February 1, 2023

Unitranche

Supportive Business Potential

Why Is America So Entrepreneur-Friendly?

There’s no doubt that the social and economic commotion caused by the Covid pandemic has caused millions of people to rethink how they want to “do business.”

For many, working for a large corporation seems to have lost its appeal. Working remotely has opened many people’s eyes to the art of the possible. Starting a business may not seem as intimidating as it once did. These paradigm shifts—as well as resources like the Internet—have helped make entrepreneurship more attractive than ever.

Of course, entrepreneurs sprout up all over the world. But the United States seems to provide an especially fertile environment for smart people with good ideas. That’s the thesis of Launchpad Republic: America’s Entrepreneurial Edge and Why It Matters by Howard Wolk and John Landry.

Wolk is an experienced entrepreneur, company builder, and investor. He’s co-president of the Cross Country Group, a privately-held firm consisting of start-ups and mature companies. He’s a former senior fellow at the Harvard Kennedy School’s Center for Business and Government. Landry is a business historian and writer, and former editor at Harvard Business Review. He earned a Ph.D. in economic history from Brown University.

Rodger Dean Duncan: What is it about the U.S. economy and culture that is so accommodating to entrepreneurs?

Howard Wolk: America has a unique and longstanding tradition of encouraging and supporting entrepreneurship. While many point to the role of immigrants, the culture and political institutions are even more important. In many respects, entrepreneurship is a rebellious act, and the U.S. enables it better than most places because of a negative quality: we limit the ability of incumbents to stifle entrepreneurs. Our separation of powers, federal system, Bill of Rights, common law system, decentralized finance, autonomous corporate form and the strong voice of consumers (which outweighs producers politically) all play a role in enabling entrepreneurs to create and compete.

Duncan: You write about “Gorillas and Guerillas.” In what ways do start-ups and established companies make each other better?

John Landry: Big companies are great at some things, particularly managing resources at scale. But they can easily become lethargic and bureaucratic and set in their ways. The best large companies are disciplined and focused, but usually only because they face competition from startups. And even those stalwarts can’t cover the entire economy, so startups have plenty of opportunities in niches or in developing new platforms that big companies cannot pursue. They can also partner with big companies to bring innovation to the market. These “guerillas” are adept at commercializing these opportunities, which keeps “gorillas” on their toes, establishes a new competitive platform that older companies can acquire as part of their efforts to stay relevant, or even knocks the gorillas off their pedestal entirely.

Duncan: What role has “bigness”—General Electric, AT&T, and now Amazon—played in inspiring entrepreneurship?

Wolk: Ironically, while many entrepreneurs start out as “Davids” taking on “Goliaths,” a large percentage of them dream of building large powerful incumbents themselves. And America is unique in allowing this to happen. We allow this to happen so effectively that many start-ups challenge dominant players and win—but unlike other countries, we don’t let them consolidate their power with government support. That’s why the United States has a higher “churn rate” of large companies than most other countries. GE and AT&T are both great examples of large companies that were models, but then became susceptible to challengers and to challenges that brought them down. We may be seeing something similar now with Meta/Facebook.

Duncan: How has the Internet contributed to the explosion of entrepreneurship in the U.S. and elsewhere?

Landry: The Internet has been enormously important in promoting entrepreneurship, but also, ironically, existing tech companies, because of their large technology platforms. New companies can enter markets and scale up with fewer resources than ever, as platforms from Uber and Etsy to Shopify and Apple help them reach huge audiences. The Internet and these platforms have also spread information that has encouraged the growth of venture capital to help fuel this explosion.

Duncan: The Covid pandemic has caused a lot of paradigm shifting in our society. How has the pandemic affected entrepreneurship?

Wolk: It has had many effects, some of them contrary. The pandemic destroyed many small businesses, particularly on Main Streets. At the same time, more than five million new businesses were started, a remarkable number after years of declining small business formation. Many of these new businesses took advantage of digital platforms to succeed in ways they couldn’t in the past, such as in the gig economy and remote work.

The pandemic also seems to have led many people to question their commitment to big organizations and to try out a life path that gave them more control—which often led to entrepreneurship of some kind. Plus the pandemic generally shook things up and prompted innovative experiments, especially in 2021. That seems to have cooled off in 2022, with inflation and supply chain issues making it harder on many young companies. The banking and venture capital markets have also pulled back considerably. But we think entrepreneurship is going to continue to be stronger than it was in 2018, when we were working on the book and worried that entrepreneurship seemed to be out of favor and big companies ascendant.

Duncan: What do you see as opportunities for “intrapreneurship” in the coming years?

Landry: There’s been a lot of talk of corporate intrapreneurship, but it never seems to get much traction as a way of replacing outside entrepreneurship. In the 1970s through 90s, American corporations were concerned about global competitiveness. Now, most big firms worry about digital transformation and fear being disrupted by young upstarts. Many are on the lookout for new ideas and innovation, particularly involving foundational technologies.

The work of theorists such at Richard Foster and Clay Christensen helped them understand things like “paradigm shifts” and the “innovators dilemma.” They are still looking to innovate internally, but they’ve seen how hard this is for them to do, so they have stepped up their efforts to acquire nascent firms to help them stay nimble. They’ll continue to foster some internal entrepreneurship, but we’ve learned that startups and other outside innovators are essential to real progress—on social as well as economic challenges.

Duncan: What can leaders do to foster organizational cultures that provide a fertile environment for intrapreneurship?

Wolk: They can certainly do a lot. Companies are learning from the West Coast model of governance, which involves a heavy use of networks and the ability to layer in new technologies. For a long time, large companies were very hierarchical, and the lifecycle of technology was fairly long. Now they are de-emphasizing hierarchy and looking to the cloud and elsewhere to make sure they can plug and play new technologies to keep up. Firms worry about “technical debt” more than ever.

Duncan: How do you think entrepreneurship will help us solve important problems?

Landry: Entrepreneurship has been a critical component in helping to build the country, and it will be an important part of what is needed going forward. Entrepreneurship will be a critical piece toward addressing climate change, commercializing new technologies and even addressing inclusivity and inequality. In the transition to electric cars, for example, entrepreneurs such as Elon Musk played a much bigger role than large companies or environmental regulation.

Duncan: How does America’s support of entrepreneurship spill over to the political system?

Wolk: One of the most important aspects of America’s economy is its churn rate at the top, particularly among the largest corporations and wealthiest families. This churn rate sets us apart from most other developed countries, which tend to have the same big businesses and elites over many decades or even longer. This churn rate in economics also translates into a less static political system, as new players enter the scene and old power structures are challenged. America’s constitution is the longest serving in the world, and there is a link between that and the sustained entrepreneurial culture.