The job-creation potential of start-ups

Cite this Article
Larry Ribstein, The job-creation potential of start-ups, Truth on the Market (August 19, 2011),

A friend who is very active in startups and angel investing in southern California emailed me about whether I knew of research on the potential multiplier effects of a company on job formation.  Examples that came to her mind were eBay and Mary Kay, which create many small businesses.  I thought of Google as an incubator and exit opportunity for small firms.

She wants to know because she’s thinking about a business school competition for new business ideas that will give a special prize for job creation if this can be measured at an early stage before any jobs actually have been created.

This seems to me to be a great question to be asking in an economy that desperately needs jobs.

I emailed this to several friends, who agreed with me that it was an important issue but were not sure how to answer it.  One referred to established businesses that invest in R & D which leads to ideas that the established business fails to implement.  But he notes that new firms like those in the business competition are unlikely to have large R&D expenditures at the formation stage. Another suggested looking at whether the start-up is a platform technology and asking applicants to articulate the nature and scale of potential spin-offs from their business.

My correspondent followed up with a question whether anyone knew of “research on what parameters correlate directly with job creation.” E.g., cash flow; the need for feeder companies inherent in the start-up’s business model (e.g., Apple’s apps and iTunes; the car industry).

Any ideas out there?