A Million Startups that Offer Lasting Good Jobs

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.

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Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

16 Reactions
  1. Scott,

    Great points made in your article. Nine times out of ten, I like what Friedman has to say. I think that sometimes putting statements out there like he tends to do, at least get the wheels in motion.

    Are those wheels realistic? I don’t really know. But it’s a little start, right?

    Franchise King

  2. Using these assumptions the goal of 1 million startups seems very out of reach. Seeing the stats (only 19% of businesses add employees & only 30% of startup efforts produce an up-and-running business in 6 years) my question would be to ask how we can change the environment so that 50% become employer businesses or 60% are up-and-running businesses after 6 years. I know many people avoid adding employees because of the increased regulation it entails.

    In short, how do we create a funnel with a higher conversion rate instead of just pouring more into the top of our existing funnel?

  3. Great question and thoughts, Robert. I’m always glad when I read your comments. It is a complicated problem with no easy answers, but like Joel points out – we still need to keep moving and keep starting businesses.

    Scott, have you seen any data points that compare the other ways we spend money to create jobs and if they have any equally sustainable value in 5 years? I appreciate the foundation and logic you’ve put behind studying Mr. Friedman’s suggestions. I think we need a dose of fresh water to keep us thinking, but we gotta keep moving and creating companies and jobs. Some of these small companies will far exceed the small company status and reach medium and large size in 5, 10, 15 years. How do we factor those in?

  4. I think part of the math is off. 50% of the businesses that fail do so because of a shortage of startup capital. If the administration made more startup capital available, then there’s a good chance you could need less startups to have an end result of 1 million sustaining businesses.

  5. Let’s not get hung up on the big sexy number Friedman threw out there to produce a catchy headline – the sentiment is spot-on. Designing legislation, incentives, etc. that will facilitate innovation and reduce external friction for start-ups can be a vital contribution to re-building our economy in a more sustainable and forward-thinking way.

  6. Great piece, Scott. I hope your insight will inform the policy conversation on business development at the White House. That same op-ed piece by New York Times columnist Thomas L. Friedman inspired my opinion blog from last week, “Will 2010 be the Year of Start-Up America?”

    To more start-up success.

    Melinda Emerson

  7. Very good points made in the post and in the comments. I’d just add that the purpose served by Friedman’s opinion piece and Scott’s practical take on quantifying what’s actually needed to create jobs via small business sector is it helps us to focus on movement, engagement and support for this effort. Just a few days ago I read about a new charter school in Cleveland that is built on a foundation of solid academics AND entrepreneurial training for students from K-12.

    That for me is where this vision of a thriving small business sector actually begins.

  8. It’s so refreshing when someone puts actual numbers to the grand schemes that get tossed around as solutions to economic growth. Your analysis provides a starting point for a realistic discussion on what it will actually take to generate job growth. I would add to your calculation, what percentage of those businesses will leave the United States once they become operational?

    One of our Real Estate clients is about to be laid off from a company that’s employed him for the past 28 years. Why? The company is moving its operations to Mexico. Lack of available credit would not cause a business to move out of the country. It is extremely expensive to relocate.

    If the answer to the loss of that company’s flight to Mexico is to replace it with start-ups, then we will need to generate at least 134 start-ups to replace today’s lost jobs by the year 2015. That is, if that successful business doesn’t decide to move its operations out of the country too.

  9. John Seiffer at http://www.BetterCEO.com

    Another option is to focus the effort on ways to increase the percentages. Focus only on employer companies, help a higher percentage of them succeed, etc.

    This analysis is based on historical numbers but I think we need to do something different – not just more of the same.

  10. I think that Thomas Friedman’s idea is excellent. What we need is lots of new fresh ideas and businesses that will be positioned to compete in the new global economy. We are no longer only competing with those down the block or even just in the US. We are competing on a global front and we need all the ideas and innovation to succeed. The US government should be creating funds to provide start up capital or resources. How about providing a pool of “free” employees to start ups. These “free” people would be paid by the US govt for a 12 month period with the objective of the employees being trained in a new field and a new business getting the leverage of manpower and brains to succeed. Hopefully many of those “start ups” will become sustainable businesses and end up employing those people at the end of the 12 months.

    James Todd
    Publisher: BuildMySiteforFree.com

  11. Scott Shane runs a fascinating analysis of what exactly it would take to create 1,000,000 good, well-paying, new, small business jobs in the country.

  12. Fortunate someone is talking about start ups; unfortunate politicians only debate the issue. Consistently missing from the equation of the borrow/spend concept as a means to recover from a deep recession is capital for start ups typically comes from personal assets since banks traditionally do not loan to new business until 18 months into the operation, new business owners don’t account for finances in the first 18 months and often postpone financial reporting until well after 24 months (or may never opt to manage by financial reporting but instead use the ‘seat of the pants’ methodology), and new business owners rarely have an accounting system because they think they are “too small” and/or operate in such a way as to avoid taxation by postponing financial documentation. It is fortunate we talk about the needs of small business as it relates to start ups but unfortunate its failure rate has more to do with financial management than about throwing money at the problem. However many start ups are about self-sufficiency, diversifying to increase income streams, and increasingly look at virtual business models and independent contractors rather than the traditional model for business because tracking methods are available. Surely small business will drive recovery but in unpredictible ways because the market has outgrown tradition and mythology. While others attempt to solve intractable problems with politics and capital the proverbial Mother of Invention, Necessity, is at full play.