Entrepreneurship, Creative Destruction, and Innovation

Entrepreneurship encompasses a wide range of definitions, from simple explanations like “the process of establishing a business” to more sophisticated views such as “innovating to create something novel, thereby transforming value.” Joseph Schumpeter, a leading intellectual of the 20th century, revolutionized the understanding of entrepreneurship with his seminal concept of “creative destruction.” In his groundbreaking book, The Theory of Economic Development (1934), Schumpeter analyzed entrepreneurship from a historical lens and argued that it flourishes in dynamic, growth-oriented economies rather than static ones where history merely repeats itself.

Schumpeter said, “The function of entrepreneurs is to reform or revolutionize the pattern of production by exploiting an invention or, more generally, an untried technological possibility for producing a new commodity or producing an old one in a new way, by opening up a new source of supply of materials or a new outlet for products, by reorganizing an industry and so on.” He highlighted how shifts in external circumstances disrupt the circular economic equilibrium, triggering a process of “creative destruction.” Driven by innovation, this process transforms production and productivity patterns, propelling the economy toward a new equilibrium.

Entrepreneurship, the art of launching and managing business ventures for profit, is often hailed as the driving force behind economic growth. Together, innovation and entrepreneurship fuel the modern business world, with innovation serving as the catalyst for progress by bringing new ideas to life and improving existing processes. Entrepreneurship, in turn, acts as the engine that converts these innovations into successful, thriving businesses.

In his 1984 article in Harvard Business Review, renowned management guru Peter Drucker identified four key drivers behind the rise of the entrepreneurial economy in the U.S.: the rapid evolution of knowledge and technology, demographic trends, an ample supply of venture capital, and the ability to effectively manage entrepreneurship.

Against this backdrop, the importance of “uniqueness,” “creative destruction,” and “innovation” for an entrepreneur cannot be overstated. Our conversation began with an exploration of the core concept of entrepreneurship.

Deshpande on Entrepreneurship and Creative Destruction: The Power of Creating Something Better

Dr. Deshpande begins by emphasizing the intrinsic nature of entrepreneurship: the drive to transform the world from its current state (A) to a better one (B). This transformation is fueled by a deep insight and passion for change. Entrepreneurs often face uncertainties but are determined to achieve their vision of a better world.

In response to my inquiry and reference to the concept of “creative destruction,” popularized by economist Joseph Schumpeter, and the notion of “uniqueness,” Deshpande emphasizes the importance of “creating something better.” He explains that by introducing superior solutions, older ones are inevitably rendered obsolete. “When you create something better,” he explains, “the old ways fade away.” While this phenomenon is timeless, the pace of change has significantly accelerated in the last 50 years, embedding entrepreneurship as a central pillar of economic progress.

The entire system is designed to encourage the continuous generation of better ideas and the creation of institutions around them, whether for social or economic change. This process has significantly accelerated the pace of global transformation. As the world evolves more rapidly, entrepreneurship has become a central force in driving a country’s economic dynamics.

According to Deshpande, innovation is the process of creating something better from the very beginning—a deliberate effort to improve, add value, or address unmet needs. It involves challenging the status quo, rethinking established norms, and introducing ideas, products, or processes that make a meaningful impact. Innovation isn’t always about groundbreaking inventions; it can also be about incremental changes that refine existing solutions to make them more efficient, accessible, or sustainable. Most successful entrepreneurs embody this mindset, working tirelessly to create something better, that transforms industries and improves lives. At its core, innovation thrives on curiosity, creativity, and the relentless pursuit of excellence, driving progress and fostering growth in individuals, organizations, and societies.

The true catalyst for entrepreneurship, according to Deshpande, is change—often propelled by technology. Technology opens new possibilities, and entrepreneurs seize these opportunities to drive innovation and growth.

The Changing Landscape of Entrepreneurship

The landscape of entrepreneurship and economic development has evolved significantly over the decades. A notable shift has been the transition from focusing solely on individual entrepreneurs to emphasizing the broader ecosystem that involves multiple stakeholders.

Nijkamp (2003) notes that knowledge is a critical driver of business performance, aligning with endogenous growth theory, which views economic growth as the result of deliberate actions by various stakeholders, including governments. Instead of a controlling approach, government policy now adopts a facilitating role, investing in R&D, education, training, and knowledge centers to create the necessary conditions for entrepreneurial success.

