The Magic of Startups: Jobs

It’s new businesses, not small businesses, that are the key to creating new jobs.

That’s according to Carl Schramm, president and CEO of the Kansas City-based Kauffman Foundation, who came to Washington today to deliver his annual “State of Entrepreneurship” speech.

Schramm’s opinions matter not only because the Kauffman Foundation is the nation’s leading organization promoting entrepreneurship, but also because Schramm is a co-founder, along with AOL founder Steve Case, of the new Startup America Partnership. That’s the private-sector group that is working with President Barack Obama’s administration to foster high-growth startups in the U.S.

Schramm rattled off a string of statistics from Kauffman research that show that if we want new jobs, we better encourage the growth of new businesses. Between 1980 and 2005, businesses less than 5 years old were responsible for nearly all the net job creation in the U.S. Jobs created by older businesses were offset by jobs lost at older businesses. On average, 1-year-old businesses create nearly 1 million jobs a year, while 10-year-old firms create only 300,000 jobs a year.

New firms aren’t necessarily small firms, Schramm stressed.

“The widely repeated claim that small businesses are the vital source of new jobs isn’t supported by the facts,” he said. “It may sound good on the campaign stump, but here’s the reality: Companies with fewer than 500 employees—the official definition of a small business—account for roughly four out of 10 jobs. Firms of less than 100 employees—a more commonsense definition of small business—account for less than one-third of American jobs.”

The key to growing the U.S. economy is helping more new businesses become billion-dollar companies over time. Currently about 15 of the 600,000 new businesses launched every year in the U.S. grow to become billion-dollar businesses, according to Kauffman. If we could increase that number to 45 to 70 a year, “we’d permanently increase the economy’s growth rate by one full percentage point,” Schramm said.

“There are a lot of people with the gumption to take a chance,” he said. “But the real need is to lift the entrepreneurial batting average so that there are more highly successful entrepreneurs.”

That’s where Startup America comes in. The private-sector partnership chaired by Case will help build “entrepreneurial ecosystems that will enable new companies to take root and thrive,” he said.

“That means support networks that draw on mentors’ personal and business relationships to unlock doors, guide new entrepreneurs to the best opportunities, teach them the mechanics of commercialization, and provide them with introductions to possible financing, sponsors, suppliers, and other partners,” he said.

The partnership also will work with federal agencies on programs to help entrepreneurs, but the government’s track record “is horrible on this frontier,” he said.

The government, however, can remove barriers to entrepreneurship. Schramm highlighted three steps government could take:

• Reform immigration laws so that more high-skilled immigrants can start businesses in the U.S. Immigrants are more likely than native-born Americans to start a business, and “25 percent of successful high-tech startups over the last decade were founded or co-founded by immigrants,” Schramm said. Highly educated immigrants want to come to the U.S., but India, China, Brazil, and other nations are becoming attractive alternatives, he said.
• Improve university technology licensing practices so that innovations generated by academic research can be commercialized more efficiently. “At too many universities, overly centralized and bureaucratic processes are clogging the innovation pipeline and making it harder to commercialize discoveries,” Schramm said.
• Reform the nation’s tax system by taxing consumption instead of income. Consumption taxes “lead to more favorable treatment of capital accumulation, they are more supportive of innovation, and unlike income taxation, they do not punish saving,” Schramm said.

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Kent Hoover is the Washington bureau chief for bizjournals.