Betting on more Entrepreneurship 2.0 and 3.0

What we can learn from reflecting on startups, innovation and artificial intelligence

By Dr. Christian Hugo Hoffmann

Summary

This position paper, which will be published as a larger version in the collected volume “Artificial Intelligence, Entrepreneurship and Risk” by Springer, develops a thesis which is twofold: On the one hand, there are tipping points in our founder cultures, according to which both the way firms are built and the specific founder personalities can change fundamentally. On the other hand, it is argued that we face two global tipping points in our startup cultures. The first, heralding Entrepreneurship 2.0, challenges a key characteristic of startup formations and of startup founders, namely that these activities and personalities are associated with a comparatively high level of risk-taking. In the era 3.0, by contrast, companies will no longer be established and run solely by human entrepreneurs, but in (a large?) part also by artificial intelligence (AI). In a later section of this article, I outline the requirements that AI systems must fulfill for qualifying for this era 3.0.

Introduction

The importance of this article, where the concepts of Entrepreneurship 1.0 to 3.0 are formed for the first time to the best of my knowledge, is first of all based on the observation that entrepreneurship and startup careers have faced a hard time. One reason is that most young talents and university graduates prefer to work for the state (which is associated with security and predictability of life circumstances) than to build a career in the “free” economy (where overtime and fluctuations are feared). Put in a provoking way, they would rather administrate and redistribute “public funds” instead of earning what can subsequently be administrated and redistributed via taxes and levies.

With my contribution at hand, which draws on a wealth of first-hand experience of entrepreneurship, I would like to advocate a revaluation of entrepreneurship and raise enthusiasm for innovation creation, which startups stand for more than any other form of enterprise. And this purpose, which is pivotal for individuals as well as the economy as a whole, is served from an unusual perspective in what follows, distinguishing between Entrepreneurship 1.0, 2.0, and 3.0 in a systematic manner.

What is entrepreneurship resulting in Entrepreneurship 1.0?

Entrepreneurs embody the creative power of free markets and ensure the prosperity of societies (Hoffmann, 2015). Surprisingly, however, economists largely ignore the role of the entrepreneur, the concept is often insignificant and marginalized in this community. The explanation for this can be found in the neoclassical focus on equilibria and perfect competition.

In a refreshing departure from this tradition, Austrian economist Joseph A. Schumpeter (1908, 1939) coined the most pronounced concept of the entrepreneur to date (Frambach et al., 2018). In his understanding, the entrepreneur does not bring the economy into a state of equilibrium, but leads it out of a static state. (S)he is the creative-heroic figure who successfully harnesses technical inventions and permanently changes and advances the economy and society by creating new products, designing novel methods, or opening up uncharted markets. The Schumpeterian entrepreneur is, therefore, an innovator or a creative destroyer of the status quo, who is able to convince people (customers) of a new offer. (S)he gains a monopoly profit from these activities before imitators catch up, ultimately resulting in a market which enters a phase of stagnation again. Schumpeter’s concept of the entrepreneur is refreshing because it places the entrepreneur at the center of market activity as a formative phenomenon and does not see her/him merely in functional terms, as a decision-maker and risk-bearer, or marginally as a basically interchangeable assistant in fulfilling consumer wishes. The typification of the entrepreneur as an active, individual shaper and creator who disrupts markets is most likely to correspond to the self-image of many entrepreneurs today and it is captured in my notion of Entrepreneurship 1.0. 

