Many small businesses fail. And innovating can be easier with corporate backing.
By ETHAN PENNERA major focus of both political parties is job creation. Underlying the discussion is a glorification of the merits of the "small business" at the expense of "big business." The commonly quoted statistic from the Small Business Administration (SBA) is that 65% of all new jobs are created by small businesses, defined as any business employing 500 people or fewer. Armed with that bias, and appealing to populist sentiment, there is growing support in Washington for tax reforms aimed at helping small businesses by cutting the taxes they pay or by offering them tax breaks for new hires.
But here is what many people do not realize: 99.7% of all companies in America meet the SBA's definition of small business. This implies that the remaining 0.3% of American companies—big business—create 35% of all new jobs in this country. While cutting taxes in general is always a good idea for kindling economic vitality, ignoring the important role that big business plays in job creation is a short-sighted mistake.
Given the aforementioned statistic, combined with the fact that most low-paying companies fit into the small business definition, it is not a stretch to conclude that large companies are disproportionately responsible for creating both higher paying and stable jobs. Small companies clearly create jobs, and occasionally these companies provide stable, long-term employment. But the large majority of jobs created by this group are both very low-paying and highly unlikely to be around for the long term. According to the SBA, 56% of all startups fail within their first four years of operation.
It is actually within large companies that an entrepreneur can find, already in existence, much of what it takes to insure a venture's success. This includes the capital required to fund startup costs, the marketing presence to create a near-instant reach to customers, and the standing required to gain trust of both vendors and customers. The two largest bond fund managers in the world, Pimco and Blackrock, were born inside of existing large companies—Pacific Mutual Life and Blackstone, respectively—and flourished under entrepreneurial leadership. Blackrock then went on grow immensely after it was sold to Mellon Bank.
In my own career I've had a number of opportunities to build new businesses within existing big companies. In 1993, with financial backing from Nomura Securities, my partners and I built a commercial real estate finance business in which we applied securitization techniques to the market in a comprehensive way for the first time.
At our peak we directly employed approximately 500 people around the country and indirectly many more. At Nomura we were credited with having inspired the creation of the Commercial Mortgage-Backed Securities (CMBS) market, which peaked in 2007 at $230 billion in new issue volume that year. As a consequence, we directly created thousands of high-paying jobs and helped to create many more jobs indirectly through the related services required to serve the new market (including legal, accounting, and rating agency and more).
Recently I joined CB Richard Ellis Investors, another large company, to build a new business line addressing the financing needs of the commercial real estate industry. My partners and I have been seeded with some capital from our parent company along with many other extraordinary benefits that have allowed us to jumpstart our operation in a challenging business environment. We've hired about a dozen people thus far and our plan calls for significant growth which, if we are successful, will lead to the creation of many new jobs. Perhaps, as was the case with Nomura, our success will inspire other companies to follow in our footsteps and many more jobs will be created.
In sum, if the government wants to spur the creation of stable and high-paying jobs it would do well not to neglect big business when establishing policy.
Mr. Penner is executive managing director of CBRE Investors and the founder and president of CBRE Capital Partners.