Big Tech has generally done well in this pandemic. Zoom, Slack, Netflix, Amazon – these are the COVID economy’s big winners.
But the experience for startup tech companies, on the other hand, has been altogether different. Venture capital is drying up. Silicon Valley companies have laid off thousands of workers in a reckoning The New York Times called the “Great Unwinding.” It’s an extremely precarious time for investors, companies, and employees. But everyone is suffering right now – why should the rest of us care about startups?
Because these companies play a much wider economic role than we give them credit for, and we’re all going to need them going forward. Tech startups aren’t just apps, foosball tables, and IPOs – these are companies that create disproportionate numbers of high-quality jobs. They drive economic growth. And they supply critical products that make entire industries of established companies more productive and competitive. They’re turning the economy we have into the economy we’re going to need.
Six Ontario technology hubs (including the one I lead) recently banded together to study the broader economic importance of startups. The data is Canadian, but the findings are relevant for governments, investors, and companies everywhere. These are important lessons for anyone who wants the U.S. economy to flourish after the pandemic.
Their report, The Post-Viral Pivot, shows how startups are plugged into a constellation of advanced industries – artificial intelligence, clean technology, health care – that drive job creation and economic growth.
The companies in these sectors create a disproportionate share of new jobs, including highly paid positions in science, technology, engineering, and mathematics fields. While America was trying to reestablish its traditional manufacturing sector, Canada was pivoting to STEM.
STEM jobs aren’t for every worker, but we still need to double down on them – they’re key positions in the global economy going forward. Since the 2008-09 recession, employment in Canada’s software industry has grown four times faster than overall private-sector job creation. These and other advanced industry sectors accounted for roughly 8% of all Canadian private-sector employment over the same period. Companies working in computer systems design created three times as many new jobs as Canada’s entire vehicle manufacturing and parts industry.
Key sectors of the tech industry (including software, computer systems design, electronic components manufacturing, and medical equipment manufacturing) were experiencing much faster GDP growth than the rest of the economy, with the pace accelerating in recent years. These sectors do more research and development, they have higher rates of labor productivity, and they export more.
These shifts are being driven by universal worldwide demand for tools that are safer, cleaner, and more productive. The companies that provide them are, and will continue to be, essential suppliers.
Unless, of course, they don’t make it through the pandemic. The report also shows the risks of allowing startups to wither on the vine before they get a chance to grow into tomorrow’s tech superstars.
The uncertainty of the current investment climate has roiled markets, but it also risks disrupting the flow of angel investment and venture capital that early-stage companies need to grow into profitable enterprises or superstars. With capital and customers sitting on the sidelines, startups are being hit especially hard – globally, two-thirds of startups have reported that they will run out of money within six months.
In Canada, the innovation community banded together to lobby for more federal stimulus money with a unified voice. The government poured fresh money into a new BDC Capital Bridge Financing Program to support venture-backed startups through equity instruments and loans.
But in the U.S., billions of dollars in federal stimulus money also meant for small businesses has found its way to over 300 public companies – some of which have had to return it to limit public scrutiny. Meanwhile, there’s a debate within America’s innovation community about whether or not venture-backed startups should even be eligible for federal loans meant for small businesses without secondary means of sourcing capital. And investors are leaning on the argument that they can’t just distribute money without certainty that companies will survive the pandemic.
All of this could lead to many, many lost jobs. In Canada, the report’s modeling shows that a 25% decline in employment in the sectors where most startups operate would wipe out 274,000 positions. If that were applied proportionally to the United States, that would mean about 2.7 million jobs – a massive loss of employment and talent that could go elsewhere.
Lost investment, lost innovation, lost jobs, and lost talent matter. Google, Facebook, and Apple are tech’s current dominant employers, but today’s world comes at us ever faster. Some of today’s startups will grow up to challenge these giants – the only question is who will reap the jobs and economic benefits.
Canada’s economic landscape is different; there is greater collaboration between the public and private sector for startup support. Regardless, the lesson here for everyone, including America, is that economies need to take advantage of the companies and industries that are most likely to grow. Big Tech is an industry of companies that are dominant now, but startups are the next generation. Every country needs a healthy pipeline of these companies to create ideas, employment, and growth after the pandemic. Canada knows it, and America should too.
Yung Wu is CEO of MaRS Discovery District, an innovation hub in Toronto.
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