The Only Startups That Matter to Job Creation
You hear it all the time: Small business is the engine of U.S. job creation, so they need tender loving care, like special tax breaks and other goodies. This narrative is wrong. Census Bureau data show that small businesses destroy almost as many jobs as they create.
Now comes the Kauffman Foundation with an insightful report showing that not all small businesses are equal-opportunity job destroyers. High-tech startups are different. Unlike small businesses overall, they create net new jobs.
The actual numbers are stark: In 2011, the last year with data available, high-tech companies between one and five years of age created a net 16,700 jobs. Other businesses between one and five years in the private sector overall lost 513,700 jobs.
What's more, the foundation concludes, technology startups aren't located just in the usual places around Silicon Valley, Austin, Texas, and Boston. Some of the most dynamic cities for high-tech company formation include Missoula, Montana, and Cheyenne, Wyoming.
But Colorado outshines them all as a hub of innovation, with Boulder, Fort Collins-Loveland, the greater-Denver area and Colorado Springs in the top 10 metropolitan areas ranked by density of high-tech startups.
The report's author, Ian Hathaway, a San Francisco economist, says the important element in job creation isn't the smallness of a business but the newness. About half of all new businesses fail within five years. Small technology companies tend to fold or grow rapidly, reflecting what economists call the "up or out" dynamic. The surviving ones in the subset of information and communications technology (ICT) are the most likely to go on and create net new jobs in the U.S., Hathaway says.
The study found that the high-tech sector was 23 percent more likely -- and the ICT subset 48 percent more likely -- than the private sector as a whole to form new businesses in 2011.
The report defines high-tech as companies whose employees work largely in the science, technology, engineering and math fields. The ICT subset includes computer and communications equipment, semiconductors, systems design, software, Internet service providers and digital publishers. ICT excludes aerospace, pharmaceuticals, engineering services and scientific research and development.
"Though they start small, young high-tech and ICT firms tend to grow especially rapidly in the early years—so rapidly, in fact, that job creation is robust enough to outshine the job destruction from early stage business failures. The same cannot be said of new firms broadly, where net job destruction in the early and middle years is substantial," the report says.
Moreover, young high-tech companies are more widely dispersed throughout the U.S. than other private-sector startups are.
The metro areas with the highest density (see map) are located either near a university or a well-known technology or aerospace hub. The secret sauce, says Hathaway, seems to be a highly skilled workforce. While Hathaway didn't say so, it may also include the desire of college grads to live and work in a place with a high quality of life, such as near the mountains (thus explaining why five of the 10 high-density startup regions are in the Rockies).
Still, it isn't necessarily true that success begets success. Though major metropolitan areas and existing high-tech hubs, including San Francisco and Boston, still see a lot of startups, smaller regions now show the strongest growth.
All of this is good news for the U.S. economy. There is more geographic and economic diversity among high-tech formations than for the private sector as a whole, where new firm formations tend to happen only where entrepreneurship is already high. Other studies have shown that one high-tech job results in four others in the local service economy. Studies also show that the disruptive process of innovation and entrepreneurship, while sometimes costly in the short term, leads to productivity growth. And that's what really makes the U.S. economic engine purr.
(Paula Dwyer is a member of Bloomberg View's editorial board. Follow her on Twitter.)