Do Startups matter?

You’re familiar with “lean startups,” no? Travel in certain circles, read certain publications, or simply use a smartphone, and these agile little companies will confront you at every turn, talking to their customers, pivoting, iterating, bringing minimum viable products to market, selling out to Facebook for $22 billion — all that fun stuff.

Their rise is awesome news for all of us, Steve Blank proclaimed in the Harvard Business Review a couple of years ago. Blank, a former serial entrepreneur who now teaches at several universities, is the godfather or grandfather or maybe uncle of the lean startup (Eric Ries, who came up with the term, was his student and investee). “Using lean methods across a portfolio of startups will result in fewer failures than using traditional methods,” he wrote in HBR. “A lower startup failure rate could have profound economic consequences.”

Yay for profound economic consequences! At least if they’re positive. Blank clearly thinks they are, and most of the evidence points to him being right about that, in theory. New businesses exploiting new technologies drive productivity gains and economic growth.

There are two critiques of the lean-startups-will-save-the-economy story that have gotten a lot of attention lately, though. One was articulated by philosopher-billionaire Peter Thiel in his book “Zero to One”:

Making small changes to things that already exist might lead you to a local maximum, but it won’t help you find the global maximum. You could build the best version of an app that lets people order toilet paper from their iPhone. But iteration without a bold plan won’t take you from 0 to 1. … [W]hy should you expect your own business to succeed without a plan to make it happen?

The other rap is that, so far, the evidence that we’re in a startup-fueled economic renaissance is still pretty sparse. Despite the incessant talk of disruption and startups, most economy-wide indicators of entrepreneurship and business dynamism have been sliding for years. Productivity growth has been sputtering.

Blank is in New York right now teaching his Lean Launchpad class at Columbia Business School, so I put these two criticisms to him over tea (hey, it’s important to prepare for the future). Blank ordered Armenian mint, I had green. And rather than answering directly, he pivoted and came up with this taxonomy. These, according to Blank, are the six different kinds of entrepreneur:

1. Lifestyle businesses. Blank’s example: a surfer who gives lessons on the side.

2. Main Street businesses. “My parents ran a grocery store in Queens.”

3. Scalable startups. Super-ambitious dreamers out to “create a billion-dollar business come hell or high water.” Elon Musk’s name came up.

4. Viable startups. “Kids in their 20s create a mobile app.”

5. Social entrepreneurs. “The 21st century version of the Peace Corps.”

6. Corporate entrepreneurs. People in big companies, trying to innovate.

Main Street “is still the core when you look at the overall numbers,” Blank says. And Main Street businesses have been in a long decline as bigger, more efficient, more productive companies have shoved them aside.

The viable startups are Blank’s area of interest. He’s certain there are lots more of them than there used to be — certainly in Silicon Valley — and that they will survive and thrive in greater numbers than in the past thanks to the methods he and Ries have been popularizing. They are just still a lot less numerous than the Main Streeters.

Then there are the scalable startups, those world-changing enterprises that Thiel wants to see more of. “The problem with Thiel, and I don’t know him personally,” Blank says, “is that he’s like a lot of very smart guys who’ve been very successful in a particular thing, and think the whole world works that way.” Entrepreneurs such as Steve Jobs and Musk are rare, wonderful creatures of a breed impossible to replicate or teach. Besides, they’ve also been known to pivot, iterate and even pay attention to their customers on occasion (Blank says he used to see Jobs watching shoppers at the Palo Alto Apple Store).

The lifestyle entrepreneurs aren’t of great economic significance, and Blank says he doesn’t know what to make of social entrepreneurship, although he encounters tons of students who want to do that. As for corporate entrepreneurs, he thinks that most of what’s been done along those lines so far is “innovation theater,” but holds great hope for the future, in part because big corporations are starting to listen to him.

All this sort of reconciles Blank’s (infectious) enthusiasm with Thiel’s skepticism and the less-than-encouraging data. It doesn’t settle the matter, of course. Whether we’re at the cusp of a startup and technology-driven economic transformation or a sad era of slowing growth is one of the Great Questions of Our Age, and I’m not going to answer it here. (Other Great Questions that I won’t answer here: Will the machines make our lives better or take our jobs and then gun us down? Will Europe’s economy ever grow again? Will the Oakland A’s finally make it past the first round of the playoffs this year?) After getting some feedback from my readers, though, I will probably iterate these arguments in future columns. I might even pivot.

Source: Bloomberg View, Author: Justin Fox