America is a nation of entrepreneurs. Or so the story goes.
We’re obsessed with startups and unicorns. We have a soft spot for “pull yourself up by the bootstraps” tales, even the mythical ones. Steve Jobs building the first Apple computer in his garage. Elon Musk revolutionizing the electric car. Uber upending the taxi business while raising an eye-watering $1.5 billion in venture capital. We love a good Shark Tank episode, watching ideas go from sketch on paper to big-money deals in an easy 60 minutes. These stories define our understanding of what it means to be an entrepreneur.
But entrepreneurship—or our prevailing notion of it—is failing America. Entrepreneurial activity is in long-term decline. The rewards of innovation are concentrated in the hands of a few. What was supposed to be the secret sauce of the American success story has become instead a driver of growing income inequality.
Entrepreneurship is broken. It’s leaving far too many opportunities on the table—and far too many people behind.
The decline of the American entrepreneur
When most of us hear the word “entrepreneur,” we imagine someone starting a new business. Yet by this measure, American entrepreneurialism has been declining for decades. In 1978, 1 out of 7 businesses was a startup. By 2018, the percent of new businesses had fallen by nearly half.
Millennials, many of whom came of age during the Great Recession, are on track to be the least entrepreneurial generation alive—and it’s not hard to see why:
- Many are buried in student loan debt.
- Millennials grew up with massive economic and political upheaval, causing many to crave security and take fewer risks.
- Millennials have been fed a one-size-fits-all college-to-career pathway.
- Millennials have had limited access to capital, compared to earlier generations.
There are indicators of a rebound in entrepreneurial activity since Covid-19, though it’s early to say how durable it will be. As businesses shuttered and the supply chain buckled under the weight of a global pandemic, many people had to find creative new ways to make a living or provide essentials that were suddenly in short supply, like hand sanitizer and masks.
But it shouldn’t take a pandemic to fuel innovation. Entrepreneurship isn’t supposed to be a last resort taken only in dire need.
So what is getting in the way? Given how much we lionize entrepreneurs, given all our investment and good intentions—the proliferation of accelerators and incubators, for example—why aren’t we seeing more entrepreneurship? And why aren’t we seeing more of it translate into widely shared economic prosperity?
Obsession with scale is killing entrepreneurship.
Today it’s widely assumed that venture capital is the default path for would-be successful entrepreneurs. You have an idea, then you find investors to capitalize it. In reality, fewer than 1% of businesses successfully go (or are able to go) this route. And only 1 in 40 of those achieve unicorn status. Most will fail.
Yet we fawn over the unicorns. We fixate on valuations and exits. The success stories of billion dollar companies and venture rounds that rise to the top of our news feeds further skew our perception of entrepreneurship. This has two chilling effects on entrepreneurial activity:
- Only the most “scalable” ideas win. Countless problems do not have a scalable solution at first glance. Many business ideas will never scale enough to attract VC funding. When we financialize entrepreneurship, making scale the price of entry, we leave good ideas on the table, untested.
- People are discouraged from trying. We’ve front-loaded all the high-stakes decisions. Most people think being an entrepreneur means you have to quit your job or raise a ton of capital in order to take action. But only a small, privileged few can afford this route. For everyone else, the step between “I have an idea” and starting a business may as well be a mountain—one they will never climb.
The problem isn’t venture capital itself. Some ideas are scalable. Some need venture funding in order to take off. The problem is when there’s no other clear path for ideas that don’t fit this framework, or when we prematurely dismiss—or latch onto—ideas that haven’t been tested. Ultimately, obsession with scale leaves us with fewer ideas and fewer chances to bring those ideas to life.
Successful entrepreneurs are a small (and homogenous) bunch.
More than three quarters of all venture-backed founders are white. Startups led by women entrepreneurs got just 2.3 percent of all VC funding in 2020—little surprise when you consider only 1 in 9 decision makers at VC firms are women. Entrepreneurship is supposed to level the playing field, so anyone with an idea can rise to the top. Instead, the prevailing model reinforces longstanding inequities.
The concentration of entrepreneurial resources goes beyond gender and race. Just five metro areas in America account for more than 70% of all venture capital investment. If you live in a place like Tulsa, Oklahoma or Omaha, Nebraska, your chances of securing venture backing are small—and with the decimation of community banks during the Great Recession, there are few other places you can go for local funding.
Is it any wonder economic growth has been slower in regions outside the coasts? The concentration of opportunity in the hands of a few is a persistent threat to shared prosperity and stability.
Startup business models aren’t keeping up with a changing world.
Access to capital isn’t actually the biggest barrier to entrepreneurship. It’s our antiquated model of what entrepreneurship even looks like.
The digital revolution is well underway, yet we are still operating from the same economic playbooks and theories as thirty years ago. Few communities outside Silicon Valley have made the leap in how they build and scale businesses for the digital age.
Entrepreneurship needs a revolution of its own. The very notion of what is scalable and how is different in a digital economy where the line between local and global gets blurred, if not erased altogether in some cases.
Entrepreneurship needs to accommodate ventures of all shapes and sizes, not just the biggest, most scalable opportunities. There are ideas everywhere—problems crying out for solutions. Technology makes it easier than ever to test ideas quickly and inexpensively before you scale them. Before you consider throwing yourself into the race for venture funding.
Before you start a restaurant, you could do a popup or test kitchen. Before you launch an app-based rewards program to support local businesses, you could test it with a simple (and inexpensive) QR code. Customer discovery can happen with landing pages, digital ads, or a free Slack group.
Under the old model of starting a business, we spend a disproportionate amount of energy raising money—instead of experimenting, iterating, and learning what actually works.
The prevailing entrepreneurial mindset is failing our communities.
Communities have poured massive resources into startup infrastructure, only to wonder when the hoped-for growth will materialize. As one leader stated, “We’ve spent millions putting in the plumbing of our startup ecosystem, but the water isn’t flowing.”
Even many of the buzziest, most innovative tools we rely on—accelerators, incubators—are built on old models. They focus on teaching you how to go after funding, more than how to test your ideas and turn them into actionable ventures.
Most small- and medium-sized cities can’t compete with major urban hubs in the race to scale big ventures. The most widely fêted unicorns—the industry disrupters like Uber and DoorDash—almost always extract value from smaller communities, rather than create value within them.
It’s time for new models, new ways of building the future.
It’s time to put ideas before funding—so we can reduce the barriers that keep people from putting their ideas into action.
It’s time to reduce the cost of failure—and expand our definition of success to include more than just VC-backed startups and unicorns.
It’s time to stop forcing everyone into a single, one-size-fits-all model of entrepreneurship—and help them test their way to the best new businesses, digital innovations, and social enterprises.
Not everyone needs to be an entrepreneur, at least not the way it’s usually defined. But everyone can be a builder. Almost everyone has a problem they care about, and an idea for how to solve it.
We can reduce the gap between idea and action. For the price of a bet on a single unicorn, we can fund thousands of small experiments, ensuring the best ideas rise to the top, no matter where they come from or what form they take.