Why Starting Smaller Really Matters

In Starting Smaller; Staying Smaller: America's Slow Leak in Job Creation, we focus on declining contributions of new and young firms to employment in the U.S. over the last decade. 

And when people ask why this matters I say because "what you are born with, is what you have to live with." This is the most important thing I have learned from studying business dynamics at the national level.

What do I mean?  Look to the following chart from the report:

http://www1.kauffman.org/Blogs/DataMaven/July-2011/Why-Starting-Smaller-Really-Matters/Screen-shot-2011-07-13-at-6-37-18-AM.aspx 

When we follow businesses born in the same year, over time it becomes apparent that they follow some steady trends. 

Namely, your total cohort employment tends to be fairly sticky at age 2 (the solid red line above), about as many hirings as firings in total, but by age 5 the total employment of the cohort has dropped to 90 percent of its initial total (dotted red line above). 

Anything below 1 on this graphic means that the cohort of businesses has lost jobs in comparison to what they were born with; above it means the cohort has gained jobs in total. 

Notice that the lines on this graphic are almost always below 1. 

So, when a cohort of new businesses starts with less employment, it keeps less employment as it ages. The BLS and Census data show that in the last 35 years, what a business cohort has started with in terms of employment, is likely to be that cohort's maximum employment over time. 

As we point out in the report, the cohort of businesses started in 2009 began with between 700,000 and 1,000,000 employees fewer than would have been expected historically. 

There is also evidence from BLS that this slowdown in employment generation has been going on for much longer. 

Thus, it seems we have been accumulating recent new business cohorts with less employment potential. 

And indeed, what people fail to realize is that the population of U.S. businesses is just like the population of U.S. - a steady accumulation of years of small changes which often go unnoticed at any point in time (see Neutralism and Entrepreneurship for a good discussion). 

In the U.S. case, new businesses provide a new lifeblood of business activity, fueling hiring, entry of more productive business concepts, and the like. 

Individual U.S. businesses come and go but on the average there is a steady and slow accumulation of businesses, driven by new entrants over time. 

With fewer and fewer jobs at the start and declining rates of employment retention in cohorts of businesses, as shown above, America's slow leak in job creation accumulates into a major part of America's jobs crisis. 

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e.j. reedy data maven

E. J. Reedy

As a director in Research and Policy, E.J. Reedy oversees the Ewing Marion Kauffman Foundation’s research initiatives related to education, human capital development, and data.

Since joining the Kauffman Foundation in 2003, Reedy has been significantly involved in the coordination of the Foundation’s entrepreneurship and innovation data-related initiatives, including the Kauffman Firm Survey, for which he served as a principal investigator, and the Foundation’s multi-year series of symposiums on data, as well as many web-related projects and initiatives. He is a globally recognized expert in entrepreneurship and innovation measurement and has consulted for a variety of agencies.