Can start-ups help the economy?

Mitchell Hartman Nov 22, 2010

Can start-ups help the economy?

Mitchell Hartman Nov 22, 2010


Tess Vigeland: We hear all the time how important small-business growth is to job creation — and the signs so far aren’t good. The Labor Department reports the total number of businesses in the U.S. economy shrank during the recession. And new businesses that are opening their doors are adding fewer jobs.

But as Mitchell Hartman reports from the Entrepreneurship Desk at Oregon Public Broadcasting, it’s only the fledgling start-up firms that really matter to job growth.

Mitchell Hartman: At Portland software start-up Elemental Technologies, dozens of employees are building servers and taking orders from broadcasters and cable companies. They’re buying Elemental’s powerful new video-processing tools that stream high-def TV to mobile devices.

CEO Sam Blackman whips out his iPad and clicks on the ABC News app to pull up a video stream with the new technology.

Sam Blackman: You can actually spin this globe and pick your favorite story.

Mitchell Hartman: Oooh, “Close Call, Meteorite Nearly Hits Man.”

Blackman: Click on the little play button here, and…

ABC announcer: Jimmy Duncan knows exactly what nearly hit him.

Jimmy Duncan: It was a meteorite.

ABC announcer: It hit the ground in downtown Smithville last August…

Hitting the jackpot with a technology start-up may not be as rare as that meteor strike in downtown Smithville, but it could seem pretty close. Half of new firms fail within five years. Elemental’s in year four, though, and so far it’s tripled to 36 employees. Blackman expects $10 million in sales next year.

Blackman: And as you get to a $20 or $30 or $40 million dollar revenue mark, then you start to employ 100, 200, 300 people. And it grows fairly quickly.

Robert Litan of the Kauffman Foundation has crunched the numbers on job-creation going back to 1980.

Robert Litan: It turns out that start-ups, companies that are in their first five years of life, account for virtually all net job growth in the United States economy.

Litan says while plenty of big established companies have added jobs, others have downsized or outsourced overseas. And even as companies rebuild after the recession, the pattern holds. Here in Oregon, for example, Intel, Wal-Mart, Facebook are hiring, but Hewlett Packard’s downsizing. International Paper and Weyerhauser are closing mills.

Litan: The existing firms’ job creation is more or less offset by the destruction of jobs. The really only way we’re really adding jobs over time, on net, is through the constant influx of these new firms.

Not all those new firms matter. Litan says there are really two types of entrepreneurs.

Litan: Those that replicate what others are doing, like opening just another dry cleaner or a restaurant. And in contrast, the innovative entrepreneurs, the ones that come up with new products, new processes or new ways of doing things. Because those are the ones that really change the economy.

But do we have enough of those promising, innovative young start-ups to dig our way out of recession?

Peter Cohan: My hunch is that the small companies will not be able to create enough jobs to take up the slack of 8.5 million unemployed since December 2007.

Peter Cohan teaches management at Babson College. He says even though there have been impressive advances in biotech and cleantech, Internet and mobile computing, none of it adds up to a new technology revolution that could jumpstart the U.S. job engine.

Cohan: Over the last 40 years, we’ve had once-a-decade technologies that companies would invest massive amounts of capital, because they would massively improve their productivity. In the 60s, we had mainframe computers; in the 70s, we had minicomputers; in the 80s, networked PCs and in the 90s, the Internet with all these companies basically going online.

What about today’s Internet powerhouses, the Googles and Facebooks of the world?

Cohan: Facebook is obviously wonderful for anybody who owns 30 percent of it. But as an economic phenomenon, it’s not creating a huge amount of headwind, it’s not creating a lot of other companies and other industries.

Of course, there could be earth-shattering new technologies already out there with the potential to grow blockbuster companies and spin off whole new industries. But even if there are, there’s no guarantee they’ll grow a lot of jobs in Portland, Boston or San Jose.

Eric Rosenfeld: The companies that are growing, are outsourcing more. And some of that growth is occurring in India, some of it’s in China.

I met venture capitalist Eric Rosenfeld at a conference in Portland where start-ups were pitching for investment.

Conference speaker: Thank you very much for the opportunity, I appreciate being here, and as I said there’s about $700,000 left in our round…

These entrepreneurs are growing their companies fast in fields like online retail and green energy.

Rosenfeld: And that’s how they are competitive here in the U.S., is because they’re very good at managing that outsourcing process, and that allows the jobs here to be very high-value.

Meaning high-skilled and high-salary. But not necessarily abundant enough to regain the jobs we’ve lost, or add the new jobs we’ll need for young people entering the workforce.

I’m Mitchell Hartman for Marketplace.

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