There has been an ongoing explosion in entrepreneurial activity in recent years, supported by ubiquitous cloud services, accessible, low-cost open-source software, big data analytics capabilities, and professionals hungry for new opportunities beyond the 9-to-5 corporate walls. And we’re not just talking about Silicon Valley.
A recent study calculates that the number of technology-based startups in the US economy grew 47 percent in the last decade, and these new firms have been “making an outsized contribution to economic growth.”
The analysis, released by the Information Technology and Innovation Foundation (ITIF), a science and tech policy think tank, is intended to make the case for more government support of tech-driven startups. But it also points to the fact that technology is paving the way for more entrepreneurial thinking in all locales across the nation. Again, thanks to cheap, ubiquitous technology, many people have opportunities to be a disruptors or part of disruptive ventures. As Rob Atkinson, president of ITIF and co-author of the report (along with J. John Wu) put it, tech-driven ventures “offer better-paying, longer-lasting jobs than other startups, they innovate more, and they are more likely to export their goods and services, which makes a disproportionate contribution to growth.”
Plus, he added, don’t get discouraged at the sight of huge mega-players — such as Amazon, Google or Microsoft — eating up oversized shares of the market. “There is a false impression that because some technology-driven companies have become hugely successful, there is now no room for new entrants,” he opined. “But that’s clearly not the case. Technology and innovation-driven startups are thriving.”
Opportunities with large, established organizations have been flatlined for decades. Total employment at the Fortune 500, for example, stood at 27 million in 2015, up seven million since 1995. The total US workforce grew by 18 million in the same time period. Fortune 500 employment has consistently been about 17% of the total workforce.
The ITIF report finds technology-based startups—defined as firms 10 years old or younger in tech-based industries — “have been getting better at creating jobs and staying in business.” The report finds, for example, that tech-based industries have the highest employment multipliers—one tech-based job creates five jobs in other industries. In addition, wage growth among tech-based startups was higher than overall U.S. wage growth from 2007 to 2016 (20 percent versus three percent).
Atkinson and Wu report that since 2007, the number of start-ups has increased 47 percent, from 116,000 firms in 2007 to 171,000 in 2016, while startups as a share of all technology-based firms have increased from 72 percent to 73 percent. “The number of start-ups remained stable through the recession, started to recover from 2011 to 2013, decreased slightly in 2014, and increased over the past two years.”
The glow around startups as job-creation machines has its detractors, however. Daniel Isenberg, a Babson College professor and founding executive director of the Babson Entrepreneurship Ecosystem Project, for one, feels there may be a halo effect around startups — shaped by the multi-million and multi-billion-dollar valuations of some Silicon Valley players — that mask their underlying struggles and failings. In a recent article in Harvard Business Review, he observes there is a ‘survivor bias’ at work: “Since so many new companies fail in the first years, the few outliers who do jump successfully through the many hoops are by definition more robust as businesses, and so dramatically distort our views. Hence, you could say ‘startups create jobs’ – as long as you ignore the large majority that don’t.”
The ITIF study attempted to overcome some of the fuzziness around what constitutes a tech-driven “startup,” pinning its definition down to 10 technology-based industries: pharmaceutical manufacturers, medical device manufactures, computer and electronic manufacturers, semiconductor machinery manufacturers, semiconductor component manufacturers, aerospace manufacturers, data processing services, computer systems and design services, software publishing services, and R&D-performing services. “Although firms in these 10 industries make up less than five percent of U.S. businesses, they make outsized contributions to income, employment, innovation, competitiveness, and productivity,” Atkinson and Wu write.
The study is not meant to suggest that launching or building a tech-driven startup results in sales and revenues gushing through the front door. Actually, the process of building such a business is very challenging, and takes time and patience. “They often experience accounting losses for several years because they undertake heavy initial R&D and prototyping and testing investments, often many years before developing a significant revenue stream,” Atkinson and Wu point out. “Many fail somewhere along this process, but if their technology and business models succeed, they often experience robust growth rates, hiring skilled and semi-skilled workers and paying well above the median wage.”
To succeed, tech-driven startups “face a set of challenges different from that of the typical start-up. They must find a way to grow before being able to make sizeable and sustainable revenue. They must be able to cope with significant global competition. They need to be able to develop and protect their intellectual property. And they need to be able to attract talent skilled in technology development.”
At the same time, as they grow, tech-driven ventures offer better opportunities to professionals. For instance, they pay an average of $102,000, more than double the current US average of $48,000, the ITIF authors state.
The ripple effect of entrepreneurial startup activity is also notable. indirect job creation. “These are jobs created in other firms that technology-based firms conduct business with—for example, manufacturing jobs in production supply chains, laboratory technicians in third-party laboratories, hospital workers where biotech firms conduct trails, and lawyers and accountants that help firms. They are also responsible for induced job creation—the jobs created by the spending of their employees on everything from groceries and financial services to entertainment.”
And, importantly, they provide people with an entrepreneurial spirit, and a recognition that cheap, ubiquitous technology — such as cloud services — open up new avenues of innovation. This isn’t just limited to entrepreneurs in one-person startups — innovators within larger organizations can also build their own ventures to help move their employers in new directions. The DIY economy is here.