Myth 1: Supporting entrepreneurship in general is good policy
Eighty percent of all jobs created in the US are created by so called small business. However, entrepreneurship, in general, is not the path to economic success for all. The average entrepreneur, including the self-employed, average $100,000 in sales or less per year and employ less than one person. The rate of entrepreneurship as a whole in the US has been stagnant for the last 30 years. Focusing on developing an entrepreneurial economy by taking a general approach is a very poor strategy and very inefficient. The 80 percent of jobs are almost all created by fast growing firms, those growing at a rate in excess of 20 percent per year, and primarily in high tech industries. Jobs like these that have been created in Lexington average a salary twice that of Lexington's average salary as a whole. By focusing on firms who can create these jobs, we expand the tax base which increases revenue to the city government in a more sustainable way. The buying power of these jobs will provide the spin-off demand necessary for the sustainability of the so-called "main street" businesses referenced above.
Myth 2: The so-called brain drain
Many lament a so-called "brain drain" of talent from cities as college graduates leave college towns like Lexington for the big city. Many have interpreted research by the likes of Richard Florida and others to mean that to compete in a 21st century economy; we must retain and attract these people. However, the facts paint a somewhat different picture. Kauffman foundation research shows entrepreneurship rates are the lowest among those 20-34. The fastest growing segment is among those ages 45 and above. The typical entrepreneurial, creative type is 40 years old, married with at least one child. This holds true even for web technology startups. While Facebook may have been founded by a college-aged guy, Twitter's co-founders were all in their mid-30s. The facts indicate that those just out of college are likely to always be pulled in the direction of the opportunity to live and work in big cities. However, as they get older, get married and potentially look at having kids, many creative types will look for areas of the country with a lower cost of living and high standards of living. This is where cities like Lexington can compete. With a low cost of doing business and a solid quality of life, Lexington should be focused on attracting creative types as they get into their 30s. It is not about having more bars in downtown, it is about having diverse entertainment options including family friendly ones and doing a better job of promoting the options we already have. In fact, Lexington is attracting these types of creative individual; it just isn't publicized or recognized. The creative types in their 30s and 40s are more financially secure and have the experience necessary to be successful as an entrepreneur. Statistics show they will be more likely to start a business then they would have been in their 20s.
Myth 3: The government & government funded entities can drive entrepreneurial growth
Many cities and other government entities have focused on building and funding incubators and giving tax incentives in order to try and attract entrepreneurial businesses to locate in their area. The problem is that research, by Scott Shane, PhD. at Case Western Reserve University, shows that incubators have no appreciable affect on the number of high tech businesses formed or located in a particular area. In fact since nearly every city has one form of incubator or another, it is no longer a differentiating factor. The fact is an entrepreneur who would like to start a business will find an office, garage or closet with which to do so. Further, tax credits inordinately benefit large companies that generate taxable income, not startups just getting started who are likely to show a loss for a few years. Unless the tax credits are saleable and therefore can be monetized by the startup, they are of negligible value in attracting or encouraging entrepreneurial formation.
In fact, government can only set the stage and provide an environment where entrepreneurial creative types can succeed. This means that economic development as we know it has to change. Instead of focusing on attracting businesses to relocate, in today's climate, focusing on quality of life issues and maintaining a low cost of doing business are cities economic development strategies. Key examples of government policies that will help attract talent to a city: relatively low taxes, regulations favorable to starting a new business, land use planning that encourages mixed use and allows for affordable housing for all income levels, low utility rates, entrepreneurship education in schools and so on. The Kauffman Foundation provides and example of how regulations can stymie growth: Right-to-work states have seen much more growth in the last 50 years than pro-union states have.
Entrepreneurs and creative types will choose to live and work in cities that provide the amenities they are looking for. No amount of government funded encouragement will lead people to start a company or stay in a city in which they do not want to live. Cities should focus their economic development dollars towards creating incentives and implementing policies that will make their cities attractive to this creative class and less resources chasing the strategies of the previous century.