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Do Start-Ups Generate Jobs?

 
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By Peter Behr
Washington Post Staff Writer
Monday, June 28, 1999; Page F32

The 85 employees of Torrent Networking Technologies Corp. in Silver Spring struck gold last April when their small communications manufacturing firm was purchased by giant Ericsson AB of Sweden for $450 million, a bundle that the employees shared in varying degrees with investors.

Start-up successes like Torrent are the high-octane additives that energize the economies of the nation and its regions, according to Cambridge, Mass.-based analyst David Birch, who calls them the gazelles of the business world.

The latest analysis by Birch's Cognetics Inc. cites fresh evidence of how important small start-ups are to job creation.

As the nation emerged from the recession of 1990-91, "it was the younger firms that carried the economy," Birch said. "On average, the younger the firm, the faster it grew."

Firms with 19 or fewer employees in 1994 increased their employment by nearly 19 percent on average over the 1994-98 period. By contrast, mid-size firms (20 to 99 employees in 1994) grew 8 percent on average; firms with 100 to 4,999 employees expanded by 5 percent, and the largest firms grew just 1 percent over the four years.

Looking at state-by-state job growth, Birch concludes that the more growth that's going on among smaller firms, the more vibrant a state's economy tends to be. Small firms in the Washington region increased payrolls more than 24 percent over 1994-98, well above the national average. That's one of the reasons the region made Birch's list of top 10 economic "hot spots" nationally.

Other analysts say Birch's conclusions can be misunderstood if you don't pay attention to what the numbers actually say.

In this case, Cognetics took a comprehensive list of 14,000 U.S. business establishments in 1994 and tracked how employment at each firm had changed by 1998.

His report doesn't mean, for instance, that small firms provided the bulk of the nation's job growth last year. Some of the most successful companies accelerated rapidly after 1994 and had hundreds of employees last year -- but they are still in the 1-to-19-employee category, based on their 1994 status.

The point, Birch says, is that companies that started small in 1994 created jobs at a much faster rate over the four-year period than their larger competitors did. "If you're trying to find a place to work or invest, this is where you should look."

It's not an easy search, because only one in five small companies in 1994 had achieved exceptional job growth four years later.

And there's a flip side to the Washington area's high "vitality," as measured in Birch's rankings.

Yes, there's a high birth rate of small start-ups. But the death rate is high, too, notes analyst Jonathan Brandow.

Using a database similar to Birch's, the Brandow Co. in Camp Hill, Pa., found that only 58 percent of companies doing business in Virginia in 1996 were still open in 1999. The survival rate in Maryland was also 58 percent; in the District, 56 percent. All three jurisdictions were below the nationwide survival average of 62 percent, placing near the bottom in the state rankings.

For people with the stomach to face both success and failure, however, the place to look for excitement and rewards is among the small companies, Birch says.

"The sooner you find these companies, the better. It's a lot more rewarding to be the 15th employee of a successful start-up than the fifteen hundredth."

© 1999 The Washington Post Company

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