Drag on startups is drag on the economy

We know that entrepreneurs are essential to economic growth in the U.S., but two economists (one of them Nobel) brought this point home last week:

Behind the Productivity Plunge: Fewer Startups
By Edward C. Prescott and Lee H. Ohanian

In the first quarter of 2014 … [productivity] declined at a 3.5% annual rate. This is the worst productivity statistic since 1990. And productivity since 2005 has declined by more than 8% relative to its long-run trend. This means that business output is nearly $1 trillion less today than what it would be had productivity continued to grow at its average rate of about 2.5% per year.

…In our view, an important factor contributing to declining productivity growth is the large decline in the creation of new businesses. The creation rate of new businesses, as well as new plants built by existing firms, was about 30% lower in 2011 … compared with the annual average rate for the 1980s.
…
If history is any indication, many of today's economic heavyweights will ultimately decline as new businesses take their place. Research by the Kaufman Foundation shows that only about half of the 1995 Fortune 500 firms remained on the list in 2010.

Startups also have declined in high technology. John Haltiwanger of the University of Maryland reports that there are fewer startups in high technology and information-processing since 2000, as well as fewer high-growth startups—annual employment growth of more than 25%—across all sectors. Even more troubling is that the smaller number of high-growth startups is not growing as quickly as in the past.

The authors (economists from Arizona State and UCLA respectively) attribute this to the regulatory drag on small business, both in terms of raising the cost of doing business and specifically the complexity of tax compliance.

However, another explanation (which I blogged last year) was the risk aversion of would-be entrepreneurs. Is that due to regulation? Due to a belief that the system is rigged? To the challenges of starting a company in an economy that never fully recovered from the Great Recession? Or — more simply — a loss of optimism by entrepreneurs that they can financially recover if their venture is unsuccessful.

I don’t have an answer, but this is just further evidence that making the US economy more startup-friendly is essential the country’s economic and political future.

Entrepreneurial opportunities from 3D printing

This week has been my week for 3D printing in Europe. I gave a talk on the industry’s history at a workshop in Germany on the business of 3D printing on Tuesday, and listened to a number of other academics talk about their own research. On Thursday, I visited Materialise, a (soon to be public) 3D printing service bureau in Belgium. On Friday, I interviewed one of the founders of Ultimaker, a Dutch startup and a leading maker of consumer 3D printers.

In my talk, I said the flurry of consumer 3D printing startups since 2005 can be attributed to

• The “maker” movement, which began with Make magazine in 2005
• Open design communities (as that term is defined by Christina Raasch), notably the RepRap project; and
• The 2006 expiration of a key 3D printing patent.

The first created both a market and a pool of potential entrepreneurs, while the latter two reduced the entry barriers for those entrepreneurs. Together, this brought dozens of new entrants into making 3D printers in the past decade.

From my interviews (including the two this week), it is clear that 3D printing has had a transformative impact on the entrepreneurial careers of engineers and other technical entrepreneurs. When they learn about 3D printing, they drop everything and try to figure out how to make a career out of working in the industry — usually by making a better mousetrap. (Obviously not everyone who learns of 3D printing does this — but the entrepreneurs are the ones who do so.)

This reminds me a lot of my earlier research on mobile apps and open source software, what I witnessed in internet services (Web 1.0) and the PC revolution, and what I read about the airplane and the automobile. An exciting, high-growth technology attracts hundreds of entrepreneurs, many with more technical than business acumen. The lucky ones ride the growth rocket to make multimillion dollar companies, while others crash and burn.

If (as we all expect) there are scale economies, then the excess entry by firms will bring a dramatic shakeout. In another 10 years, there will be 5-10 major personal 3D printer makers — some of which will have been bought by the existing industrial makers (as Stratasys did with Makerbot) or other companies (HP, IBM, GE, etc.)

On the other hand, many of these companies will survive (or profitably exit) by migrating to niches within the product category, or upstream or downstream (or laterally) to other parts of the value network.

For example, the co-host of our workshop, Frank Piller, showed a plastic model mini-me that was scanned, hand-edited, and then printed in color. At €995 per model, it’s not a high-volume growth business, but it is a way to build resources and capabilities to pursue other opportunities.

This is an exciting time for these entrepreneurs, and for those (like me) studying such entrepreneurs. It will be also an exciting time for engineers to join the industry, just as it was 20 years ago for Internet services or 30+ years ago for personal computing.