Other than trimming budget deficits, creating jobs dominates the political discourse as we enter the fall elections. So far, from Washington D.C. to St. Paul, Minnesota, the proposals seem to revolve around the familiar suspects: cutting corporate tax rates and extending tax relief to small businesses.
Sounds reasonable enough. Minnesota has some of the highest corporate rates in the country, so cutting Medtronic’s tax bill means the medical device maker could finally open that new local manufacturing plant. And since small businesses create the majority of jobs in the country, policy should focus on them.
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Strip away the politics, though, and we get a clearer picture. If government really wants to jump start job creation, then we really should look at helping high-tech startups.
It’s true that small businesses do generate most jobs. However, if we define “small” by age rather than size, then young firms (fewer than five years old) primarily create job growth, according to a recent study by the University of Maryland and the U.S. Census Bureau’s Center for Economic Studies.
“Startups tend to be small, so most of the truth to the popular perception [around small businesses] is driven by the contribution of startups to net growth,” the study said.
Startups account for only 3 percent of total U.S. private employment but generate 20 percent of total gross job creation.
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By contrast, firms 10 years or older with more than 500 workers account for 45 percent of the private sector, but also 40 percent of job creation and destruction.
In other words, startups proportionally generate far more jobs in relation to its slice of U.S. employment than large companies, which also cut jobs nearly as much as they create them.
Startups, of course, are risky, which means they destroy a lot of jobs when they get sold or fail. However, the surviving companies grow much more rapidly than the rest of the economy. So it perhaps makes sense that we enact policies to increase the odds they will survive.
Some of the candidates running for Minnesota governor are on the right path. GOP nominee Tom Emmer says he supports expanding the state’s recently passed five year, $60 million angel investment tax credit.
Last week, Tom Horner of the Independence Party unveiled his job creation package that would establish a $140 million Minnesota Innovation Fund to help startups defray costs.
Horner’s proposal is especially promising.
Minnesota desperately needed an angel credit, but as some investors noted, what happens after the angel money runs out? How do we grow startups to the point where larger venture capital firms like Thomas, McNerney & Partners and Affinity Capital Management are willing to write checks? The Minnesota Innovation Fund could greatly help.
Another area that needs attention is so-called “gap funding” for technologies created by research institutions like the University of Minnesota and Mayo Clinic. Gap funding applies to money needed between federal research grants and outside capital for technologies being developed by technology transfer offices.
“The gap between research grants and external investments is growing and creating a hindrance in the transfer of technology from the lab to the marketplace,” according to a 2005 study by the University of Minnesota.
For research institutions, “it appears advantageous, if not necessary, to establish either an internal fund or gain access to an external fund to increase options and opportunities for the efficient development of commercializable technology,” according to the study, called Mind the Gap.
The University of Minnesota established innovation grants and will spend $1 million a year to fund Phase I trials of promising drugs. In addition, the University of Minnesota Foundation, the school’s philanthropic arm, is planning to raise a $50 million fund to back commercialization of university technologies.
Mayo Clinic has a $10 million internal fund called MMV II, the Presidents Discovery Translational Fund and Innovation Loan Programs.
“Gap funding program provides a research institution power over the commercialization of its inventions by allowing it to create movement in a sometimes static process,” the study said. “It also adds value to technology by making money available to do further research, proof of concept or due diligence.”
Internal resources will only go so far. That’s where the government could step in, Jacob Johnson, the study’s author, told last week’s annual gathering of the Association of University Research Parks.
Several states (but not Minnesota) offer tax breaks to larger companies that donate money to gap funds. Others have established external funds that focus exclusively on helping public universities commercialize technologies. About 19 percent of funding for gap funds comes from state coffers, according to the report.
“In a lot of ways, it is in the state’s best interest to inject money at this level to make sure all viable technology is evaluated to harness commercial potential,” the study said.
