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The government is spending hundreds of billions of taxpayer money to bail out companies like General Motors (GM), AIG (AIG), and Citibank (C) that are deemed too big to fail. Economists argue that these huge handouts are required to ensure the financial meltdown doesn't get any worse—and they may well be right. But these same economists would be hard-pressed to argue that favoring behemoths over startups and existing small businesses benefits the economy over the long term in any significant way. That's because massive, mature companies, particularly those that are struggling, don't create new jobs. Instead it is new businesses that fuel this country's employment growth. They're the key to our economic recovery.
Consider these stats: From 1980 to 2008, startups, defined in this case as companies less than five years old, accounted for all net job growth in the U.S., according to the Kauffman Foundation's Business Dynamics Statistics, a series of reports that rely on newly released data from the Census Bureau. The reports show that average annual net employment growth rate for startups was about 3% a year while the growth of the rest of the U.S. private sector for the same period was about 1.8%. So, without these startups, the U.S. net employment growth rate would actually be negative.
In other words, if President Barack Obama wants to foster a recovery, a good way to do so through the private sector is to focus on creating and supporting new companies. The current approach of pouring money into decrepit, poorly managed companies is actually a way to reverse job and productivity growth in the U.S.
Where should the Administration target its efforts? And who, exactly, is the typical entrepreneur? First, be aware of a few pervasive myths that surround entrepreneurship. For example, most tech entrepreneurs aren't young college dropouts, according to research conducted by my team at Duke along with Harvard's Richard Freeman. Instead they are typically middle-aged—39 on average—and well educated. Twice as many start ventures after 50 than during their early 20s. We also found they tend to be very well educated (92% have bachelor's degrees, 31% have masters, and 10% have completed PhDs).
I helped conduct a broader survey with Raj Aggarwal at University of Akron and Krisztina Holly of the University of Southern California of 549 company founders in a range fast-growing industries. It showed 70% of respondents were married when they launched their first company. What's more, 60% indicated they had at least one child when they launched their first business, and about 43% had two or more children. So much for the myth that entrepreneurs are single workaholics.
We also found that the majority of respondents (75%) had worked as employees for more than six years before launching their own company. Nearly half launched their companies with more than 10 years of work experience. A surprisingly high percentages of respondents started their first company after working 11 to 15 years (23%), 16 to 20 years (14%), or more than 20 years (10%) for someone else. So much for the myth that entrepreneurs are born, not made. (We plan to release more on the survey's findings in a report in May.)
What's holding workers back from starting businesses? What we learned was that most people simply don't know how to start companies. They have ideas and industry knowledge, but are afraid of the risk, lack certain skills, and need financing. With the recession causing millions to face unemployment, risk isn't much of a factor any more. We have a unique opportunity to start educating these workers on the basics of starting a profitable business.
The Administration should start by taking some of the money it has allocated for economic recovery to set up entrepreneurship boot camps. It could take advantage of successful programs like Kauffman's FastTrac and set them up in community colleges throughout the country. To ease the financial burden on workers undergoing this training, the government could fund scholarships.
Once trained, entrepreneurs will need seed capital to get going. But most big banks, angel investors, and VCs have been reporting big drops in their small-business funding activities. The Administration should invest a few billion to create a dedicated fund for promising entrepreneurs. The fund would provide loans at attractive interest rates to encourage folks to strike out on their own. Such a fund should not be administered by government bureaucrats who don't understand industry or by venture capitalists preoccupied with exit strategies, but by regional organizations such as the Council for Entrepreneurial Development that have an interest in fostering entrepreneurship and boosting economic growth in their areas.
Imagine what we could have helped create with the $12.9 billion that went to Goldman Sachs (GS): tens of thousands of startups. One or two might have even become the next Google (GOOG), Amazon (AMZN), or FedEx (FDX). They would have ended up creating hundreds of thousands of jobs. And they might've developed innovations like the car, airplane, air conditioner, personal computer, or game-changing Internet applications. After all, previous generations of entrepreneurs invented these products. Let's give the next batch a hand.
Wadhwa is senior research associate at the Labor & Worklife Program at Harvard Law School and executive in residence at Duke University. He is an entrepreneur who founded two technology companies. His research can be found at www.globalizationresearch.com.