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  • Measuring the Effect of Patent Rights on Innovation

    At Vox , Alberto Galasso and Mark Schankerman share some findings from their research into the impact of patent rights on innovation. While once economists thought that protecting patent rights was essential to encourage innovation, that now seems less clear. In fact, Galasso and Schankerman write that some scaling back of patent rights could spark more innovation, especially in the tech sector: We find that the loss of patent protection leads to about a 50% increase in subsequent citations to the focal patent, on average. This evidence shows that, at least on average, patents block cumulative innovation. One may be concerned that this is a publicity effect from the court's decision. However, we show that this impact begins only after about two years following the court decision, which is consistent with the onset on follow-on innovation rather than simply being a ‘media effect’ from press coverage associated with the court decision. We also find that the impact of patent invalidation on subsequent innovation is highly heterogeneous. There is substantial variation across broad technology areas. As illustrated by the figure below, patent invalidation has a large and statistically significant impact on cumulative innovation in the fields of computers and communications, electronics, and medical instruments (including biotechnology). However, we find only a small and statistically insignificant effect in the chemical, pharmaceutical, or mechanical technology field. We investigate the source of this heterogeneous effect and find that the technology fields where the impact of patent invalidation is strongest are characterised by two features: complex technology (where new products rely on numerous patentable elements) and high fragmentation of patent ownership among diverse firms. This finding is consistent with predictions of the economic theories that emphasise bargaining failure in licensing as the source of blockage. Read Do patent rights impede follow-on innovation? here .

  • Measuring the Importance of a Company's Founder to Its Long Term Survival

    In an effort to determine how much entrepreneurs matter, UK economists Sascha Becker and Hans Hvide sifted through data on Norwegian companies (apparently Norway keeps the most detailed records on businesses) and looked at the performance of firms after the death of their founders. They then compared that with the performance of "twin" companies that had not lost their founder. The companies that lost their founders had a 20% lower survival rate. Becker and Hvide share some of the results at Vox : We expected businesses that experienced the death of a founder-entrepreneur to have some kind of a dip in performance immediately after the death owing to the upheaval, but we anticipated there would be a bounce back. However, the results were quite surprising. Even four years after the death, most firms show no sign of recovering and the negative effect on performance appears to continue even further beyond that, as illustrated by the figure. A simple explanation for our findings could be reverse causality: poor firm performance leads to entrepreneurs having a higher probability of dying. To deal with this possibility, we look at whether there are pre-treatment differences between treated and matched controls. We do not find evidence of pre-treatment effects, as illustrated by the figure. This suggests that reverse causality is not a major force behind our findings. For how long in a firm's life does the entrepreneur matter? The very youngest companies suffered most after the founder’s death, but significant effects were still felt by companies that were up to ten years old. The degree of ownership the founder had retained matters. The death of a founder with a 50% stake had about half the impact of losing a founder who had retained a majority shareholding. The level of formal education of the founder also showed a strong correlation with the damage that person’s death could have. Those with the most highly educated founders experienced the largest drops in sales performance after the founder’s death. There was no difference between the results for family and non-family companies, between rural and urban businesses, or when comparisons were made between different sectors. It could simply be that the founder was a fantastic sales person who generated a disproportionately high level of sales. On the other hand, it could be down to a leadership effect, where the founder-entrepreneur inspires the employees to perform as best they can and without the presence, that drive slips away. Possibly, entrepreneur death induces a voluntary shutdown by heirs of unprofitable firms that provided the entrepreneur with private benefits, so that there is no social loss. Using quantile regressions, we find strong negative effects of entrepreneur death on sales and assets also among successful firms. The bankruptcy code in Norway is similar to Chapter 7 in the US bankruptcy code, i.e., bankruptcy is associated with creditors taking control and is not 'voluntary' as in Chapter 11 in the US bankruptcy code. We find that firms where the entrepreneur dies have twice the probability of going bankrupt. This, again, is evidence supporting that entrepreneurs create value. Read Do entrepreneurs matter? here .

