In Andy Grove’s essay on “How to Make an American Job” — which I discuss here — he begins by throwing cold water on the notion that startups can drive job gains:

The underlying problem isn’t simply lower Asian costs. It’s our own misplaced faith in the power of startups to create U.S. jobs. Americans love the idea of the guys in the garage inventing something that changes the world. New York Times columnist Thomas L. Friedman recently encapsulated this view in a piece called “Start-Ups, Not Bailouts.” His argument: Let tired old companies that do commodity manufacturing die if they have to. If Washington really wants to create jobs, he wrote, it should back startups.
Friedman is wrong. Startups are a wonderful thing, but they cannot by themselves increase tech employment. Equally important is what comes after that mythical moment of creation in the garage, as technology goes from prototype to mass production. This is the phase where companies scale up. They work out design details, figure out how to make things affordably, build factories, and hire people by the thousands. Scaling is hard work but necessary to make innovation matter.

Despite my objections to Grove’s essay, this is an important point, made very well in the excellent book Good Capitalism, Bad Capitalism, and the Economics of Growth and Prosperity, albeit to very different effect. The important thing is to create an environment in which startups can grow and flourish. But Tim Kane of Growthology offers a useful corrective to Grove:

My new study just released from the Kauffman Foundation, The Importance of Startups in Job Creation and Job Destruction, is available now. It’s short and sweet (7 pages of text), with about as simple a talking point as can be: “New firms add an average of 3 million net jobs in their first year, while older companies combined lose 1 million net jobs annually.” The surprise for me, and I expect most economists/data geeks, is that aggregate gross job creation and destruction curves along the firm age axis are convex, not concave.
I don’t have the individual charts in GIF format, but here’s a raw one from my spreadsheet. Notice how gross job creation at startups dwarfs gross flows at other firms. For example, startups create 10x more jobs than 10-year old firms, gross, and infinitely more net. How many economists even guess this is how the U.S. economy works? I didn’t until I saw the data.

It’s hard to tell quite what to make of this: do we want a constant churn of entrepreneurship, in which 10-year-old firms decay and non-core functions are relentlessly outsourced, giving rise to new firms? This certainly isn’t a pretty picture for those who like the idea of having a long tenure in a particular firm or even a particular job. But it’s certainly very interesting.