Thursday, March 5, 2009

To Encourage Growth We Need to Invest in Growth Businesses

My friend John K. and I disagree about how to create jobs by encouraging more startup formation. I think the disagreement comes from John wondering how to create more startups and me wondering how to create more jobs. There's a difference, as explained pretty well in Scott Shane's article in The American, The Startups We Don't Need.

Shane first systematically takes apart the received wisdom that startups are the engine of job creation. He shows that the average startup doesn't create many jobs at all and that the jobs created are worse than jobs in corporate America. But we all know that our economic growth is dependent on startups, right? Well,

A tiny sliver of startups accounts for the vast majority of the contribution to job creation and economic growth that comes from entrepreneurial activity. According to data from the National Venture Capital Association, since 1970, venture capitalists have funded an average of 820 new companies per year. These 820 startups—out of the more than two million companies started in this country every year—have enormous economic impact. A report posted on the Venture Impact website explains that, in 2003, companies that were backed by venture capitalists employed 10 million people, or 9.4 percent of the private sector labor force in the United States, and generated $1.8 trillion in sales, or 9.6 percent of business sales in this country. Moreover, in their book The Money of Invention: How Venture Capital Creates New Wealth, economists Paul Gompers and Josh Lerner report that in 2000, the 2,180 public companies that received venture-capital backing between 1972 and 2000 comprised 20 percent of all public companies in the United States, 11 percent of their sales, 13 percent of their profits, 6 percent of their employees, and one-third of their market value, a figure in excess of $2.7 trillion dollars.

Instead of just believing naively that all entrepreneurship is good, policymakers need to recognize that only a select few entrepreneurs will create the businesses that will take people out of poverty, encourage innovation, create jobs, reduce unemployment, make markets more competitive, and enhance economic growth. Therefore, as unfair as it might sound, policymakers need to “stop spreading the peanut butter so thin.” They need to recognize that all entrepreneurs are not created equal. They need to think like venture capitalists and concentrate time and money on extraordinary entrepreneurs, and to worry less about the typical ones.

Shane expounds on this and cites the research in his book The Illusions of Entrepreneurship: The Costly Myths That Entrepreneurs, Investors, and Policy Makers Live By. It's an interesting read in many ways, especially if you're interested in what the data actually show.


John K said...

OK, there must have been some misunderstanding on my part, because my comments were about how small business, entrepreneurs and startups could help build a sustainable economy to replace the one we've lost - esp. if the govt. would adopt policies to encourage small business creation, hiring and entrepreneurs of all types - not just the VCs and the Silicon Valley types.

So I believe your references that startups are not the big job creation engine, but I thought I was arguing for a broader type of support for small business, and against the idea that VC backed startups were the answer.

Anyways, I think we do agree on the biggest part, but I also wanted to make sure that you agreed that economic policy is a big part of enabling job creation.

John K said...

Reading thru the Shane article, I don't really buy it. I think what may have been viable in the past, depending on "high value" angel backed ex-Microsoft engineers to create more jobs than the personal service cleaning lady is probably no longer that relevant.

I think to revive the economy, we'll need more distributed job creation.

Overall, I don't think the tech industry is gonna be the answer for 6M people that are gonna lose their job this time.

Education won't be the answer either.

But building small business one, two, and four people at a time will be a big help.

Of course, it's all irrelevant now, because the policies the govt. is pursuing is gonna kill most every type of startup incentive.

Thus the rise of the "going John Galt" meme.

Anonymous said...
This comment has been removed by a blog administrator.