The G8 and Startup APEC

Jonathan Ortmans

Despite more research and data from the World Bank and OECD, while plenty of attention has been given to “SMEs” in the past, multinational government gatherings have largely ignored the importance of stimulating new high-impact startups as a prime global economic growth strategy. This needs to change.

Upon request, I provided thoughts below for this weekend’s G8 meeting hosted by President Obama here on the East Coast at Camp David. Next month I have accepted an invitation to travel to Seoul to help launch Startup APEC where, with so many nations racing to build better entrepreneurial environments that attract smart entrepreneurs with the best ideas and networks, leaders appear poised to do more than pay lip service to entrepreneurs and rather include them in their central strategy for building economies.

Throughout the world in 2012, we are witnessing some convergence between top-down policymaking and hundreds of grassroots networks focused on smoothing the path of their nation’s nascent entrepreneurs. Not only are startups cool to a generation that once shunned “business,” thereby welcoming new creative talent, but new evidence shows they are the most potent driver of economic growth and job creation. Whether new firms grow or shrink is a real and vital measure of the collective fate of an economy. They give birth to innovative products and new markets, providing jobs to millions around the globe that generate wealth and raise living standards. National leaders are already eager for policies that create jobs. The rationale is simple. In the United States, new firms are the most effective source of new jobs. Research from the U.S.-based Kauffman Foundation using government data found that between 1980 and 2005, nearly all net job creation in the United States took place in firms less than five years old. While older businesses add jobs, they are not enough to offset the job losses that occur when other older businesses decline or shut down. On average, one-year-old businesses create nearly one million new jobs a year, while ten-year-old firms generate just 300,000. And in 2007, the last pre-recession year, young firms accounted for two-thirds of the U.S. economy’s new jobs.

Not all new businesses have the same potential. Many will fail and few will have more than 30 employees, but we only need some to achieve a very high level of ongoing growth. Companies that eventually generate one billion dollars or more in revenue will drive economic growth and job creation for many years. Kauffman research looks at the link between billion-dollar companies and economic growth–showing that about 15 of these billion-dollar companies arise every year. If those numbers were to rise to somewhere between 30 and 60, the United States would add a full percentage point to gross domestic product (GDP) doubling it in 18 years instead of 24. Gains could be measured not only in terms of rising incomes but also new technologies that improve daily life around the world. Whether it is Starbucks reinventing the cup of coffee, or Steve Jobs and Apple inventing whole new industries by unleashing an apps revolution on smart phones, high-growth firms invariably bring something new to society rather than simply responding to existing demand.

The challenge in front of APEC, the G8 and other platforms for global collaboration, is to increase the number of new starts and to raise their success rate so that more companies can become high-growth firms. For government leaders, this can be difficult. New firm creation cannot be “governed” and the traditional linear thinking of governments is antithetical to organic entrepreneurial activity. Entrepreneurship will always be messy and as such leaders need strategies to inspire and smooth paths—not create plans for new top-down programming.

The good news is that there are already thousands of local startup communities organized at the city level populated by smart, global, open, socially-motivated founders driven to do good and do well. A successful startup ecosystem typically leads someone from nascent inspiration and discovery through team formation and taking startup action all on their way to real scale and growth. We already know many of the traits of a success startup. We know about the importance of teams and co-founder dating, of mentorship, of remaining lean and being able to afford to recycle teams or ideas. We know that while a young person with a disruptive idea may be vital, innovative high-growth firms also have experienced co-founders with unique knowledge of their industry. And we know that venture capital—while important in some capital intensive industries as firms scale--is less of a factor for most new starts.

With such bottom-up startup communities constantly re-learning these lessons and adapting real time to what works, government is free to focus on the best rules and incentives. No government program will ever compete with bootcamps like Startup Weekend, or accelerators like TechStars. Government leaders should be focused on encouraging more citizens to join these communities, inspiring those who would otherwise not consider entrepreneurship as a path. For example, more than a dozen heads of state actively participate each November in Global Entrepreneurship Week which in one week attracts more than 7 million attendees to 33,000 activities in 125 nations. The initiative helps legitimize entrepreneurship, puts successful national role models on a pedestal and allows policymakers to see firsthand what is working among their own so they can focus on creating the best legal environment for nascent entrepreneurs and young firms to thrive in their country.

This spring, U.S. President Obama signed into law the JOBS (Jumpstart Our Business Startups) Act. In less than one month during a politically-charged election year, the U.S. House and U.S. Senate overwhelmingly supported a legislative package that combines measures in six different bills to make it easier for young companies to raise money. It is only one of a series of “startup bills” that have arisen from looking at entrepreneurship not from a perspective of firm size—small and big business--but firm age, namely those all important first five years of firm formation. These bills are part of a rush to support startups driven by new data and helped along by President Obama launching Startup America. This and other recent action in Washington are excellent examples of an emerging nonpartisan narrative that is founded on robust research that statistically explains the powerful relationship between new firm formation and economic growth. For the United States, this is leading to changes like amending high-skilled immigration laws (e.g. startup visas) and changes to capital gains rules, but every nation will have its own short list.

What matters for the G8, G20 and initiatives like Startup APEC, will be using data about economic growth and job creation to guide what national governments should measure in their pursuit of smarter policies to support high-growth entrepreneurship. Policymakers will likely find a paucity of data and plenty of myths driven by thirty years of tired dialogue about SMEs. But whatever each nation’s “startup act” looks like, focusing public dialogue on the inventors and makers of things at future G8 and APEC meetings would lead to the sharing of better information and ideas about how to improve the success rate of all entrepreneurs in a global effort to see more new firms improve lives and expand economies.

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