Apart from the Schumpeterian entrepreneur figure as the essence of modeling Entrepreneurship 1.0 as well as both the close and necessary tie between being an Entrepreneur 1.0 and taking substantial risks with founding and running a venture, what other features can be detected to characterize Entrepreneurship 1.0, especially vis-à-vis the Entrepreneurship 2.0/3.0:

• In Entrepreneurship 1.0, focus is on the individual entrepreneur or a small group of entrepreneurs (the founding or core team) and the entrepreneur is an innovator, a source of new ideas, goods, services, and business/or procedures.
• An entrepreneur of 1.0 is a human individual who creates and invests in one or more businesses, but focuses on one business at a time, bearing most of the risks and enjoying a decent portion of the rewards.^[1]
• A startup of Entrepreneurship 1.0 is a very risky and for some time unprofitable endeavor which is seeking profits, but requires that additional capital is injected by new, external investors in return for shares of the startup. A startup is, at least initially, not creditworthy, i.e., is not qualified to take loans from a bank.
• Raison d’être: A startup of Entrepreneurship 1.0 is set up to translate new technologies (such as generative AI nowadays) or inventions into innovations coupled with the prospect of disrupting a market. Or a startup of Entrepreneurship 1.0 is set up for designing and applying a new business model to disrupt a market. 

A well-known example of Entrepreneurship 1.0 is Airbnb, operating an online marketplace for short-term homestays and experiences. Airbnb has been credited with revolutionizing or disrupting the tourism industry, and, by now, transformed into an established company with an impressive valuation and a sound, validated and working business, acting as a broker and charging a commission for each booking on the Airbnb platform. This was not foreseeable when the company was founded in 2008 by Brian Chesky, Nathan Blecharczyk, and Joe Gebbia. Because few would have thought back then that many people in the USA or throughout the world would open the doors of their private home to strangers to let them stay for one or more nights. And even less would have betted on a multi-billion business based on that hypothesis which is why the founding team also faced a difficult time first raising funds from investors to whom they could initially only present low user numbers, and thus an unprofitable business on paper. Even though one could contend that some substantial tech is involved with the platform/website (especially given the time of 2008) to explain Airbnb’s success, I would rather highlight the new business model which even inspired (together with Amazon and a few others) a whole new segment of economics, namely the so-called platform economy (Parker et al., 2017).

What is Entrepreneurship 2.0 and why do I reckon with it?

I argue in this section that we are on the brink of a new age of entrepreneurship, what I subsequently call Entrepreneurship 2.0, where the distribution of risk is reversed which happens in a twofold manner: Firstly, some entrepreneurs nowadays are able to take significantly fewer risks than their predecessors of the era 1.0. How? In a nutshell, entrepreneurs 2.0 essentially ecosystemize their business. Secondly, the distribution of risk is also reversed when we enter Entrepreneurship 2.0 because it is employees of precisely such young, micro and small companies who acquire skills and experiences that boost their careers.

3.1. The point about ecosystemizing a business for entrepreneurs is that taking advantage of ecosystem opportunities will be essential for ongoing innovation and succeeding on the markets of the future (Kawohl et al., 2022). I hypothesize that the future lies in “ecosystemized” businesses strategies. In this context, a new phenomenon is increasingly gaining ground: the business ecosystem. This is an association of (typically three to about ten) companies, including contractors, which are aligned by a central company, the orchestrator, to a common value proposition, which on the one hand is more than just the sum of the individual contributions and on the other hand could not be delivered by any single company alone (Hoffmann, 2023b).

I see two distinct drivers of ecosystems. One is given by the transition to a VUCA world a few decades ago. VUCA applies to an environment which defies confident diagnosis and befuddles executives (Bennett & Lemoine, 2014). The following Table 1 summarizes the main take-aways from their work on this phenomenon and the link to ecosystems.

The second driver of ecosystems and of Entrepreneurship 2.0 hinges on the digital transformation. While the digital transformation itself is invoked (too) often, a corollary essential to the emergence of both ecosystems and Entrepreneurship 2.0 is the subsequent reduction of transaction costs to near zero, which is rendering corporate boundaries more traversable and which is discussed at length in Jeremy Rifkin’s thought-provoking book “The Zero Marginal Cost Society” (Rifkin, 2014).

