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What Schumpeter Got Wrong About Innovation and Entrepreneurship

Which is entrepreneurial, and which is innovative: Venture A or Venture B (real but disguised)?

  • Venture A, an eight-year old startup with patents, a vision to disrupt a large growing market (think big data in a basic industry), $3 million of revenues, a $20 million operating deficit funded by investors, and an implied valuation of $200 million? The founders have 40% of the equity.
  • Venture B, the eight-year-old acquisition of a 35-year-old copycat business (think generic drugs), no patents, that has grown in eight years from $37 million of legacy revenues to $1 billion, $200 million of operating surplus, and an implied valuation of $2 billion? The team also has 40% of the equity.

You can hardly say both because, except the equity stake, they are diametrically opposed.

Most people confuse entrepreneurship and innovation. Entrepreneurship and innovation are distinct and need, in order to be useful, to remain distinct. There is a lot of innovation without entrepreneurship (think NASA, Manhattan Project) and lots of entrepreneurship without innovation (think copycat generic pharmaceuticals).  Some entrepreneurship leads to later innovation, and some innovation leads to later entrepreneurship. A good illustration of an investment in pure innovation, but not entrepreneurship, is the new $317 million MIT fabric and fiber innovation center, with involvement of government (DOD), private investors, many universities (not just MIT), large corporations, and startup incubators. As the innovations develop, I have no doubt that entrepreneurs will line up to take advantage of the innovative assets, as will larger and older corporations.

Profit and risk are at the heart of entrepreneurship. I know – some of you are wondering, “But if it impacts a market, it must be innovative.” Not so: For over two and a half centuries entrepreneurship has been conceived of as an economic, profit-seeking activity involving a person perceiving economic opportunity and taking risk for potential (but not guaranteed) economic gain. Only in the recent 10-20 years have we seen the use of entrepreneurship drift amorphously to artrepreneurship, edupreneurship, policy entrepreneurship, parentrepreneurship, intrapreneurship, and social entrepreneurship. Books now tell us that nations can be entrepreneurial.

Innovation is profit-agnostic. Even though in the macro and over very long spans of time, innovation does drive economies, at the micro level, innovation is economically indifferent: An innovation might make money (think Thomas Edison, who became very wealthy), and it might lose money (think Nikola Tesla, who died penniless after helping Edison and others to commercial success); whether it does or does not has no bearing on how innovative it was. “But that confuses innovation and invention,” some of you might think. Again, not so. For something inventive to become an innovation, it must be used. Being used distinguishes an innovation from an invention.

All innovation is not created equal. Critical thinking can be applied to things said even by very famous and transformative thinkers. The great economist, Josef Schumpeter lumped five processes under a single innovation umbrella: (a) launch of new products, (b) application of new methods, (c) opening of new markets, (d) acquiring new sources of supply, and (e) creation of a new market structure. Yet is there anyone who seriously believes that, for example, developing a swallow-able camera to diagnose bowel disease (Given Imaging) is as equally innovative as selling that same pill in Denmark, and then selling it in Sweden, and then Germany?  In its time eBay was a great innovation. Does anyone really believe that creating a copycat eBay in, say, China, embodies anything close to the innovativeness of the originator? Yet the copycat may be just as entrepreneurial (unless you measure entrepreneurship by its innovativeness and then you are into tautology-land – see below).

Non-innovative entrepreneurship can lead to innovation. I have heard experts argue that if a company grows, then by definition, it must have been innovative (and therefore innovation drives growth).  Not only is that circular reasoning, it can also work the other way around: A venture that scales through, let’s say, successfully selling mundane products, is in a better position to innovate and use innovative assets after it grows. Growing a non-innovative “me-too” business can free up the resources and generate the experience for an entrepreneur to invest in subsequent innovation. Indeed, there is a positive correlation between size and measures of innovation.

Example: tiny Solocauchos in Manizales, Colombia grew its existing plastics and rubber molding job shop from 20 to 50 people in three years by learning how to sell better and by developing some simple rubber and plastic products (think plastic toys for dogs). THEN, and only then, did the CEO, Marcelo Echeverry, see an opportunity to develop his own production equipment (specifically, a new kind of peristaltic pump) to enter into new, bigger, more competitive markets. He persuaded Colombia’s innovation agency, InnPulsa) to fund this development, and two years later is selling his first pumps.

Definitions matter. You would, hopefully, not use a piano to drive a nail, nor would you use a hammer to play Beethoven. Yet pianos and carpentry are both driven by hammers. Entrepreneurship and innovation have power as practical concepts because they are distinct. Innovation drives the nail of useful novelty, and entrepreneurship drives the nail of profitable success.