New businesses vital to economic revival

November 6, 2009

New businesses, not small businesses, have been responsible for all job growth since 1980.

A WSJ oped today points out a critical distinction in the discussion about what types of businesses drive job growth:

The more precise factor is not the size of businesses, but rather their age. According to the Census Bureau, nearly all net job creation in the U.S. since 1980 occurred in firms less than five years old. A Kauffman Foundation report released yesterday shows that as recently as 2007, two-thirds of the jobs created were in such firms. Put more starkly, without new businesses, job creation in the American economy would have been negative for many years.

The authors (all from the Kauffman Foundation) make a handful of recommendations, including: reforming IP spinoffs from universities, making it easier to access capital, and fixing the IPO Market (by allowing shareholders to opt-out of Sarbox).

Here’s a recommendation the Kauffman Foundation didn’t mention: don’t change the fundamental economics of the venture capital business by changing the taxation of carried interest (see our post entitled “Job Growth and the Carried Interest” for more on this).  Small venture capital firms lead the charge in investing in the new firms that create high quality jobs, and Congress would be wise to remember that when considering legislation that makes it more difficult for venture firms to succeed.

UPDATE:  (10/8/09)

TechJournal South covers a NVCA study that confirms the same point:

Venture-backed firms in the United States grew both revenue and jobs faster than non-venture backed companies and accounted for 21 percent of the U.S. GDP in 2008…   (for full study click here)

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