Silicon Valley startups can’t rebuild US workforce

There has been a lot of discussion lately about US jobs and Silicon Valley’s role in helping to rebuild the US workforce. US government officials and many others believe that Silicon Valley is key to reviving US jobs growth. But is this really true?

It’s worth revisiting an article in Bloomberg Businessweek from last year, written by Andy Grove, a veteran Silicon Valley executive who helped build one of its most successful companies: Intel.

Andy Grove worked with the early founders of Intel and became its CEO and chairman for many years. In this article in Bloomberg BusinessWeek he takes on our “misplaced faith in the power of startups to create U.S. jobs.”

New York Times columnist Thomas L. Friedman recently encapsulated this view in a piece called “Start-Ups, Not Bailouts.” His argument: Let tired old companies that do commodity manufacturing die if they have to. If Washington really wants to create jobs, he wrote, it should back startups.

Friedman is wrong. Startups are a wonderful thing, but they cannot by themselves increase tech employment.

Grove points out that it is the scaling of a successful business that creates jobs. And that US companies are doing a great job in scaling manufacturing and creating jobs elsewhere, such as in Asia. His example: Foxconn the manufacturing giant used by Apple and other top US companies employs more people than Apple, Dell, Microsoft, HP, Intel, and Sony combined:

… as technology goes from prototype to mass production. This is the phase where companies scale up. They work out design details, figure out how to make things affordably, build factories, and hire people by the thousands. Scaling is hard work but necessary to make innovation matter.

The scaling process is no longer happening in the U.S. And as long as that’s the case, ploughing capital into young companies that build their factories elsewhere will continue to yield a bad return in terms of American jobs.

Grove’s main point is that sending commodity manufacturing to foreign companies is a bad idea because the US doesn’t accumulate the know-how needed to lead in strategic industries such as battery manufacturing:

“Without scaling, we don’t just lose jobs–we lose our hold on new technologies. Losing the ability to scale will ultimately damage our capacity to innovate.”

Others have made similar comments about startups and their ability to create jobs. Last year I spoke with Bob Ackerman, a leading Silicon Valley venture capitalist and founder of Allegis Capital. He said that many startups are being bought by larger companies because they can’t IPO:

“Startups have to rely on being acquired by a larger company once they reach a certain size because there isn’t an IPO market to help them recapitalize and grow to the next stage. The largest expansion in jobs for a young company comes in the period after an IPO. If a company is acquired it doesn’t lead to the same job growth.”

Again, scaling is the key point for job creation. With scaling happening abroad or not at all because of US stock markets’ shallow capacity for IPOs — US government support for startups won’t create US jobs.