The Entrepreneurial Revolution and the Knowledge Economy

There is a new generation of entrepreneurs that is creating an entrepreneurial revolution that has taken root in the past 25 years (first in the United States and now accelerating across the rest of the world). Underlying this economic vitality and importance of entrepreneur-led companies is the shift to an economy in which the source of value has shifted from factories and warehouses to knowledge: the factors of scientific discovery, technological change, innovation, and productivity.

MIT researcher, David Birch, classified businesses in animal terms: the large, publicly traded firms that have shed millions of jobs over the past two decades are elephants; small businesses that create jobs when they start up but then grow very little are mice; and fast-growing businesses that start small, then double in size and double again, are gazelles. He noted that for the past 25 years, the most effective job creators in the United States have been the gazelles and the mice.

Evidence of this new era is in business statistics. Birch observed that beginning in the 1975 to 1980 period, employment trends reversed themselves. Fortune 500 grew every year until 1980 and declined every year after. The U.S. economy had not added industrial jobs since 1953. And, while the work force has grown from 50 million workers to 123 million, all the net growth has been on the knowledge side.

Specifically, “gazelles” make up only 3 percent of all firms but added 5 million jobs from 1994 to 1998. One striking example is Microsoft. In 1980, Microsoft had just $8 million revenues and 38 employees; by the end of 2000 it had more than 31,000 employees and the total market value of its stock was $362.3 billion. Paul Reynolds, a sociologist at University of Minnesota, discovered fast growers made up only 25% of all start-ups but accounted for 60% of new jobs attributable to new companies, 80% of new-company sales, and 80% of new-company “exports”. “Gazelles” are thus responsible for a vastly disproportionate share of the development that is attributable to entrepreneurship.

Another notable characteristic of “gazelles” is the extent of new value creation. For example, since incorporation in 1980, the market value of Microsoft grew to $245 billion by 2008. This year, the market value created by Google reached in excess of $150 billion, ten years after its founding in September 1998. Like Dell Computer, Intel, Cisco, Nokia and others, a substantial portion of the market values of “gazelles” is attributable to expected returns from future high-growth opportunities. Fast-growing companies offer prospects of very high rates of returns for shareholders.

New job and value creation and the entrepreneurial process are driven by innovation. According to Jeffrey Timmons, findings by the US National Science Foundation, US Department of Commerce found that small entrepreneurial firms have been responsible for half of all innovations and 95% of all radical innovation in the United States.

Innovation, the driving force behind current scientific and technological advancements, is at the heart of entrepreneurship in the knowledge economy.