The birth and death of start-ups

Poster boy for entrepreneurial start ups - Facebook founder Mark Zuckerberg with his wife Priscilla Chan. Photo / AP.

Though more and more young tech billionaires seem to be household names, the percentage of new businesses started by 20-to-34-year-old entrepreneurs has actually been declining over the past decade.

It slipped from 26.4 per cent in 2003 to 22.7 per cent in 2013, according to a report by the Kauffman Foundation.

Meanwhile, entrepreneurship programmes have become an increasingly common fixture at US universities.

Stewart Thornhill, executive director of the Zell Lurie Institute for Entrepreneurial Studies at the University of Michigan, talked with us about what's behind both these trends.

The conversation has been edited for length and clarity.

Q: Have you seen an uptick in the number of students interested in entrepreneurship?

A: It used to be, even five or 10 years ago, almost in the miscellaneous category of career services. Now it's something that students put in their application essays. When you think of what's driving that, I often point to something that seems trite but is a reflection of the public zeitgeist - "Shark Tank." It's the "American Idol" equivalent of entrepreneurs pitching to investors. The fact that it's become a prime-time, ratings-leading television program speaks volumes.

Then layer in the recent successes of the 20-something entrepreneurs of Snapchat, Facebook, Instagram. All of a sudden, 18-year-olds now think they can be billionaires at 25. As much as I try to convince them these are outliers, it's changed the perception of what's possible in a relatively short amount of time for a young person with a great idea.

Q: Do you worry that these outliers are creating false hope?

A: I think it lights the spark in them. But we need to help make sure that their expectations are tempered by the data. Any time a student pitches a business idea and uses Facebook or Google or Skype as their reference point, I'll very quickly ask them to recalibrate with something that's not a one-in-a-million outcome.

A lot of the companies we hear of now are the classic "10-year overnight success" stories. They explode into the public consciousness, but when you go back and look at their roots, an awful lot of these were struggles long before they became successful.

Q: How many successful entrepreneurs started their businesses early in their careers versus, say, worked at a big company for 15 years and then pursued an idea?

A: The case of someone who's worked for a while is not only more common, it also has a higher probability of success. The way to not just understand problems but figure out solutions is to have some relatively deep domain knowledge - people who work in logistics and storage tend to have good business ideas in the logistics and storage industry.

When you come out of school, whether it's an undergrad or an MBA, you've got a lot of general business knowledge but you don't necessarily understand how an industry works. Another challenge for today's graduates is the student debt burden. Starting a business immediately upon graduation for many is impractical.

Q: Aren't these university programs partly an acknowledgement that the job situation for graduates is not robust right now, and this is an alternative?

A: One of the reasons that entrepreneurship has been embraced across many campuses is that it does provide students the opportunity to chart their own course. The other is the realisation that every big company today started as a small company. By planting the seed of the next round of economic growth with our graduates, their long-term job prospects are going to be stronger.

Q: What is some of the most interesting new research out there about entrepreneurship?

A: A question we've finally put to bed is: Is there something special about entrepreneurs that makes them different from the rest of us? This was the subject of a lot of research, and I think we have all finally agreed that, no, there is no special characteristic.

Also, alarmingly, despite all of this interest at the student level in entrepreneurship, the ratio in the United States of new start-ups to companies that have closed is the worst of any of the G-20 nations. Over the past 40 years, we've always had more births than deaths in the population of companies. In the past year or so, that trend has reversed.

Q: And why is that?

A: People have less in the nest egg. Most initial financing comes from family and friends, but if you're in dire straits, chances are your social circle is in a similar predicament. So lack of financing is a significant hurdle.

The other is that the competitive environment has changed. You've got Amazon. You've got Wal-Mart. Would you open a hardware store if you had a Home Depot in your town?

These massively scaled global competitors have really made it much more difficult for the traditional mom-and-pop start-ups. You just don't see those kind of businesses anymore, whereas 20 years ago they were the backbone of entry to the middle class.

Q: So innovations like Kickstarter haven't had enough of an impact to offset some of these bigger trends.

A: I'm very encouraged by the emergence of crowd funding models and better ways to capitalize companies that need it, but the overall numbers tell us that it hasn't been enough. The success stories in the tech sector are overrepresented. The really sexy, splashy start-ups get a lot of time and attention, so you get the feel that there are more start-ups. But that baseline of new start-ups is still declining.

Q: Many people these days probably just equate entrepreneurship with the tech sector, right?

A: That's where the venture capital bets, because venture capitalists want to have a 10-times or hundred-times return on their initial investment, and you need these massively scalable businesses to get that kind of return. But if you're going to start a company tomorrow, your odds of getting venture capital funding are one in a thousand.

Q: Is being a risk-taker fundamental to entrepreneurial success?

A: We found successful entrepreneurs who exhibit almost every characteristic you can imagine. Risk tolerance is a great example. Every one of us will have a different tolerance or propensity to take risks, whether it's skydiving or mortgaging our house to bet it on a business. When you talk to entrepreneurs, even though they acknowledge that there is risk involved, they will also tell you that they do everything in their power to de-risk the situation.

Q: For people who have a business idea but are starting at square one, what's your key advice?

A: Many think they have the next best idea and need to keep it as secret as they can. But get your idea in front of people who might find value in it, and then listen obsessively to what they tell you.

Don't be a lone wolf. Be the kind of leader people want to work for, because it's just as risky to work for a start-up as to start one.