The job-creation potential of start-ups

Larry Ribstein —  19 August 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?

Larry Ribstein

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Professor of Law, University of Illinois College of Law

3 responses to The job-creation potential of start-ups

  1. 

    Some companies create business eco systems in which other companies can thrive. eBay is one. Google is one, having spawned the whole SEO industry and greatly facilitated online commerce and content businesses. Facebook is another, having spawned the whole social marketing industry. Apple’s iTunes is another, allowing all kinds of content creators to profit from the sale of downloadable media. Amazon’s Kindle marketplace is another, allowing small virtual publishers such as QuidProLaw.com to flourish. None of these companies are really product or ‘value chain’ companies; these are all companies whose core value configuration is a network configuration. They create value by enabling linkages that otherwise wouldn’t happen. You can think of such companies as being like the tropical reef around which cluster a huge variety of animal and plant species. Looking for add on jobs, I would look for companies that create networks, because the networks will create room for new companies that fit into the network. There have been many new kinds of network value configurations created in the last two decades, and I doubt very much that we are done.

    The other obvious category of company that creates add on jobs is a product that is so innovative that it demands a whole new value chain. The automobile and the personal computer are both examples of new kinds of products that demanded the creation of pre and post sale value chains, with the companies in those value chains generating many jobs. The problem here is that such blockbuster products are few and far between, and it’s not obvious what the next one would be.

  2. 

    The Kauffman Foundaton is putting together data on this: http://www.kauffman.org/Section.aspx?id=Research_And_Policy

    • 

      Thanks Randy. I wasn’t sure if any of this general research and data on entrepreneurialism got to the specific question being asked: the ability to identify particular start-ups that will have secondary positive effects on the job market (i.e., not just be successful). I emailed some people who are very familiar with entrepreneurship research, including that generated by Kauffman, and none had specific suggestions. But if you know of any let me know.