I knew I would be touching a raw nerve with my last two posts, on patents. But I was really surprised at the divergence of opinion. Entrepreneurs overwhelmingly supported my stance that software patents hamper innovation and need to be abolished, but friends at Microsoft, IBM, and Google were outraged at my recommendation. The big companies’ executives argued that abolishing patents would hurt their ability to innovate and thus hamper the nation’s economic growth. (They believe that companies like theirs create the majority of jobs and innovations, and they claim that without patents they cannot defend their innovations.) I am not convinced that software patents give Google any advantage over Microsoft and Yahoo, or make IBM’s databases any better than Oracle’s. But I do know one thing for sure: it isn’t the big companies that create the jobs or the revolutionary technology innovations: it is startups. So if we need to pick sides, I vote for the startups.

Let’s start with the question of who creates the jobs. This is one of the issues that I recently took Intel co-founder Andy Grove to task for, in BusinessWeek. Grove wrote a profound essay lamenting the loss of American manufacturing jobs. I share his concerns about jobs. But Andy’s protectionist recommendations for restoring America’s competitiveness were largely based on his flawed premise that companies like Intel create all the jobs—not the startups. I also discussed the tradeoff between bailing out companies like General Motors, AIG, and Citibank and nurturing startups in this BusinessWeek piece. This question is more important than it may seem.

job-creation-and-destruction1Kauffman Foundation has done extensive research on job creation. Kauffman Senior Fellow Tim Kane analyzed a new data set from the U.S. government, called Business Dynamics Statistics, which provides details about the age and employment of businesses started in the U.S. since 1977. What this showed was that startups aren’t just an important contributor to job growth: they’re the only thing. Without startups, there would be no net job growth in the U.S. economy. From 1977 to 2005, existing companies were net job destroyers, losing 1 million net jobs per year. In contrast, new businesses in their first year added an average of 3 million jobs annually.

Top PerformingWhen analyzed by company age, the data are even more startling. Gross job creation at startups averaged more than 3 million jobs per year during 1992–2005, four times as high as any other yearly age group. Existing firms in all year groups have gross job losses that are larger than gross job gains.

Half of the startups go out of business within five years; but overall they are still the ones that lead the charge in employment creation. Kauffman Foundation analyzed the average employment of all firms as they age from year zero (birth) to year five. When a given cohort of startups reaches age five, its employment level is 80 percent of what it was when it began. In 2000, for example, startups created 3,099,639 jobs. By 2005, the surviving firms had a total employment of 2,412,410, or about 78 percent of the number of jobs that existed when these firms were born.

So we can’t count on the Intels or Microsofts to create employment: we need the entrepreneurs. And there is an important lesson here for the states and cities that offer huge incentives to companies like Dell, Google, and Intel to locate their operations there. The regions should, instead, be focusing on creating more startups, not providing life support to technology behemoths.

Now let’s talk about innovation. Apple is the poster child for tech innovation; it releases one groundbreaking product after another. But let’s get beyond Apple. I challenge you to name another tech company that innovates like Apple—with game-changing technologies like the iPod, iTunes, iPhone, and iPad. Google certainly doesn’t fit the bill—after its original search engine and ad platform, it hasn’t invented anything earth shattering. Yes, Google did develop a nice email system and some mapping software, but these were incremental innovations. For that matter, what earth-shattering products have IBM, HP, Microsoft, Oracle, or Cisco produced in recent times? These companies constantly acquire startups and take advantage of their own size and distribution channels to scale up the innovations they have purchased. They let the startups take the risk and prove the business models.

This raises an interesting question. Google and Microsoft have always prided themselves for hiring the cream of the crop of software developers. It is ridiculously hard to get a job at either company. But when technology’s top guns join these companies, they seem to make a smaller impact than those that don’t get hired. So would these companies be better served by releasing their most brilliant developers into the wild and arming them with seed financing to start companies? (They could negotiate partial ownership and right of first refusal on acquisition.) We would certainly get more innovation this way.

Simply put, if we are serious about lifting the economy out of its rut, we need to focus all of our energy on helping entrepreneurs. Provide them with the incentives (tax breaks and seed financing); education; and infrastructure. And gear public policy—like patent-protection laws—toward the startups. Let’s not bet on the companies that are too big to fail or too clumsy to innovate.

  • ppnyc01

    Hi Vivek,

    I do not see why you have to compare startups with large companies. I 
    think you forget that most startups do not make any money to 
    start with, they are set up with the money generated by larger 
    profitable companies (either directly or indirectly).

    If you look around you will notice that startups thrive in places 
    where there are already well established large businesses. The reasons could be for because of talent, money, network etc.

