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Report: Young Businesses Shedding Jobs...Except in the Tech Industry

According to a report released by the Kauffman Foundation and Engine.is today, tech companies create jobs at a faster rate than start-ups in other industries. But there is a dark side to meteoric growth.
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Today, the Kauffman Foundation--in collaboration with tech research and advocacy group Engine.is--released a report taking stock of the the start-up economy. As Inc.'s Eric Markowitz reported this morning, the Kauffman numbers appear to validate Techstars co-founder Brad Feld's assertion that Boulder, Colorado is the most start-up dense city in America.

That said, there is even more to be gleaned from the report--in terms of start-up job creation. 

Small businesses have long been considered the defibrillation paddles of the economy--zapping life back into a recession-stunted jobs market. Unfortunately, today's study reports start-ups may be creating fewer jobs than you'd imagine.

According to the study's authors, most young companies--aged one to five years old--created negative jobs in the last year. Meaning that many entrepreneurs with young businesses are actually shedding jobs, not adding them.

With one noteable industry exception, that is: The tech industry.

High-tech companies, or those with a high percentage of STEM workers, continue to create jobs at an annual rate of 1.8 percent, compared to an average creation rate below -4.5 percent annually for young companies in other industries.

Sounds like great news for tech, right? As the study was released, Businessweek even went so far as to throw the industry a few props on its job creation acumen.

But not so fast. The fast-growth potential of technology start-ups also has a few pitfalls.

For example, there's an early stage drop-out rate to account for, writes study author Ian Hathaway. Young businesses are notoriously hard work, and as many entrepreneurs know, those businesses sometimes fall flat.

"About half of all firms fail within the first five years--a trend that has been remarkably consistent over time," writes Hathaway. "The job destruction forces associated with firm failure have been strong enough to erase and exceed any job gains of surviving firms that grow in the private sector as a whole."

The good news is that companies that do survive the toddler years are even more likely to hire at a rapid rate.

"Earlier research has termed this the 'up-or-out' dynamic," Hathaway explains. "Young firms tend either to fail or grow rapidly." The net job creation rates for surviving start-ups is "quite robust" he adds. Even more so for tech companies, which appear to grow at a faster rate than start-ups in other industries.

Unfortunately, those same meteoric tech firms also demonstrate higher job destruction rates once they reach their teen years. High-tech firms older than eleven years old are net job destroyers--killing more jobs than they create--Hathaway reports.

IMAGE: Robyn Lee/Getty
Last updated: Aug 14, 2013

FRANCESCA FENZI | Staff Writer

Francesca Fenzi reports on entrepreneurship, technology and small business news from San Francisco. Her work has previously appeared in TIME, USA Today, Pop City and The Northside Chronicle.




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