In a recent New York Times opinion piece, Thomas Friedman argued that “Obama should make the centerpiece of his presidency mobilizing a million new start-up companies that won’t just give us temporary highway jobs, but lasting good jobs that keep America on the cutting edge.”
Friedman doesn’t say how the President would do this, but instead writes “Obama should bring together the country’s leading innovators and ask them: “‘What legislation, what tax incentives, do we need right now to replicate you all a million times over’ – and make that his No. 1 priority. Inspiring, reviving and empowering Start-up America is his moon shot.”
It sounds great to call for a million new companies that create lasting good jobs, but how hard would it be to do?
I’m going to try to estimate the number of Americans that would need to try to start their own businesses to yield a million start-up companies that give us lasting good jobs.
To do that I need to leave aside part of what Mr. Friedman said and put definitions behind the rest. Let’s start with what I have to ignore. It would be great to create start-ups that “keep America on the cutting edge.” Unfortunately, keeping America on the cutting edge isn’t something that is easily quantified, so I’m not going to require that part.
I’m going to define “lasting good jobs” as jobs (the position, not the person in it) that last at least five years and pay at least as much as the average job in existing companies. This is admittedly an arbitrary definition of what a lasting good job is, but I need to define the concept to measure it.
To generate one million start-up companies that are around five years from now, we need to start 2.22 million companies today because only 45 percent of new businesses live five years.
To create jobs from start-ups, entrepreneurs need to create employer businesses. (A non-employer business might employ its founder but if the founder runs the new business instead of his or her old job, then no net jobs are created.) According to research by Paul Reynolds that examines the Panel Study of Entrepreneurial Dynamics, a nationally representative survey of the adult age population of the United States, only 19 percent of new business start-up efforts create employer businesses. So we need 11.7 million new businesses to create one million employer businesses that would be alive in five years.
But there’s another catch. Not everyone who begins the start-up process ends up creating a business. In fact, Reynolds’ research shows that only about 30 percent of start-up efforts result in an up-and-running company within six years. So if we factor in the success rate at new business creation, we need 39 million Americans to begin the start-up process to end up with one million new companies that are still alive and employing people five years later.
(Reynolds also says it takes 15 individuals beginning the start-up process to get an employer firm; using that estimate indicates that we need 33.3 million Americans to begin the start up process to end up with one million new companies that are still alive and employing people five years later.)
What about the quality of the jobs? According to the Census Bureau’s analysis of its Longitudinal Business Database, approximately 29 percent of five year old firms pay the average wage of businesses older than five. Using this number, I estimate that we need approximately 134.4 million Americans to begin the start-up process today to end up with one million five-year-old businesses employing people at above the average wage.
Every year about 14 million Americans get involved in the firm start-up process. So Friedman, Obama, or America’s leading innovators (or policy makers) could almost achieve Friedman’s goal if they could figure out how triple the number of Americans starting businesses every year for the remainder of the President’s first term.
While Friedman’s idea of creating one million start-up companies that create lasting good jobs is a noble goal, it’s a lot easier to say than to achieve. As anyone who has started a company knows, it is not easy to create businesses that have employees and pay them more than the average wage in this country five years after being founded.