1.4 Venture Creation's Role in Society

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From the course by University of Pennsylvania

Entrepreneurship 1: Developing the Opportunity

1710 ratings

University of Pennsylvania

Entrepreneurship 1: Developing the Opportunity

1710 ratings

Course 1 of 5 in the Specialization Entrepreneurship

How does a good idea become a viable business opportunity? What is entrepreneurship and who fits the profile of an entrepreneur? This introductory course is designed to introduce you to the foundational concepts of entrepreneurship, including the definition of entrepreneurship, the profile of the entrepreneur, the difference between entrepreneurship and entrepreneurial management, and the role of venture creation in society. You’ll explore where technology entrepreneurship and impact entrepreneurship align and where they diverge, and you’ll learn proven techniques for identifying the opportunity, assessing the opportunity, hypothesis testing and creating a prototype. By the end of this course, you’ll know how to test, validate and prototype your idea, and also whether or not you fit the profile of an entrepreneur! You’ll also be ready to move on to the next phase of entrepreneurship in Entrepreneurship 2: Launching the Start-Up.

From the lesson

Module 1: Introduction to Entrepreneurship

This module was designed to introduce you to the broad definition of the diverse topic of entrepreneurship and to give you an overview of the field. You'll learn the types of entrepreneurs, the most common categories of entrepreneurial ventures, and their key differentiating factors. Using real world examples, you'll see entrepreneurship in action in a wide variety of environments, from small businesses to social enterprises to large corporations. At the end of this module, you'll be able to define what entrepreneurship means to you, whether or not you fit the profile of the entrepreneur, and how to classify your venture to others. You'll also be able to cite current examples of successful entrepreneurial enterprises to support your own venture.

1.1 Course Introduction21:47

1.2 Profile of the Entrepreneur5:58

1.3 Entrepreneurship in Established Firms18:59

1.4 Venture Creation's Role in Society8:51

1.5 Types of Enterprises9:14

1.6 Technology Entrepreneurship14:27

1.7 Impact Entrepreneurship13:42

(Optional) The Role of Venture Creation in Society: Interview: Andy Rachleff, Founder, Wealthfront, Co-founder, Benchmark Capital15:20

(Optional) Entrepreneurship in Established Companies: Interview with Scott Mills, EVP, Chief Administrator Officer, Viacom32:33

Meet the Instructors

Lori Rosenkopf
Vice Dean and Director, Wharton Undergraduate Division
Simon and Midge Palley Professor of Management
Laura Huang
Assistant Professor
Management
Karl T. Ulrich
Vice Dean of Entrepreneurship and Innovation
The Wharton School
Ethan Mollick
Associate Professor
Associate Professor of Management- Wharton School
David Bell
Xinmei Zhang and Yongge Dai Professor, Professor of Marketing
Marketing
Kartik Hosanagar
Professor
Wharton School
David Hsu
Richard A. Sapp Professor of Management
The Wharton School

In order to think about society, there's an awful lot of actors there.

What we're going to do, is develop an extremely simple

stylized model of venture creation that's just going to include a very,

very small subset of the actors who are relevant in the whole ecosystem.

But this will allow us to focus on a few entities, where we can examine

some statistics and really understand something about the value that is created.

So to start, we need startups right?

We need ventures to be created.

And so we have entrepreneurs.

Founding entities with ideas and those ideas, those founding teams,

ultimately will need some funding, so Venture Capital is providing

funding to many startups that have high growth potential.

Likewise for established firms that are focusing on startups with particular

products or services that may be complimentary to what they're providing.

In addition to this flow of money toward ideas, we also see another sort of flow.

So while the money is represented by green arrows, the red arrow is used to represent

the flow of people from established firms to the startup context, right?

We discussed in another module how established firms can be inertial

in the face of innovation.

So professionals who are at these firms can feel circumscribed by these inertial

pressures, they'll want to pursue these technologies and so

this winds up causing some of them to want to leave and found their own firms or

join entities that are able to pursue these sorts of technologies.

And certainly this happens an awful lot in tech.

The traditional example here is that a Fairchild Semiconductors in

Silicon Valley.

