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Can't Find A Product Or Service? Start A Company

Posted: 03/19/2012 3:19 pm

Not all innovation comes from the lab. One of Forbes's newest standout billionaires is Sara Blakely, founder of undergarment sensation Spanx. As Blakely explained in a recent Marketplace interview, "I'm just like so many women -- I was frustrated, I had these white pants that I had spent a lot of money on, and you get home and you think, 'What am I really supposed to wear under this?' So it was a frustrated consumer moment."

New research from the Ewing Marion Kauffmann Foundation suggests that being a frustrated consumer or business user is a fairly common path toward entrepreneurship, especially more innovative entrepreneurship. "User entrepreneurs" are people who create innovative products or services because they need something that doesn't exist. They then start businesses to commercialize what they developed to meet their need.

Although user entrepreneurs are responsible for only about 10 percent of all startups, they account for nearly half of innovation-oriented startups that make it to the important five-year birthday. User entrepreneurs appear in all industries. Notable examples represent successes like Ms. Blakely's or in other industries like medical devices, juvenile products and sporting goods and include such brands as Yahoo!, Black Diamond and Medtronic.

Prior industry-level studies suggest that user entrepreneurs are the first to introduce key innovative products and services to the market, but innovation is not the only distinction of user-founded firms. Firms founded by professional and end users are more likely to receive venture capital financing than both typical startups and R&D conducting firms, the two comparison groups in our study. Both professional- and end- user entrepreneurs more frequently use intellectual property protections such as patents and copyrights.

Like other entrepreneurs, user entrepreneurs also possess rich stocks of human capital, attained through education, work experience and prior experiences founding new ventures. Professional-user entrepreneurs, in particular, draw on rich and deep human capital stocks, even as compared to the founders of R&D conducting firms.

User entrepreneurs appear to have greater educational attainment than the average entrepreneur. Specifically, professional and end-user entrepreneurs are more likely to have undergraduate degrees, and are more likely to have earned post-graduate (Master's and PhD's) degrees than the average entrepreneur.  The same pattern holds true even when we compare professional-user entrepreneurs to the founders of firms performing R&D. Therefore, budget cuts for post-secondary and graduate education and rapidly increasing tuition seem to present a unique threat to these most innovative startups over the long run.

In addition, our analysis suggests user entrepreneurship may represent an important avenue of business success for people from less-privileged socioeconomic backgrounds, as well as for minorities and females. This is particularly important as these demographic groups grow more significant in the American economy.

User entrepreneurs also may face unique challenges as they found firms. The value they bring to the table lies in their innovative ideas and insights: Their products solve real problems. However, the challenge of commercializing highly innovative products often lies in ensuring that potential customers understand the value embedded in the products and services offered.

These findings emerged from data collected as part of the Kauffman Firm Survey, a longitudinal study that annually tracks the progress of nearly 5,000 startups launched in 2004. It is the largest study of its kind in the world, and helped us identify three kinds of user entrepreneurs:

• End-user entrepreneurs develop products or services for personal use and represent roughly 40 percent of user-entrepreneur firms.

• Professional-user entrepreneurs develop products or services for business use; they account for about another 40 percent.

• Hybrid professional-/end-user entrepreneurs represent about 20 percent of firms in this category.

While this is our first study exploring the characteristics of this group of entrepreneurs, it's clear that user entrepreneurs are coming into their businesses with more tangible ideas and innovations upon which to build a firm. This was a first pass at analysis, and we will be going back to look at them in more depth.

 

Follow E.J. Reedy on Twitter: www.twitter.com/@KauffmanFdn