  • Kauffman Sketchbook: Networking Know-How

    One draw of being an entrepreneur is the opportunity to be one's own boss. But progress is much harder to come by without working through ideas with others. So successful entrepreneurs work to build a network of advisers and confidants. In this Sketchbook video from the Kauffman Foundation , FastTrac president Alana Muller outlines an approach to building a strong network:

  • Kauffman Sketchbook: The Essence of Entrepreneurs

    What makes for a successful entrepreneur? Kauffman Foundation senior fellow Paul Kedroksy sums it up with one line: "They were maddened and frustrated at the world and they scratched their own itch and it turned out to be an itch that a lot of us have." Using Craig Newmark, Mark Zuckerberg, and Steve Jobs as examples, Kedrosky helps us understand this key "essence" of entrepreneurs in a Kauffman Sketchbook :

  • Atlanta Fed President on Growth and Jobs, and 'Misrepresentations' of the Impact of Small Firms

    We find that a lot of the talk about small businesses as job creators in the U.S.--especially during political campaigns--isn't quite backed up by the data. The same may be true elsewhere. Atlanta Fed President Dennis Lockhart was in Spain to speak with students at the Instituto de Empresas . The focus of his speech was on growth and jobs, and he spent some time tamping down heightened expectations for smaller faster younger firms--or "gazellas"--to drive growth in the U.S. or Europe: We found that the role of young firms in job creation is easily overstated. For instance, the claim is often made that new firms alone account for all net job creation. This is true in what you might call an accounting sense. That is, the number of jobs created by new firms about matches or exceeds the net number of jobs created by all firms. But this fact ignores the reality that established firms that are growing create many more jobs each year than do new firms. It's just that established firms that are downsizing are responsible for destroying a lot of jobs as well. New firms haven't been around long enough to downsize. In fact, as a group, young firms between one and five years old destroy more jobs than they create because of the high failure rate. Moreover, we found that many small firms are not established with an objective to grow and add employees. The landscape of small, young businesses is heavily populated with "mom-and-pop" businesses. They play an important social role, but are not a major source of jobs beyond the initial number of employees at establishment. In our investigation we then looked at the argument that it is the relatively small subset of small, young, fast-growing firms—the gazelles—that drive job creation. It's clear that gazelles do contribute significantly, but it's the growth dimension, not the age or size dimension, that matters most. That is to say, fast-growing mature firms also account for a lot of job creation. And heavy emphasis on technology and bioscience industries—so popular among economic development professionals—may also be misplaced. High-growth firms emerge in a number of industries, some decidedly low tech. All in all, it's not so obvious that the likely source of high-growth firms can be identified. The recent recession significantly constrained the growth opportunities of companies. By one definition of fast growth, there are about a third fewer fast-growing firms in the U.S. economy now compared to the mid-2000s, and they are adding about half as many jobs compared to the earlier rate. It may seem like an obvious point, but one still worth emphasizing. Innovation and entrepreneurial activity are most likely to achieve maximum impact in terms of job creation in a context of general economic growth. Read the full speech here .

  • Esther Dyson on 'Resilient Dynamism' and Entrepreneurship

    Esther Dyson was at the World Economic Forum 's annual meeting in Davos last week as, it seems, a representative for entrepreneurs and entrepreneurial thinking. In her work with the World Economic Forum, Dyson is focused on helping entrepreneurs move beyond the startup phase and into resilient dynamism In this interview with the BBC 's Tanya Beckett , Dyson talks about the notion of "resilient dynamism" and why encouraging and helping visionary entrepreneurs is good for the global economy. She also argues that economic downturns are the best time for entrepreneurship to flower.

  • Doing Well by Doing Good

    Christian Busch bills his company, Sandbox , as "the leading global network for the most inspiring innovators below 30." And it is based on the premise that young entrepreneurs want to "do well while doing good." It is a difference, he says, of the model put forward by previous generations where the Carnegies, Rockefellers and Gates take on philanthropic endeavors after they have had their success. In this Harvard Business Review Insight video, Busch speaks about the challenges and opportunities in creating an organization in which financial success and value to society are not treated as separate endeavors:

