Suppose your investment advisor called you and said, “Have I got a deal for you? I will sell you 12,027 shares of a fund at $6.10 per share. The total cost to you is only $72,918. Sound good?”
Your advisor continues, “This is a killer fund. In 17 years, the price per share will rise from $6.10 to $18.30. And, in full disclosure I am required to tell you the fund will buy back a few shares along the way. Sound good?
You reply, “Sounds great, but could you tell me more about the number of shares that will be bought back along the way?”
The advisor nervously answers, “Well, you see…the price per share increases from $6.10 to $18.10. Sound good?” Very quickly the advisor continues, “And the fund will only buy back 9,348 shares. You will still have about 22%-23% of your original shares. Sound good? Can you sign right here?”
You say, “Let me get out my calculator. That means the value of the fund is only $48,987 after 17 years. Sound good?”
The manner in which jobs are created by startups has a similar rate of return. (For purposes of this discussion, startups will be defined as companies less than one-year old that have employees. The Bureau of Labor Statistics (BLS) has tracked the performance of these companies since 1994.)
From the BLS data it is possible to look at the number of firms, average firm size, total employment, and survival rates for the firms formed in 1994. The BLS data shows:
Number of Firms
• In 1994 there were 12,027 firms.
• In 2011 there were 2,679 firms.
Average Firm Size
• In 1994 the average firm size was 6.1 employees.
• In 2011 the average firm size was 18.3 employees.
Total Employment
• In 1994 the firms had 72,918 employees.
• In 2011 the firms had 48,987 employees.
Survival Rate
• In 1994 the survival rate was 100%.
• In 2011 the survival rate was 22.3%.
Do the numbers look familiar? If not, revisit the opening paragraphs.
Startups are critical to future of our country for a variety of reasons; however, they may not be job creation machine that we have been led to believe. They add jobs in year one, but that base declines in year 2 and erodes further over time. Sound good?
With the decline in the number of startups and survival rates, this is a particularly frightening model for economic growth in the state!
For additional information on startups and job creation go to https://cber.co/ or the report “Where Are All the Startups?”
©Copyright 2011 by CBER.