How Important Are Startups to the Economy?
For all the talk of small businesses and startups driving the US economy, just how important are they? According to new data from the Kauffman Foundation and the US Census Bureau, without the jobs they create, yearly employment growth would be negative.
Startups accounted for three percent of total employment from 1980-2005, which seems a modest number. But given that the average annual net employment growth over the same period was 1.8 percent, the data suggest without the jobs from new firms, employment growth would be negative.
Micro firms with one to four employees were especially significant, accounting for an average of 20 percent of new jobs each year.
"The question they addressed in this study is how important are new businesses to job creation? The answer is: Real important, that's what these numbers indicate," said Robert E. Litan, vice president of Research and Policy at Kauffman.
The study found that while startups do tend to decline slightly during downturns, they remained fairly robust in even the most severe of the sample period's recessions.
According to Litan, "In a recession, you tend to get a lot more people starting companies because they can't do anything else, and the number of start-ups is actually remarkably stable."
"If this one holds up to the previous pattern, it will not decline significantly."
But that's a big if, he added.
John Taylor, research and financial affairs executive at the National Venture Capital Association, reported that venture capital firms are optimistic and they are seeing high numbers of promising startups.
"Our field reports say there are very good teams of people and business plans, almost record levels of quality coming to them now," he said.
But while venture capital firms are still investing, they are counseling slower growth and expect capital to last longer. According to Taylor, this will mean fewer new jobs in the short-term.
"You can expect these companies to start on less head count than two or three years ago they might have," he said.