  • Scott Shane: Startup Survival Rates

    Among the many academics and econobloggers who write about startups, Scott Shane has become a reliable, albeit sobering, voice. Shane, Professor of Entrepreneurial Studies at Case Western Reserve University, often focuses on the conditions required for small businesses to succeed. And he doesn't fall victim to the romantic side of entrepreneurship. So it comes as no surprise that he is once again reminding us of how difficult it is for small businesses to survive in today's business climate. At Small Business Trends , Shane has compiled the data from the Bureau of Labor Statistics and the Census Bureau in order to track the survival rate of startups. And the resulting picture is not very rosy: Shane: The 1995 BLS EST, 2000 BLS EST, and 2005 BLS EST lines each track the five year survival rates of the cohorts of new establishments founded in 1995, 2000 and 2005 respectively. Five years after they were started, 50, 49 and 47 percent of the new establishments started in 1995, 2000 and 2005, respectively, were still alive. The remaining two series come from the Census Bureau. The 2005 CENSUS EST line shows the survival rate of new establishments founded in 2005 through 2010, while the 2005 CENSUS FIRMS line shows the survival rate of new firms started in 2005 over the same period. Five years after they were started, the Census Bureau finds that 45 percent of the new establishments and 43 percent of the new firms were still alive. While I have thrown a whole lot of numbers at you, I am making a very simple point: The typical new business started in the United States is no longer in operation five years after being founded. That’s true whether statisticians at the BLS or Census are doing the measuring and it’s true whether you measure new establishments or new firms. Read Start Up Failure Rates: The Definitive Numbers here .

  • Kauffman Foundation: Worker Hiring and Churn Rate Higher at Young Firms

    According to a new study from the Kauffman Foundation , new businesses are showing "signs of recovery" in worker turnover. It stands to reason, as the report shows, that startups have a greater percentage of new hires, but the finding that worker churn rates seem to be recovering only at young firms is telling, and may suggest, as the report points out, a slackening in economic dynamism. From the report: Figure 1 shows the rates of job creation and destruction by broad firm age groups from 1998:2 to 2011:1 for a selection of twenty-eight states. These twenty-eight states account for 56 percent of total U.S. nonfarm employment in the second quarter of 1998, according to the BLS’s Current Employment Statistics. Fluctuating around 20 percent, job creation rates for the youngest businesses—those that are zero to one year old—are much higher than for more mature businesses.14 Job creation rates for the youngest firms are twice those in the firm age range of two to ten years and four times as large as the rates for mature businesses (eleven-plus years old). Though less dramatic than the differences in job creation rates, job destruction rates also are higher for the youngest businesses than for more mature businesses. In comparing the job creation and destruction rates across firm age groups illustrated in Figure 1, it is evident that young firms have the largest net job creation rate (the difference between job creation and destruction). For the youngest firms, the net job creation rate in booms exceeds 10 percent and, even in the recent recession, exceeded 6 percent. In contrast, the net job creation rates for more mature businesses are positive in booms and negative in recessions, with a slightly higher average for businesses between two to ten years old than for those eleven years old or older. The finding that the highest net job creation rates are from young firms is consistent with the evidence in Haltiwanger, Jarmin, and Miranda (2010) from the BDS. Job creation rates are procyclical, that is, they rise during economic expansions for all firm age groups, while job destruction rates are countercyclical. Though these patterns are not surprising, the cyclical patterns differ sharply across the 2001 and 2007/09 recessions. While there was a notable increase in the job destruction rate for young businesses in the 2001 recession, the job creation rate for these businesses did not change much. In contrast, the 2007/09 recession exhibited a more pronounced decline in job creation for the youngest businesses, along with an accompanying increase in job destruction. The implication is that the 2007/09 recession hit the youngest businesses much harder than the 2001 recession did. Though the youngest businesses were hit hard in the 2007/09 recession, they are the group that has had the most robust recovery, with their job creation rate growing from 0.18 to 0.23 between 2009 and 2011. Read Job Creation, Worker Churning, and Wages at Young Businesses here .

  • Fear and Startup Success

    Is it possible to have too much money as a startup? In this Harvard Business video, Jessica Herrin argues that having just enough money has its advantages. When every decision feels like it is a make-or-break move, one is more likely to work a little harder, to think a little sharper. Herrin is CEO and founder of Stella & Dot , and she advises entrepreneurs embrace a scrappy approach to developing a budget:

  • Kauffman Sketchbook: "Startupville"

    We're adding a book to the reading list. Venture capitalist Brad Feld 's Startup Communities: Building an Entrepreneurial Ecosystem in Your City is now out. We are always interested in any research into what makes one environment more fertile for innovation than others, and Feld's background as an early stage investor gives him a valuable perch through which to evaluate "entrepreneurial ecosystems." The Kauffman Foundation has pulled four key concepts from Felds book to highlight in this Sketchbook video:

  • Kauffman 'Are You An Entrepreneur?' Survey

    The Kauffman Foundation , with the help of Forbes , has been asking individuals to share why or why not they start businesses. Some 5,000 people have answered the "Are you an entrepreneur?" questionnaire, and their answers provide a bit of a picture into what people think goes into being a successful entrepreneur. We were struck by a few of the answers, but especially the obstacles people cited as making it hard for them to start a business. From the release: See the full infographic, and read the report here .

