Role for Both Types of Companies.

Living in the San Francisco Bay Area, one would think that entrepreneurship and young companies are at the center of our economy and should be where everyone wants to work. It’s easy to forget that Google, Amazon, Apple, and Facebook, while they started as small, young companies, are now some of the largest companies in the world with some of the largest market capitalizations. While younger than companies such as Procter & Gamble and General Electric, many of these companies have been around for some time now and are big, established companies. Yet, entrepreneurship and small businesses are often heralded as the savior to growth and employment. Add to that the Mainstream Entrepreneur movement where anyone can become their own boss using platforms such as Etsy, Uber, and Ebay.

So which is it—are big, older companies driving the economy, or are smaller, younger companies the savior for growth? There’s been some debate this year around this very question, about what size and age of company is fueling the economy and whether one is better than the other—old vs. new firms.

• This year Ian Hathaway and Robert Litan of The Brookings Institute posited that older companies are representing more of economic growth and that entrepreneurship has actually waned compared to times past. They consider such facts as:
  • There are more companies age 16+ years old, and these companies employ more workers.
    • “The share of firms aged 16 years or more was 23 percent in 1992, but leaped to 34 percent by 2011—an increase of 50 percent in two decades. The share of private-sector workers employed in these mature firms increased from 60 percent to 72 percent during the same period. Perhaps most startling, we find that employment and firm shares declined for every other firm age group during this period.”
  • Fewer companies have been started since 1990 than in the past and more of these companies are failing, leaving a greater balance towards large companies.
• They raise concerns for the economy given these facts and since older firms tend to have lower productivity, be less innovative, and have lower growth rates that limit hiring.
• Daniel Isenberg and Fernando Fabre took exception with Hathaway and Litan’s study, suggesting that things are not so dire. Instead of raising concerns about the lack of start-ups, Isenberg and Fabre want to champion the role of “scale-ups,” those companies that might not be small, yet are still driving disruptive growth, finding incremental growth vectors. They assert that these new-ish, innovative, and entrepreneurial in-spirit companies have created and reinvented industries and are just as critical to the economy as “older” companies. Perhaps the companies noted at the start are good examples of this phenomenon.

Perhaps it goes both ways and shouldn’t be seen as so negative in either case. It’s a good thing that older, experienced companies have found a way to hold their own in this economy, and living at the center of Silicon Valley, it’s refreshing to be reminded that while start-ups are an important part of our economy, the reality is that the majority of employees are working in large, established organizations. On the flip side, we know that new-ish companies, be them start-ups or scale-ups, are a necessity to fuel innovation and job growth. Both have a role in keeping our economy healthy.

Industry Forecast: Help us find the right mix of both big and small, young and old companies for the good of the economy.

Sources:

Hathaway, Ian and Litan, Robert E. “The Other Aging of America: The Increasing Dominance of Older Firms,” The Brookings Institute, July 31, 2014. http://www.brookings.edu/research/papers/2014/07/aging-america-increasing-dominance-older-firms-litan

Isenberg, Daniel and Fabre, Fernando. “Don’t Judge the Economy by the Number of Start-Ups, Harvard Business Review, October 1, 2014. https://hbr.org/2014/10/dont-judge-the-economy-by-the-number-of-start-ups

O’Connell, Ainsley. “How The Word “Entrepreneur” Got Too Popular For Its Own Good,” Fastco Labs, Fast Company, April 16, 2014. http://www.fastcolabs.com/3029196/how-the-word-entrepreneur-got-too-popular-for-its-own-good