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Nearly half of innovative U.S. startups are founded by ‘user entrepreneurs,’ according to Kauffman Foundation study

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By: | March 7th, 2012 | leave a comment

Media Contact: Jodi Briden, 215-204-7993, jodiw@temple.edu

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Media Contacts:
Rose Levy, 646-660-8641, rose@goldinsolutions.com
Barbara Pruitt, 816-932-1288, bpruitt@kauffman.org

 

New study is first to identify characteristics of firms started by entrepreneurs who create products for their own use, then commercialize them

 

A study released today by the Ewing Marion Kauffman Foundation shows that “user entrepreneurs” have founded more than 46 percent of innovative startups that have lasted five years or more, even though this group creates only 10.7 percent of U.S. startups overall.

“Who Are User Entrepreneurs?” is the first study to quantify the prevalence and characteristics of user entrepreneurs – those who have created innovative products or services for their own use, then subsequently founded firms to commercialize them – and identify how the firms they start compare to other U.S. startups in terms of revenue growth, job creation, R&D investment and intellectual property.

“Users have ignited technological change in industries ranging from medical devices to sports equipment to juvenile products. In many cases, users, not producers, have the best information, and their incentive is to build something better for their own use. As a result, they are able to create truly novel innovations. When they commercialize these innovations, we all benefit,” said Sonali Shah, assistant professor and Buerk Fellow at Foster School of Business, University of Washington, and co-author of the report. “This report provides the first comprehensive documentation of the prevalence of user entrepreneurship. Users make significant innovative and economic contributions to society – contributions that we are just beginning to understand and acknowledge.”

“Importantly, we observe significant differences between user entrepreneurs and others along dimensions that matter to economic growth and innovation, including access to outside equity capital and the intensive use of intellectual property protection,” said Sheryl Winston Smith, assistant professor of strategic management and entrepreneurship at the Fox School of Business, Temple University, and co-author of the report.

Three particularly interesting patterns emerge:

  • First, user entrepreneurship appears to be particularly common among innovative startups, and a high fraction of professional- and end-user entrepreneurs receive venture capital financing. Almost 6 percent of end-user entrepreneurs across all industries reported receiving venture capital in their first six years of operations.
  • Second, professional-user entrepreneurs seem to possess greater amounts of and richer human capital relative to other types of entrepreneurs. Their firms also seem to prosper with respect to revenue generation and were more common in the high-tech industries.
  • Third, end-user entrepreneurship may be a particularly attractive path for women and some minority groups. Although end-user entrepreneurs do not appear to possess greater human capital compared to other types of Sheryl Winston Smithentrepreneurs and were different with respect to comparison groups, again a relatively high fraction of these firms reported receiving venture capital financing.

“User entrepreneurs are different from other entrepreneurs,” said E.J. Reedy, Kauffman Foundation research and policy fellow and co-author of the report. “It is clear that these entrepreneurs are coming into their businesses with more tangible ideas, innovations or customers to build a successful firm. This was a first pass at analysis, and we will be going back to look at them in more depth.”

The authors compared three types of user entrepreneurs – end-user entrepreneurs (those who developed products or services for personal use); professional-user entrepreneurs (those who developed products or services for business use); and hybrid professional-/end-user entrepreneurs – with other “innovative” U.S. startups that had performed R&D during their first year of operations, and with U.S. startups in general. The findings draw on data from the Kauffman Firm Survey longitudinal study tracking nearly 5,000 firms founded in 2004.

Several previous industry-level studies suggested that user entrepreneurs were the first to introduce many key innovative products and services into the commercial marketplace in industries as diverse as medical devices, juvenile products and sporting goods. User entrepreneurs have founded many well-known and successful companies, including Yahoo!, Black Diamond and Medtronic. Firms founded by the three user entrepreneur types also differed from U.S. startups overall, and from one another, in terms of market sectors, revenue, financing methods and intellectual property ownership.

Other study findings are available at www.kauffman.org/end-user.

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