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US must support new entrepreneurial ventures to create jobs and remain competitive

During National Small Business Week, Sen. Mazie K. Hirono (D-Hawaii), a member of the Senate Small Business and Entrepreneurship Committee, introduced legislation to help small businesses in Hawaii and across the country grow and succeed.

The United States needs to support new entrepreneurial ventures in order to create jobs, sustain innovation and remain competitive in a global economy. But lumping small business owners and innovative entrepreneurs in the same category will only serve to mask the problem.

{mosads}Small business and entrepreneurship is not synonymous. Small businesses are certainly an important part of our economy, but they are quite different than high-growth entrepreneurial start-ups.

Small business is not the engine of job growth. The prevailing belief to the contrary is appealing to populist policy makers and small business advocates, but is not supported by analytical research.

Census data demonstrates that young firms, those one to five years old, are responsible for about two-thirds of job creation (Kauffman 2014). And this is not a new phenomenon. David L. Birch studied 5.6 million businesses between 1969 and 1976 and found that two-thirds of net new jobs were created by firms with twenty or fewer employees. Perhaps more importantly, he found that approximately 80 percent of those jobs were created by firms four years old and younger (‘The Job Generation Process’ 1979). While entrepreneurial ventures generally start small, they are intended to scale rapidly. Small businesses generally stay small in support of the owner’s lifestyle.

Small businesses are often founded as an alternative to traditional employment, sustaining a level of income for its founders. An independent contractor, solo-professional, mom-and-pop shop, and family business are examples. Some of these certainly grow to become very large firms that create a significant number of jobs, but those are the exception.

Entrepreneurship is the ability to recognize, analyze and capture opportunity in order to create value by solving problems or creating a bundle of benefits. The three key elements that distinguish an entrepreneurial venture from a small business are a truly new business innovation, a basis of sustainable competitive advantage, and an inherently scalable business model.

High-growth entrepreneurial ventures are needed to transform the economy. A large number of small businesses does not translate into job creation, commercial innovation and national economic competitiveness. With only 3.8% of adults engaged in early-stage entrepreneurial activity, Japan is ranked among the least entrepreneurial economies in the Global Entrepreneurship Monitor (GEM) 2014 Global Report. It is, however, often referred to as a ‘nation of shopkeepers’ (i.e. small business owners), which may explain why it has been in a recession for more than two decades. The nation’s economic success in the 1970s and 80s was largely due to manufacturing efficiencies, which were eventually competed away to the consumer in the form of lower prices. In the end, innovation is the only basis of sustainable competitive advantage.

Unfortunately, for the past 30 years business startups have been steadily declining in the United States (US Census). This is likely due to financing difficulties and a sharp decline in average household net worth, which fell 48% for those under 30 since 2007 (Pew 2014).

SBA guaranteed loans can help small businesses, but will not significantly spur the growth of entrepreneurial start-ups. These firms need private equity investments, something President Eisenhower recognized in 1958 when he signed the Small Business Investment Act, a time when public support for venture capital to promote American innovation was galvanized by Sputnik.

Bachenheimer is clinical professor of Management at Pace University’s Lubin School of Business and executive director of its Entrepreneurship Lab. He was also the founder of a small business, Annapolis Maritime Corp., and co-founder of an entrepreneurial venture, StockCentral Australia.

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