This is not a trivial question. An economic system, while certainly complex, can be steered using a relatively structured process. And individual entrepreneurs – even if governments try to depress them – will always find a way to lift their head above water and come up with a great, executable idea.

The role of government through what can be called “economic policy” is pretty straightforward. To facilitate an economy where small, disruptive businesses can grow and operate side by side with large, established enterprises, governments have a standard toolbox:

1. Tax policy: encourage investments in entrepreneurial businesses; encourage investments in new product development; facilitate favorable tax treatment for “liquidity events”
2. Corporate law: make it easy to establish a new corporation, as well as to liquidate and dissolve a failed one; design bankruptcy laws such that entrepreneurs and their investors can sustain the risk of a failed idea or company; make M&A law practical and simple to follow through
3. Labor law: make it easy to hire and even easier to fire; allow for simple and flexible treatment of salary structures and compensation vehicles (such as stock options); allow for a flexible workday and workweek; allow for the mobility of social benefits programs when employees change jobs
4. Fiscal policy: subsidize the cost of entry to new industries, or technologies, or new types of businesses, either through lower entry cost or higher realization (“exit”) benefits. The Israeli government Yozma program was an innovative example how to jumpstart a venture capital economic ecosystem.

But society is a different story. Society embodies so many intangible qualities that make it what it is.

In the great ecosystem we’re all part of, society is the earth, the ground which you expect to be fertile. Only on fertile ground can individual trees grow as entrepreneurs, sometimes using the economic and regulatory systems to leverage growth, sometimes finding a way to reach the sky despite them. And while even in the desert of resourceless or restricting economies you’ll find the occasional tree, the more fertile the ground – the more trees will grow.

The essence of this is that laws and regulations, while essential, are not sufficient to foster an entrepreneurial ecosystem. Government must enable and provide a fertile ground, not a stretch of asphalt – and that ground is society itself. And society is driven by subtler things than just laws and regulations.

But how does society become entrepreneurial? How does society become the fertile ground for widespread innovation and entrepreneurship? I argue here that the main aspect of that is culture, and not legislative policy.

You may ask, then: what’s the culture of entrepreneurship and what are the cornerstones based on which can governments possibly design it?

Cornerstone 1: not only is it legitimate to “get rich quick” – it is acceptable, even cherished. In Israel, as in Silicon Valley, China and other places – a young person with a new fashionable car, photos in the “high society” section, as well as a sudden mention of a significant charitable contribution – is a role model, an aspiration.

Not only does the press highlight newly successful entrepreneurs – In Israel the Prime Minister has been photographed calling entrepreneurs whose company has just been sold, or gone through an IPO – and congratulating them. Everyone saw that – and a message was planted.

Cornerstone 2: failure is not a reason to be ashamed – and not a reason to avoid hiring someone. The trivial saying “those who don’t try never fail” is a mantra in entrepreneurial societies. But that saying implies a great truth: you certainly can’t succeed if you don’t try. And if you fail – learn from it and try again. When one observes the press and media in entrepreneurial societies –  it’s easy to notice that even as successful entrepreneurs are cherished, those who have failed are mentioned as well, but not in a negative fashion.

And when you apply for a government grant or another type of economic stimulation for your new business, or seek a new job – past failure is not a prohibitive factor.

Cornerstone 3: it’s very acceptable to move quickly from one job to another, in search of the successful entrepreneurial business. Employees are not shy about it; employers almost condone it. Your friends (and your parents) accept it.

All government has to do is signal that’s acceptable by making pension and social benefits very easily transferrable.

Cornerstone 4: challenging the way things are is embedded in the culture. Kids and adults are encouraged not only to ask “why” – but to proactively seek and suggest their alternatives. What in some cultures seems as misbehaving, in entrepreneurial societies is considered a virtue.

In the Israeli military, special forces units are adored not because they can run 50k with 50kg on their backs, but because they’re considered as creative barrier busters, who will find a way to circumvent. That’s another “institutional” way to signal that’s OK, in addition to rewarding such attitude throughout school.

Cornerstone 5: you may not study physics at kindergarten – but you’ll certainly study entrepreneurship! In the public education system in Israel, students from k-to-12-to college-to grad school experiment with entrepreneurship and innovation. You can see first-graders sell their invented merchandise during teacher-parent days; many high schools hold business plan competitions; and the best universities in the country compete on the quality of their entrepreneurship programs and their availability to the entire student body.

Here, the public education system designs the psyche and culture of whole generations.

Imagine such a culture – and you can imagine the fertile ground from which numerous entrepreneurs emerge. Most fail and try again, some succeed and go on, and others are hired by large global corporations in order to foster “intrapreneurship”  – disruptive growth from within.

It’s not that the entrepreneurial society is without challenges. Encourage it too much – and it may come at the expense of a solid, profitable, large company-based economy. But the entrepreneurial society is possible, it’s happening, and it – like the economy as a whole – can be steered and encouraged by the state.

The regulatory framework can ease the way for an entrepreneurial ecosystem to emerge. But it is the societal and cultural ecosystem which determines whether a country will have an entrepreneurial society. The State can – and must – encourage that culture.

