Entrepreneurship in the Age of Big Data: All or Nothing

During a speaker event at the Amsterdam Business School (2018), professor Mayer-Schönberger of Oxford posed an interesting statement: innovation used to be the product of human creativity but is quickly becoming the product of computer intelligence; as a result, it is now harder for small start-ups to dethrone established companies. In his book “Reinventing Capitalism in the Age of Big Data”, he defends this statement by noting that computer intelligence is fuelled by data and that most data is owned by large organisations.

If it is indeed harder than before for start-ups to enter existing markets, it seems reasonable to assume that entrepreneurs feel discouraged to start new ventures. However, according to the Dutch Chamber of Commerce, there are more start-ups than ever before in the Netherlands, especially amongst young adults. Additionally, the amount of money being invested in tech start-ups and the number of acquisitions by large tech companies keep increasing. Could it be that starting entrepreneurs are naïvely driven by success stories of Unicorns and overnight millionaires in Silicon Valley? In an attempt to answer these questions, this paper examines the following hypothesis:

Entrepreneurship in the age of big data is driven by unrealistic expectations, fuelled by private funding. Although the total gains from new ventures are higher than before, the distribution is more unequal. In other words, entrepreneurship in the age of big data is all or nothing.

To accept or reject this hypothesis, three pieces of research are required: (1) whether the returns from (tech) entrepreneurship are higher than before, (2) whether the distribution of these returns is unequal, and (3) how the high number of new entrepreneurs can be explained. Additionally, it is discussed what the impact of these trends is on society and if, and how, governments should intervene.

Overall gains from entrepreneurship are higher than before

The average age of the S&P 500 companies has decreased from almost 60 years in the 1950s to less than 20 years today. This provides an initial indication that it pays to start a new venture. Additionally, it has been established that entrepreneurship contributes strongly to a country’s macroeconomic growth, which indicates that, overall, gains from entrepreneurship are positive. Since there are more entrepreneurs today than in the past, this provides another indication that the overall gains from entrepreneurship today are larger than they have been in the past. However, a far easier argument for this claim is provided by today’s high amount of venture capital investment. Assuming that venture capitalists expect the same high returns as they did in the past, this implies that the gains from entrepreneurship are currently higher than they have ever been.

The distribution of entrepreneurial success in unequal

At least in the Netherlands, and most likely in the rest of the Western world, gains from entrepreneurship are greater than before. However, by definition of capitalism, these gains are not evenly distributed amongst all entrepreneurs. In fact, besides the large number of start-ups, there are also more start-up failures than before, and the number of entrepreneurs with personnel has actually decreased. This implies that, although there are more entrepreneurs, the number of successful entrepreneurs with a growing company has dropped. Considering that the number of tech companies valued over $1 billion doubled between 2014 and 2015, which implies that company growth rates are extremely high, the benefits from entrepreneurship go to a lucky minority.

Why are there more entrepreneurs than before?

In 1979, Kahneman and Tversky outlined that people assign value based on potential gains and losses, rather than expected value. As a result, they enter lotteries, even though expected returns are negative. The same phenomenon could be at play when it comes to someone quitting his or her job to become an entrepreneur: the value of entrepreneurship is measured by its potential gains (e.g. a multibillion-dollar business) and losses (e.g. foregone income from employment, and some time and effort). Another explanation could be the increasing inequality between the rich and poor. As returns on capital keep increasing more rapidly than returns on labour, it is reasonable to assume that people lose confidence in their ability to improve the quality of their lives by being employed.

Discussion: (how) should governments intervene?

Going back to professor Mayer-Schönberger’s statement that it will be harder for start-ups to innovate in the future and given that the gains from entrepreneurship go to a select few, it can be inferred that the unequal distribution of wealth is likely to keep rising. Besides the likelihood of revolution and revolt increasing with higher levels of inequality, Mayer-Schönberger argues that concentrated innovation creates a single point of failure. This is especially undesirable in the case of algorithms, as unintended biases will be persistent and hard to identify.

Additionally, the current focus on disrupting technologies may create extensive financial gains for those involved, but it could be destroying more value than it is adding, according to Kenney and Zysman (2018). They argue that, due to the influx of venture capital, there has been “remarkable turmoil in many formerly stable industrial sectors, as the new entrants (…) undercut incumbents on price”. These companies can afford to run their business at a loss to drive out competition, which existing firms cannot as they are expected to make a profit to operate their business. Thus, despite a plethora of resources on successful individual entrepreneurship, a societal strategy on how to ensure value-creating entrepreneurship is still missing.

So, what can be done to prevent a single point of failure? Mayer-Schönberger provides a suggestion: introduce a progressive data-sharing mandate, which would force large data owners to share some of their data. As a result, there is no longer a lack-of-data disadvantage for small start-ups, meaning that they would, in theory, be able to come up with similarly innovative solutions. Also, according to the Dutch statistics agency CBS, most of the innovation in the Netherlands comes from multinational companies, even when expressed as a percentage of total earnings. They are also more likely to apply for government subsidies. This implies that disruption to these companies’ ongoing operations might not necessarily be positive and it may be worth exploring if governments, without taking away the incentives of stimulating entrepreneurship, could consider protecting these companies against hostile start-ups funded by venture capital.

However, besides government intervention to stimulate value-adding entrepreneurship, there are things that can be done by existing and future entrepreneurs to increase the likelihood of a successful venture in the Age of Big Data. Regardless of the endeavour, the main challenge will be to collect enough valuable data. And although governments have a job to do, recent ventures such as Airbnb and Uber provide confidence that entrepreneurs will indeed find ways to do so in ever more creative ways.

Conclusion

Although it is becoming harder for start-ups to compete with established companies, the potential pay-off is enormous. This is largely fuelled by an influx of venture capital, but also by the competitive advantage gained from having more data than the competition, which can be exploited once established. Alternatively, the increasing number of start-ups might be the result of rising inequality, as the gap between the return on capital and the return on labour widens, creating a larger incentive to switch from employment to entrepreneurship. And although entrepreneurial societies are generally associated with larger economies, the current trend of all-or-nothing entrepreneurship is likely to create single points of failure and thus, instable economies.

As a solution to the rise in disruptive entrepreneurship, Mayer-Schönberger proposes that data-rich companies share part of their data, either voluntarily or through regulation. Consequently, start-ups will be able to develop innovative artificial intelligence, which will decrease the concentration risk of our society’s knowledge. It may also reduce the need for all-or-nothing entrepreneurship, as the need to grow reduces.

This paper was originally written as part of the MBA Big Data & Business Analytics at the University of Amsterdam Business School.

 

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