Sunday, October 07, 2012

High-Growth Firms Needed To Reduce Unemployment

The most recent economic data for the Pittsburgh Region continue to be a cause for concern. Our unemployment rate has increased for two months in a row. Over 95,000 of our residents were unemployed in August, more than any August since 1985. Job growth in the region has been slowing, and most of the jobs being created are not in the high-wage sectors where they were lost. Our labor force won’t keep growing for long if there aren’t enough job opportunities for those looking for work.

How can we accelerate job growth? National studies have consistently shown that most new jobs are created by small businesses, and recent studies have found that virtually all net new jobs are created by young startup firms. Some of the most desirable young firms are those with fast-growing revenue, because more revenue typically means more jobs, and rapidly growing revenue means new jobs will created quickly.

The federal government doesn’t report information on how many fast-growing firms there are, but a national publication does. Each year since 1982, Inc. magazine has published a list of the “Inc. 500” – the fastest growing young firms in the country. To be considered, a firm must: (1) be privately-owned (i.e., its stock is not publicly traded); (2) have high revenue growth over the previous three years; and (3) have at least $2 million in revenue in the most recent year. The 500 firms with the highest revenue growth in the country make the Inc. 500 list. Although being on the list is no guarantee of long term success or large job creation, many of the companies that have made the Inc. 500 list have created thousands or tens of thousands of jobs in the course of the past decade. Past Inc. 500 lists have included companies like Intuit, Jamba Juice, Jiffy Lube, Microsoft, Oracle, Qualcomm, Under Armour, and Zappos.

Last month, the Kauffman Foundation (a large foundation headquartered in Kansas City that has dedicated itself to studying and supporting entrepreneurship) released a study that analyzed the locations of Inc. 500 companies over the past 30 years. Its findings should be a wake-up call for economic development efforts in Pittsburgh.

Although the study showed there was at least one firm from Pittsburgh on the Inc. 500 list every year since 2001, there have never been more than 6 on the list in any one year. On average, Pittsburgh had 3 firms on the list every year from 2001 to 2010. (In 2012, there was only one Pittsburgh firm on the Inc. 500 list – an IT staffing firm called Independent Catalyst. In 2011, Precision Therapeutics and Urban Lending Solutions were on the list as well as Independent Catalyst.)

In contrast, the Washington, DC region had an average of 39 firms on the Inc. 500 list every year between 2001 and 2010, more than 10 times as many as the Pittsburgh region. Boston had an average of 21 firms every year, 7 times as many as Pittsburgh. Atlanta had an average of 19 firms on the list every year, Chicago had 18, Dallas had 16, Philadelphia had 14, Seattle had 12, Denver had 9, and Indianapolis had 7. Even Buffalo had more firms on the list (nearly 4 per year) than Pittsburgh.

In fact, Pittsburgh ranked near the bottom (42nd) among the 52 largest metropolitan areas in the country in producing Inc. 500 firms relative to population. It also had fewer Inc. 500 firms relative to population size than 33 smaller metropolitan regions, including Provo (Utah), Ann Arbor (Michigan), Tulsa (Oklahoma), Des Moines (Iowa), and Akron (Ohio). Scranton, Pennsylvania had a firm on the list almost every year, a higher rate of success relative to population than Pittsburgh.

The Kauffman Foundation researchers looked for factors that might explain which regions had the most firms on the Inc. 500 lists. What they found surprised them. Although the availability of venture capital, the amount of academic research, and the number of patents filed have often been viewed as important indicators of a region’s ability to create new startup firms, the Kauffman study found that none of those factors was significant in predicting the number of Inc. 500 firms.

The most significant factors were the proportion of a region’s jobs that were in high-technology sectors and the number of science and engineering graduates per population. This isn’t surprising because many fast growing firms aren’t inventing a brand new technology; they’re merely finding a new way to use an existing technology, such as computer software, the internet, or medical devices. That means that many successful entrepreneurs will need to have skills and experience in using technology, but the most important skills will still most likely be creativity and entrepreneurship, which is why high growth firms can and do start anywhere.

With such a small number of fast-growing firms in the last decade, it’s not surprising that Pittsburgh also had one of the slowest rates of total job growth in the country before the most recent recession. If we’re going to accelerate job growth in the decade ahead, we’ll need more fast-growth firms to lead the way.

The best-funded economic development efforts in Pittsburgh have focused either on trying to attract large new facilities or on supporting commercialization of completely new technologies, but the Kauffman study suggests we need to broaden our economic development focus and help entrepreneurs in a wide range of industries to start up and grow rapidly.

We already have many effective programs to provide advice and mentoring to entrepreneurs, but startup firms also need capital, customers, and skilled workers in order to succeed. We’re fortunate to have a professionally managed network of investors in startup firms (BlueTree Allied Angels) but more high net worth individuals in our region need to join so that entrepreneurs don’t have to move away to find capital. Banks need to help by providing working capital to small firms with significant growth prospects. Large firms can help by buying the products and services startup firms produce, so young firms aren’t forced to leave the region in order to find their first customer. And a much higher percentage of our high school graduates need to be proficient in math and science so rapidly-growing technology businesses can find the kinds of workers they need.

Pittsburgh never makes the national lists of “top regions to start a business,” and it’s time we made that a regional goal. If we want our region to grow, we need to put out a much bigger welcome mat for entrepreneurs.

(A version of this post appeared as the "Regional Insights" column in the Sunday, October 7 edition of the Pittsburgh Post-Gazette.)


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