By Nolan Klouda, CED Executive Director
with Jon Bittner, Alaska SBDC Executive Director
This piece was originally published by the Alaska Journal of Commerce
When it comes down to it, economic development is simple in concept if not in practice. The name of the game is removing barriers and cultivating the right conditions so that businesses can expand to create jobs and new wealth. Economic development practitioners use three broad strategies for doing this: attracting businesses from elsewhere, strengthening established firms, and launching new ones by nurturing an entrepreneurial ecosystem. All three are viable approaches, but right now the two of us are feeling especially optimistic about the role of entrepreneurship as we celebrate Alaska Startup Week.
Why? Let’s start with a surprising fact: startup companies are the major workhorses of private sector job creation. Firms less than one year old create the vast majority of new private sector jobs in Alaska, on net, each year. In some years, these startups account for essentially all net job creation among the state’s businesses.
How can this be right, given than most of us don’t work for brand new companies? Well, each year businesses throughout the economy launch and close, expand and contract. This process creates a large number of jobs, and destroys a similar number. The annual churn of employment, although disruptive, is part of a healthy functioning economy, and in good times more jobs are created than destroyed, referred to as net job creation. Until the recent fallout from oil prices, Alaska had an excellent record of ever increasing employment.
We examined this pattern using US Census data for Alaska based on IRS tax returns. Between 2005 and 2014 (the most recent information available), businesses less than one year old created a net average of 5,200 private jobs each year. But net job creation among businesses of all ages averaged just under 5,000. Take away the startups, and growth in private sector employment would be stagnant or negative, even when oil prices are high.
The numbers get even more interesting when we consider the contributions of very small “micro” firms with fewer than five employees. Some--but not all--of these small businesses are startups, but they also punch above their weight regardless. Over the same 2005-2014 period, micro firms accounted for a remarkable 75% of private net job creation in Alaska. Our state appears unique in this regard, as the equivalent figure at the national level averaged less than 5% over the same timeframe.
So the numbers are loud and clear: small and young firms are economic powerhouses, and a prosperous future for Alaska demands that we pay attention to them. Of course this does not diminish the importance of our large employers and major industries. On the contrary, strong seafood, natural resource, and visitor industries are probably responsible for much of the small business expansion and creation we see. Plus, we can’t forget that large companies like Alaska Airlines and GCI were once small startups.
But what can we do to help startups and micro firms? No two are alike, and we don’t claim to speak for all of them. On a basic level, small operators need regulatory barriers eased, good infrastructure, and a skilled workforce. They often seek investment for launch or expansion, mentorship from those that have been in their shoes, and advice from subject matter experts. Training and advising programs, such as those we represent, have proven track records in helping new firms launch, and existing ones expand. Alaska’s economic development community and private sector thought leaders have only become more sophisticated over the years in providing meaningful assistance, deploying startup capital, and growing entrepreneurial potential within individuals.
And in this vein, Startup Week is more than a public celebration of entrepreneurship. We contribute resources and staff time to it because we see the promise of tangible outcomes. Research from the national level suggests that the public sector can be most helpful to entrepreneurs by helping them connected with other talented individuals, and facilitating learning opportunities. Entrepreneurs need to meet other entrepreneurs to exchange ideas, receive mentorship, and form new partnerships. Innovation demands the transfer of knowledge, which can’t happen in a vacuum. Networking events and shared spaces help to make these things happen, which is exactly the purpose of this week’s events. As we write, Alaska’s entrepreneurs are planting the seeds of future prosperity, so please join us in cheering them on!