Entrepreneurs are somewhat of a mascot for the U.S. economy -- nothing embodies the American dream more than an entrepreneur. Consequently, we’ve been trained to think there’s a positive correlation between the number of start-ups and the health of the economy. But Daniel Isenberg, professor of entrepreneurship, and Fernando Fabre, president of Endeavor Global, argue otherwise. Real, high impact entrepreneurship comes from “scale-ups” instead. Scale-ups are growing businesses that promote a “long-term entrepreneurship,” eventually leading to more innovation and increased economic health. The continued growth of established businesses does more for the economy than a high number of start-ups that open and close quickly.
In a recent Harvard Business Review article, Isenberg and Fabre cite a Brookings Institution report that blames a decline in entrepreneurship in the U.S. on established companies. The report argues that the presence of these entrenched players stifles opportunities for entrepreneurs, harming the economy. Isenberg and Fabre point out a major hole in this argument: the Brookings Institution doesn’t classify a company as entrepreneurial if it has survived more than 16 years. This implies that fewer start-ups reflect an economy that can’t support new business; in other words, a stifled economy without entrepreneurship. In actuality, existing companies are growing and adding more value to the economy due to innovation and longevity.
A company’s longer life doesn’t mean innovation has disappeared. After all, just one innovative scale-up may produce more jobs than many start-ups could. Sometimes stable, growing companies like Google, Starbucks and Netflix are accused of being economic behemoths that preclude entrepreneurs from being successful. But Isenberg and Fabre remind us that Germany experienced a similar “decline” in start-ups in the past 30 years but still had a strong economy. It was only recently that its GDP began to fall.
Isenberg and Fabre explain that “the decline in new business formation is associated with increased per capita income, and the more new businesses countries have, the lower their GDPs are.” Fabre uses Greece as an example since the Greeks have more start-ups than the U.S. but a lower GDP. The fewer start-ups in the U.S. are more sustainable, providing more jobs and lasting longer.
To promote the scale-up mindset, Isenberg and Fabre created a “Scale-Up Declaration” to lead into Global Entrepreneurship Week in November. Their nine-point declaration explains the benefits of scale-ups: Entrepreneurs create value and are necessary in all sectors of society. What makes great entrepreneurs are people who scale up their operation and then reinvest their knowledge or financial gains to help the next generation of entrepreneurs. The New Market Tax Credit embodies this mindset by helping finance scale-ups, which may be a better policy than having every big city build multiple incubators, accelerators or escalators.
Fabre gave an example in a TED talk of a successful scale-up entrepreneur in Jordan named Fadi Ghandour. Ghandour started Aramex, the Arab equivalent of FedEx. He focused first on growing his company and 12 years later he reached a major milestone when his company became the first Arab-based company listed on the NASDAQ stock exchange. Ghandour then reinvested in Jordanian entrepreneurs. Now Jordan’s entrepreneur ecosystem, to a great degree, traces back to one of five people, and Ghandour is one of them.
With the Scale-Up Declaration and Ghandour’s example, perhaps entrepreneurship should be viewed differently. An entrepreneur doesn’t have to be one who only starts something -- he or she can contribute to expansion. Scale-up entrepreneurs have the power to recycle life and energy into the economy by reinvesting in innovation. Then their own contributions can be multiplied as they and those that follow them revitalize their nation’s entrepreneurial ecosystem over and over again. It’s true, scale-ups require start-ups. But, when it comes to a society making a decision about where to put its next incremental resources, it may pay to put more emphasis on prioritizing scale-ups.
(John Hoffmire is director of the Impact Bond Fund at Saïd Business School at Oxford University and directs the Center on Business and Poverty at the Wisconsin School of Business at UW-Madison. He runs Progress Through Business, a nonprofit group promoting economic development. Krystal Bailey, Hoffmire’s colleague at Progress Through Business, did the research for this article.)