Clearing the fields to let in the wilderness

– by Jonathan Cave on behalf of the FutureEnterprise consortium –

image001

Enterprise means – or used to mean – bold initiative involving risk and
complexity. In common parlance, it has come to mean almost any business organisation. Of course, any population of businesses includes those with an appetite for well-thought-out risk taking. But not all enterprises are enterprising and not all risk-taking offers realistic prospects of success or is undertaken with forethought and pursued with strategic awareness.

This category error is increasing as vast numbers of firms operate in overlapping markets that (too often) disappear before their potential can be fully realised or grow fat (and slow) on the fruits of accidental success. Those who support the birth and growth of industry through knowledge-sharing, financing or policy struggle to tell the difference.

In a world of fuzzy boundaries, it is all too easy for well-intentioned support initiatives to move from specific solution to systemic problem, targeting the wrong enterprises and technologies, focusing on individual parts rather than the ecosystem as a whole and creating perverse incentives leading to fragility, inequality and stagnation rather than robust, equalising and dynamic growth.

This post identifies a few of the more obvious drawbacks of this loss of discrimination and links them to policies intended to help Europe recover from – or survive – its current economic woes.

Recent developments have undermined faith in traditional market dynamics’ ability to tackle global challenges and sustainably reward entrepreneurial effort. One aspect is a shift in perspective from risk to uncertainty; when financiers and policymakers cannot ascertain the best course of action it is natural to choose the safest (low-hanging fruit like ‘picking winners’ and supporting incumbents) or to seek to avoid decisions that might not pay off by using broad selection criteria, such as firm size.

Among the even less desirable consequences are the following:

Misallocation: support (financial or policy) may be provided to unsound ventures and models, starving good ideas and good people of the chance to play their part in meeting the challenges of our time;

Injustice: the need to manage scarce resources means that meritorious failure – taking on risk that does not pan out – is often punished, while accidental success is often rewarded. Thanks to the miracles of globalisation and network effects, punishments and rewards tend to be grossly disproportionate;

Persistence: success and failure have long shadows, since they provide data, if not understanding. Businesses that have successfully innovated in the past are regarded as ‘safe bets’ for future innovation, despite Schumpeter’s[1] characterisation of creative destruction as successful innovation leading to (temporary) monopoly – and Hicks’ prescient corollary that “the best of all monopoly profits is a quiet life[2].” By contrast, in Europe at least, early failure is punished for a long time; credit becomes harder to obtain and what should have been an incentive to try again becomes a self-fulfilling prophecy of failure. This flies in the face of the spirit of truly dynamic innovative economies; as Samuel Beckett said[3] “Try again. Fail again. Fail better.”

Bureaucratic inertia: closely related to persistence is an inability to resolve uncertainty quickly. If the ability to learn from failure (and to spread the lessons) depends on anything, it is the resilience, enthusiasm and sociability of young people, young enterprises and young ideas that do not anticipate failure and seek to avoid it, but try new things, knowing that they can only win, even if the venture fails. But if ‘the system’ only rewards outcomes rather than attempts, they (and we) may lose this resilience because it takes too long to find out and move on. Long and slow administrative processes, sclerotic markets and well-meaning attempts to prop up initiatives in the face of mounting evidence of their unsoundness all reinforce a deliberate, cautious culture that carefully avoids ‘enterprise.’ The solution is crystallised in a phrase current in the US: “fail faster.”

Perverse incentives: As the dotcom experience shows, it is possible to obtain start-up capital with a suitably plausible slide deck without much of a business model beyond a quick payoff to a positive feedback loop of expectations. This is risky, of course, but the risks faced in financial markets may seem easier to tolerate and ‘manage’ than those in the ‘real economy.’ There is less need to work closely with those who supply inputs and buy and use outputs. Much of the risk is in any case emergent – so there is little chance of anticipating outcomes – and systemic – removing the need to diversify. Regulators and global players set the rules and manage the system, crowding out a lot of self-organised and self-protective behaviour.

The need for speed: Modern networked markets reward agility and reactiveness more than anticipation or adaptation. This can be seen at many levels:

  • The premium for ‘mere novelty’ – being the Next Big Thing for as long as it lasts and moving on to the next ‘generation’ as soon as possible. This isn’t new; back in the 1960’s the Boston Consulting Group’s “Experience Curve[4]” analysis showed that demand elasticity was low – and return on investment was high – at the beginning and the end of a market, with much thinner margins during the shakeout and competitive phases. Only vultures come in at the end, but a diet of starters still offers rich pickings.
  • Front-running[5] – if a firm can get in and out quickly and does not have to sink much capital in a particular initiative, it can do even better by working out where the market is heading and surfing the wave, exiting before it shows signs of breaking. A quick reaction time, a short horizon and a lot of nerve (not necessarily the same thing as entrepreneurial spirit) are the keys to success, and the problem is made worse[6] by modern technologies such as algorithmic trading and big data analytics.
  • Conflict vs. competition – recent work in ‘neuroeconomics[7]’ shows the aggressive responses to risky situations – taking big risks when small ones might be more prudent and responding strongly to weak signals – is correlated with success in highly – ‘competitive’ environments like financial trading – or the scramble for access to venture capital or market attention. When merely relative rewards lead to sustainable absolute advantages, and especially when compatibility and network externalities produce winner-takes-all ‘tipping equilibria[8]’ it is very easy to move from trying to do one’s best to trying to finish ahead of one’s competitors. Thus trading firms reward outperforming fellow employees more strongly than contributing to overall firm performance (which is in any case hard to measure). The result is a Tragedy of the Commons where what should be sensible incentives turn back on themselves.
  • The triumph of the quick and stupid – just as mere novelty may trump serious innovation by being flashier, requiring fewer contributors and being quicker to market, so to do simple rules of thumb and automated decisions[9] tend to drive out more sophisticated models and understanding. In innovation terms, this can turn an innovation race into an all-pay auction; the first patentable invention forecloses the market and speed is the dominant measure of performance. Markets that are not viewed as contestable attract little entry; there is much more defence of existing market share than creation of new markets.

