Young firms are the main source of new jobs in this country. Kauffman Foundation researchers have combed through government data and found a remarkable fact: Between 1980 and 2005 nearly all net job creation in the United States took place in firms less than five years old. To be sure, older businesses add jobs, too, but not enough to offset the job losses that occur when other older, even vibrant, businesses shed jobs. On average, one-year-old businesses create nearly one million new jobs a year, while ten-year-old firms generate just 300,000. And in 2007, the last pre-recession year, young firms accounted for two-thirds of the economy's new jobs.But Schramm went on to explain that by new firms, he was not talking about small firms. Companies with fewer than 500 employees, he said, account for roughly four out of ten jobs, and those with less than 100 employees account for less than one third of American jobs. So the key to job generation, says Schramm, is high-growth firms -- like Google and eBay and more recently Groupon -- that have the potential to grow quickly to $1 billion or more in revenue.
Kauffman's vice president of research and policy, Bob Litan, says that the U.S. currently sees about 15 of these companies emerge yearly, but if that number increased to between 45 and 75, the economy's growth rate would increase by a full percentage point. The key to building more billion-dollar companies, says Schramm, is to create an environment where a greater percentage of the 600,000 Americans who launch new businesses every year can achieve high growth. So how do we achieve that?
According to Schramm, it's mostly about legislative reform, which is the subject of a new Kauffman Foundation book called Rules for Growth, comprised of 20 essays about public policy reforms that would support entrepreneurs at little or no cost. They include reforming immigration policy with a new Entrepreneurs Visa; improving university technology licensing practices so that innovation can move more quickly from the laboratory to the marketplace; reforming the tax code; and reforming intellectual property laws.
I'm largely in agreement with Schramm and with most of what was said in the panel discussion that followed his address, although it would have been terrific to hear the opinions of someone who was not white, male, and over the age of 60. A little diversity next time, please! I also wish there had been less emphasis on the "get government out of our way" theme, and much more focus on the subject that Schramm touched upon at the very end of his talk: the need to create ecosystems for entrepreneurship so that we can support and mentor budding entrepreneurs and give them the resources they need to grow their companies.
Schramm talked about programs like YCombinator, The Foundry, and Kauffman's own initiative, Kauffman Labs for Enterprise Creation. It seems to me, however, that if we really want to increase the odds of success among entrepreneurs, our efforts need to begin a whole lot sooner than when a 20-year-old decides she's about the launch the next Facebook, or when a forty-year old starts feeling stymied by government regulation. It needs to start in K-12, with how we educate our kids, how we introduce them to the world of entrepreneurship, encourage them to be innovative and creative, and teach them the value of economic independence. No, they won't all create the next Groupon, and only a tiny fraction will grow their companies to $1 billion in revenue. But they will, at the very least, learn how to create jobs for themselves. With nearly 20% unemployment among 16-24 year olds, that seems like a pretty noble goal to me.
And so it's my strong belief that while incubators and supportive ecosystems -- and colleges and universities as well -- should certainly be on the lookout for the next entrepreneurial superstars, they also ought to mentor and support the kinds of community-based businesses that make up the vast majority of the U.S. small business community. What concerns me about putting so much emphasis on high-growth rock star entrepreneurial companies is that it gives young entrepreneurs the impression that they need to go big or go home. It's the wrong message.
Footnote: Next week, I'm headed to the Future of Entrepreneurship Summit in Orlando, where the topic of educating the next generation of entrepreneurs will be front and center. Check back for a post on the summit. In the meantime, tell us how you think entrepreneurs and budding entrepreneurs can be supported and encouraged to start and grow companies that create jobs.