The Wall Street Journal
By: Scott Shane
June 13, 2011
The Obama administration is trying to spur job growth by helping tech start-ups get off the ground. But job-growth statistics suggest the plan may rest on some faulty assumptions.
Startup America, one of the highest-profile efforts the government has launched to help small businesses, has a simple premise: New tech companies are big job creators. So, the Small Business Administration is giving tech entrepreneurs better access to equity capital, and other groups are offering them mentoring help, among other things.
A close look at the data, though, shows that these tech start-ups don't actually produce many jobs. In fact, start-ups in general create far fewer jobs than established companies. If we want to create a lot of jobs, it would make more sense to get existing small businesses--across all industries--to return to hiring.
Let's look at the numbers. According to an analysis by the National Science Foundation, only 13% of the private-sector labor force worked in technology-intensive industries as of 2006, and fewer still--4%--worked in small high-tech businesses.
When it comes to start-ups--the primary target of the administration's program--the numbers are just as stark. From 1993 to 2008, 79% of new jobs were created from the expansion of existing businesses rather than from the formation of new companies, according to an analysis by the Small Business Administration's Office of Advocacy. Another SBA analysis shows that the average age of high-growth companies is 25 years, and they are found in all industries, not just tech.
But it's not just the assumptions behind the plan that seem shaky. The actual provisions of Startup America also seem likely to bring meager results.
One of the keys to the program is the Early Stage Innovation Fund, a dollar-for-dollar match by the SBA to funding from venture capitalists and business angels who make early-stage investments in potentially fast-growing companies. The SBA will commit $1 billion over five years to this fund.
Given the size of the venture and angel pool, though, that amount will likely have a negligible effect on job creation.
Angels and venture investors poured about $46 billion a year into young companies from 2006 through 2010, according to data from the NSF and the University of New Hampshire's Center for Venture Research, as well as the National Venture Capital Association. The SBA's matching funds will add only $200 million a year to that pool of money--an increase of just 0.4%.
How many jobs will that money bring? Most likely, very few. For one measure, consider this: The NSF estimates that in 2007, angel investors put $26 billion into start-ups, and that those start-ups employed 200,000 people--indicating that angel-backed start-ups created one job for every $130,000 of investment they received. Therefore, boosting business angel-investment dollars by $200 million annually would create about 1,500 jobs.
For comparison, Census researchers figure the private sector generated 14 million-plus positions from March 2008 to March 2009--and in a the midst of a recession, no less. Fifteen hundred jobs are a drop in the bucket.
Dr. Shane is a professor of economics at Case Western Reserve University. He can be reached at email@example.com.