The Dark Side of Innovation

I recently read this very interesting article on the WSJ's SmartMoney blog. In relation to our discussion last Tuesday about sensing opportunity, the article discusses some of downsides of the entrepreneurial process, particularly those that have recently risen around the current economic context. For the sake of brevity, I will boil down the main points in a list and provide my respective perspectives:

• According to the Small Business Administration, half of start-ups will fail within their first five years, and only one-fifteenth survive to see their tenth anniversary. Investors who choose to back such faltering start-ups also have a high risk of going bankrupt, or losing everything - 40%.

Starting a business is hard. Really hard.

This seems to align with Gourville's Degree of Product Change matrix; the vast majority of new products or services are not sure hits, and therefore won't take off. A lot of these new businesses tend to be small service businesses like home painting or lawn cutting, which might provide a marginal improvement over local competition, but are ultimately financially unsustainable. Tech start-ups tend to be long hauls, in that their ideas usually require a good degree of behavioral change for a minor-to-moderate product change.

• Angel Investors have been lowering their rate of new investment. In 2011, 39% of angel deals came at the start-up stage as opposed to 75% in 2007. David Brophy, a colleague here at Ross, reportedly said that it's easier to raise money for companies which have already been developing and that "There's been a cloud over the whole early stage market."

The new angel investing paradigm.

A large part of this has to do with increased government regulation of business and stricter fiscal policy, which pressures lenders into pursuing higher interest rates because of the increased degree of risk associated with rough economic states. At the same time, I believe it is important for investments to be made in new start-ups because they are the ones who spur the national economy by spearheading the job market... Right?

• Jobs created by small businesses peaked at about 4.65 million a year in 1997 to 2000; in 2010, new companies created less than 2.5 million jobs. Compared to the past, young companies are also adding fewer employees as they grow.

Survival of the fittest?

This is a more systemic problem because it illustrates the steady decline of a major business philosophy - that start-ups are absolutely essential to the revitalization of a country's economic state and productivity. The fact that fewer jobs are created from new ventures can be attributed to several factors, among them greater technological automation and increased risk aversion from job seekers and employers. However, a deeper issue could very well be innovative stagnation, where we as a society have grown so complacent with what we have that we are now less inclined to hop on board potentially awesome ideas that would otherwise have taken off. What do you think?