Declining science‐based startups: Strategic human capital and the value of working in startups versus established firms

Abstract

AbstractResearch SummaryWe document that since 1997, the rate of startup formation has precipitously declined for firms operated by US PhD recipients in science and engineering. We explore how increasing knowledge complexity can be associated with fewer science‐based startups. The decline in startup formation is accompanied by an earnings decline, increasing work complexity in R&D, and more administrative work for science‐based founders. Founding a startup appears to have become increasingly harder over the past 20 years, while established firms are becoming more attractive workplaces for PhDs.Managerial SummaryThe increase in knowledge complexity has changed the balance of incentives between starting own business versus working for an incumbent firm in favor of the latter for PhDs. If maintaining a steady flow of new businesses in the high‐tech sector is important to keep the flow of commercialization of new ideas coming, managerial practitioners and policy makers may need to find ways to make the job of the founder more attractive. The findings in this article point to the importance of secularly increasing value of complementary assets in work practices, especially for founders and employees that are high value generators. Alternatively, the increasing dominance of a few very large tech firms that the increasing burden of knowledge is fueling could be just fine, and startups need not play an important role in economic development.