Here Come the Disrupters: Insights into Entrepreneurship in Foreign Affairs Magazine

If you care about entrepreneurship, you need to read the latest issue of Foreign Affairs magazine (January/February 2015). The cover title is Here Come the Disrupters—the Special Entrepreneurship Issue. You’ll find influential, smart, and high-powered writers and interviewees, including Jeff Bezos (founder of Amazon.com), Michael Moritz (one of the most successful technology venture capitalists), Robert Litan (an economist at the Brookings Institution), Mariana Mazzucato (Professor at the University of Sussex and author of The Entrepreneurial State), and even Harvard’s Clayton Christensen. Here are my key takeaways:

1. Innovation zigs and zags

New ventures never end up being successful according to the original plan. Michael Moritz, an early investor in Google, points out that (1) at that time, most experts thought it was already too late to start a new search company, and (2) the company didn’t start off in the business that it eventually tapped. (Google started by selling licenses for its technology to web sites and corporations, before it stumbled on an algorithm that ranked advertisements, and that’s what transformed the business.) Niklas Zennstrom, co-founder of Skype, points out that when they started the company, they couldn’t have known that all laptops would soon have microphones, and not long after that, that they would all have video cameras.

Creativity research has come to the same conclusion. That’s why my latest book is called Zig Zag: The Surprising Path to Greater Creativity.

2. The social value of entrepreneurship

Innovation and entrepreneurship provide social benefits to society. Even though they make a few people very rich, they increase the quality of life for everyone. In his interview, Zennstrom says:

On balance, disruptive innovation is very positive. For customers, it’s fantastic. Over the long term, if you don’t have disruptive innovation, you will become a country or a market full of incumbents and will eventually be disrupted by somebody else.

Yes, the huge wealth generated by new technological innovations has gone to a relative few people, and many new technologies have put people out of work and lowered wages. But as Zennstrom points out,

Technology itself is not creating poverty. If anything, technology makes things cheaper and allows people who are living in challenging conditions to get access to more opportunities.

3. The role of government

Mariana Mazzucato has been getting a lot of press lately with her new book, The Entrepreneurial State. She argues that all innovations originate with government funding and support—not from private sector market competition, and not from visionary venture capitalists or entrepreneurs. In her article in this special issue, you’ll get a good overview of her argument. But her view is explicitly rejected by all of the other experts. They all agree that government has a role to play, but much more limited than what Mazzucato advocates: the experts believe that the government’s most important role is funding basic research at universities and private think tanks. After all, everyone knows that Silicon Valley is in Palo Alto because of Stanford University and the federally funded research that took place there. These experts also believe that government should provide support systems like education and health care, and remove burdensome regulations that block innovation, particularly relating to employment (get rid of noncompete clauses; reduce certification requirements for various workplace functions). Governments should allow greater immigration and provide tax breaks for early-stage investing. Liberals will like some of these ideas, and conservatives will like others. Innovation research can’t be easily shoehorned into either end of the political spectrum.

Those are my three big takeaways. Here are some highlights I enjoyed from each of the articles, if you’re interested in more details.

Interview with Michael Moritz (early stage investor)

Do you know from the beginning that a Google is going to be a Google?

No. It’s the PR people and the marketers and the revisionists who proclaim that everything was obvious from day one. On day one, nothing is obvious, because all you’re doing is trying to concentrate on getting through the first six months.

If we or the founders are honest about what we thought was possible on day one…we consistently underestimate the potential of a company that becomes great.

What are the most important qualities for an entrepreneur to have?

Clarity of thought. The ability to communicate clearly. A great sense of mission. A massive willingness to persevere. A willingness to make painful decisions. Extraordinary energy.

What can governments do to increase the scale and quality of entrepreneurship?

First, help to underwrite the cost of fundamental basic research that occurs within universities.

The state’s role in the evolution of technology is best aimed at fueling adventures of the mind into the impossible reaches. That is very long range, and it’s the sort of thing that almost no companies have the wherewithal to contemplate.

