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Monday, April 1, 2013

Tom Still: Like ice cream and jelly beans, small businesses come in different flavors


By Tom Still
The role of small businesses in job creation in the United States is getting overdue attention from federal and state policymakers, thanks, in no small part, to studies that show virtually all net new jobs nationally are born of small, young companies.

While encouraging, such figures also come with important qualifiers that politicos should bear in mind as they debate innovative ways to stoke the fires of job creation.

Let's start with the concept of "net" new jobs. In a dynamic economy that is constantly reinventing itself, today's jobs may be part of tomorrow's unemployment line. It has always been that way in a market economy, with new ideas and companies pushing up from below and crowding out older products, services and firms. It's what economists have long described as "creative destruction" or "economic churn."

Of course, many older companies create jobs. Most long-established companies in Wisconsin do so every day. But older companies also tend to shed jobs as they become more efficient, lose ground to competitors or suffer loses during an economic downturn. On balance, job creation among larger U.S. companies has been something of a wash for three decades or more.

Young, small companies create jobs by definition – even if most of them are one-person shops. While the survival rate for young companies isn't universally high, there are enough new companies created every year to keep the process of "creative destruction" humming along.

All small businesses are not created alike, however. There are four basic categories – three of which are not major job creators, nor ever intend to be, and one that more than pulls its weight when it comes to churning out jobs.

"Mom and pop" businesses are classic small businesses – bakeries, beauty salons, restaurants, retail shops and more – that add tremendous value and stability to the economy. But their owners generally don't hang an "Open for Business" sign on Main Street believing they will employ dozens or even hundreds of workers someday. For them, employee growth is a choice, not an imperative.

"Lifestyle" businesses are often launched by people who have taken an avocation, hobby or talent to the next level. Like owners of mom-and-pop operations, the owners of lifestyle businesses aren't typically driven by company growth. They want to be profitable and earn a good living, but they rarely see a bigger workforce as helping them meet those goals.

"Social" businesses are usually the product of an owner's belief system and often start with some sort of greater-good cause in mind, whether it's the environment, health and wellness, working with children, or providing some sort of human service. While staying in business is a goal because that also helps the cause, creating jobs is usually down the list.

"High-growth" entrepreneurs are the type most likely to create jobs because they want to grow – and they believe their products or services are market-disrupters. These are entrepreneurs who say they expect to create 20 or more jobs in five years, who pursue angel and venture capital, and who dream of scaling their young company into tomorrow's Facebook, Google or Home Depot.

The distinction should matter to policymakers. While governments may want to pursue small business policies, that's not necessarily the same as policies focused on high-growth entrepreneurship. Small business policies might concentrate on ensuring access to credit, providing technical assistance and removing outmoded regulations. Entrepreneurship policies could include strategies to encourage availability of early stage capital in high-growth sectors, protect intellectual property, ease technology commercialization from universities and stay in front of new regulations – particularly those that might offer opportunities.

Innovation can be found in all types of companies, large and small, but if national and state policy goals are centered on job creation, it makes sense to tailor some of those policies to high-growth startups that have both the will and the way to grow.

-- Still is president of the Wisconsin Technology Council. He is the former associate editor of the Wisconsin State Journal in Madison.

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