The superior value proposition in such ecosystems – superior because by definition an ecosystem is more than the sum of the contributions of the individual organizations involved therein – can basically take two forms: Either the ecosystem partners focus together on a specific customer need, which they fulfill in a way that has not yet been achieved. A nice example in this regard is the House of Lab Science AG, cofounded by this author in 2021 who also designed/set up the business model and architecture. In the center of its operations is the value proposition “Lab-as-a-Service” positioned. House of Lab Science focuses on both life sciences startups’ and more established companies’ need for labs and orchestrates a whole range of services from various providers (for an overview of the currently more than 60 services, see this page), from cleaning to concierge service, to biowaste disposal specialists – all of which is hybrid in the customer’s sense: physical advice and execution combined with digital presence and self-service on the proprietary House of Lab Science platform. The individual services are provided by specialized partners, but they are closely orchestrated and coordinated by House of Lab Science. For more insights into the House of Lab Science, cf. also Hoffmann (2022).

3.2. The distribution of risk is also reversed when we enter Entrepreneurship 2.0 because it is employees of precisely such young, micro and small companies who acquire skills and experiences that boost their careers and make them more robust than it would be the case with bureaucratic monsters in the public or private sector. The latter are places where many jobs are cut in the face of ultimately home-made management mistakes (Finews, 2023; NZZ, 2023a; NZZ, 2023b; Handelszeitung, 2023; Handelsblatt, 2022).

A startup of Entrepreneurship 2.0 is and possibly prefers to remain proudly small, e.g., in contrast to some former startups of the era 1.0 which turned into giants themselves such as Airbnb. In this light, we might start wondering what the optimum size of a corporation is. As I also explored elsewhere (Hoffmann, 2019), big business is slow, bureaucratic and hierarchic (and this is probably also a reason why entrepreneurs chose to actually become entrepreneurs): Administrative and management teams in big businesses monitor and coordinate production, and since such administrators held crucial knowledge necessary to operate the business, they were usually paid a premium above what their skills would have commanded in the spot market. In the Information and Networking Age of 2.0, most tasks that were formerly captured within large firms as an expedient to reduce information and transaction costs (Ronald Coase), will be taken over by much smaller entities, (small) startups, or even migrate back to the spot market.

There are other, potentially less known and studied factors that come to play when we consider and analyze the risks which entrepreneurs 2.0 and their team members bear vis-à-vis the (larger) risks of a career in a big corporation. Let’s look at and discuss two examples:  

• Large corporations are less open to forms of New Pay than startups.
• Apropos New Work and organizational theory: For a long time, it was believed that the pyramid shape was the best structure for organizing people and work. That is not necessarily wrong: clear hierarchies provide order and stability. But there are increasing signs that this type of organization no longer works (in the VUCA world, see above): Employees are exhausted – and so are managers. There exist many reasons for this exhaustion. One of them is the fact that the pyramid structure does not do justice to the complexity of our world today. So says Frederic Laloux, author of the seminal book “Reinventing Organizations” (Laloux, 2014). And he’s not the only one. There is an alternative: organize people not in a pyramid, but in a circle (Krogerus & Tschäppeler, 2022: 160f.). Overlapping circles, as displayed below in Figure 1, can then even count as a panacea for fighting silo thinking in organizations. How does this question about the organizational structure of companies impact entrepreneurs’ and employees’ risk position? My hypothesis is in this regard that while people in big corporations try to primarily manage and meet the expectations of their “line manager”,^[2] which possibly leaves them insensitive to what is needed (also from their own side) to keep the company competitive, to make it fit for the future, etc., entrepreneurs and team members of small startups are either at the forefront of innovation, sales and coping with business challenges or at least very close to it. Like this, entrepreneurs 2.0 and their teams acquire many more business skills and valuable experiences on how markets and venture-building works, which in turn are qualifications and distinctions that are very lucrative to most employers.

