By Tom Still
If you want to understand the vital role of small businesses in job creation, nationally and in Wisconsin, two studies help tell the story. It’s a tale that state and federal policy-makers should want to hear, clearly and often, as they reflect on what comes next.
• In a report released a little more than two years ago, the Ewing Marion Kauffman Foundation concluded that, if not for start-ups, the nation as a whole would have lost jobs in 22 of the 29 years spanning 1977 through 2005. Why? Older, larger companies shed more jobs than they created. Young companies, 5 years old or less, added jobs in all 29 years.
• A few years back, the state Department of Workforce Development examined job creation in Wisconsin between 2000 and 2007 and reached a strikingly similar conclusion. During those years, companies ranging in size from one to nine employees added 94,327 jobs statewide – an increase of 18.5% – and companies from 10 to 99 employees created 11,521 jobs, up 1.4%. Conversely, companies with 100 to 499 employees lost 32,498 jobs (down 7.5%) and firms of 500 or more workers lost 76,637 jobs – down 18%.
Of course, many older companies create jobs. Most long-established companies in Wisconsin do so every day. But older companies also tend to shed jobs as they become more efficient, lose ground to competitors or suffer loses during an economic downturn.
Read the full commentary in the Milwaukee Journal Sentinel here.
Young, small companies create jobs by definition – even if most of them are one-person shops. While the five- and 10-year survival rate for young companies isn’t high, there are enough new companies created every year to keep the process of “creative destruction” humming along.
All small businesses are not created alike, however. There are four basic categories – three of which are not large-scale job creators, nor ever intend to be, and one that more than pulls its weight when it comes to churning out jobs.
• “Mom and pop” businesses are classic small businesses – bakeries, beauty salons, restaurants, retail shops and more – that add tremendous value and stability to the economy. But their owners generally don’t hang an “Open for Business” sign on Main Street believing they will employ dozens or even hundreds of workers someday. For them, employee growth is a choice, not an imperative.
• “Lifestyle” businesses are often launched by people who have taken an avocation, hobby or talent to the next level. Like owners of mom-and-pop operations, the owners of lifestyle businesses aren’t typically driven by company growth. They want to be profitable and earn a good living, but they rarely see a bigger workforce as helping them meet those goals.
• “Social” businesses are usually the product of an owner’s belief system and often start with some sort of greater-good cause in mind, whether it’s the environment, health and wellness, working with children or providing some sort of human service. While staying in business is a goal because that also helps the cause, creating jobs is usually down the list.
• “High-growth” entrepreneurs are the type most likely to create jobs because they want to grow – and they optimistically believe their products or services are market-disrupters. These are entrepreneurs who consistently tell pollsters and researchers they expect to create 20 or more jobs in five years, who often pursue angel and venture capital and who dream of scaling their young company into tomorrow’s Facebook, Google or Home Depot.
The distinction should matter to policy-makers. While governments may want to pursue small business policies, that’s not necessarily the same as policies focused on high-growth entrepreneurship.
Small-business policies might concentrate on ensuring access to credit, providing technical assistance and removing outmoded regulations. It sometimes involves targeted tax policies, such as the current conversation in the state Legislature about a “sales tax holiday.”
Entrepreneurship policies could include strategies to encourage availability of early stage capital in high-growth sectors, protect intellectual property, ease technology commercialization from universities and stay in front of new regulations – particularly those that might offer opportunities. Gov. Scott Walker has proposed a $25 million early stage fund for Wisconsin as a part of his budget bill and legislators are considering next steps.
“Getting incentives closer to the economic activity has got to be a part of the strategy when it comes to small-business growth,” said Dennis Winters, chief economist for the state Department of Workforce Development.
Innovation can be found in all types of companies, large and small, but if national and state policy goals are centered on job creation, it makes sense to tailor some of those policies to high-growth start-ups that have both the will and the way to grow.