Tuesday, October 28, 2014

Entrepreneurship as Experimentation

"The solution of the economic problem of society is... always a voyage of exploration into the unknown."

That is Friedrich Hayek, as quoted in Entrepreneurship as Experimentation, a new paper that Michael Clemens flagged to me recently.  It emphasizes the important disruptive impact that entrepreneurship has on society.  But it's also a refreshing antidote to so much of the nonsense that is written about entrepreneurship.

Much effort (and hot air) has gone into honing the selection of entrepreneurs by venture capitalists, incubators, academics, and philanthropic funders.  Some people claim to be able to have knock-out tests for "real" entrepreneurs and/or have a rigorous way of assessing the likelihood new ventures will succeed.

But the reality is different:

  • Nearly two-thirds of all startups fail.
  • Only six to eight percent of startups generate good returns to venture investors.
  • Even the best venture capitalists are unable to predict which of their investments will succeed.

Seasoned venture capitalists understand the implications.  The key, in the words of the authors, is to "democratize entry and facilitate efficient failure."  Good venture firms create a large portfolio of experiments, look for ways to reduce the cost of experimentation, gain early information about likely success (through methods like the lean startup approach), and quickly exit investments that are not paying off.

The same "democratization of entry" approach is now underway in the citizen sector through GlobalGiving and other platforms.   A small group of people is now even starting to think about democratization of entry in the government sector.  In both sectors, facilitating efficient failure will be crucial.  Efficient failure requires effective feedback loops, and a number of interesting operational and funding collaboratives are now underway.

Stay tuned.