Are startups the key to fighting the recession?

According to Businessweek, bailout money would be better spent on startups.

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[…. The] 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%.

The message here is clear: big business loses jobs, and small businesses make them again. As someone who’s started a few companies that are still increasing employment, I’m proud of the role that entrepreneurs have in making jobs. Still, two things bother me:

  • Doesn’t anyone remember the Dot Com era? That whole bubble was built on startups. Sure, they employed a lot of people, but how long did that last? Do we really need to give startups even more money?
  • How much of the employment gains from startups are simply at the expense of bigger businesses? It would be great to get some figures on that.

Funding startups to fight the recession and increase employment could be a stroke of brilliance if the kick-start follows these rules:

  1. Loans are better than grants. Obviously as an entrepreneur, I’d rather receive a grant than a loan. (Free money, anyone?) But the way companies are funded in North America is too much about VC money, which is about spraying money around and seeing what sprouts up quickly. It favours short-term payoffs. Long term loans are more likely to build solid companies.
  2. Focus on the long term. The whole point is to have a permanent effect on the economy, not stimulate yet another bubble. The solution isn’t to fund a hundred “could be the next thing” companies. It’s to support companies that are likely to be around in five years.
  3. Don’t focus just on tech companies. Sure, high tech is sexy. And it’s important to stimulate that kind of growth. But tech companies–hardware, software, biotech–are where the VC money is already going. And not everyone in the US is ever going to become an engineer, so we need to create more jobs outside of tech. Peter Lynch has said that the best bets are companies that use technology, not the ones that make it, because the margins on any given technology consistently decrease.
  4. Do fund resources for entrepreneurs. Successful entrepreneurs tend to be experienced in their field but not experienced running businesses. They are also likely to already have families, which makes them sensitive to needs like health care. Resources such as business education and subsidized health benefits could go a long way towards encouraging the creation and growth of new businesses.

Thanks to Guy Kawasaki for Tweeting the Businessweek article.