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.