What You Should Know About IPOs and Job Growth

Startup companies are a huge catalyst for job growth. Yet a new study by the Kauffman Foundation suggests that venture capital lobbyists have been overstating the extent of this growth in order to sell politicians on the benefits of allowing startups to go public.

The widely cited figure that 92 percent of employment growth comes after the IPO is not corroborated. This report finds that 10 years after IPOs from 1996-2000, only 37 percent of jobs come after the IPO.

According to the study, the conventional wisdom was based solely on a select group of highly successful IPOs, such as eBay and Google. When taking into account the entire population of IPOs, many of which have either been acquired or gone bust after 10 years, the employment growth is much lower.

How much of our 8.1% unemployment rate can be attributed to the IPO market’s decline over the past decade? Does this study affect your thoughts on the JOBS Act, which may have been based on wildly inflated job growth assumptions?

The study points out that job growth from IPOs over the past decade has slowed as companies have waited longer to go public. Felix Salmon has an interesting take on this:

Once upon a time, when IPOs were primarily ways for young, fast-growing companies to raise the capital they needed to continue to grow, there was a strong case to be made that they helped create jobs. Today, however, IPOs are something else entirely. If there were more IPOs, that might be a good thing, but it’s silly to believe that we’d have more jobs that way. IPOs, like leveraged buyouts, are financial tools used by financial professionals to make money. Those financial professionals surely like to think of themselves as job creators. But their real job is to make money, not jobs. And so while there are reasons to bemoan the lack of IPOs in recent years, this idea — that we’d have many more jobs right now if there had only been more IPOs — isn’t one of them.

What are your thoughts on this? Despite the revised statistic, are startups still the most powerful way to boost job growth?