If we delineate Entrepreneurship 2.0 based on these findings from 3.1. and 3.2. and if we pay special attention to what differentiates it from Entrepreneurship 1.0, we can arrive at the following characteristics: 

• In Entrepreneurship 2.0, focus is not on the individual entrepreneur or a small group of entrepreneurs, but on the ecosystem which is constituted, among others, by one or more startups and which brings forward a superior value proposition.
• An entrepreneur of 2.0 is a human individual who creates and invests in one or more businesses, not necessarily focuses on one business at a time, ^[3] bearing some but not necessarily most of the risks as the risks are distributed throughout the elements of the ecosystem.
• A startup of Entrepreneurship 2.0 is a less risky venture.
• Raison d’être: A startup of Entrepreneurship 2.0 is more purpose-driven and addresses overarching complexes of customer requirements by contributing to and, possibly orchestrating an ecosystem which, in turn, serves a superior value proposition. A certain disruptive technology or fancy business model of a single company within an ecosystem are less in the foreground.

Outlook: Entrepreneurship 3.0 and its drivers

A second systemic and even more striking turning and tipping point is marked by the transition from Entrepreneurship 2.0 to 3.0. How so? The third evolutionary stage in entrepreneurship, which you can only read about in the actual book chapter 😉, will no longer be dominated by human players; instead, machine players will be in the mix.

Take-aways for the reader at a single glance

• Entrepreneurship 1.0 is derived from the Schumpeterian model of the entrepreneur and the entrepreneur as an individual in this category is essentially bearing high risks.
• Entrepreneurship 2.0 is marked by a reversal of comparative risks: Entrepreneurs of the class 2.0 take both significantly less risks than those of the class of 1.0 through ecosystemizing their business and significantly less risks compared to employees in large corporations or public administrations.
• There is a call to action for Entrepreneurs 2.0: Systemize yourself, define your systems’ boundaries and decide for yourself to what different ecosystems you would like to function as a subsystem to.
• The near-term future lies in “ecosystemized” businesses strategies.
• Entrepreneurship 2.0 prevails in a VUCA world and is enabled by the reduction of transaction costs to near zero in the wake of the digital transformation, which is rendering corporate boundaries more obsolete.
• New Work and New Pay shape tomorrow’s workplaces, and those who shape or participate in or contribute to those antecedents today will probably have a better standing tomorrow.
• Whereas employees of large corporations try to primarily manage and meet the expectations of their “line manager”, entrepreneurs and their team members are at the forefront of innovation, sales and coping with business challenges. In this way, entrepreneurs 2.0 and their teams acquire many more business skills and valuable experiences on how markets and venture-building works, which in turn are qualifications and distinctions that are very lucrative to most employers today and tomorrow.
• In Entrepreneurship 3.0, focus is not on the individual entrepreneur, not on the ecosystem, but on customer satisfaction as well as AI readiness coupled with the simple economics of AI (Agrawal at al., 2018; Hoffmann, 2018).

About the author

Christian Hugo Hoffmann is Co-Founder and CEO of House of Lab Science AG and Director of the Swiss AI Startup Center at Technopark Zurich. He is a passionate entrepreneur, author and speaker with a strong focus on AI and fintech. Christian has not only worked at several software start-ups, but also deals with philosophical questions of AI in his spare time, e.g. as a guest researcher at the Digital Society Initiative and the Ethics Center (both University of Zurich). More information at: https://www.christian-hugo-hoffmann.com/

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^[1] Admittedly, this wording is vague and suffers from being under-determined. However, on this level of generality, we cannot make more precise statements. With this in mind, it is fair to state though that the entrepreneur takes the highest risks because (s)he puts money on the table to get the company started and, on top of that, depends on a thriving startup to secure an income, thus a concentration of risk. On the other hand, the rewards from successful venture-building vary drastically, e.g., depending on if and what kind of exit is realized or on how many and what type of external investors were onboarded prior to the exit, etc. Cf. also Hoffmann (2023a) for more information.   

^[2] In the simplified Figure 1, the line manager of a member of staff is one or more managers, for a manager it is the boss, and for the boss it would be the Board of Directors.

^[3] Systemize yourself, define your systems’ boundaries and decide for yourself to what different ecosystems you would like to function as a subsystem to.

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