Karol Śledzik (2013) highlights that modern knowledge-based economies rely on dynamic technological progress and collective innovation rather than individual efforts. Schumpeter’s concepts of innovation and entrepreneurship remain relevant and continue to evolve under Neo-Schumpeterian economics. As modern capitalism faces crises like the subprime and euro-debt downturns, the question arises: should nations act as entrepreneurs to drive innovation, and would this approach offer the best path forward in a post-crisis world?

Granstrand and Holgersson (2020), after a detailed conceptual analysis of the literature on innovation ecosystems, propose a synthesized definition: an innovation ecosystem is a dynamic and evolving network comprising actors, activities, artifacts, institutions, and relationships—both complementary and substitutive—that collectively influence the innovative performance of individual actors or populations of actors.

Reflecting on the evolution of entrepreneurship, Dr. Deshpande notes how much the field has transformed over the past four decades. In the 1980s, entrepreneurship was less common and lacked the prominence it enjoys today. “When I started my first company,” he recalls, “there were only a handful of entrepreneurs in Massachusetts.” Today, however, entrepreneurship has become a mainstream aspiration, driven by a confluence of factors.

Dr. Deshpande identifies three key changes that have shaped the entrepreneurial landscape:

• Access to Capital: The formalization of venture capital has provided structured funding opportunities for innovative ideas. Mechanisms such as angel investors and venture funds have streamlined the process, enabling entrepreneurs with viable concepts to secure the necessary resources.
• Market Readiness: Customers now embrace innovation at an unprecedented rate. The fast-paced environment demands companies to adopt new ideas for a competitive edge, creating opportunities for bold entrepreneurs.
• Collaborative Ecosystems: The rise of entrepreneurial hubs, incubators, and peer networks accelerates innovation. By fostering a culture of rapid experimentation and iteration, these ecosystems enable entrepreneurs to refine their ideas and pivot quickly when needed.

The Role of Governments in Spurring Innovation

Entrepreneurship drives economic growth, job creation, innovation, and the introduction of new products and services, making it essential for governments to foster and support entrepreneurial ecosystems through the creation of enabling environments. The World Economic Forum outlines seven key actions for governments: providing access to funding, reducing bureaucratic barriers, investing in education and training, encouraging innovation, establishing supportive legal frameworks, fostering a culture of entrepreneurship, and promoting networking and collaboration.

Since the turn of the 20th century, governments have played a pivotal role in spurring innovation, either directly through explicit investments and policies or indirectly by creating enabling environments for growth. Key examples include:

1. United States – Innovation through Federal R&D:
   The U.S. government has historically driven innovation through agencies like DARPA, NASA, and the National Science Foundation. These efforts led to groundbreaking technologies such as the internet, GPS, and space exploration, establishing the U.S. as a global innovation leader and laying the foundation for Silicon Valley’s rise.
2. European Union – Horizon Europe:
   Since the mid-20th century, European governments have emphasized collaborative research and innovation. Programs like Horizon Europe, one of the largest R&D funding initiatives, continue this tradition by focusing on sustainability, digital transformation, and health, fostering cross-border collaboration and technological advancement.
3. Singapore – Smart Nation Initiative:
   Since its independence in 1965, Singapore has relied on strategic government intervention to drive innovation. Initiatives like the Smart Nation program build on decades of regulatory excellence, focusing on AI, robotics, and smart cities to position Singapore as a technology and innovation hub.
4. India – Startup India and Digital India:
   Historically, India’s innovation ecosystem was government-driven, with major investments in industries like steel, railways, and space exploration (e.g., ISRO). Modern initiatives like “Startup India” and “Digital India” continue this legacy, reducing bureaucratic hurdles, providing funding, and enhancing digital infrastructure to promote tech-driven innovation.

Governments have long recognized the economic and societal value of innovation. Whether through direct investments in R&D or fostering ecosystems that empower industries and individuals, their actions continue to shape the global landscape of progress.

The nature of innovation has shifted significantly in recent years. In the post–World War II era, governments often directly drove innovation through their own R&D efforts or by funding targeted research. While this linear model of innovation—moving from government to academia and industry—still exists, it is increasingly rare in today’s interconnected world.

We have entered an era of innovation by ecosystem, where multiple stakeholders collaborate across complex networks. In this context, government remains crucial, but its traditional tools, designed for a simpler era, are often inadequate. To effectively catalyze innovation within ecosystems, governments must adopt fresh approaches, embracing new frameworks and tools that reflect the realities of a more interconnected and dynamic world.

