Acres of Diamonds Theory - The Key to Small Business Success

Many of you will have heard or read Russell Conwell’s celebrated speech “Acres of Diamonds”.  The central idea of the work is that one need not look elsewhere for opportunity, achievement, or fortune—the resources to achieve great things are present in one's own community. This theme is developed by an introductory anecdote, told to Conwell by an Arab guide, about a man who wanted to find diamonds so badly that he sold his property and went off in futile search for them; the new owner of his home discovered that a rich diamond mine was located right there on the property. Conwell elaborates on the theme through examples of success, genius, service, or other virtues involving ordinary people to his audience and exhorts us to "dig in our own back-yard".  An inspiring idea, but one that until recently seemed to be lacking a solid grounding in empirical fact.

In a study published earlier this week, Professor Olav Sorenson from the Yale School of Management and Michael Dahl of Aalborg University analysed data relating to 13,166 Danish startups that launched between1995 to 2004. The study aimed to find out whether choosing to launch a business close to home helped venture performance, either because of a better understanding of the market and strong social ties, or whether it damaged venture performance because founders prefer to stay close to home when there might be more favourable economic conditions elsewhere.   The study, " Home Sweet Home: Entrepreneurs' Location Choices and the Performance of Their Ventures," was published in full in Management Science.

In summarising the findings of his study, Sorenson said: "Ventures perform better -- survive longer, generate greater annual profits and cash flows -- when their founders locate them in their home regions where they have deep roots of family and friends. The effect we found is substantial. It's similar in size to the value of having prior industry experience."

To assess how the choice of location influences the performance of the companies, the researchers examined startups as well as their founders. The study showed that, relative to a newcomer, an entrepreneur who had been in the region where the startup was based had a nine percent lower failure rate and earned roughly $8,172 (£5,220) more in annual profit. Each year that a founder lived in the region reduced the failure rate by around two percent and translated into $1,362 (£870) more in profits

Meanwhile, experience also helped drive a startup to success: entrepreneurs with average prior experience in the industry had an 11 percent lower failure rate and earned $3,508 (£2,240) more in annual profits relative to an entrepreneur without prior experience.

The study also showed that there were larger benefits to launching in the founder's "home" region in areas that were less populated. This supports the theory that people in smaller communities are more socially-linked.

For those of us who are always looking out for the next big thing, perhaps the time has come to put down some roots wherever we may be and get on with the business of “digging in our own back yard”.  Based upon the findings of this study, perhaps Russell Conwell was right all along and by always looking outward, we’ve been missing the “Acres of Diamonds” beneath our feet.