Entrepreneurship and the Money Myth

There are many myths in the venture business — I alluded previously to the myth of U.S. VC value add — but I was reminded of another one today. The myth? That access to money matters.

Here is some drive-by proof, with the Milken Institute having just released its 2006 capital access index figures. The top ten (with 2005 ranking in parenthesis) as follows:

1. Hong Kong (2)
2. Singapore (3)
3. United Kingdom (1)
4. Canada (10)
5. United States (4)
6. Australia (7)
7. Switzerland (12)
8. Netherlands (13)
9. Ireland (10)
10. Sweden (5)

Match this up across these countries with entrepreneurial activity, successful exits, and dominant startups, and you quickly discover pretty much zip correlation, at least in tech, life sciences, etc. Put differently, capital access is, for practical purposes, a wash across developed countries, so the factors underlying entrepreneurial success must be found elsewhere, like risk-taking, clusters, talent, etc.


  1. Did you adjust for population? The U.S. has about 5 times the population of the U.K., 9 times the population of Canada, 15 times the population of Australia, 43 times the population of Hong Kong, and 65 times the population of Singapore. If Singapore, for example, had only one successful exit for every 50 in the U.S., it would be doing considerably better on a per-capita basis.

  2. Nope, doesn’t help. This sort of thing is unsurprising and shows up as well, by the way, in the economics of geography literature from Romer and others. There is much more to entrepreneurial success than capital access and population.

  3. These numbers make total sense. If you think about the most game-changing startups, they were usually from founders who had nothing to lose. Whether it is H or P or Gates or Yang or the Google guys, they were all either young (and living at home or with 10 other people in a tiny apartment or in a college dorm) or they were working on their big idea as their night job.
    They had nothing to lose by trying and nothing to lose by failing. This attitude counts for a whole lot more than money. In fact, many of the great companies we idolize now didn’t need that much startup capital – just some sweat equity, scrounging and maybe maxing out a credit card or two or borrowing from the parents. Capital makes you lazy – you buy nicer servers rather than figuring out how to get more with less, you hire a director of sales rather than understanding what the market wants, and you start going to dot-com parties in the valley rather than figure out how to monetize. And, you lose your laser vision by appeasing the VC gods by chasing revenue in hindsight you wished you hadn’t.
    I also personally believe VCs ask questions like “why” and “can you prove it” that don’t let truly innovative ideas flourish. Can you imagine what would have happened to eBay if he had to do a detailed spreadsheet and market study as to the feasibility of online auctions or if he had Ansersen Consulting (remember, this was back in the day) do a detailed market analysis – they would have told him to become a large retail store and become the Webvan for junk!

  4. Saying that capital access doesn’t matter is like saying that rainfall has little to do with crop yields.
    The Capital Access Index encompasses a wide range of topics that are directly (i.e., total credit by the banking sector, alternative investment, market liquidity, etc.) and indirectly (i.e., institutional environment) related to financing start-up and exiting business. Lack of capital access is a global issue and it can’t be solved by looking at the top 10 countries and saying, “Oh, these countries are fine. Move along, nothing to see.”
    For most years, we’ve found the Index was indeed correlated with entrepreneurial predisposition and performance in the countries covered by the Global Entrepreneurship Monitor. Also, capital access and the growth of entrepreneurial capitalism (which seems to work better than the oligarchic or state-directed forms of capitalism) proves consistently and positively associated with the removal of bureaucratic barriers to start-up firms in the data base by Djankov, Labporta, Lopez-de-Silanes and Shleifer (National Bureau of Economic Research, 2000).
    Or, just forget economists, ask any entrepreneur (or their banker) and they’ll tell you that access to capital is critical to survival and growth. Yes, risk-taking, clusters, and talent have an impact – we never said they didn’t.
    Exits are another point and you are correct that these are severely constrained by the lack of equity and bond market development in too many countries—the very point of our Capital Access Index.
    Capital access and capital structure do matter. That’s why so many countries are rushing to open up capital markets and globalize, or be left permanently behind in this rapidly globalizing world. The savings-investment cycle requires fair and balanced capital markets to survive as everyone since Schumpeter have shown theoretically and empirically. Yes, Virginia, finance matters.

  5. Alexander Marktl says:

    I live in Autria. Access to venture capital is like non-existent here. Result is that we don’t really have any innovative start-ups (jajah is the only mentionable since years).
    But in my opinion the problem is not just the lacking money. People here don’t have an entrepreneurial attitude. I’m working with some guys on an Adobe Apollo based project. It was hard like hell to get some people who really want to create something big but with no guaranty.
    In the Valley everybody wants to change the world. In Middle Europe people laugh about you, if you talk about such things.
    I think Paul’s right. Every company starts with a vision. If people don’t have visions, countries don’t have innovative companies and venture fonds don’t have a business model.

  6. Haven’t you selected on the dependent variable, and then faulted it for failing to explain the remaining variance?
    I agree with your conclusion that other things matter a lot more than small variations in your capital market instutions once a country is in the top 10, but access to money matters if you’re not in that rarified group.