Startups are driving job growth in the new economy

But fewer than half are still in business after five years

Since the Great Recession, employment has been on the rise. There has been plenty of debate as to what is driving the economic recovery. But part of the credit is going to startup companies and the entrepreneurs who are being lauded for embracing new technologies that not only change the way we work but impact how investors choose their next venture.

On the surface, the numbers certainly are impressive.

In 2015, 414,000 startups created 2.5 million new jobs, according to a 2017 U.S. Census report. The Bureau of Labor Statistics shows that 415,226 startups were created in 2017, leading to a gain of 1.7 million jobs. And venture capitalists invested a record $130.9 billion in new companies in 2018.

Numbers like these help shape the conventional wisdom that business and civic leaders need to cultivate companies that embrace new technologies and encourage job creation around them.

Embracing Startups

“This is a remarkable time, and that’s why you’re seeing such strong growth in the economy. Mine are the companies that are creating all the jobs. The small businesses in America are doubling their size every year because they’ve been unshackled through either deregulation or lower taxes or whatever.”

Kevin O’Leary is one of those investors who is bullish on startups as a driver of new job creation. A businessman, author, and television personality, he is the chairman of O’Shares ETFs and is well-known for his appearances on the show Shark Tank.

WorkingNation caught up with O’Leary at the Milken Global Conference 2019. He tells us the rapid changes in technology are playing a key role in the companies in which he invests because they affect everything from job creation, to sales and distribution, to workflow.

He points out that so much of today’s workplace technology is cloud-based and relatively inexpensive. Those two factors are creating a low barrier to entry, providing startups with the platforms they need to scale, and allowing businesses to focus more on the products or services they sell.

This technology’s impact on scalability plays a key role in what O’Leary looks for in a company. He says most of the businesses he invests in have already gone through their initial growth phase and are looking to him to “pour gasoline on the fire.”

“So, I’m saying, ‘Okay, if we’re going to have 30 percent more people next year, let’s say we have 26 employees and you’re telling me we’re going to have 56, how are you going to organize that? What’s the plan?’

“Because what you’re going to find in a lot of these companies is, those 26 employees are in five different states. Or they’re working over in India, or they’re in Shanghai, or they’re doing something in Mumbai. This is a common structure today, particularly in technology companies. And so, I trust that they’ve already investigated the technologies in working for them, and they’ve got platforms that are expandable,” O’Leary explains.

Additionally, the gig economy has proven to be a growing benefit to entrepreneurs. Statistics show 42 percent of small businesses employ contract workers, making it less expensive for new firms and providing them with more flexibility.

Easier Entry to Worldwide Markets

For O’Leary, technology also has made it simpler for companies in which he invests to enter foreign markets immediately rather than first waiting to establish themselves domestically. He encourages startups to build that infrastructure into the business from the beginning.

“You start right away by selling internationally because you have all these platforms all around the world. You can go on Amazon internationally, Alibaba. There’s many other nascent and some very large verticals to sell products to.”

Along with scalability, and international sales, O’Leary cites changes in the way technology and these platform-based workplaces affect the nature of the day-to-day work experience.

“I invest in a lot of nascent companies that are racked and stacked with millennials. They have entrepreneurial ideas, I’ve got over 50 of them, and they are not used to working the traditional nine-to-five way that other companies have been built,” O’Leary says. “They have a completely different vision of how they’re going to live their lives and how they’re going to interact and work as they grow.”

O’Leary says now, more than ever, technology, and the ability to work remotely, directly impact hiring and workflow. Time and distance from the workplace are no longer barriers to employment, and the traditional work methodologies are going by the wayside.

“It’s project/task-based. In other words, all right, in the next 90 days, you got to get this done. I don’t really care where you do it, as long as you hit the target. And that’s where we now find that video conferencing, a lot more texting, a lot more work done, even in videoing a response and then emailing it to somebody.”

Startups – A Tempered Assessment

But despite eye-catching numbers and investor enthusiasm, there are some signs that startups may not be the economic panacea that many think they are. That’s because they don’t always reflect the jobs lost when startup companies fail. A 2018 study by the Small Business Administration (SBA) suggests that “business startups play an important role in job creation but have a more limited effect on net job creation over time.” That’s because the report found “about one-third of all startups close by their second year of existence and fewer than half of all startups are still in business after five years.”

The SBA study shows that the size of the business also has a determining effect on overall job creation. “Startups with fewer than 20 employees tend to have a negligible effect on net job creation over time whereas startups with 20-499 employees tend to have a positive employment effect, as do surviving younger businesses of all sizes (in operation for one year to five years).”

And a 2017 report by the St. Louis Fed shows that even though startups make sizeable contributions to job creation, that contribution only amounts to about two percent of total employment when looked at nationwide. It found only those companies 11 years old or more have a lasting impact on employment.

Then there is the downside of the jobs being lost to technology. A McKinsey Global Institute Study found that 39 million U.S. jobs could be lost to automation by 2030; as many as 800 million jobs worldwide.

Investors Unfazed

Those numbers haven’t dampened the enthusiasm of venture capitalists like billionaire investor Steve Case. He has acknowledged the potentially negative impact of technology on the workforce but believes the focus needs to be on how technology can help replace the jobs that are lost. His Rise of the Rest Seed Fund is aimed at spurring job creation in cities across the United States that are outside the coastal entrepreneurial hubs.

History has proven that, over time, workers displaced by technology have been picked up by new kinds of industry. The World Economic Forum (WEF) predicts technology will lead to a net increase of 58 million jobs worldwide by 2022. This will be driven by widespread high-speed mobile internet, the adoption of big data analytics, AI, and cloud-based communication.

These are precisely the types of technologies investors like Kevin O’Leary and others take into account when they consider investing in a startup.

Jeff Ryder is an award-winning journalist, writer, and digital producer. His credits include initiatives for Verizon, Penske Racing, Sprint, Sony, McDonald’s, and Rolling Stone.

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