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On Small Business
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Posted at 04:26 PM ET, 12/10/2011

How startup failures drive economic success

Entrepreneurs don’t often succeed with their first startups, and many continue to fail with their second and perhaps even their third. But that’s not the point on which policy makers should focus, according to several experts who spoke Thursday on the Hill.


Moderator Steve Felice of Dell (far left) and panelists Scott Case and Jonathan Ortmans listen as the SBA’s Sean Greene responds to questions. (Neshan Naltchayan )
Economically speaking, the important thing is that they almost always try again.

“Small business owners, if they fail at their first attempt, they’ll immediately go take a job in their industry,” said Scott Case, chief executive of the Startup America Partnership. “The local salon owner who doesn’t make it will go cut hair for someone else. But not a startup founder. A founder will shut down their business and just start again. And that’s the fuel that drives the market ahead.”

Case was among a group of business leaders and lawmakers who spoke Thursday at a forum hosted by the Center for Public Policy Innovation. Initially, the panel was meant to discuss ways the government can foster job growth by promoting innovation and unleashing the power of small business, but experts quickly clarified that it isn’t necessarily small firms — but rather new firms — that hold the key to economic recovery.

“What we really need to do is concentrate on these high-growth, high-impact firms,” said Jonathan Ortmans, a Kauffman Foundation senior fellow and president of Global Entrepreneurship Week. “Research shows that almost all net new jobs come from firms less than five years old. That poses questions about how much should we be talking about new and young firms rather than small firms.”

Debate surrounding the importance of distinguishing between small businesses and new businesses has recently heated up in the nation’s capital. A month ago, speaking at the Federal Reserve, a pair of economists from the National Federation of Independent Business and the University of Maryland disputed whether access to capital remained a major concern for American businesses. Ultimately, most of the dispute hinged on their different perspectives regarding who could best jumpstart the economy — the nation’s smallest employers or the nation’s newest employers — all because the two groups reported starkly different observations of the current lending environment.

On Thursday, Ortmans and Case sided with the notion that policy makers should more strongly emphasize the interests of early-stage startups, noting that most companies’ hiring booms take place during their first few years in existence and that high-growth companies consistently account for some of the country’s greatest advances in technology. They also urged the government not to overemphasize the fact that many startups won’t still be in business several years down the road.

Why? Because even though those companies won’t still be in business, those entrepreneurs will almost assuredly be back with something better.

“This is a recycling and reformatting process, Ortmans said. “I don’t sit there and think, ‘Oh well, 80 percent of those firms failed last year.’ I think about the people behind those firms and how much stronger their networks and ideas are, how much more knowledge they have about their unique industries, how much stronger they are having gone through that process.”

Case noted that high-growth startups also face vastly different challenges than their mom-and-pop counterparts, with high-growth firms less often burdened by regulatory hurdles but more often struggling to find the talent and expertise they need to grow their businesses quickly. He urged the government to help entrepreneurs find skilled workers and partner with big corporations.

“These startups are special and they have a different mindset,” he said. “They also have a different set of needs, sometimes in terms of financing, but largely in terms of knowledge and expertise. We have to connect them with help from big institutions.”

And as for whether policy makers should distinguish between startup founders and traditional small business owners, Case suggests going straight to the source.

“If you sit in a room of 200 startups, and you ask which of them are small businesses, no one will raise their hand,” he said. “What they’ll tell you is that they are giant businesses that just haven’t scaled yet.”

Follow On Small Business and J.D. Harrison on Twitter.

By  |  04:26 PM ET, 12/10/2011

 
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