How to Build a Stronger Economy

How to Build a Stronger Economy

Many enterprises have been launched from a new idea. At Gallup Inc., a privately held research and consulting firm specializing in polling and workplace advisory services based in Washington, D.C., this has happened three times. First, in the 1930s, George Gallup pioneered the practice of public opinion polling, solidifying his company’s position at the head of the field when he predicted Franklin D. Roosevelt’s victory in the 1936 U.S. presidential election. Second, in the 1970s and 1980s, psychologist Don Clifton reinvented motivational and leadership research by coming up with new ways to identify and work with individual strengths. Clifton worked for the employee-owned company Selection Research, which merged with Gallup in 1988.

Around 2013, Gallup embarked on a third endeavor, based on the idea that entrepreneurial talent is the key to a thriving economy. The leader of this initiative is Gallup’s chairman and CEO, Jim Clifton. Clifton, who is the late Don Clifton’s son, oversaw the 1988 merger, became CEO of the combined company just afterward, and drove Gallup’s international and intellectual expansion (launching the Gallup World Poll in 2005 and blending the fields of opinion and values polling and human development). Under Clifton’s leadership, Gallup has convened world-class talent. Nobel Prize winner Daniel Kahneman and Internet pioneer Vint Cerf are fellows there, and best-selling business authors Marcus Buckingham and Tom Rath started their careers at Gallup.

Gallup’s current focus on entrepreneurship stems from Clifton’s belief that the most critical drivers of economic success are not structural factors such as globalization and technology, but the psychological attributes of startup leaders. When enough people have the determination, confidence, understanding of profitability, and abilities of entrepreneurs, an economy can thrive. The role of leaders in this context is to encourage the care and education of such entrepreneurs — which might, incidentally, mean fostering higher levels of immigration. Clifton’s new book on this subject, coauthored with Gallup principal scientist Sangeeta Badal, is Born to Build: How to Build a Thriving Startup, a Winning Team, New Customers and Your Best Life Imaginable; it details the methodology described in this interview.

Clifton sat down with strategy+business this summer at Gallup’s headquarters, where he talked about the research and his concerns about the lack of startup vigor in the world today. He also described his family foundation’s efforts to help jump-start economic growth by setting up programs to identify, recruit, and train young potential entrepreneurs. Clifton doesn’t see them as the beneficiaries of philanthropic largesse, but as the leaders on whom the next economy depends.

S+B: How did you get involved in your inquiry about entrepreneurialism and economic growth?
CLIFTON: The founder of this company, George Gallup, liked to deal with really big issues. And we have continued that tradition. In 2012, I noticed that our clients were having trouble with growth in the United States. Everything we read in the press said we were in a recovery, but when we looked at GDP figures, we saw we had averaged only 2 percent annual growth since the recession. I checked with Gallup’s chief economist, and he told me we’re not in a recovery. Not knowing who to believe, I took the train to Princeton University and met with [economist and Nobel laureate] Angus Deaton.

I said, “Angus, are we in a recovery?” He gave me a one-word answer: “No.”

“Well, why does everything I read say we are in one?” I asked.

He said, “I don’t know.”

So we did a project where we pulled together proprietary and public business data to figure out what was going on. We focused on the U.S. because that’s where we’re based. Nobody prints these figures much because they’re not fun, and we Americans want to be optimistic and hopeful.

First of all, while GDP is growing, the more important figure is GDP per capita. It’s increasing, but at a declining rate. If you asked our chief economist, he’d say it’s down to about half a percent of growth per year, it’s the lowest it’s ever been, and it’s still going down. It going to hit zero and go below it.

S+B: That sounds like stagnation.
CLIFTON: Yeah. Or worse. It reflects the fact that incomes and salaries are staying level, on average. There are more jobs, but they’re largely crappy, low-paid jobs. Those with high pay are getting paid more. We’re indeed losing the middle class.

