Sunday, October 03, 2010

Jumpstart Job Creation Through Startup Businesses

After some very positive signs of recovery in the spring, job growth in the Pittsburgh Region has been stagnant during the summer. In August, we still had over 31,000 fewer jobs than we did in 2008, and 14,000 fewer jobs than we did in 1999. That’s bad news for the nearly 100,000 workers in the region who are unemployed.

Where should we look to jumpstart job growth here? Although conventional wisdom has held that small businesses are the principal engine of job growth in the U.S. economy, a recent study from the National Bureau of Economic Research indicates that the biggest contributor to net job growth isn’t small businesses, but new businesses, i.e., entrepreneurial startup firms. Business startups accounted for all of the net new jobs created in the U.S. between 1980 and 2005.

That doesn’t mean that older and larger firms don’t create new jobs – they do, but they also eliminate jobs through layoffs, plant closings, bankruptcies, etc. The study says that in the absence of startup firms, job creation and job destruction by other firms would result in no net job growth.

Although Pittsburgh was once one of the most entrepreneurial places in the country, in recent years it has become one of the least. Data from PittsburghToday show that the Pittsburgh region has one of the lowest rates of startup businesses compared to other regions, and a smaller percentage of our jobs are in young firms than other comparable regions. This may also explain why, as described in a previous post, Pittsburgh has fewer jobs in key technology sectors than most regions in the country.

Pittsburgh also has a weak reputation as a home for entrepreneurs. Pittsburgh ranked 60th in Fortune Small Business magazine’s 2008 “Best Places to Live and Launch a Business” and ranked 48th out of 50 large cities on Entrepreneur magazine’s “2006 Hot Cities for Entrepreneurs” list.

What is needed to make Pittsburgh one of the top regions in the country for startup companies, and how can you help?

First, we need to encourage cutting-edge research and development, since every successful startup starts with a good idea. We already have a wealth of innovative ideas being generated at our universities, thanks to nearly a billion dollars in research each year. But the universities need your help to build their endowments so they have adequate facilities and personnel to support that research.

Second, we need to encourage talented university students and faculty to turn that research into commercializable products. For example, Project Olympus at Carnegie Mellon helps students and faculty explore the commercial potential of their research. However, this innovative and valuable program has no long-term source of funding and could have a much bigger impact with more resources. You could help by making a contribution to support it.

Third, we need to provide technical assistance and seed funding to entrepreneurs, particularly those with products and services in high-growth sectors like advanced materials, energy, information technology, and medical devices. Thanks to Innovation Works, we already have one of the best overall programs in the country for supporting technology-based startups. But it is overly dependent on state government funding, and it’s currently facing significant cutbacks due to the state budget deficit. You could help sustain it by making a tax-deductible contribution to its operating budget.

Fourth, we need to invest in the startup firms themselves so they have adequate capital to grow. The most critical need is “angel investors” – high net-worth individuals making investments of $25,000 to $250,000 early in a startup company’s growth. The Pittsburgh Region is fortunate to have BlueTree Allied Angels, a professionally-managed angel network, but BlueTree needs more angel investors to join its ranks, The next governor could help by creating a tax credit program for angel investors in Pennsylvania similar to what Ohio and a number of other states have.

Finally, we need to buy the products and services those startup firms produce. A company can’t be successful without customers, and many local startups have been forced to go outside the region to find their first customer. You can help by looking at the BlueTree and Innovation Works websites to identify startup companies with products or services you could use.

We have a good foundation to be one of the most startup-friendly regions in the country. But current programs need to be significantly expanded, and we need a more aggressive effort by public officials and regional economic development agencies to tell prospective entrepreneurs that Pittsburgh is committed to helping their companies be successful here.

(A version of this post appeared as the Regional Insights column in the Sunday, October 3, 2010 Pittsburgh Post Gazette.)


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