May 18 2010
by Geoff Mamlet

All You Need Are Jobs, Jobs, Jobs Are All You Need

All you need are jobs, all you need are jobs,

All you need are jobs, jobs, jobs are all you need.

My apologies to the Beatles, but the tune that the Congress is singing in Washington these days is really off. With the official unemployment rate verging on 10%, you would think that Congress would be singing from the “job creation” page of their hymnal. Instead, they’re singing another tune entirely.

Earlier this year, the Kauffman Foundation released a series of studies based on US Census data from 1980 to 2005. During this 25 year period, employment in the US grew by an average of 1.8% per year. According to the Kauffman Foundation report, the Census data shows that without the jobs created by new businesses – companies that were less than 5 years old (which we would refer to as startups) – we would have averaged an annual decline in employment of 1.2% per year. That is, startups created enough jobs to make up for the disappearance of jobs elsewhere in the economy (other new businesses going under, as well as more mature businesses shrinking or failing) and more besides – enough to account for all of the net new job creation in the US for 25 years.

As seen in this graph, the overall job creation effect of new businesses is only modestly impacted by economic downturns (the shaded areas on the graph). Early stage investors know that the great ideas that become great companies can emerge in any economic climate.

These results were intriguing, so the Kauffman Foundation again used data from the US Census Bureau for another study looking at job creation data for the year 2007. Businesses were ranked by the number of net new jobs they created during the year. The top 5 percent of the companies, in terms of new job creation, accounted for 2/3 of the net new job growth. The top 1 percent created 40% of the new jobs.

Not surprisingly for those of us working with startups, 75% of the firms in the top 5 percent were less than 5 years old. Many startups fail to reach their 5th birthday, of course, but those that do have payrolls that were created from whole cloth – they didn’t exist before that company started.

What about the companies that ranked tops in new job creation? What does the Census data say about them? 80% of them are young companies, and the vast majority of them are companies with fewer than 250 employees. These are not the behemoths of the Fortune 1000; these are the sorts of companies one would find in a venture portfolio. These are the kinds of companies that create economic growth.

So, back to Congress. With this information in hand, you’d think they’d be working on facilitating the creation of more startups. Unfortunately, they’re working on something very different. Current legislation before the Senate (the financial reform package already approved by the House , and the Tax Extenders Act of 2009) would:

  • Change the incentives for investment in startups by venture capital by declaring “carried interest” for venture investors to be taxable as “earned income”. If you want people to do more of something, do you make it less rewarding for them?
  • Enable states to regulate investment in private companies, in place of today’s Federal regulation. If you want to make it easier for investment to flow into startups, are you better served by having one regulatory scheme, or 50?
  • Raise the requirements for the “accredited investor” standard from today’s $1m net worth or $200k annual income, to $2.3m net worth or $450k annual income. If you want more angel investors and more venture funds (new venture funds rely heavily upon individual LPs to get started), do you shrink the pool of prospects?

None of these proposals sing in harmony with the Job Creation Chorus we need to be performing now.

Hey, Congress, you’re singing out of tune!

All you need are jobs, all you need are jobs,

All you need are jobs, jobs, jobs are all you need.

All you need are jobs (all together now)

All you need are jobs (everybody)

All you need are jobs, jobs, jobs are all you need.

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