S+B: What’s causing this? Is it automation? Or global competition?
CLIFTON: Both. At big companies, human resources leaders are preparing for massive layoffs, because they see artificial intelligence coming. It could knock out 80 percent of the current-day accounting jobs. That plus consolidation are likely to hold down wages for some time.

But although those factors are important, we think there’s a more fundamental cause of economic decline: a drop-off in entrepreneurial leadership. There aren’t enough people running companies who can lead them to grow.

We noticed this when we began tracking the population statistics for companies. The number of publicly listed companies in the U.S. has crashed from almost 8,000 in 1998 to about 3,600 in 2017. It will probably decline further, because M&A has been accelerating, but I don’t know how much further it can go. Can it shrink to 1,500? All together, this could add up to a loss of [US]$4 trillion to $5 trillion in market capitalization.

Then we looked at IPOs. The number of initial public offerings per year is way down. In 2018, there will be fewer than 100. Everyone, from private equity to major investment banks, is vying for the few that remain. Not only are people starting fewer companies, but the companies that exist have largely given up on growth. They talk about growth, but then they buy their competitors and knock out all the middle people, instead of building new markets. This research looked at the U.S., but it’s also true globally. Business is not in a building mind-set.

Even millennials have stopped starting companies. The number of startups in the U.S. per capita is the lowest it’s ever been, since we started measuring it at Gallup. It’s right there in the federal government data. We have a very serious startup problem, and we’ve hit a place where the number of business deaths per year, through M&A and bankruptcies, is larger than births.

S+B: Is there a similar issue on the privately held side?
CLIFTON: Yes. The economic engine of free enterprise is much smaller and more fragile than anybody knows, especially in the United States.

There are 6 million firms in this country. This doesn’t include self-employed people, many of whom can’t find regular work. A firm, in this context, is a company with a payroll. It has employees who are not the proprietor.

About two-thirds of these firms, or about 4 million, have four employees or fewer. They’re really small. They might raise sheep, sell hail insurance, or write software. They only have a couple of employees, and a lot of them are in remote places like the middle of Nebraska.

The next group, with five to 10 employees, numbers about a million. Another 500,000 have between 10 and 20. Another 360,000 or so have between 20 and 100 employees. And then the numbers get tiny. Only 80,000 have between 100 and 500 employees. Only 18,000 have between 500 and 10,000; that’s where our firm is. And only 1,000 companies have more than 10,000 employees. Each one of those 1,000 largest companies is getting smaller.

If you want a growing economy, you have to have more companies getting larger. Instead, we have fewer startups, and our existing companies are getting smaller.

S+B: Why would there be a drop-off in entrepreneurial leadership?
CLIFTON: We started to study that question in 2013. We looked for exceptions — companies with genuine expansion. We got a list of the Inc. 500 — the fastest-growing companies and their CEOs, as tracked by that magazine. When we looked at correlating factors, we found that the fastest-growing companies were predominantly led by first- or second-generation Americans: immigrants or sons or daughters of immigrants. No other factor stood out: not born rich or poor, race or ethnic background, or even IQ.

S+B: Why immigrants?
CLIFTON: It appears to be related to personal attributes — determination, selling [ability], being a disruptor, and so on — that successful entrepreneurs share with immigrants. Most well-meaning people are wrong about where startups come from. They believe startups come from innovation. But we found that startups come from what we call the “builder” quality: the entrepreneurial personality that leads people to start new ventures and bring them to success.

Think of someone like Wayne Huizenga. He didn’t have a college degree. He started as a trash collector. But he started three Fortune 500 companies — Waste Management, Blockbuster Video, and AutoNation — in one lifetime. That’s extraordinary. Steve Jobs had the same quality; he led both Apple and Pixar to be among the world’s most influential enterprises. Another example is Vint Cerf, who is a senior scientist here at Gallup. He is a serial innovator, closely associated with the founding of the Internet; he figured out how to get the packets of data to fly across fiber optics. We’ve found the builder quality attributes among people like actor John Leguizamo, who created his own theater company; Dave Myers, an engineer who created two new product lines at Gore-Tex; and Charles Schwab, founder of the investment brokerage.

