The Importance of Startups: How They Help in Job Creation & Destruction
It turns out that entrepreneurs are the most valuable players in the economy.
Recent studies look at job creation and job destruction to confirm that startups create 3 million jobs per year and, unlike existing firms, startups do it without destroying thousands more in the process.
If you ask me, that makes all of you entrepreneurs out there some pretty valuable folks, which is why I’m going to talk about the importance of startups in this article.
Startups create 3 million jobs per year
So, first off, I want to say a big thank you to all of our hardworking entrepreneurs, because you, ladies and gentlemen, are the reason I have a job right now.
The next thing I want to say is that starting a business is hard. Trust me; I know from experience.
The Importance of Startups in Job Creation
Like many others, my father and his father both experienced a dark period of unemployment.
So when they started their businesses, it was partly because they wanted to fuel job growth.
With that said, my father’s first two startups failed in the first year. (You know what I’m talking about).
But, hey, every time he took it upon himself to start a new business he employed 20-30 new people who previously had no income.
And even though all of those employees were out of jobs in a year or less, it may have been for the best according to recent discoveries that confirm the importance of startups in job creation and job destruction.
Now I’m sure many of you know quite well how painstakingly difficult it is to tell someone they’re out of work, especially if they only had a run at it for about a year.
Not only do you feel like you’ve let yourself and your family down, but you feel as if you’ve let your employees and their families down too.
If you can relate, then listen carefully to the rest of this article, because by the end of it you’ll feel like a much better person for going under at some point in your career.
In fact, that feeling is the very beauty of entrepreneurialism, because, to us, ‘failure’ is only a pessimistic way to refer to the process of business development.
The Importance of Startups in Job Destruction
Believe it or not, it may actually be a good thing that roughly 25% of startups fail in their first year and 50% by their fourth.
So how is this possible?
Earlier I mentioned a new set of data called the Business Dynamic Statistics. Let’s just call it BDS for the rest of this article.
The BDS is a bunch of data that considers a firm’s age in a dynamic format and business scholars are going nuts about it.
If you don’t know what the deal is with the study of business dynamics, one source explains it as a method that “involves measuring the flow of firms and workers that underlie a modern economy.”
For good reason too…
Not only is the BSD the first of its kind, but it also uncovered some long-held assumptions about job creation and job destruction regarding established firms and startups.
It made sense too until the BSD incorporated a firm’s age in a dynamic format, which showed that the exact opposite is true of older and larger firms.
Startups created an average of 3 million jobs per year
In a set of data stretching all the way back to 1977, startups created an average of 3 million jobs per year. (By startup, I mean any firm that is less than a year old).
Since all startups are basically age zero, they don’t undergo any gross job destruction.
What’s even more interesting is that the BSD uncovered a common assumption about established firms, which is that they will have a positive net job gain. That’s not the case.
On the contrary, established firms suffered from net job losses during several economic recessions. Startups had consistent job growth levels and created more jobs than they lose.
Now you would think the whole process of getting into business only to find out you’re going under 6 months later is just a chaotic way to create and destroy a bunch of jobs in an extremely short period of time.
And that, my friends, is where the dynamic process comes into play because it argues that the startup process is actually the key to productivity gains, job creation, and sustained economic prosperity.
What About the Startups That Succeed?
I didn’t set out to write this article solely about the good news for all of the startups that fail in the first year.
We have to account for successful startups as well, because they’re creating jobs too.
Innovation is at the heart of entrepreneurialism
That being said, entrepreneurs are always creating a new market or finding innovative ways to challenge incumbents in an existing one, which is how old ideas get replaced with new ones.
More often than not, these old ideas get replaced because they just aren’t as productive as the new and improved ones. And with nearly 600,000 business births every year, the result is an extremely productive economy.
But how do startups effectively create new markets or replace incumbents in an existing one?
It all comes down to the product. A recent study found that the “lack of a market need for their product” was the main cause of over 40% of startup failure.
The Lean Startup Method
As an entrepreneur, you’ve probably heard the term “lean startup” before.
It’s a rather new method for developing businesses and products first coined by a fella named Eric Ries back in 2008.
Lean startup is basically a way to shorten product development cycles by launching products as soon as possible to learn about your target market.
By doing so, lean startup methods treat products as experiments and engage in a practice known as validated learning.
In theory, the method can be used to see if a product addresses a need that the consumer had no idea even existed before being presented with the solution.
But I didn’t just bring this up to talk about some guy named Eric Ries and his major claim-to-fame, no matter how awesome it is.
I brought this up because the lean startup method is a way to visualize the importance of startups in job creation and job destruction.
For example, let’s say you get an idea for a new mind-blowing product and you’re eager to make it a reality so you can finally escape your day time job.
The only problem is that you don’t have the capital to waste two or three years to check off every step of the old school R&D model you learned in business school ten years ago.
That’s where the lean startup method comes in to save the day because, with it, you don’t need to endure months of surveys, market research, and trial runs.
To put it simply, lean startup method requires you to make the product, put it on the market, and wait to see what happens.
If your product fails, then you take whatever information you learned about your target market and use it to create a completely different or even better product.
It may sound silly but it worked for the tech startup DropBox and now companies like Intuit and GE are using it to innovate their business models.
The lean startup method is the way entrepreneurs are able to change the market so rapidly and, as a result, improve economic productivity.
It keeps old ideas from sticking around longer than they should by increasing competition and, thus, helping in job creation.
The Problem of Existing Firms
Maybe you’re still not convinced of the idea that “startups are the only thing behind job creation.”
Usually, I would tell you to ask yourself why you chose to become an entrepreneur to begin with, but in this case, I think a couple of key details will help clear the air.
So here’s some reassurance from a guy that knows what he’s talking about a lot better than I do:
“Survivors create zero to 7 million net jobs (half of which are at establishment births), while Deaths account for a net loss of 4 million to 8 million jobs, which are large flows for the context of the steady job creation of 3 million startup jobs.”
Did you catch that?
The two types of existing firms are Survivors and Deaths, according to the expert.
Survivors are existing firms that continue to stay in business, while deaths are those that go out of business.
That being said, it’s pretty clear that, compared to startups, existing companies are extremely unstable in terms of job creation and job destruction.
So What’s It Really Mean?
To simplify a relatively complex argument, this implies that entrepreneurs are way more important in the economy than established firms. No big deal, right?
I mean, we’ve been running things like this for decades and the show goes on.
Well, that’s what I thought until I realized that, more often than not, the government is willing to spend billions of dollars on established firms during any major economic crisis.
So for the past several decades the United States has mostly based its economic policy on a flawed model of employment growth. That’s frightening, but also explains a lot.
Is now a good time to mention that the BSD data is not exactly “new”? In fact, the data has been around for quite some time, but it was only recently made available to the public.
Before you sink into a deep state of disillusionment over the fact that many of our current policies might only be good at ruining the economy, let me remind you of the good news.
The show goes on because of, both, our good and bad ideas. As far as I’m concerned, that’s reason to celebrate.
So pour yourself a drink and pat yourself on the back, because if there’s anyone that deserves it right now, it’s you.
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