The importance of startups: Considering the benefits of entrepreneurship

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New firms can have an important role in the economy and broader society; this article explores the advantages as well as some disadvantages of startups. 

Dimensions of importance

Before considering the importance of startups, it is important to recognize that startups can result in multiple layers of benefits, expanding beyond the value created directly by the firm itself.  

  • Society at large: The impact that innovation commercialized through startups can have on the broader society.
  • The industry: The role of startups in the ecosystem of an industry.
  • Individuals involved: How startups can impact the founders, as well as other employees of the firm.

Key impacts of entrepreneurship

Key source of innovation

One of the primary benefits to the broader society of startups is that they can be more innovative than existing firms. Startups do not have the legacy resources that can lock existing companies into a particular way of operating, allowing them to pursue new ways of operating and different business models.

Community support innovations more broadly

Beyond the individual firm, startups can have a broader impact on the innovation of an entire community. Silicon Valley has become a hub of innovation, benefiting from the clustering of knowledge, connections, and technology across an ecosystem of startups and more mature technology firms.

Developments at one firm can spill into other firms – creating new opportunities to build on the technology trajectory. Similarly, employees at startups can go on to start their own firms later in their careers, further driving a cycle of innovation within a community.

Job creation

Startups can be an important source of job creation – ultimately all firms were startups once. Job creation can also expand beyond the specific firm to the broader community. New jobs that are created can bring new wealth to a community, supporting other businesses, such as restaurants and hairdressers, that benefit from the increased wealth within the community.

Help make existing firms more competitive

One potential benefit of startups is that they can help increase competition in a particular industry, forcing established firms to have to improve their practices or introduce innovations themselves. Particularly in concentrated industries, where there are only a small number of established firms, startups (or the threat of startups entering), can help drive continuous innovations and improvements at established companies.

Can facilitate economic mobility

A final benefit of startups is that they offer economic mobility. While there is a lot of uncertainty associated with startups, with failures not uncommon, establishing a company to pursue an identified market opportunity is a way in which many individuals have accumulated their wealth. There are numerous ‘self-made’ individuals who have succeeded in accumulating wealth by launching their own companies – moving from a low-income bracket to substantial wealth within a single generation. 

Provide opportunities for more freedoms

Beyond the possibility of accumulating wealth, starting a firm can also be a means for founders to realize greater flexibility and improve their quality of life. Indeed, for many entrepreneurs, the reason for starting a firm can be as much about the lifestyle and ability to have control over one’s own path.

Potential negative consequences

Displacement of firms and industries

The success of startups may have significant consequences for incumbent firms and industries. If a startup is able to develop a setup allowing for the provision of products or services at a much lower cost, or are able to add additional desired features or otherwise improve the service, this can have significant consequences for existing firms.

As an example, the rise of Uber and Lyft have both had significant consequences for regular taxi firms. Some of the success of the ride-sharing firms comes from how easy they have made booking a cab service – now it is just one click to hail a cab. For existing taxi cab firms, who have struggled to launch their own service (or convince users to return to regular taxis), this has significantly lowered their fares.

Displacement of jobs and opportunities

Beyond the individual firms, the developments from startups may cause a displacement of jobs – a concern that has gone hand in hand with technological advancements. Autonomous driving, although creating jobs involved in the development of the technology, inherently puts at risk jobs in trucking and transportation.

The creation, but also reductions of jobs can create tensions, because in many cases new jobs that are created require different skills to those that are lost. Relatively low-skill jobs can be lost to high-skill positions – often higher-paying, although potentially un-attainable by those employees previously in the industry. While historically, new jobs created through innovation have often outweighed jobs lost (with unemployment lower than decades ago) – this relationship need not hold true. Although the loss of jobs through automation has been a possible concern since the beginning of industrial advancement, and has so far not played out, there is nothing inherently true about this – there is always the possibility that at some point automation will lead to reductions in net employment, with significant societal consequences.  

Not all developments are good for society

Although it may be comforting to think that new startup developments help advance society towards a better world, this is of course not necessarily the case. While social media for example may have some significant advancements in terms of how easy it is to remain connected with others, these firms also pose risks to privacy, self-esteem, and potentially the democratic election process.  

Not all startups are high value add

Finally, it is important not to generalize the benefits from tech startups to more general smaller firms. Startups can take many forms, and not all are likely to go on to have significant societal benefits. For example, while new small stores or small service firms can be an important source of employment to the founders and company employees, such firms are less likely to have a broader impact on innovation trajectories.