S+B: How do you distinguish and measure these builder quality attributes?
CLIFTON: We have a collection of data accumulated over many years, based on a research instrument that’s now called “CliftonStrengths.” This was developed by Don Clifton as the crowning achievement of his lifetime study of strengths assessment work. It’s possible to detect if people have this quality through a self-administered survey, asking questions about their preferences and attitudes. And when we took our collection of data on this, built a test database, and conducted related surveys of and interviews with thousands of students and businesspeople, we found that this quality correlates to the growth of successful startups.

In our 2013 effort, our research team assessed a sample of high school graduates and estimated how many have that same builder quality. Their answer was half a percent. It might be a little more or less, but that’s the ballpark. In other words, if you took a thousand high school kids, from around the country, about five of them have the capability to build an enterprise with no limits.

We found another 2 percent, maybe as high as 10 percent, who can build a more modest enterprise, let’s say something to $50 million in revenues.

In that thousand-kid sample, there won’t be any more entrepreneurs among those in high-income or low-income families; among males or females; or among black, white, Asian, or Hispanic people. But if they’re immigrants, or children of immigrants, then the finding booms up.

S+B: And we’re not just talking about immigrants to the U.S. It would be as true of someone emigrating from the United States to India or from Europe to China?
CLIFTON: We don’t know that.

S+B: Does it also correlate with migration of other sorts — for instance, within the same country, or from rural to urban locations, or from a profession in the arts to the sciences? Or anything of that sort?
CLIFTON: Actually, it doesn’t. Only with people who go to live in a new country — or their children. You’ve got to be careful in analyzing this, because people emigrate for different reasons. Some people are looking for security, some are escaping a very uncomfortable situation. They are less likely to have this quality. But others are looking for new opportunities. They’re the hard-core, driving, entrepreneurial immigrants.

The Entrepreneurial Personality

S+B: How would you describe the builder attribute? What does it consist of?
CLIFTON: Let’s grossly oversimplify and say we’re talking about rare determination. These are clever, logical people, but they don’t necessarily score high on academic tests.

Here’s an anecdote to illustrate the determination factor. I don’t put a lot of faith in samples of one, but this is evocative. I know a woman who immigrated to the U.S. from a city just across the Rio Grande. She’s a U.S. citizen now. I asked her how she made the move. She said that she and her friends in high school always talked about crossing the river. They’d say, “Is tonight the night?” but it was never the right night. Finally, one day, she said, “Screw it, I’m going without you,” and she got in the back of a truck that was driving across. The other ones didn’t. Think of that moment of self-selection.

S+B: So it’s not being an immigrant that causes you to have this quality. Rather, the quality tends to exist, for whatever reason, in people who happen to immigrate.
CLIFTON: And for that reason, there is a higher probability that they can start and run rapidly growing companies.

S+B: Do you think it was the children of immigrants who created the great surge of industrial advancement in the U.S. in the 19th century?
CLIFTON: It looks like it, but we don’t know for sure.

S+B: How do you account for the wave of innovation involving personal computers and the Internet that began in the 1980s?
CLIFTON: All the military technology invented by the Defense Advanced Research Projects Agency (DARPA) went out later to commercial development, and it provided a context for the builders in Silicon Valley. The entrepreneurs went nuts. They created Intel, Microsoft Windows, and everything else.

S+B: And they disproportionately included first- and second-generation immigrants.
CLIFTON: Exactly. However, it’s not enough to have builders. You also need a market for what they create. Innovation on its own has almost no value until you create a customer. In fact, my definition of an entrepreneur is like Peter Drucker’s: somebody who creates a customer where none previously existed. Right now, we’re not doing either — fostering builders or creating customers. And that’s causing the Western economies to get into a real rut.

