How Startups Have Changed the Way American Business Thinks

While other countries may create superior products, America generates startups that forever shift the nation's economic structure

While other countries and regions may create superior products, America generates startups that forever shift the nation's economic structure

What would things look like today if the great start-up companies of the past three or four decades had not come into existence? What would life be like without Apple or Microsoft? How about no Google or Facebook? No Intel and its offshoots, developing ever-faster semiconductors? No to change the way we shop. No Starbucks. No Genentech, powering the biotech revolution. I could go on. Maybe large companies would have stepped in to pioneer some of these changes in the ways we work and play and consume, in the efficiency of our economy, and the development of new computer hardware and software and drugs. But even so, it would have taken much longer for those changes to be fully realized.

Start-Up NationAmerica is a Start-Up Nation: a living example of the process that Joseph Schumpeter memorably dubbed "creative destruction." Other nations may create superior products and even build world-dominating industries, but the very essence of America's economic and cultural DNA is its ability to generate ever-new generations of startups, spearheading new technologies and business models, creating and transforming whole industries, powering job generation, and raising living standards. While other nations deepen and expand their existing industries and technologies -- Germany turns out more and better cars; Japan and Korea stamp out bigger and higher-definition TVs -- America generates startups that forever shift the nation's whole economic structure.

Our start-up economy has its problems, of course. Nearly two decades ago, I worried that we were being beguiled by something I called the "breakthrough illusion." In a book of the same name that I co-authored with my friend and colleague Martin Kenney, I argued that our relentless focus on startups was hampering our ability to follow through -- that we were ceding too many of the high-paying manufacturing jobs and technical expertise that flow from actually making things to other nations. Many of my fears have been borne out. Our start-up-fueled breakthrough bias has helped create an economy that is more adaptable but also more disruptive: It generates new industries while sacrificing old ones. The process of economic development becomes more uneven; innovation and growth are highly concentrated in certain places. Communities, regions, and whole classes of Americans endure periods of pain and hardship as the locus of innovation shifts from one place to another, and more and more production work is off-shored.

Still you have to ask yourself: On balance, what kind of economy would you rather have -- a dynamic, innovative, self-revolutionizing one, or a staid and static one, built around older and potentially more vulnerable industries?

What makes some places more fertile ground for startups than others? Some believe there's a simple, almost magical formula. "Take one great research university, add venture capital, and shake vigorously" is the way a Silicon Valley wag once put it. The past several decades have seen no shortage of efforts in the United States and around the world to build the next Silicon Valley. It should come as no surprise that very few of these efforts have succeeded.

America's Start-Up Economy emerged out of a half-century or more of painstaking and deliberate effort. During the Great Depression and its aftermath, American thinkers, business leaders and entrepreneurs worried about our economy's ability to recover its former vitality. Harvard's Alvin Hansen argued that the country had exhausted its productive force and fallen victim to "secular stagnation" -- a story that has a familiar ring today. Schumpeter bemoaned the ways that large corporations were smothering the kinds of entrepreneurial impulses that had formerly propelled innovation and economic development. John Kenneth Galbraith wrote scathingly of the onset of a sclerotic, self-interested bureaucracy. The marxist Paul Sweezy excoriated the shift to Monopoly Capital. And William Whyte depicted the rise of the non-descript, ever-conformist, risk averse, go-along-get along type he dubbed simply the Organization Man.

But down in the trenches, in places like Silicon Valley and the greater Boston area, new institutions were being developed. Frederic Terman, the famous MIT academic transplanted to Stanford, had pioneered the idea of "steeple building," creating engineering " steeples of excellence," attracting federal research dollars, recruiting top faculty for new and commercially relevant disciplines and encouraging top students like "Bill" and "Dave" of Hewlett Packard fame to spin off their companies, creating jobs for Stanford graduates, and sparking regional development. General Georges Doriot at Harvard was working out plans for one of the nation's earliest venture-capital funds, the storied American Research and Development.

Silicon Valley was little more than orchards and fields back then. But in that fabled, out-of-the-way outpost, a small group of pioneering entrepreneurs and venture financiers -- Arthur Rock and Tommy Davis, Eugene Kleiner, Tom Perkins, and a dozen or so others -- were developing new model of venture capital-financed start-up innovation. Within a couple of decades, they did it: They created a powerful network and social structure for innovation, a culture that valued ideas and merit over corporate hierarchies, and a venture-capital system that drew its resources from limited partners far and wide, that funded companies based on equity and shared risk -- and that empowered and rewarded the techies who made it all possible.

This system of innovation is based on three key principles: technology, talent, and tolerance. A great university like Stanford or MIT is a necessary but in-itself insufficient condition for success. It's the same with venture capital. This system, this social structure of innovation and new firm formation, requires a constant flow of especially talented people -- and not just scientists and investors, but entrepreneurs with the vision and skills to follow through, executing and building companies. This can only happen in an environment that's open, meritocratic, and diverse, where it doesn't matter what you look like or where you are from, or what your ethnic background or sexual orientation is. More than half of all the Silicon Valley startups launched over the past couple of decades have had an immigrant on their founding teams.

Silicon Valley is very much a product of the open thinking and counter-cultural environment of the Bay Area--hippie culture, some might say. Hippies are what Jobs and Wozniak looked like, with their long hair, ripped jeans, and beards. "Doing LSD was one of the two or three most important things I have done in my life," Jobs famously told The New York Times' John Markoff. Try to picture Jobs and Wozniak in one of the leading centers of banking or industry- New York or Boston, Philadelphia, Detroit or Pittsburgh -- back in the 1970s. They would have never had the chance to pitch their invention -- they would have been turned away by the security guards in the lobby. When I met Donald Valentine, the founder of Sequoia Capital and an early venture investor in Apple, and asked him how in God's name he knew to bet on those two, his answer summed up the spirit of the Valley's start-up culture. "It's a mistake to look only at the shell," he told me. "It's what's inside the shell that really mattered." And he reminded me that it was his job as a venture capitalist to "identify the something special inside [new companies'] shells."

What Valentine could see in Apple's unlikely founders, the leaders of America's emerging economy are seeing generally today: the limitless potential of the new. As brutal as the force of destruction has been for some of us in the contemporary economy, the power of creativity remains even greater -- and we are only beginning to tap it.

Image: IR Stone/Shutterstock.