It’s certainly true that having more companies employing more people would help the economy. And it’s also true that having more companies starting would be a step along the way. There is a downside though. It’s generally accepted that around four out of every five new start-ups fail. From a macroeconomic perspective, such a high failure rate isn’t necessarily a bad thing; it’s part of the cost of sorting the wheat from the chaff and identifying which business ideas are good and which are less so.
From a microeconomic perspective, however, I’m not convinced that encouraging ever greater numbers of our school and university leavers to do something at which we can reasonably predict, from experience, that 80% of them will fail is an entirely brilliant idea. And I rather suspect that if we doubled the number of start-ups, the number of failures would more than double – we might still get a higher number of successful companies in total, but the ratio of that successful number to the total would be less.
Partly that’s because more business start-ups probably means that we’re moving into the more marginally viable ideas; and partly it’s because encouraging more and more people to start businesses means that we’re going beyond the pool of people who have the enthusiasm and the commitment without having to be persuaded to give it a try.
But it also partly comes down to us not really having much clue as to what does or does not make a successful entrepreneur. Values such as commitment, hard work, and perseverance are all part of it, but there’s also an immeasurable something called flair – and I personally suspect that another little attribute called ‘luck’ plays a much larger role than is generally acknowledged.
It’s easy to ignore the question of luck. Successful entrepreneurs always think that their success is down to their own exceptional personal qualities; and the unsuccessful ones usually have plenty of other things to blame – taxes, red tape, unreasonable expectations that employees should be paid a living wage, the banks, the markets; the list is probably endless.
We know that banks and financiers aren’t particularly good at identifying which businesses will succeed, although there’s an element of self-fulfilling prophecy in that those to which they lend are more likely to succeed than those to which they refuse to lend. We also know that all the government agencies and services promoting entrepreneurialism aren’t terribly good at predicting success either – although the fact than many of those employed in such areas seem to have little experience of actually running businesses themselves and are experts, mostly, in filling in forms to draw down grants and loans, may be a contributory factor. And we know that the entrepreneurs themselves are not very good at knowing what will succeed – if they were, we wouldn’t have an 80% failure rate.
People like Michael Moritz who invested in Google at the right time are feted as though they were financial and entrepreneurial geniuses, but is that true, or were they, in reality, just lucky to be in the right place at the right time? Is entrepreneurial success more like kissing frogs than shrewd investment? I suspect that it is.
Again, from a macroeconomic viewpoint, kissing a whole lot of frogs before one turns into a prince may well be a sensible strategy to pursue. But shouldn’t we make the fact that that is what we are doing just a tiny bit clearer to those young people who are being encouraged and persuaded to go frog-kissing?