Dr. Deshpande highlights the importance of government support in reducing barriers for entrepreneurs and creating fertile grounds for innovation.

From subsidizing venture capital to establishing incubators, governments can catalyze economic activity and employment. Moreover, public funding for research often lays the groundwork for technological breakthroughs. The internet, for instance, emerged from government-funded initiatives.

Drawing from his experience as Chair of the National Advisory Council on Innovation and Entrepreneurship under President Barack Obama, Dr. Deshpande explains how governments can align innovation with market needs. “Government-funded research drives technology,” he says, citing how advancements like video conferencing became accessible thanks to decades of innovation supported by public funds.

Fostering Innovation through Market-Driven Research

Chaston, in his book Technological Entrepreneurship: Technology-Driven vs Market-Driven Innovation, highlights the contrasting perspectives of Schumpeter and Kirzner on entrepreneurship. Schumpeter emphasized technology-driven entrepreneurship, focusing on innovation stemming from scientific breakthroughs and R&D, with little reference to market forces. In contrast, economist Israel Kirzner viewed entrepreneurship as market-driven, with entrepreneurs reallocating resources from low to high productivity areas, driven by profit motives and alertness to market opportunities. According to him, technology-driven entrepreneurship often precedes market analysis, relying on disruptive innovations, while market-driven entrepreneurship emerges when market demand matures. In this stage, customer demand shapes opportunities, and adapting business models becomes a more effective strategy for sustained entrepreneurial success.

Habtey (2012) examines the relative disruptiveness potential between technology-driven and market-driven innovations and finds that technology-driven disruption follows the patterns outlined in disruptive innovation theory, while market-driven business model innovation experiences a bottleneck effect. Initially, strategic choices, specialization, and investments boost disruptiveness potential, but over time, these same factors lead to stagnation.

To bridge the gap between innovation and market impact, Dr. Deshpande and his wife, Jayshree, established the Deshpande Center for Technological Innovation at MIT. The center focuses on connecting researchers with real-world problems, ensuring their innovations are market-ready upon completion. This approach enhances the likelihood of meaningful impact by aligning invention with entrepreneurial opportunities. By fostering collaboration between academia and the market, the center has accelerated the commercialization of research. This model exemplifies how governments and institutions can cultivate an ecosystem that drives both innovation and entrepreneurship.

From Ideas to Impact: The Journey of Innovation

Dr. Deshpande has long been passionate about the power of innovation and entrepreneurship to create meaningful impact. He believes that the journey from a simple idea to a successful startup—or even licensing it to a larger company—often hinges on the idea’s potential for real-world application. At MIT, it was observed that initiatives passing through the Deshpande Center were three times more likely to generate meaningful change. This success story motivated Dr. Deshpande to push for broader applications, which led to his instrumental role in the launch of the I-Corps program. In 2010, during President Obama’s administration, Dr. Deshpande, in collaboration with the National Science Foundation, played a key role in launching the program nationwide while serving as co-chair of the National Advisory Council on Innovation and Entrepreneurship. The overarching goal of the initiative was to ensure that not only were innovative ideas being generated but also that these ideas were aligned with some of the world’s most pressing global challenges. Dr. Deshpande believes that real impact can only be achieved when solutions address genuine and significant problems.

The National Advisory Council on Innovation and Entrepreneurship (NACIE), established in 2009 under the America COMPETES Act, has played a pivotal role in fostering innovation and entrepreneurship within academia. Under the leadership of co-chair Dr. Desh Deshpande, NACIE architected plans and programs that mobilized higher education institutions to advance innovation across five key areas: student and faculty entrepreneurship, technology transfer, university-industry collaboration, and regional economic development. Its efforts have inspired universities, colleges, and research labs to develop comprehensive programs supporting the innovation economy. Partnering closely with the U.S. government and private sectors, NACIE initiated impactful strategies, as highlighted in its 2013 report, The Innovative and Entrepreneurial University, which emphasizes replicable best practices to commercialize research and support economic growth.

Charged with developing a National Entrepreneurship Strategy that strengthens America’s ability to compete as the world’s leading startup nation and innovator in critical emerging technologies, NACIE continues to drive the innovation economy, including growing a skilled STEM workforce and removing barriers for entrepreneurs ushering innovative technologies into the market.

