Startups and Job Creation

Startups and Job Creation

Startup America Doomed:  Unless we “Scalerator” it.

Entrepreneurship is eminently desirable, and no doubt part of the story behind “American Exceptionalism.”  We cannot, however, just say we are for it or coin a phrase like “Entrepreneurial Ecosystem “, throw money at it, and think we are going to replay the 19th century industrialization saga.

New York Governor Cuomo had big ambitions for his version of Startup America – Start-UP NY.  He offered no taxes to new start-ups for ten years and proximity to New York State university campuses.   Only 76 new jobs were created during the first year.  With advertising expenses running over $50 million, that computes to about $697,368 per job.   Rex Sinquefield (2015) concludes that “gimmicky programs with overhyped taglines are not the true drivers of growth”. (Forbes, May 29, 2015, Rex Sinquefield, ‘With Only 76 Jobs Created Cuomo’s Start-Up NY Is A Bust – With The Cost Of $697,368 Per Job’).  As we will see below, it is doubtful that start-ups are in fact the job creators that many believe they are.  Cuomo is still standing by the program despite his admission that it was off to a slow start (Capital Playbook, ‘Cuomo’s Start-Up NY Program off to a slow start’, Will Brunelle, April 3rd, 2015).

The idea that Start-Ups are the primary job creators stems from several sources.  Certainly the Steve Jobs legend about his garage and the start of the computer revolution, as well as other Silicon Valley success stories, fuels this belief.  The academic source for this view, however, is the Kauffman foundation report from 2010, “The Importance of Startups in Job Creation and Job Destruction”.  (Tim Kane, Ewing Marion Kauffman Foundation).   This paper gave academic credence to the idea of Start-Ups as job creators. 

The Kauffman study was based on Business Dynamics Statistics (BDS), compiled by the U.S. Census Bureau.  This database tracked startup data (firms younger than one year) from 1977 and 2005.  The conclusions are startling:  existing firms are net job destroyers, losing 1 million jobs per year.  On the other hand, new firms add 3 million jobs per year.  Startups, in other words, are almost exclusively responsible for job growth.   Policies aimed at shoring up large firms, since they are net job destroyers, are therefore ill-advised.  Though the Kauffman study does not explicitly say so, one could infer that they are quite skeptical of the recent bailouts – why put huge sums of money into large firms which are not creating jobs anyhow?   (To be sure, there are other reasons to prop them up even though they may not be job creators).  Might it not be better to spend billions on Start-Ups and let the “too big to fail” companies go the way of Lehman Brothers?  They might also endorse Hillary Clinton’s recent unfortunate wording of her statement to the effect that “businesses don’t create jobs”, which she then clarified over and over.   

The following is probably the Kauffman study’s best statement of their position:

Similarly the common zero-sum attempts to incentivize firm relocation are oblivious to the important pattern of gross job creation revealed by the BDS.  States and cities with job creation policies aimed at luring larger, older employers can’t help but fail, not just because they are zero-sum, but because they are not based in realistic models of employment growth.  Job growth is driven, essentially entirely, by startup firms that develop organically…in terms of the life cycle of job growth, policymakers should appreciate the astoundingly large effect of job creation in the first year of a firm’s life.  In other words, the BDS indicates that effective policy to promote employment growth must include a central consideration for startup firms.  

The featured image for this forum article shows the now well known illustration of Kauffman's quantitative evidence for Start Up job creation, showing net job creation, Startups vs. Existing Firms. (Source, Kauffman, 2010).

A program like Startup America is the natural consequence of an academic study like this one which we might note, stems from a governmental agency – the U.S. Census Bureau.  Suddenly, the “ Entrepreneurial Ecosystem” takes on new importance.   Common sense, which might reveal to us that the biggest U.S. employer –Walmart--, is important to job creation (maybe open up a new Supercenter?), and the importance of other large firms, goes out the window.   In its place is a mad rush for start-ups.

Davila, Foster, He, & Shimizu (2015) arrived at diametrically different conclusions.  (Antonio Davila, George Foster, Xiaobin He, Carlos Shimizu, Australian Journal of Management, Feb, 2015, Vol. 40, Issue 1, p 6-35.  The rise and fall of startups: Creation and destruction of revenue and jobs by young companies.)   Like the Kauffman study, this too was a large, wide ranging study, involving 158,000 companies in ten countries and eight industries.  The study was inspired by George Foster’s common sense doubts.  His entrepreneurial contacts had lots of horror stories, start-ups quickly going out of business, and “roller-coaster” rather than “hockey-stick” (upward trending) existences.

The researchers found that a few young firms enjoyed good revenue and job growth, but many firms offset these gains.  In the fifth year, total job destruction amounted to 65% of all the new jobs created in that year.

“And that estimate on the debit side of the ledger probably understates the bloodshed.  It doesn’t count jobs lost in startups that went belly-up or jobs cannibalized when startups take market share from incumbent firms, what economist Joseph Schumpeter called “creative destruction.”  (Lee Simmons, 6-9-15, Stanford Business, ‘George Foster: Are Startups Really Job Engines?’)  Foster considers the bottom line to be that the contribution of start-ups is much less significant than assumed.   Foster’s take home message is to support start-ups which are having difficulty:  64% of firms had at least one year of revenue decline and they created no jobs in years three to five.  “…public policy needs to be more oriented to sustain the scaling of ventures…if you don’t get a scalable infrastructure in place, you can get derailed and plummet very, very fast.”   

The stark conclusions were drawn by Daniel Isenberg, Babson Executive Education Professor of Entrepreneurship Practice.  Isenberg says that start-ups lose the jobs they create very quickly, they are not always highly paid, and frequently take a long time to create any jobs.  There is a better solution, says Isenberg.  If policymakers want to see results, they should focus on sustaining existing companies with a record of success and ambitions to grow.  These companies are 15 to 20 years old.  Medium-sized companies (between $10 million and $1 billion in revenue) have created 92% of new jobs since 2008.  (Anne VanderMey, Fortune, 7-27-15, ‘ The problem with trying to be the next Silicon Valley’).

Babson’s Daniel Isenberg is Professor of Entrepreneurship Practice at Babson College Executive Education and founder of the Babson Entrepreneurship Ecosystem Project.  He advised the White House on Startup America, but had a falling out with them because of the White House’s exclusive focus on early stage ventures  (Wikipedia).  He is currently advisor to “Scale Up Milwaukee” and “Manizales Mas” in Columbia.  His idea of “scaling up” and “scalerator” education can best be summed up by a paragraph from the Scale Up Milwaukee website.  Notice how it reflects a de-emphasis on start- ups, rather focusing on attitude and drive toward growth:

“Daniel Isenberg…has defined entrepreneurship as consisting of the continual aspiration to growth and to the creation of more-than-average scaling up of business ventures, regardless of the sector or age.  Scale Up ventures may be family businesses, startups, manufacturers, services, retailers, or tech companies.”  (Start up Milwaukee web site).

 

Comments

Michael Taku's picture Michael Taku | November 10, 2015 5:44 am MST

"Scale up" and "Growth"  are important concepts in view of globalization and the fact that  more than 90 percent of potential customers of US SMEs are beyond U.S. national borders. These concepts reflect areas of research topics  in which the Center  scholars and doctoral students can make a contribution to extant body of knowledge.  In this regard, "the scaling up" of  enterprises in dveloping countries through clusterization(Taku, 2014) and  internationalization(Taku, 2015) are strategic. In general, international business research, both at the country and firm levels are therefore a area of interest in which I would like to engage in colloborative work.