Peter Drucker, the notable business thinker of the 20th Century once said that business was simply about two things: marketing and innovation. But he defined innovation not as possessing brilliant ideas but in being conscientious. Using Drucker’s definition of innovation, we – as leaders, as a municipality, as a state – need to more radically implement a conscientious policy of supporting entrepreneurship and innovation centers as a mandatory institution that services each community’s wellbeing just as we expect to find fire and police departments, public schools, libraries, parks and medical centers in every city. Lest we forget, it is new startups that are creating the most new jobs and new revenue, according to the Kauffman Foundation. Policymakers need to tie their economies with entrepreneurial growth.
With no disrespect to our municipal small business assistance centers, the Small Business Development Centers (SBDC) or to the chambers of commerce, we need to get our heads around those facts that drive our economy. While these institutions provide a valuable service to small businesses, what’s blatantly obvious is that their services are utilized randomly than as an inclusive culture that we as a community should expect in our economic agenda. If over 60 percent of businesses fail by the third year that should be evidence enough that our existing methods of supporting entrepreneurs needs a lot of improvements.
Innovation and Entrepreneurship Keep Our Economy Strong
Innovation and business development should be at the heart of a healthy community because they create new jobs and generate the revenues necessary to provide our public services. China is an example of this as are more and more nations such as Denmark, Finland, Sweden, Hungary and New Zealand – all with higher startup rates per capita than the United States. (Source: Gallup World Poll)
Moreover, as our jobs economy migrates at a rapid pace towards a self-employed workforce, we must consider a new method of supporting their wellbeing in the same way as employees have an Employment Development Department. According to the Freelancer Union, the self-employed workforce will be at least 40 percent of all workers by 2020 even by conservative estimates. Being proactive to support this growing trend now will serve our economy far better than continuing to ignore the importance of entrepreneurship and innovation as natural and necessary change agents.
Innovation is critical for our economy to grow but it must go hand-in-hand with entrepreneurs who can run with the idea and bring it to market. No matter how great an idea, if it doesn’t become marketable, it has no value to society. True entrepreneurs are doers – and they calculate the risks and go after what they believe is the right course of action with a sense of passion and urgency.
Growth in Jobs and the GDP Only Comes with New Entrepreneurial Activities
Think about it this way, jobs and the national GDP growth rarely follow innovation. But growth in jobs and the GDP will always follow the rise of entrepreneurial activities. Both the Gallup polls and the Kauffman Foundation have compiled enough data on this factor to indicate that while innovations are valuable, they are not always of value to the customer; thus having no economic or social benefit.
According to the Kauffman Foundation, nearly 100 percent of the US net new jobs are coming from new, small businesses (one to 19 employees). Yes, these are entrepreneurs who oftentimes are sweating the finances and working ungodly hours creating jobs and increasing the local tax base, usually with little support or capital infusion. These are the very jobs that job training programs are servicing and for which a community almost unknowingly gains economic benefits. By periodically taking away incentives for entrepreneurship, those businesses go away and job training programs become irrelevant.
We need continuous support of our innovators as the federal government has done for the sake of the economy, but it’s the entrepreneurs who gladly take on the role of instigators; who experiment and iterate, who figure out how to market and sell these new innovations. It’s the entrepreneurs who are asking the critical questions: 1. Who are the customers? 2. What value is this innovation bringing to them? 3. How many customers will buy this? 4. How will we deliver it better than anyone else?
Every local community needs to finance and support an economic ecosystem consisting of innovators, entrepreneurs, entrepreneurial support systems, and policymakers working hand-in-hand in a circular system. Like a garden, we need seeds, water, fertilizer and sunshine. Cut out one and the garden dies.
5.4 Million Businesses Justify A Stronger Support System
The demise of many entrepreneurs was felt during the Great Recession of 2008. Until that point, new startups outpaced business failures by 100,000 each year. But from 2009 to 2014, the annual failures outnumbered new startups by 70,000 – 470,000 failing to 400,000 new startups. It was the first time in American history when the numbers went in reverse. (Source: Gallup Poll, 2014)
In terms of jobs, this translates to a high of 138,000,000 employed at the start of the 2008 to the elimination of over 8,000,000 jobs at the low point in January, 2010. As startups are beginning to come back, the number of jobs has also risen to an all-time high of 142,000,000 as of August 2015. (Source: Bureau of Labor Statistics) Of this amount, the US Small Business Administration estimates that 63 percent are employed by firms with one to 19 employees.
While 2015 looks promising with more startups since 2008, the United States still lags behind 11 other nations in business startups. According to Kauffman, new startups are the biggest generators of jobs. Overall, there are 6 million businesses in the country with 3.8 million of them having four or less employees. Companies with 5 to 9 employees are one million strong. 600,000 firms have 10 to 19 employees (meaning 5.4 million or 90 percent of all businesses have under 20 employees). 500,000 businesses employ 20 to 99. There are 90,000 companies with 100 to 499 employees, 18,000 have 500 employees or more and 1000 firms have over 10,000 employees. (Source: Gallup Poll, 2014)
Getting Our Heads Around A Formal Economic Ecosystem
If the Kauffman study is correct, that young firms are the greatest engine for job creation (1.5 million new jobs per year by firms less than a year old), we need to rethink our local policies encouraging a beehive of entrepreneurial activities in every city. If we change our paradigm of innovation and entrepreneurship centers as new income generators for the local economy, the improved odds for businesses to succeed means a long lasting revenue stream for the city coffers.
Specifically, these centers would include hands-on training, one-on-one advising, access to capital, incubators with a systematic support system, shared workspaces, post-launch support services, community-wide business launch festivals and specialized network gatherings. In addition, public schools need to update their curriculum to prepare students for the emerging economy by introducing entrepreneurship, creativity and financial literacy as experiential training rather than classroom lectures.
Economists may present data showing the historical turbulence of our economic system but we also haven’t supported a publicly funded economic ecosystem. We seem to be caught in a time warp where we continue to believe in entrepreneurs as lone wolves who prefer operating without anyone interfering. We know that when this happens, 63 percent of them go belly-up by the third year. And we also know that when entrepreneurs work in tribes, putting their ideas out there to discuss and improve, 89 percent of them get to the five-year benchmark when steady customers and profits are realized.
The facts are staring us in the face: entrepreneurs bring innovation to market. They produce nearly 100 percent of the net new jobs in America. Profitable businesses pay their fair share of taxes and contribute their expertise to the market which then creates an exponential aftereffect allowing others to thrive. It’s time to shift our thinking and develop a conscientious innovative solution. What we need is an economic ecosystem invested through public funds with every expectation of generating jobs and strong revenues.