The Economic Need for Entrepreneurship and New Ideas
Over the past 15 years, the amount of startup companies in the United States has grown exponentially. Stemming from the Silicon Valley technology movement, this new desire for creativity and innovation is at an all-time high. Despite the general positivity surrounding this innovation, entrepreneurship seems to have been given a negative connotation; entrepreneurship is looked upon as a lazy way to start a career and make money. However, when studying the impact that entrepreneurship has on society, the following is clear: entrepreneurship, being driven by an economic need, provides a positive impact on markets.
By analyzing (1) the reason startups are created, (2) the importance of an entrepreneurial mindset within existing companies, and (3) the economic benefits that startup companies provide, the value of entrepreneurship in an ever-evolving marketplace is apparent.
The Reason Startups Are Created
In any economy, companies exist because of the economic need for them. Recently, the large increase in startup companies can be attributed to people who have discovered deficiencies within the marketplace. Seeing these issues, entrepreneurs capitalize on them and create businesses, solving both their financial needs as well as the needs of the market.
The identification of these needs has led to an issue: people want solutions to these needs. Inherently, people want to take the easiest path to their desired goal. The lack of these solutions leads to unrest within the market. In turn, the unrest leads to the creation of new firms. As is stated in The Economist, the entire purpose of firms existing is to lower both opportunity costs and transactional costs. Rather than achieving these solutions by yourself, firms provide the means to get a project done in a simpler and cheaper manner.¹
For example, let’s look at a fairly successful startup company. VidAngel, a Provo, Utah based movie streaming company, saw a need within a market. VidAngel conducted a market study (shown in Figure 1) and found that over 54 million Americans would want to use a streaming company like theirs, which allowed them to remove potentially objective scenes from their movies. By identifying this need, VidAngel was able to build a remarkably successful business, and just raised $10 million in public investments last October.² A need for this product in the market was apparent, and VidAngel was able to create a company that provided a positive effect for both the company and the market as a whole. Next we will look at the importance of the entrepreneurial mindset.
The Importance of an Entrepreneurial Mindset
Every single product that any company has ever produced has been the result of a new, innovative idea. By definition, these new ideas are called entrepreneurship. While it’s easy to see the positive impact an innovative mindset can have in the large aspects of companies, within the simple functions of a firm is where it becomes more difficult to see.
In a study conducted by the Arabian Journal of Business Review, the research found that the most successful companies (including Apple, Nike, and Tesla) embraced innovation from all levels of the company, including interns and entry-level position employees.³ These companies realized that they have brilliant employees working for them throughout all levels of the company and were able to maximize their potential. Entrepreneurship is all about generating new ideas, and that concept is essential to any firm that wishes to adapt and grow in an ever-changing marketplace.
The Economic Benefits of Startups
While the preceding sections are critical reasons for the importance of entrepreneurship, the main reason that entrepreneurs are important is that they provide economic benefits that would otherwise go unrealized.
In a study conducted by the Kauffman Center for Research, S. Michael Camp, Ph.D., discovered that an obvious positive economic outcome came as the result of entrepreneurship in developed countries. While there was no evidence that entrepreneurship was the cause for all positive outcomes, Camp was able to attribute at least one-third of the difference in economic growth to the new entrepreneurial activities.⁴ Even if only one-third of the economic growth could be attributed to entrepreneurship, that amount of growth is a substantial number. This phenomenon can be explained through simple economics.
In competitive markets, equilibrium is reached when supply equals demand. However, for the market to reach the correct quantity of output where supply is equal to demand, the economy must be producing all possible products that the market sees as a need. This increase eliminates what is referred to as deadweight loss, and allows the market to function more efficiently. The less deadweight loss there is, the more efficiently the market operates. These effective startup companies are seeing needs within the market and capitalizing on them, thus providing a positive economic output.⁵
Additional evidence of positive economic outputs of entrepreneurship is apparent when looking at venture capital backed firms. Venture capital is a form of financing that is primarily used by young, risky companies, such as startups. In a study conducted by Stanford’s Graduate School of Business (shown in Figure 2), Ilya A. Strebulaev and Will Gornall were looking to study the long-term effects of venture capital backed firms on the U.S. economy. Their most significant findings found that companies financed by venture capital since 1979 accounted for 43 percent of all U.S. companies and 38 percent of all U.S. employees.vi The positive effect this has on the economy is apparent. If the company is successful, startup companies can go on to provide immense economic benefits.
Despite its sometimes negative reputation, entrepreneurship is essential to the economy. By looking at why startups are created, the reason for the need for new companies is apparent. An entrepreneurial mindset is important in all companies because that’s how firms are able to grow and adapt to new market needs. Additionally, the economic benefits of startups far outweigh any potential costs, and provide long-term solutions to many market deficiencies. Simply put, in order to create the most efficient economy we can, entrepreneurship needs to be encouraged. The new, innovative minds that are currently emerging in society need to know that their ideas matter, and their business ideas can create societal benefits beyond what they could hope for themselves.
¹The Economist. 2010. Why Do Firms Exist? December 10. Accessed March 13, 2017. http://www.economist.com/node/17730360.
²Invest in VidAngel. October 20. Accessed March 13, 2017. https://api.vidangel.com/invest/.
³Chirani, Ebrahim, Farzin Farahbod, and Forough Pourvahedi. “Entrepreneurship and its Importance in Organizations.” Arabian Journal of Business and Management Review (Oman Chapter) 3, no. 4 (11, 2013): 72–76. https://search-proquest-com.erl.lib.byu.edu/docview/1492865574?accountid=4488.
⁴Camp, S. Michael. “Groundbreaking Research Initiative to Explore Role and Importance of Entrepreneurship in Regional Economic Growth.” Business Wire, Feb 27, 2001. https://search-proquest-com.erl.lib.byu.edu/docview/446059787?accountid=4488.
⁵Mankiw, N. Gregory. 2015. Principles of Economics — 7th Edition. Stamford, Connecticut: Cengage Learning.
⁶Strebulaev, Ilya A., and Will Gornall. 2015. How Much Does Venture Capital Drive the U.S. Economy? October 21. Accessed March 13, 2017.https://www.gsb.stanford.edu/insights/how-much-does-venture-capital-drive-us-economy.