The U.S. needs more startups to stay competitive, a Federal Reserve official said Thursday.
Dennis Lockhart, the president of the Federal Reserve Bank of Atlanta, spoke at the Conference on Small Business and Entrepreneurship in Washington.
"We know the startup sector is important, and it is sputtering," Lockhart said. "We need more activity in this area of the economy." He singled out scalable startups as the drivers of job creation.
"If we want to grow jobs, one place we should look is to startups and young businesses, especially scalable-growth businesses that often set out to commercialize innovation," said Lockhart, a former Georgetown University professor who has led the Atlanta Fed since 2007. He noted that research shows that with regard to job creation, it's new businesses that make the most difference in creating jobs, "rather than small business broadly defined."
Every once in a while a hamburger joint in San Bernadino, Calif., becomes McDonald's, he said, but most "mom-and-pops," as he called them, start small and remain small. In contrast, entrepreneurs behind scalable-growth businesses hope their companies will become large. He cited a 2010 Kauffman Foundation study showing that just one percent of employer businesses—those growing the fastest—generate roughly 40 percent of new jobs in a given year. Three-quarters of those businesses are less than five years old.
Lockhart said it is "too narrow a view" that increased lending from commercial banks will jump-start these businesses, though.
"Capital formation for scalable startups and early-stage businesses—including debt capital—is both a free-market and public policy challenge," he said. He added: "It is tempting to look at the commercial banking sector as a fix. I think that is too narrow a view."
Most startups are funded initially by personal savings, credit cards and home equity—and while it's true banks have curtailed loans to them, they are not natural backers anyway. "The more reasonable domain of banks is loans of moderate risk to more established businesses that can demonstrate a track record. Because banks make loans using mostly depositors' money, they have to be right in their credit decisions virtually all the time," he said.
Fed Chairman Ben S. Bernanke said Wednesday that policy makers should think “carefully” about how to support small businesses and entrepreneurs to boost job growth in the face of “difficult economic times.”
Fed presidents rotate voting on monetary policy; Lockhart's next turn is in 2012.