Bringing the I-Corps Model to India

The NSF Innovation Corps (I-Corps) program, launched in 2011, aims to accelerate the transition of scientific discoveries into marketable technologies, products, and services. It reduces the time and risk of commercialization, enhances U.S. economic competitiveness, promotes academia-industry collaboration, and equips researchers with innovation and entrepreneurship skills. Focusing on “deep technologies” rooted in fundamental science and engineering, I-Corps provides experiential learning in customer discovery and industrial problem-solving to bridge gaps in knowledge and skills. The program’s expansion was formally authorized in 2017 under the American Innovation and Competitiveness Act (AICA).

In 2017, the American Innovation and Competitiveness Act (AICA) officially authorized the expansion of the NSF I-Corps program to advance academic innovation and entrepreneurship. Schultz and Becker (2022) examine the program’s impact, offering a topical review of the New York City Regional Innovation Node—led by the City University of New York in partnership with New York University and Columbia University—as a case study showcasing its role in fostering regional innovation and collaboration.

As co-chair of NACIE, Dr. Deshpande played a key role in shaping several of these initiatives and collaborated with the National Science Foundation to implement a similar approach nationwide through the I-Corps program. This initiative aligned innovation efforts with market needs, enabling researchers to address pressing real-world challenges effectively.

India has emerged as a global leader in academic talent and research output, despite dedicating a comparatively smaller share of its GDP to R&D. Producing 40,813 PhDs annually, India ranks third worldwide, following the United States and China. In 2022, it also ranked third globally in research output, with over 300,000 publications, reflecting a robust research ecosystem. Additionally, India secured the sixth position in global patent grants with 30,490 patents, showcasing its evolving innovation landscape and growing potential in intellectual property creation. The Gross Expenditure on R&D (GERD) in the country has been consistently increasing over the years and has more than doubled from Rs. 60,196.75 crore in 2010–11 to Rs. 127,380.96 crore in 2020–21.  India’s GERD as percentage of GDP remained at 0.66% and 0.64% during the years 2019–20 and 2020–21, respectively.

Given this scenario, Deshpande recognized the need for an Indian equivalent of the I-Corps program, especially as India now invests over ₹100,000 crores (USD 12 Billion)annually in research and development. Reflecting on this, he stated: “To address this need, we established the Gopalakrishnan Deshpande Center for Innovation & Entrepreneurship (GDC) at IIT Madras six years ago. This program replicates the I-Corps model and has been delivering similar success. Just as the U.S. government embraced and expanded the initiative, I hope the Indian government will adopt and scale this program nationwide. It exemplifies the power of a collaborative ecosystem encompassing academia, entrepreneurship, investment, and governance to drive innovation and progress.”

Innovation + Relevance = Impact

The concept of “Innovation plus relevance equals impact” emerged from discussions between Desh Deshpande and Alex D’Arbeloff, chairman of the MIT Corporation, during Deshpande’s tenure on the board starting in 2000. This idea was partly a response to shifts in the nation’s research landscape. In earlier decades, major corporate research centers like Bell Labs and IBM had been the driving forces behind technological innovation. However, as Deshpande observed, the center of gravity in technology and innovation had shifted to universities. Unlike corporate labs, university researchers often lacked direct connections to the marketplace and the business world.

To address this gap, the goal became to guide university researchers—who consistently generate innovative ideas—toward those with the most commercial potential. The challenge, as Deshpande framed it, was: “How do you help them pick and choose which ideas to pursue so that the probability of having an impact increase?” The solution coalesced into a simple yet powerful formula: “Innovation plus relevance equals impact.” This approach emphasized aligning groundbreaking research with real-world needs to maximize its transformative potential.

Bridging Creativity and Real-World Needs

Deshpande emphasizes that while innovation thrives on the freedom to explore, its true impact is realized only when researchers and entrepreneurs remain connected to real-world needs. He often highlights that without this connection, even the most brilliant ideas can become isolated, failing to achieve practical relevance or societal benefit.

In his view, relevance can take many forms, from addressing the challenges of small, local communities to creating solutions with the potential to drive global industries. Deshpande frequently uses the example of cell phone technology, which began as a niche innovation but evolved into a global necessity, sparking numerous industries and innovations.

Deshpande believes that an entrepreneur’s vision is central to determining the scale of impact. Whether tackling regional issues or addressing global demands, he underscores the importance of understanding and meeting the real needs of a target community. This approach, according to Deshpande, fosters a vibrant ecosystem where micro-entrepreneurs, SMEs, and global corporations contribute collectively to progress and innovation, amplifying the potential for widespread and meaningful change.