  • OECD Report: Start up Faster Recovery by Encouraging Entrepreneurship

    " Start-up rates in most countries are slowly bouncing back toward their pre-crisis levels," according to new data from the Organisation for Economic Cooperation and Development . The number of startups basically dropped off a cliff in 2008 all across OECD countries. But while most countries are seeing the rate of new business creation recovering slowly, there are some exceptions. France, for one. France has shown the most spectacular increase in new businesses, due to introduction of a simplified start-up procedure (“regime de l’auto-entrepreneur”). Australia and the United Kingdom have reported robust growth in business creation in late-2011 and Norway has grown steadily, but the number of newly created enterprises remains below its pre-crisis level in most countries surveyed, according to the report. Access the data from the report, or read the report (subscription required) here .

  • Partnership for a New American Economy Report on U.S. Losing Ground in Race for Top Talent

    The Partnership for a New American Economy wants us to take a close look at how the U.S. may be falling behind in the recruitment of top talent from around the globe. The Partnership is a the coalition of big names in business and city government,business leaders, like Michael Bloomberg, Steven Ballmer, and Rupert Murdoch. And its recently released report is a scathing criticism of U.S. immigration policy. There is a lot in the report to discuss, but we found the Partnership's call to change policy to encourage more entrepreneurs to set up shop in the U.S. to be particularly provocative. According to the report, the U.S. provides relatively little incentive--or perhaps only disincentive, when put into a global context--for people with new business ideas to come to the U.S. From the report: Innovative programs are emerging to incentivize new groups of highly educated workers to leave their home countries and start companies that attract capital and boost domestic job creation. Chile, the United Kingdom, and Canada have all launched programs targeted at entrepreneurs and investors. Start- Up Chile, for example, offers im- migrants $40,000 in equity-free capital and a one-year visa to start a company on Chilean soil. So far, the program has drawn more than 1,600 applications from 70 countries, with applicants based in the US leading the way. More than 200 foreign start-ups are now up and running thanks to the program, raising $8 million in seed funding from firms in France, Brazil, Argentina, Uruguay, and America.67 Recent developments in the UK show the real push many countries are making to attract the entrepreneurial immigrants so helpful in job creation. In 2008 the UK created a special entrepreneurship visa that allowed founders of companies with £200,000 of investment (about $320,000) to settle in the country for three years. In 2011, however, the UK decided to compete for such high-value immigrants by opening its doors to the most promising, non-EU entrepreneurs still further. Today, the government al- lows some high-potential entrepreneurs funded by venture capital firms, angel investors, or seed groups to come into the country with just £50,000 in funding (about $80,000). Start-up founders who create 10 jobs within three years - or generate £5 million in revenues (about $8 million) - are also put on a more rapid track to gain permanent residency. Such changes are having an impact. In the first year under the revised rules, Paul Barrett, the Economic Migration Policy Advisor for the UK's Immigration and Border Policy Directorate, says applications for the country's entrepreneurship visa program more than doubled. At the same time, the country also created a way for potential entrepreneurs to visit the country to explore starting a business: Such immigrants can now get special six-month prospective entrepreneur visas. "We didn't want to get left behind," Bar- rett said of the motivation be- hind recent initiatives "There's a lot of competition out there now for global talent." Like many countries focused on economic growth, high-talent immigrants - including entrepreneurs and investors - are deemed critical to the country's future success. As Barrett explains it, "Attracting high- skilled immigrants, investors and entrepreneurs - those who will truly grow our economy - that's where the thrust of our recent policies have been." Download the full report here .

  • Why You Should Take it Personally: Startup Mistakes from Noam Wasserman

    In his work at Harvard Business School , Noam Wasserman focuses on management at entrepreneurial firms. In The Founder's Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup , he writes about the key mistakes that startup founders make in the early days of a company. In this video, he says that a lot of the mistakes founders make can be placed into one of three categories:
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