Wanted: More Jobs
I don’t have a fancy degree from an Ivy League school, and I’m not formally trained in economics. So you won’t see me on the President’s economic advisory team, or lecturing on the philosophical differences between the Keynesian and Austrian economic theories.
Instead, I grew up watching my father start a manufacturing firm and build it into a successful, multimillion-dollar business. I followed in those footsteps by helping two technology startups grow from infancy to a spot on the Inc. 500 list and eventually sell for more than $100 million.
What I’ve learned through these experiences is that innovative startups are the engine of the American economy. Startups breathe life into slow growth industries (think Starbucks, Crocs and Netflix). Startups create new products and new markets (think salesforce.com, Google and Twitter). And startups solve complex scientific and engineering challenges to create life-changing products (think Intel, Amgen and TiVo).
Naturally, as innovative startups grow they create jobs — and lots of them. An eye-opening study by the Kauffman Foundation brings that into sharp focus. The study showed that startups are responsible for all net job growth in the U.S. since 1977.
Think about that for a minute. In aggregate, older more established firms do not create jobs (at least not in the U.S.). Job growth at one company is matched or exceeded by a decline at another. In essence individual companies are trading market share, but the market itself is growing slowly or not at all. When you add in technological advances to improve employee productivity, outsourcing to offshore locations, or simply eliminating positions to meet a lower level of demand, it is not surprising that established firms do not drive job growth.
Not all startups are equal
Any entrepreneur with the guts to launch a new startup deserves enormous respect, but not all startups are created equal when it comes to job creation. Startups in slow-growth markets such as restaurants, retail and other consumer services suffer from the same challenges as more established firms. Namely, a new growth company takes market share from an established player, so any new jobs created are eventually met with job cuts at other companies.
Similarly, startups in cyclical industries such as transportation, hotels, construction, real estate, etc., will not create sustained job growth. In good economic times, these companies will boom — and just as quickly go bust when the economic winds change.
While there are exceptions to these broad generalizations (note Starbucks and Crocs), sustainable job growth usually comes from scalable, innovative startups. These are the startups that venture capitalists and angel investors target. And these are the startups that will create new markets and lead the U.S. out of this economic slowdown.
Angel and venture capital investing
The startups noted earlier all share one common trait: they were funded by angel and/or venture capital. It is safe to say that without that capital, these companies would not have reached their respective heights.
Venture capital (VC) as a distinct asset class has existed since the ’60s, reaching its high point during the dot-com boom of the late ’90s and early 20000s. With such a long history, venture capital remains a relatively small segment of the capital markets. According to a report by HIS Global Insight, in 2009, new venture investments totaled $18 billion. Since 1970, only $474 billion has been invested in 27,000-plus companies. By comparison:
The U.S. Treasury Department will issue more than $1.1 trillion in debt this year to cover the budget deficit.
The junk bond market is greater than $600 billion in size.
The wars in Iraq and Afghanistan cost more than $170 billion in 2010 alone.
But venture-backed companies have an outsized impact on GDP and employment. VC-backed companies produced more than $2.9 trillion in revenue in 2009, representing more than 21 percent of total U.S. gross domestic product. More importantly, 12.1 million people are employed at venture-backed companies, representing more than 11 percent of total private sector employment.
These numbers clearly show that innovative startups create economic growth and sustainable employment.
An alternative plan
That’s why I get viscerally angry watching the economic ignorance of our federal and state governments. Politicians pay lip service to wanting to create jobs, then spend tax dollars on big corporate giveaways, old industry subsidies, and pet projects that have little impact on actual job growth.
And when our government finally recognizes the need to create jobs and support small businesses, they create programs that will do neither.
A simple (and most likely profitable) plan that will have a fast and tangible impact on jobs is to create a federal “matching fund” for any angel group or venture capital firm to access. The matching fund would automatically invest a matching amount in any innovative startup that receives investment from the VC/angel group. Funds should be made available only for seed and early-stage investments. Extra incentives should be given to promote investment in regions of the country with low levels of VC investment and/or high levels of unemployment.
Under this plan, capital will be invested in companies with the highest potential for job and economic growth, and the fund will most likely turn a profit when all is said and done.
But don’t hold your breath waiting for innovative economic solutions to materialize in Washington. Instead, allocate some of your portfolio to angel/venture investing, then find a local angel group and get involved. You will be rewarded by working with some of the best and brightest entrepreneurs, while helping get the American economy growing again. And with any luck, you will make some money along the way.