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DIY entrepreneurs launch nearly half of all innovative start-ups

Nearly half of all innovative businesses are founded by user entrepreneurs, people who commercialize products they have created for their own use.

This according to the report, “Who Are User Entrepreneurs?” co-authored by Sonali Shah, an assistant professor of management at the University of Washington Foster School of Business, and published by the Ewing Marion Kauffman Foundation.

Of the study’s sample of US start-ups launched in a single year across all industries, user entrepreneurs founded 10.7 percent of firms that survived the first five years.

But user entrepreneurs founded 46.6 percent of innovative businesses—formed around an innovative product or service—that made it past their fifth birthday.

“This report provides the first comprehensive documentation of the prevalence of user entrepreneurship,” Shah says. “Users make significant innovative and economic contributions to society, contributions that we are just beginning to understand and acknowledge.”

Mother necessity

Shah and co-authors Sheryl Winston Smith of Temple University and EJ Reedy of the Kauffman Foundation examined data from the Kauffman Firm Survey, a longitudinal study tracking nearly 5,000 firms that were founded in 2004.

The authors compared firms founded by three types of entrepreneurs—end-user entrepreneurs (who develop products or services for personal use); professional-user entrepreneurs (who develop products or services for business use); and hybrid professional/end-user entrepreneurs—with other innovative US start-ups that had performed research and development during their first year of operations, and with US start-ups in general. They considered revenue growth, job creation, R&D investment, intellectual property and venture capital financing.

In addition to quantifying the prevalence of user entrepreneurs, several patterns emerged:

  • User entrepreneurship is particularly common among innovative start-ups.
  • A relatively high percentage of user entrepreneurs receive venture capital financing, including 4 percent of end-users and 6 percent of professional-users. Of the latter group, 17 percent received some form of outside equity financing.
  • Professional-user entrepreneurs generate greater revenues and possess more and richer human capital than other types of entrepreneurs.
  • End-user entrepreneurship may be a particularly effective path for women and some minority groups.

Igniting change

This new study builds on Shah’s considerable prior work revealing the motivations, characteristics and processes of user entrepreneurs, who operate outside of the traditional innovation incubators of universities or corporate R&D departments.

Shah and Mary Tripsas won the 2008 Thought Leader Award from the Academy of Management’s Entrepreneurship Division for their paper, “The Accidental Entrepreneur: The Emergent and Collective Process of User Entrepreneurship.”

Among other findings, the paper noted that 84 percent of firms in the juvenile products industry—everything from Boppy to Bummis to Baby Einstein—were founded by users (in this case, inventive parents).

“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,” Shah says. “As a result, they are able to create truly novel innovations. When they commercialize these innovations, we all benefit.”