for the rest of the economy.
A decline in high-tech dynamism might be particularly problematic for future growth. Aside from the direct impact on productivity this sector has on technology-adopting segments of the economy, the high-tech sector itself plays an outsized role in income, employment, and productivity growth overall. Of the job-creating young firms, high-tech start-ups are particularly dynamic–growing at twice the rate of a typical young business, and high-tech firms account for an outsized share of America’s fastest growing businesses.
How does this analysis square with talk of a “tech bubble”? One answer is that this activity, which is concentrated in web and mobile, represents only a subset of the broader high-tech sector. There’s good reason to believe that the last two years have ushered in a new wave of these typically leaner start-ups, and early-stage VC and angel investment data would back that up.
On the other hand, it may genuinely reflect slower growth across the broader high-tech sector. That appears consistent with one recent analysis that shows high-tech job growth slowing in 2013 after a rapid expansion the two years prior. Taken in the context of a longer-term decline, segmented green shoots wouldn’t reflect a robust recovery.
While this work may pose more questions than answers, the results make it clear that we must do more to promote a dynamic and entrepreneurial high-tech sector right now.