For a couple of years now, we've been in a tech start-up boomlet: Lots of new small computer-centric businesses chasing venture capital not just in Silicon Valley, but to a certain extent smaller towns around the country. Tech start-ups now even have their own advocacy groups that produce data on their economic impact, just as the Bigs do, and try to impress upon legislators the benefits of creating start-up-friendly communities. Mainly, the argument goes: Jobs! Here's how to incubate the next Facebook, Microsoft, and Google--or at least a bunch of medium-sized Ubers, Instagrams, and Foursquares.
But in the aggregate, how well do tech start-ups foster growth, compared to other industries? Even if they create a few jobs quickly, like an instant sugar high, don't most of them soon fail?
The start-up lobby, Engine Advocacy, and its booster the Kauffman Foundation are out with a study today that tries to answer that question. Their findings, using Census data and private surveys, present a mixed case for tech start-ups (which they define as new businesses with a high proportion of employees in science, technology, and engineering fields). Here are a few indicators:
Young tech firms do add jobs at a higher rate than the private sector as a whole, but over the longer term--when factoring in business failure--also shed jobs more quickly:
Out of those that survive, the dynamic is similar:
Also, interestingly, the older tech firms tend to employ many more people--you typically don't stick around for a long time as a small-to-medium tech company, in what's called the "up-or-out" phenomenon:
Secondly, tech firms started more frequently through the recession than the rest of the private sector (where the dearth of new business formation has been widely lamented):
But they also employ fewer people on average, because it takes less manpower to run a tech-enabled business:
Although, because of the higher rate of new business creation, very young tech firms now employ more people than those in the private sector overall:
The rest of the report looks at regional density of start-ups, which has the effect of listing some small places--like Fort Collins, Colo. and Cheyenne, Wyo.--as start-up hubs, while New York City and Los Angeles go unmentioned.
Overall, the story is still one of potential: Tech-centric businesses are starting faster than conventional ones. But they're also more likely to cluster around existing high-tech job centers, like big tech companies and universities, so not every place has the same ability to formulate a start-up hub from scratch. And even if they ramp up fast and employ lots of people in the near-to-medium term, they fail at the same rate as the rest of the private sector as a whole. So while it's smart to be a good place for lots of people to start businesses that live for a while before they fail--in hopes that a few of them might survive and thrive--don't expect your podunk burg to become a boomtown when the start-ups move in.