S+B: It sounds like you buy economist Robert Gordon’s theory that innovation has halted and we’re not going to see productivity gains again as we did in the 20th century.
CLIFTON: I would disagree [about innovation halting]. Productivity gains come from successful entrepreneurs, and that’s what the economy is lacking. There aren’t enough people starting companies or creating customers.

Look back at Henry Ford. He redesigned manufacturing for automobiles, but his greatest genius was in creating customers. Nobody could afford a car until he figured out how to increase their salaries and their buying power.

Fostering Economic Vitality

S+B: Can this builder quality be fostered and developed?
CLIFTON: The data suggests that people are born with it. But it appears so randomly it’s hard to tell. So the easy answer is, it’s born and then made. If you want a robust economy, you can’t just go looking for Waynes and Steves and expect to find enough of them. You have to find young people with potential and then make sure they have a chance to develop it further.

Universities don’t seem to see this. Even the entrepreneurial business schools fail to systematically produce entrepreneurs. They’re trying to frame their schools as building grounds for economic growth, but they’re not generating startups.

S+B: Why not?
CLIFTON: I think it has to do with the way they pick students. The admissions office is concerned with IQ. If your standardized test scores are 1,600 and mine are 850, you’ll get in and I won’t. They consider your ability to read, recall, and reason; they’re also into sports achievement.

We find in universities with famous innovation and entrepreneurship laboratories that elite students can score high on IQ-type tests while scoring significantly lower on entrepreneurship tests.

On the other hand, we’ve given the same test to a group of young people from Wards 7 and 8 in Washington, which are poor, mostly black neighborhoods. We found 15 kids who did score high as significant potential builders. We put them in internships.

Our theory is that of the 4 million kids who graduate from high school each year in the U.S., if you really want to increase productivity, you would find those who score high as builders and put them in special schools. Spot them like you currently spot talented potential sports stars. If 5 percent of the population of high school graduates have this quality, that’s 200,000 people. That’s a lot of kids.

S+B: And if 10 percent of them start enterprises, and your theory is correct, you have 20,000 potential growth engines.
CLIFTON: Exactly. Our research is intended to give cities, organizations, incubators, and universities an opportunity that we have never had before: to identify potential Wayne Huizengas early in life. They’re hard to spot because they tend to lead nontraditional lives. They don’t test right.

But if we found those every year, we could put them in some kind of special accelerated development program. They could learn about customers, contracts, how to get half of an investment up front, and whatever else they need to know to start enterprises. Like sports stars, they would not have to waste their time on conventional academics. Note that many successful entrepreneurs, including Bill Gates and Mark Zuckerberg, dropped out of university.

S+B: Is anybody running an initiative like this?
CLIFTON: We’re starting a training program for 15 students with a builder orientation whom we’ve found among low-income students at the University of the District of Columbia. Gallup and the Clifton Foundation have a similar effort at the University of Nebraska; we test about 1,000 incoming students at the business school each year, and we’ve found 20 to 30 with these tendencies. We put them in a special program designed to help them learn what they need to know to build companies. They already know they want to do this; most of them already have small companies underway. I asked Mia, one of our students here in D.C., what kind of business she wanted to start, and she looked at me like I was nuts. “I already have a clothing business,” she said.

S+B: Once you’ve identified a builder, is that all that the startup needs?
CLIFTON: We’ve found that there are three key roles in a startup: the builder, who is the alpha customer person; the manager, who oversees the organization; and the expert, who understands the techniques and means of success. For instance, if you started a restaurant, you need a builder who understands the concept and how to sell it; a manager who can make sure the bills get paid; and a chef who makes the food people talk about. Similarly, a few of us started a market research company about 40 years ago. I was an alpha customer guy. We hired a manager and an expert statistician. I wouldn’t have had a chance without both of them, and they wouldn’t have a chance without me. Incidentally, both of them could have had tenured faculty positions at their university. However, they preferred an entrepreneurial environment. They both died as multimillionaires.

Published at Tue, 04 Sep 2018 05:00:00 +0000