Starting up job creation

By Kavan Bhandary

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There is a myth that job creation happens at startups and small firms.

After an economic crisis, policymakers often tout startups and entrepreneurship as the silver bullet to improve employment. There is some truth to this. In OECD nations, startups employ 20% of the population and account for 50% of new job creation.

However, demonstrably, new employment opportunities arise when small firms grow big. As governments implement incentives and policies to support a post-pandemic surge in new jobs, they need to prioritise helping startups scale quickly. 

An ecosystem in crisis

Entrepreneur-led innovation made lockdowns palatable. Startups are actively trying to help flatten the curve by creating digital clones of physical services. Brand-new companies target underserved markets and, although very risky, can often generate the largest gains.

Venture capitalists (VCs) disproportionately fund those firms that show the most promise. Over a ten-year horizon, VC-backed firms grow disproportionately faster and have more employees and patents. However, early-stage funding, through angel- and seed-stage funds, has contracted. VCs see late-stage companies as safer bets.

Unlike SMEs, startups are more vulnerable to market shifts brought on by crises. Their higher risk profile limits access to funding, liquidity, and strong relationships with supply chain vendors. Reliance on small founding teams puts them at the risk of labour shocks. 

Complicating things further, for startup ecosystems around Europe, Asia, and others, a sizeable proportion of investments come from foreign VCs. These VCs are less invested in the region's overall economic growth and have lower risk tolerance during crises.

Despite overwhelming odds, in many sectors, startups have continued to hire employees. On the other hand, more established players requested bailouts while announcing layoffs, hiring freezes, and stock buybacks.

 

How should governments step in?

In the US, the first two quarters of 2020–21 saw a marked decline in new businesses formation, though quarter three shows a resurgence. Governments are rapidly increasing spending to shore up the economy and boost job creation. The risk is that they will do so by championing incumbents, protecting them from competitors. Such a stance risks throwing a barely afloat ecosystem into an existential maelstrom. The result would be a lost generation of never-founded firms and could-have-been jobs that don't exist.

Governments need to implement supportive policies that soothe market discomfort around risky startups. Unleashing investor 'animal spirits' will rejuvenate funding and help tackle the present-day economic freefall. Recognising this, some governments have begun implementing solutions to support the cause of startups.

 

Addressing startup needs

Cash is key to survival. In such a precarious position, grants and zero-interest loans can be the adrenaline shot needed. Some countries are attempting innovative ways to assist cashflow problems, such as Japan's zero-interest unsecured loans, Australia's Business Support Fund that offers grants up to AUD 10,000, and Bahrain's rent waiver for state-owned property tenants. Taiwan borrowed the private-market playbook investing six to 12 months of funding against preferred stock.

Second, governments need to push beyond their love for top-down solutions that fail. They often try to cherry-pick industries and ape ecosystems, such as technology, which have worked in other regions. Instead, they need to encourage natural growth around industries and sectors that already exist in their market.

Government procurements and contracts have scope for more directed intervention. Regulatory bodies can break the stranglehold of established businesses in the public-private works, giving startups a fighting chance at new revenue sources. They can do so by easing regulatory hurdles, exploring performance-based contracting, and establishing multi-vendor agreements.

Finally, a critical role governments play is cultural. Creating an atmosphere that eases the burden of startup failure both to entrepreneurs and investors can have a far greater impact than any direct or indirect policy intervention. Protective nets to reduce the economic downside of failure, mentorship and networking hubs, and helping develop entrepreneurial skills in the un/employed will boost the ecosystem.

Government policies that support established companies or merely increasing the volume of new businesses are bound to fail. Instead, governments should focus on building a level playing field for organisations and lowered risk for VCs. The road to economic recovery begins by helping startups scale. 

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