    I think large and profitable companies have a larger stake in the 
    creation of startups and jobs than what you attribute.

    Best
    PP

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  • Anonymous

    Startups does create more jobs in US, but once they grow, they start outsourcing the jobs to Asia for higher profits.

  • http://twitter.com/paulwallbank Paul Wallbank

    Your point about attracting large corporations is well made, Vivek. A couple of years ago I was working with a state government on developing a strategy to promote their local tech industries.

    One thing that stood out was just how much money that state government threw at large corporations for little if any returns.

    The silliest part was many of the subsidies were for logistics centres and big box stores that were going to be built in the state anyway.

    Having been up close to that particular sausage machine, I came to the view that the best thing governments can do to help entrepreneurs and small business is to minimise red tape and taxes and let hard working and smart folk get on with things.

  • http://profiles.google.com/kdsandeep Sandeep Deshpande

    I would count ipad as an incremental innovation too, I would put iPhone alongwith appStore as the real innovation and after that all the innovations that Apple did are just incremental including iCloud. Ipod touch is not innovative, it is based on iPhone. iPhone-phone chip=iPod touch.

    And it is a big mistake to not consider android as an innovation. The copying of various android features in iOS5 shows that android has a number of great features worth copying.

    Google does not know how to monetize all the wonderful services they give away for free like google docs. Google docs is damn good, Google maps is innovative, Google earth is innovative too. I don’t really know how you can say they are not innovative. Google maps are being used by more than 200 million people.

    Now google offers is a straightforward clone of groupon, that I agree :)

    Job creation is one aspect only, what about societal impact, when google gave away navigation for free, 100s of millions of users were introduced to a new concept which they would have needed to spend 100s of dollars if not for google. Society was enriched.

    • Ostrakosa1987

      Google bought company called Keyhole in 2004 which is a part of Google Maps innovation…

  • Teuku Faruq

    Hello Vivek!! Im Faruq from Indonesia. I like this post and your latest writing about visa. Yesterday i was wondering where we are heading after reading an article from Fareed Zakaria (http://ti.me/emzfIP). Now, one thing that im sure is we will never know what the future hold for us. We only know that there are some indicators that going to lead us to there. Thanks again for the article.

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  • http://schuheonline.weebly.com/ Lazaro Burlington

    What a great web log. I spend hours on the internet reading blogs, about tons of different subjects. I have to first of all give kudos to whoever created your theme and intermediate of all to you for writing what i can only describe as an fabulous post. I honestly believe there is a skill to writing articles that only a few posses and frankly you have it. The combination of demonstrative and upper-class content is by all odds highly infrequent with the king-sized amount of blogs on the cyberspace.

    • vivek

      Thanks, Lazaro…

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  • Michelle Erickson

    I agreed with your article completely. We started with people who loved creating great technical “stuff.” The merger & acquisitions frenzy resulted in an obsession with sales, marketing, revenue, and share price. Customer service took a dive since everyone was buying their market share instead of earning it. And you saw an increasing unwillingness to fund those pesky development teams as milking the existing products was more profitable. Most technical people got booted off the senior staff level. It would be interesting to see the number of products that were killed off by M & A over the last ten years in comparison to the number of products that just died of natural causes in the market place.

  • http://www.samsanthosh.blogspot.com Sam Santhosh

    Hi Vivek,

    Your post is interesting. The point about the job creation by startups in the U.S is well acknowledged. At the same time bashing the large tech companies (which were all entrepreneur created start ups at one time) does not look very fair. It is true that as tech companies become large they are unable to innovate and create new products (except a few like Apple) with the ease of startups and end up buying the small companies. But they do provide many valuable functions in the tech ecosystem including the exit opportunity for entrepreneurs. A large number of small companies as well as new start ups thrive on the stable (? :) if not stable at least successful from a network effect point of view) architecture provided by the big companies and provide steady employment to a large number of techies (all cant or don’t want to start companies) and maybe that is why many cities welcome the large companies to set up shop.

    I whole heartedly agree with you on the increased support that society should provide entrepreneurs but it does not have to be at the expense of the large companies. They are also needed in the ecosystem.

    Cheers

    Sam

  • http://www.bizsensors.com Biju Paulose

    Hi Vivek,

    Loved your post and I totally agree with your point of view. I joined my friend Soumadeep Sen when he started http://www.bizsensors.com – and he has a killer product in the BI and Business Performance Management space – however, what makes this journey a little difficult is that VCs don’t always look for a great idea – i think this point is aptly highlighted in your other post about how VCs are interested in an exit strategy, etc.
    Do look us up when you have the time, and I’ll be happy to “listen to some good advice” from you!