Matters Of Fact

In 1979, David Birch shattered the prevailing wisdom about job creation. Now he's at it again.

 

David Birch doesn't remember where he was at the time, in his office at Massachuesetts Institute of Technology or at Cognetics Inc., the small (six employees) company he founded in 1983. It doesn't matter. What matters is that he had scarcely finished addressing the Federal Express envelope when the Federal Express truck driver appeared at his door to take delivery. David Birch marveled. Academic researchers do sometimes marvel; so do the chief executive officers of growing businesses. But rarely do they take the time to examine the marvel close up. That is what David Birch did. He asked the driver if he might go out with her one day, on the route, just to see what her job was like.

Jobs. Birch first made a name for himself by studying jobs. In 1979, he published a paper called "The Job Generation Process," which instantly propelled him into that exceedingly small group of economic researchers who manage to discover something that is simultaneously true, novel, and very important.

He discovered that a large proportion of the new jobs being created in the United States were not to be found where economists and policymakers had habitually gone to look for them. Jobs were not being generated by the celebrated Fortune 500, not even by the distinguished Fortune 1,500, but by small businesses and by businesses that had been small only a few years ago.

David Birch's paper jostled public perceptions of the economy as no academic study had done in decades.The effect was like what would happen if all the meteorologists in the country were suddenly to abandon their obsession with rainfalls and cloud covers and start talking about soil temperatures and water tables. Small business, abruptly, was it. What it was -- apart from being a good, a promising, an exciting thing -- no one knew. But subsequent studies by David Birch enlightened us. He laid out the odds of entrepreneurial success, plotted the trajectory of an entrepreneurial career, prescribed the tests and measures of an entrepreneurial ecology. He also won fame -- speaking engagements, the solicitations of governments here and abroad, a book contract, and interviews.

We interviewed Birch at his Cognetics office in East Cambridge, Mass., one of the fastest-growing entrepreneurial environments in the world. Cognetics, however, was leaving East Cambridge for North Cambridge. The old furniture factory it had occupied for one and a half years was about to be renovated. Boxes of papers were piled up against the walls, technicians were disassembling Cognetics's engine, a minicomputer, while the fuel of the enterprise, reel after reel of data, billions of bits of it, was being carefully stored away for removal to the new office.

Birch is professorial in the Cambridge manner -- chinos and tweed jacket, sensible shoes, and a button-down shirt. Once a year he and his family -- his wife (a kindergarten teacher) and two children - go up to New Hampshire to bring down the wood, seven cords of it, with which they heat their house all winter. He is a handsome man, 47 years old, and as fit as a former athlete should be. He spoke to us while sitting in a fawn-colored recliner, very much at ease, laughing sometimes, delighted always, sharing his discoveries.

INC.: You have been studying small businesses for a good many years now; so let's suppose that a friend of yours walks into your office one day and tells you he is thinking of starting a business. He would like to know what to expect. What could you tell him?

BIRCH: Well, first of all, I'd have to know what kind of business he was thinking of. There are really two classes of small business, you know: entrepreneurial businesses and what I call income-substitution businesses. The latter are by far the most common; they make up something like 80% to 90% of all small businesses in the country. They might be pizza parlors, or real estate brokerages, or produce stores. I call these "income-substitution" businesses, because rather than working for a company, you work for yourself. Your purpose is not to create or grow anything, apart from the act of birth itself. Your purpose is to generate an income that will support you and your family. You don't dream of having 2 stores next year and 4 stores the year after that and 50 stores the year after that -- you just don't think that way, it doesn't even occur to you.

INC.: OK, but let's say your friend wants to go into an income-substitution business. What are his chances of making it?Not great, right? We've heard that 85% of all small business ventures fail.

BIRCH: It's false. Absolutely wrong. I don't blame you, though; I heard it too, when I first started looking into these matters and I tried to find out where it came from. I think what happened was that people took another statistic -- that 85% of the businesses that fail are small businesses -- and twisted it. Of course small businesses do fail, the income-substitution ones as well as the entrepreneurial ones. Failure is an essential part of the system. But it's not anything like the lambs-to-the-slaughter affair that the 85% figure suggests. They start out, these new businesses, and within the first year 20% of them are gone, vanished. Then in the second year another 15% are gone, in the third year another 10% and so on -- the curve flattening out. In other words, the chance of your failing in the first seven years in a new business in this country is closer to 50%.

 1 | 2 | 3 | 4 | 5 | 6  NEXT