About the author:

Eyal Kaplan was a managing partner with and Israeli venture firm for almost 20 years. In recent years he has focused on working with companies and investment firms on growth-through-innovation strategies.

When we met shortly after that, I congratulated him and asked whether the experience was good enough to start a second career. He looked at me and said “Absolutely never. Startups are so small. They may present great innovation, but it is impossible to grow them into significant companies in terms of income”.

“So”, I asked, “will you go back to running a $3-5 billion company?” “No”, he said, “These are too big to manoeuvre, certainly to grow through innovation and internal entrepreneurship”. He then pondered for a while and said: “The sweet spot is a $1 billion company; it’s big enough to create a critical mass in every department but small and nimble to come up with great, transformative ideas.”

The truth, of course, is in the eyes of the beholder. I would guess that had my friend been the CEO of a $50 billion company, he would have viewed a $5 billion one as nimble and innovative.

R&D investment worldwide continues to grow and will likely hit this year the $2 trillion mark. Of this, the US will spend close to $500 billion, spread across government, academia, and large corporations – the latter capturing about $330 billion. In comparison, as described bellow, the spending on R&D by small and startup firms has declined in recent years.  For large corporations, given that R&D is the main source of growth-through-innovation for corporations,  that amount has to be directed effectively towards high-yield efforts, averting risks of “casino like” probabilities for success.

Compared with this amount, the $120 billion globally, and $50-60 billion in the US, invested by venture capital firms in startup companies, is not minuscule. It used to be that these amounts were invested primarily in technology-based startups, fostering the type of innovation that large companies could absorb into their traditional processes and turn into growth. That would add another $30-40 billion to the total R&D spending, and directed into high-risk projects.

This has changed in significant ways in recent years, as an increasing portion of venture capital money has been directed at startups betting not on technological innovation, but on business model innovation. When one examines most “unicorns” (startups that reached a private valuation of $1 billion) – It can clearly be seen that the vast majority of them employ an innovative or transformative business model, not necessarily highly innovative technology. Still, even the smaller R&D expense by small, venture-backed companies, plays a crucial role in the economy. What is that?

In corporations, the health of the balance sheet puts a pressure on the type of innovation they can experiment with. With all the talk about the importance of innovation and internal entrepreneurship in large companies, one cannot ignore the risk-reward equation they must employ. The reasons are beyond the typical “two-quarters outlook” that many blame. Corporations are machines or living creatures optimized to run smoothly large, methodical processes. Management, employees, consumers, and governments depend on that to hold the economy as steady as possible and minimally erratic. Therefore, innovation in large corporations tends to be evolutionary, not transformative. Even with islands of more aggressive innovation – a product here, a business line there – on the whole corporations do, and arguably should emphasize stability, controlled growth, and financial certainty.

While increasingly emphasizing the need for innovation and “intrapreneurship”, management must focus on financial visibility and controlled volatility in spending on R&D-based business expansion. In other words – corporate management cannot bet the store on transformative ideas long before they’re proven. Casino-like statistics are unacceptable.

Yet, true transformative growth typically occurs thanks to wild ideas hatched by “wild entrepreneurs.” Eventually, big corporations need these in order to stay competitive, break a slow-growth mold, and at times, simply to survive.

This is where the role of the “casino economy” comes into play. For large corporations, the entrepreneurial, venture-backed universe is a perfect playground:

• let the entrepreneurs and their backers predict or bet on transformative technological change, as well as innovative business models;
• rely on talent not available in-house, which is difficult to recruit;
• treat all this as an off-balance-sheet activity;
• decide when to adopt;
• and – most importantly – let society as a whole fund this entire casino!

And casino it is indeed. Of approximately 3,800 venture-backed companies each year in the US, less than 500 are acquired in following years, and a handful more survive as independents through an IPO. Very few end up generating over $1 billion in revenue. These companies have raised a total of approximately $8 billion (out of $50 billion invested each year). And while the investment return for the VCs might be positive (it rarely is) – this is certainly a very poor yield on R&D and business model innovation investment.

So, VCs and entrepreneurs bet huge amounts of money and time on innovation, within an economic environment that not only allows for it but actually encourages it. And when the time is right, and the winners have emerged, large corporations step in and integrate those winners, turning their attention on an accretive effort to grow their business – not only for the benefit of their shareholders but for the benefit of society as a whole.

In return, it is society itself that funds that great casino. The vast majority of money that venture capitalists raise comes from public sources: pension funds, insurance companies, endowments, and foundations – money earned by employees and entrepreneurs and put to use back in the economic system – a portion of it in  fostering the “startup economy”. It is the invisible hand of public, societal money that stirs the stew out of which, eventually, large corporations continue to grow and prosper and return the value to society. It is not governments  brute-force mechanisms, commissions, and regulations to try and foster that growth and innovation – but quiet, invisible public money that lets a natural selection process set the pace and direction of the economy.

Governments should focus on allowing this ecosystem to thrive, fostering educational, cultural, and legal frameworks encouraging the participants in the startup economy to take part in it. How they should apply this “light touch” approach is a matter for a separate discussion (and my talk at the conference).

About the author:

Eyal Kaplan was a managing partner with and Israeli venture firm for almost 20 years. In recent years he has focused on working with companies and investment firms on growth-through-innovation strategies.