Fairchild gave birth to many well known semiconductor firms

as the members of their organization left and founded newer firms.

So one baby from Fairchild is of course intel,

which has been extraordinarily successful in that space, but there are quite a few.

And that's another history worth looking up.

It's not only that this happens in high tech firms, but much of the value that's

created in the startup context is in the tech sector, which we'll see shortly.

But there are other examples of contexts where people will leave established firms.

So for example, professional services firms, legal services,

accounting firms, consultancies, and the like.

Again partners at these firms may leave and found additional firms,

so the same sort of idea of established firms spawning offspring occurs.

So, lets talk about what's happening in this context where new products and

services are being created, value is being created,

investment is being made, and the like.

Let's focus first of all on the value that's created

just by the fact that new enterprises or small businesses exist.

Let's talk about the enterprises themself and

the jobs that are created within these enterprises.

According to the Kauffman Foundation,

0.3% of US adults were entrepreneurs in 2014.

Let's put that in context.

3 out of every 1,000 US adults were self-employed

in 2014, had some sort of enterprise.

So it sounds like a very small number, but there's an awful lot of US adults.

There are more than 28 million enterprises in the United States.

And over 99% of these are small businesses.

And small businesses are defined by the Small Business Administration as less

than 250 employees.

According to the Small Business Association, 67% of all

private sector jobs created in the US occur in small businesses.

In high tech, this number is lower.

It's not 67%, it's 37%.

And this makes sense because the overall set of ventures includes lots of self

employment where there are virtually no employees or a very small number,

the food trucks, the dry cleaners, and the like.

In high tech, of course we have many firms that become very, very large.

And so even with that, small businesses high tech start ups still account for

37% of all private sector jobs created in the US,

so a lot of employment is happening as a result of venture creation.

Let's focus on the value created within these ventures for

investors, much attention of late has been focused on what are called unicorns.

Startups that have grown and been funded to

receive valuations over $1 billion.

So this fancy full name unicorn is meant to conjure that the rarity

of such an occurrence, who's ever seen a unicorn?

But of course the number of unicorns is growing and it's no longer so rare.

That said it's still under 100, but again, it is growing.

So put that number in perspective.

The number of unicorns is less than 2 out of every 1,000 venture back startups,

0.2% of all venture back startups actually become unicorns, so it is rare.

Here's a graphic that depicts the great skew in unicorn evaluation.

So this is just showing for the 80 some unicorns that already exist,

how much they're currently valued at.

And as you can see from that really steep curve that valuations pretty quickly

stay close to $1 billion and there are only a few that are much more dramatic.

Of course the outlier on the left side is Uber,

which is valued at over $40 billion at this point.

As you move toward the middle of the graph you'd see Blue Apron,

which is between $1 and 2 billion.

And then Eventbrite as you move further towards the right,

it valued slightly over $1 billion.

The majority of unicorns, like those three that I've just noted,

are indeed consumer-oriented rather than more enterprise-focused.

Now importantly, 65% of these valuations are just on paper.

They're based on the backing from VCs.

The terms of the deals and the funding that these firms have received,

these are unrealized gains at this point.

But if 65% of these firms are still private with unrealized gains,

we can also examine the 35% of firms that have exited.

Let's examine those statistics on exits.

And when I say exit, this can be either an initial public offering to the markets,

or it can be an acquisition by an established entity.

If we look at the full set of firms that received venture capital between 2004 and

2013, so the most recent decade for which this data is fully processed and

available, what we find is that there are over 800 exits

that were valued at more than 100 million.

Of these, 145 of these were indeed valued over 1 billion.

So again getting into that unicorn territory.

Importantly, of these high value exits,

75% of them were in the broad information technology sector.

And so not only were the vast majority of the deals themselves in information

technology, but these deals actually represented 86%

of the overall value generated.

So tech is really an area where much value is being created both for

investors as well as on the jobs front, as we already discussed.

The next biggest sector, it turns out, is actually healthcare.

In this brief module we focused on venture creation's role in society.

And even with the simplest model of just start ups and established firms and

investors, we could already see how the creation of jobs and opportunities

creates an immense amount of value for investors as well as society.

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