One particular smart person in my orbit is my brother-in-law Clint Smith, a lawyer in Silicon Valley. I was just visiting him and I hit him with a question that’s been plaguing me and…um…a bit more importantly, holding back the jobs recovery. I found his response not only provocative, but it feels right.
Where are the startups? More precisely, where are their jobs?
As I’ve written elsewhere, while the number of startups hasn’t fallen much, controlling for the business cycle, the number of jobs they create has fallen…a lot (see figures) Yes, figure 1 shows that the number of startups fell sharply in the downturn, but so did everybody else. What’s notable here is the difference in employment growth between the two expansions shown in figure 2. Jobs in these firms fell by half in the 2000s.
This isn’t merely of passing interest. Startups—the ones that survive, that is—play a disproportionate role in job creation coming out of downturns. The question of why they’ve been MIA in terms of job creation seemed particularly germane in Silicon Valley.
Clint’s take is this: too many startups are getting absorbed by big firms and when they do, they’re stagnating. He thinks it has something to do with the difficulty some of these small, dynamic firms have going public on their own. That throws them into the world of quarterly targets, regulatory filings, SEC compliance, etc.
Wasn’t this always the case?, I asked. His view, and I’m sure this is true, post-Enron/World.com, SarBox, etc. this kind of reporting has become a much bigger deal, especially for small firms.
OTE’ers know that I’ve got little sympathy for complaints about regulatory filing burdens—you trade publically, you need to honestly and transparently tell investors what you’re up to, and no, I don’t trust you to do that without oversight. But Clint may well be right about the dynamics at play here.
So the small guys start to grow and Microsoft or Google or HP or Oracle comes along and offers them a clean gazillion or so. It’s not that they die at that point—and this is all theoretical, if not anecdotal. But he gave me lots of examples of firms that stopped growing, innovating, or adding many jobs once they were acquired by Big Tech.
While thinking about this, I ran by Skype, which was bought by Microsoft for $8.5 billion in cash a few months ago. I’m sure I’m projecting—and we’re beyond even anecdote here, into impressionism. But it seemed like a much more drab, little place than the dynamic innovator I envisioned.
Anyway, more to come on this, but it’s an important theory that deserves consideration and research. He even offers an idea to solve it, which I don’t love: have a special category of equity markets for smaller, riskier ventures with many fewer reporting requirements.