[Finally, because of the rapid change caused by creative destruction] the government has to provide a fantastic educational system so that people have the skills and wherewithal to be able to make a living for themselves in a world where manual endeavor is no longer valued.

Interview with Niklas Zennstrom (co-founder of Kazaa and Skype)

[The most important qualities for an entrepreneur are] courage—because as an entrepreneur, you’re trying to do something that no one has done before, and a lot of people will try to discourage you….Another important thing is curiosity….And the ability to question the status quo, to ask why things cannot be done in a different way.

[A lot of success depends on luck and timing that you can’t predict. The success of Skype depended on more widespread broadband, which in fact happened. And then: when we launched, laptop computers mostly did not have microphones. But then soon after, all laptops started to be shipped with microphones.] And the year we launched video coincided with all laptop manufacturers starting to install video cameras into their computers. Is that luck? Is that skill? It’s timing. We could not foresee everything.

Robert Litan (An economist who is a senior fellow at the Brookings Institution)

Litan notes that over the past 30 years, the rate of start-up formation in the U.S. has slowed down a lot. He argues that the U.S. government needs to (1) allow more immigration, (2) reduce business regulations, (3) provide free health care to all workers, (4) improve the education system. (Again, note that these are half liberal and half conservative recommendations.)

Closing the wage gap…will require significantly overhauling public education systems so that they can better teach technological literacy….Better education represents the best change to level the playing field.

James Bessen (Lecturer at Boston University)

Bessen argues that in recent years, government policies in the U.S. have increasingly favored entrenched special interests, stifling new innovation startups. He argues for a return to the original U.S. model, where government provides research funding to universities and a variety of private firms. Over the decades, this has been far more successful than the French and British model of providing funding to national telephone and computer companies. (Does anyone remember France’s Minitel?)

He argues that patent law, especially the 1990s extension of the law to cover software, favors larger established companies at the expense of smaller innovative startups. This change in law was largely due to the immense lobbying power of established, large companies.

He argues that states with “cumbersome employment regulations”, especially noncompete agreements, are blocking innovation. An additional block to innovation is “strict requirements for certification to work in certain fields”.

Mariana Mazzucato (author of The Entrepreneurial State)

Mazzucato has become the flag-bearer for a very leftist and distinctly European vision of innovation—the same model explicitly rejected by every other contributor to this special issue. She rejects the established wisdom among economists that governments have always been lousy at picking winners; she says

That view is as wrong as it is widespread…the state has historically served not as a meddler in the private sector but as a key partner of it. Across the entire innovation chain, from basic research to commercialization, governments have stepped up with needed investment that the private sector has been too scared to provide.

I think this is just a matter of which colored glasses you’re wearing. Everyone agrees that the U.S. military funded the ARPAnet, which later turned into the Internet. Everyone knows that the U.S. military originated GPS. Everyone agrees that governments should fund basic, long-range research. But it’s simply false that governments have led the way with commercialization; it’s false, and even crazy, to say that the private sector is “too scared” to drive innovation, implying that governments are braver, stronger, and smarter.

If Mazzucato were correct, then the most centralized economies with the largest governments would be the most innovative countries. But exactly the opposite has occurred: The most Capitalist countries, with the most vibrant private markets, have generated the great majority of worldwide innovation and entrepreneurship.

Clayton Christensen with Mezue and van Bever (Harvard University)

This article comes right after Mazzucato, and in the first paragraph, they reject her thesis:

It is not societies, governments, or industries that create jobs but companies and their leaders. It is entrepreneurs and businesses that choose to spend or not, invest or not, hire or not.

They make a really good point: in countries that have emphasized “top down” government-driven investments, the result has been “sustaining innovations”—small incremental improvements in existing technologies—rather than “market-creating” or “disruptive” innovations—and the latter generate greater value and wealth. I think this is exactly right, and it’s why countries with vibrant private sectors, access to venture capital, market competition, and minimal government involvement have been the most innovative.