What do these observations have to do with policy? Part of the underlying problem lies with conventional enterprise life cycles. The early history of the ICT sector is filled with firms that became successful, grew and – as a result – slowed down into ‘corporate’ and extremely uncertainty-averse defence of their position. Fortunately, this drove the best and brightest to resist recruitment or to escape into their own micro-enterprises with like-minded individuals. As these aged, they in turn slowed down and generated a new set of smaller and agile rivals. Recent history shows some of the same characteristics; when half the connected world uses FaceBook, for example, some of the competitive edge dulls. Problems of security or privacy, when they arise, are dealt with defensively. And innovation out of fear or predatory motives has a different character than innovation in hope or simply messing around to see what happens. Therefore, policy should try to sustain the dynamism of the life cycle, for instance by eschewing a conventional industrial policy that tends to pick winners and reinforce incumbency in favour of an overtly pro-competitive stance[10].

But government policy, especially under pressure from world economic upheaval, is equally uncertainty-averse and prone to the same ageing process. It takes a bold official to embrace the failure of businesses (especially those in receipt of public money) or defend a research and innovation programme when many of its projects fail. It is hard to lend public support to unconventional forms of enterprise, like loose and dynamic networks of people with compatible or complementary perspectives and a willingness to take big (and ostensibly ‘silly’) risks. It is difficult to avoid throwing more policy and financial resources after sunk investments in projects that were not needed, came too slowly to the market or simply did not work. It is particularly hard to embrace policies that are costly to major corporations even when they ultimately lead to a more productive and profitable European economy. But the current environment requires precisely this courage. Large pilots, whose success is a political imperative, may need to give way to a more dynamic, lighter-touch and more overtly experimental portfolios of initiatives, enabled but not controlled by government and industry. Only in this way can the large amounts of liquid capital remaining in the European economy be put to innovative use. Above all, managing the political and shareholder risk requires transparency and accountability to an uncomfortable degree.

The New Forms of Enterprise studied by the FutureEnterprise project show a way back to a classic spirit of enterprise that has been largely lost, but which is once again needed. And this spirit of enterprise must prevail in government, civil society and the republic of science as well as in the kingdom of industry. The vision is expressed in the Research Roadmap produced by the project[11] and more concretely in the common vision and framework for Digital Business Innovation[12] [Ref to D3.3.1]. This framework encompasses a host of specific measures that can implement this cultural change. They include:

  • new legal forms for loose, temporary and even non-monetised enterprises;
  • rethinking regulation (along the lines already spelled out in the Better Regulation Package and applied for some years by Member States[13]) to focus on principles rather than practices and to adapt to the changing nature and function of competition;
  • novel forms of risk capital participation aligned to the needs of innovative (often web-based) entrepreneurs; unbundling and changing the structure of many forms of Intellectual Property Protection; streamlining many of the support processes;
  • improving the coordination between largely traditional (e.g. Horizon 2020, Structural Funds) and potentially-novel (e.g. European Fund for Strategic Investment, the UK Catapult Programme); and
  • adopting selection and targeting criteria that are less tied to specific technologies, applications, market segments or firm sizes and more to the kind of initiative that will contribute to the competitive dynamism and resilience of the enterprise ecosystem that alone can restart the European economy after the shocks of recent years.

And above all, policy needs to find new forms of partnership with all the stakeholders in this ecosystem, including firms of all sizes and none, creative individuals of all ages and interests, firms of all types and structures and private/civil society initiatives that are simultaneously trying to grapple with these issues – e.g. networks of young entrepreneurs, social enterprises and start-ups; incubators like Ariadne Capital’s “Entrepreneurship country.”


future_enterprise_logo_final-01

FutureEnterprise («Road mapping, Research Coordination and Policy activities supporting Future Internet-based Enterprise Innovation») FP7 project was launched in October 2013 with the aim to support the research activities in Internet-based Enterprise innovation and Future Internet from the perspective and for the benefit of enterprises.
FutureEnterprise provides unique offerings related to the Digital Enterprise for its stakeholders including designing a MOOC (Massive Open Online Course) for web entrepreneurs and SMEs who want to apply digital business innovation in their everyday activities and become “new forms of enterprises”; providing libraries of Education / Business / Research Seeds; delivering a research roadmap on new forms of enterprises, as well as its accompanying adoption guidelines.
FutureEnterprise will also provide concrete recommendations for policy makers and the EC in order to create and accelerate “new forms of enterprises”.

More information at: http://www.futureenterprise.eu/ and @FutureEnt_EU

Advertisements
This entry was posted in Uncategorized. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s