Academia as a Catalyst for Change

When asked about the role of academia in entrepreneurship and innovation, Deshpande emphasized its pivotal contribution by drawing from his own experiences, particularly with Sycamore Networks. After selling Cascade Communications to Lucent, which then managed 80% of the internet’s backbone traffic, he identified a critical issue: bandwidth constraints. Domestic bandwidth, such as between Boston and California, was expensive—about a million dollars per month for just a megabit—while international connections to regions like India were even more limited, often offering only a few kilobits. This made global communication both inefficient and costly.

At the time, companies poured billions into optimizing data transmission within these constraints, prioritizing certain data types, like video over audio, to improve performance. The experience, however, was far from seamless; technologies like video calls were virtually unattainable without significant effort.

This changed when Deshpande collaborated with MIT scientists. They introduced him to the transformative potential of fiber optics and laser technology. A single optical fiber, as thin as a human hair, could transmit data via a laser beam blinking 10 billion times per second. Moreover, by using different-colored lasers, multiple beams could travel through the same fiber, increasing capacity from kilobits to terabits.

This breakthrough not only disrupted the industry but also redefined what was technologically possible. It illustrated how scientific advancements born in academia can translate into entrepreneurial breakthroughs, unlocking unprecedented opportunities and shaping entire industries.

Investing in Teams, Not Just Ideas

In response to my query about his shift from entrepreneurship to venture capital and mentorship, Deshpande shared his perspective:

“By 2000, after the success of Cascade Communications and Sycamore Networks, I transitioned from being a CEO to an investor and mentor. For about a decade, I focused on venture capital before turning my attention to the social sector. While my office still makes investments, my personal focus has shifted toward mentorship and social entrepreneurship.”

When asked about his key criteria for selecting companies to invest in, Deshpande emphasized the importance of the team:

“I always prioritize an A-team with a B-idea over a B-team with an A-idea. Startups rarely execute their original plan as intended. The team’s ability to adapt, respond to challenges, and pivot when necessary is what truly determines their success. An A-team can refine and elevate even an imperfect idea, while a B-team, no matter how brilliant their concept, often struggles without constant direction. Great teams leverage mentorship effectively—they seek guidance but remain independent, innovating and problem-solving on their own. The team’s vision must be bold enough to justify their efforts, but their agility and resilience are what make the difference in the end.”

“I prioritize backing strong teams over perfect ideas, as adaptability is key in navigating the uncertainties of entrepreneurship. A visionary and resilient team can transform even a mediocre idea into something impactful. Conversely, even the best idea will falter without the right team to execute it. Therefore, investing is less about directing and more about empowering teams to discover their own path.”

A comprehensive survey titled How Venture Capitalists Make Decisions: An Inside Look at an Opaque Process by Paul Gompers, Will Gornall, Steven N. Kaplan, and Ilya A. Strebulaev reveals that venture capitalists consider both the entrepreneur (the jockey) and the business idea (the horse) essential. However, they ultimately view the founding management team as the more critical factor for success.

Social Entrepreneurship: A New Lens on Impact

When asked about how social entrepreneurship differs from mainstream startups and the challenges faced, Deshapnde explained: “The core concept in both worlds is recognizing the current state (A) and envisioning a better state (B). However, the approach differs when serving people with disposable income versus those without.

Of the 8 billion people in the world, approximately 3 billion have disposable income. To reach this group, you must compete for their attention with innovative and compelling offerings. Since they have choices, your product must be both novel and relevant.

For the remaining 5 billion, particularly those at the bottom of the pyramid, daily life is marked by financial constraint. Here, innovation takes a back seat to practical, relevant solutions. The equation shifts from innovation plus relevance equals impact to relevance plus innovation equals impact. Co-creating solutions that fit their realities is essential, with innovation serving as a supporting element to relevance. That said, some innovation is still necessary for true change.”

Co-creation with communities ensures solutions are not only innovative but also practical and impactful.

Social entrepreneurs are more interested in understanding the social, economic, political, and cultural context of the problems they are trying to solve than traditional entrepreneurs are.

A Shared Vision for a Better Future

In both worlds, the essence lies in envisioning a better future (B) while understanding the present reality (A). Whether it’s a startup disrupting an industry or a social initiative addressing grassroots challenges, the driving force remains the same: connecting innovation with relevance to create lasting impact.