Re-think on climate for start-ups

EDITORIAL      Australia's economic recovery is dependent on businesses yet to exist, in many ways. This is especially true for growth in Australia's regions.

Australia's economic growth depends on fostering that sector of the economy which is the most vulnerable - and certainly the sector most unlikely to win loans from banks, nor the favourable attention of the government: start-up businesses.

Entrepreneurs who develop high growth businesses are the keys to our success.

How can this be? It seems counter-intuitive that the sector (research shows) we can genuinely rely upon to grow our economy - start-ups - is the very sector most policies, and pollies, hold as the riskiest and are loathe to support financially.

(Except, perhaps, Queensland, which has announced a series of $50,000 grants for businesses developing what it calls ‘Big Ideas' that will benefit the state's economy).

But research by the Kauffman Foundation in the US is clear: Over the past 20 years, from looking at the employment and economic data, most growth in the US has come from SMEs in their first five years of operation.

The Kauffman Foundation is an organisation that fosters education and entrepreneurship - they started Entrepreneurship Week in the US (mid-November) and that has now received the strong endorsement of US President Barack Obama.

President Obama gets it: he needs innovative start-ups, and lots of them, to bring the country out of the unemployment mire.

Staggeringly, real net job growth comes consistently from start-up businesses, no matter what condition the economy is in. Established organisations, however, reach a point in which net job losses come regularly - and especially in times of recession - in the name of efficiency and as new labour-saving technologies are utilised.

This information has come to Business Acumen through John Sheridan's Digital Business Insights organisation, which has been surveying and conducting case studies into Australian business for the past nine years. Business Acumen is working with DBI to produce what is likely to be the most salutary report ever produced on the real business of construction (to circulate in January).

Mr Sheridan's own research over the past nine years supports the US claims that most job growth in the economy comes from start-ups in their first five years. It is also true that 84 percent of incubated businesses stay where they were founded. This is great news for regional Australia.

A few regions have recognised the challenge of increasing economic development by backing start-ups and early-stage innovators - regions as diverse as Cairns in Tropical North Queensland and Whittlesea in Victoria.

The Kauffman studies show that so-called ‘gazelle' firms (age three to five) comprise less than one percent of all companies, yet generate roughly 10 percent of new jobs in any given year. The 'average' firm in this gazelle category contributes 88 jobs per year, and most end up with between 20 and 249 employees. In contrast, the average firm in the economy as a whole adds two or three net new jobs each year.

These are astonishing statistics.

While there are also high rates of failure of start-ups, on balance the way to boost and sustain an economy is to have a genuine focus on fostering start-ups and early-stage innovators.

Australia, if it is serious about a future beyond its recent reliance on resources, must genuinely ask how government policies, finance industry policies and regulatory policies positively enhance the environment for start-ups and entrepreneurs.

Right now, that's a very nasty question indeed.

-Mike Sullivan, Managing Editor, December 2010.

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