What appears below is the speech Henry Nothhaft (Tessera President & CEO) gave at the Innovation Alliance conference on January 21, 2010, which is published with his permission. Readers may also find interesting Nothhaft’s recent article Looking for Jobs in All the Wrong Places: Memo to the President, relating to President Obama’s State of the Union Address and published by Harvard Business Review.
All told, I’ve helped create more than 6000 jobs and return 8 billion dollars to investors. And this work experience has given me first hand insight into a subject that economists are only now beginning to study closely. Namely the surprisingly powerful role that start ups play in job creation and economic growth. Of course, economists have been studying the sources of economic growth for a long time. 50 years ago, Robert Solo discovered to every one’s great shock that virtually all economic growth, or at least 80% of it comes from technological innovation. Not capital inputs or productivity increases or anything else, just technological innovation, the kind of break-through innovation that crates whole new industries and millions of jobs. Like the development of semiconductors, personal computers, software, and the Internet.
Solo won the Nobel prize in economics for his discovery. And most economists will tell you that innovation is still the one true source of American prosperity. But what the economists usually won’t tell you is that the kind of break through innovation that creates new industries and new jobs always, that’s always, come from small start up companies not large established firms. Hewlett Packard rejected Steve Wozniak’s idea for a personal computer, so he and Steve Jobs started their own company in Steve’s garage.
That’s the way it’s been with every single industry creating innovation of the last 100 years or more. From cars to planes, computers, software and biotechnology. Except in maybe one case, the cell phone industry where Spectrum was controlled by the government. The key break-throughs were all made by start ups.
Now, what’s even more interesting about start ups and it is something that economists discovered only this past year is that starts ups also create all new jobs in the US. That is start ups create ALL new jobs in the US. The conventional wisdom has always been that small businesses create jobs, at least most of them. But new research conducted only this past year by multiple teams of researchers found that it is actually new businesses, start ups, that create jobs. And even more shocking, they create all of them. That’s right, start ups have been responsible for all net new job growth in America since 1977. If you took them out of the equation and looked only at large established firms, job growth in America would actually be negative during the last 34 years.
As senior researcher, Tim Kane of the Kauffman Foundation put it, “When it comes to US job growth, start ups aren’t everything, they’re the only thing.” So everything depends upon start ups. Job creation, our standard of living, our prosperity as a nation, the American dream itself. All of it depends upon technology start ups being able to obtain capital and hire people so they can create the innovative new products, services and medical advances that drive our national prosperity. This is big news. It means that if the target of national policy is job creation, and increased prosperity, then the bulls eye of that policy has got to be on start ups. And yet, policy makers seem to have trouble wrapping their minds around this fact.
Last month, President Obama held a summit on job creation and invited a group of fortune 1000 CEOs to give him advice. Exactly the wrong group of people to talk to. It’s not just President Obama of course. Every president and every congress for the last 60 years has done exactly the same thing; sought advice from everyone but the one group in the world who actually creates jobs, entrepreneurs.I guess somehow we are invisible and our voices go unheard. Everyone else has a voice in Washington; big business, retailers, insurers, doctors, bankers, teachers and every other interest group you can think of. Only entrepreneurs do not have a voice. Yet ironically, they are the vital few to quote Jonathan Hughes, “upon whom all society depends for progress.”
So what do we entrepreneurs know about why the engine of job creation has sputtered to a halt? And what needs to be done about it? Well let me tell you what I have seen going on over the last decade or so in Silicon Valley and why it’s what so many of us in the valley refer to as the lost decade. Every where you go, start ups are unable to get patents on their inventions approved in anything like a timely manner, thanks to a huge back log of applications that has built up at the patent office over the last 10 years due to lack of funding and other issues. I will let our other distinguished speakers testify to the causes and cures for the backlog and funding problem. But I can tell you from first hand experience as an entrepreneur, that what it means for start ups and job creation as well.
Take the case of Stanford Immunologist, Sam Strober, one of the very top people in his field. He invented a new treatment for Lupus, which is a pretty devastating disease for which there is currently no treatment except steroids for symptoms, and launched a start up called Innate Immune. Then he recruited the former director of clinical research at Genentech Dr. Andrew Pearlman to be the firm CEO. Now here you have two world renowned scientists with a patentable new treatment for an awful disease that afflicts millions of people. Exactly the kind of opportunity that venture capitalists look for and sure enough, Innate Immune soon had VCs lined up and ready to commit 30 million dollars to develop the drug.
There was only one problem, they couldn’t get a patent. Sure they filed for it 7 going on 8 years ago, but because of the huge back log of our underfunded and over burdened patent office, they couldn’t get it approved. So the VCs walked away. I mean what else could they do? Who would invest huge sums of money it takes to bring a new drug to market without any promise of market exclusivity and a healthy return on investment that a patent offers? And with no money of course Innate Immune couldn’t hire the scientists and technicians and marketing administrative staff needed to develop their drug.
We are not just talking about Innate Immune’s new lupus treatment, of course or about a new wound healing gel invented by a WI start up called Metrolab. In their case the patent was finally issued. But it was issued 7 years after the start up applied for it. Which unfortunately for them was 2 years after it had already gone bankrupt for lack of a patent that they needed to attract investors.
The same story is repeated many times a day. Each and every day in our country, thousands of innovative new products and potentially life saving new medical treatments go uncommercialized and unavailable to the public each year, and as a result, hundreds of thousands of jobs. Patent Office Director David Kappos once said it was millions of jobs that go uncreated each year. And for the lack of a patent, or rather for the lack of three-quarters of a million patents that lie locked up in the patent office’s back log of 1.2 million applications, according to one top bio tech lawyer in Silicon Vally I know, literally all of his life’s sciences start ups are either stopped cold or at least stalled in their development efforts for lack of a patent. Because no patent means no funding and no business.
The problem is not just in the life sciences. According to the 2008 Berkley patent survey of entrepreneurs, 76% of venture backed entrepreneurs and 67% of all entrepreneurs say patents are absolutely vital to obtaining funding. I can testify to this personally. Looking back over my career, I can say, in fact, that patents have usually, though to be fair not in every single case, been a major factor in financing the ultimate success of the 6 companies that I’ve led.
So pick an industry, any industry with many start ups and in every field, a big reason why job creation is stalled and remember only start ups create jobs. It’s because patents are simply getting too hard to come by and too difficult to defend against infringers who are well aware of the long odds against the patent issuing these days. What’s the scale of the patent backlogs effect on job creation? According to my analysis of the Berkley Patent Survey, every patent is associated with somewhere between 3 and 10 new jobs. In my previous company Danger, which had 100 issued and pending patents, the number was 4 jobs per patent and patent application.
Now not every patent, of course, is a job creator. I’m just guessing here, but somehow I don’t think the patent issued a few years ago for a method of exercising a cat ended up getting a lot of people of the unemployment role. But, when retired Judge Michel and I ran the numbers last year, on how many jobs might be created by funding the patent office properly, so it can clear the backlog of patent applications, we wrote in our Op-ed in the NY Times, that it could mean as many as 2 and a quarter million new jobs. For the meager billion dollars it would cost to get the Patent Office in working order, that’s a fantastically cost effective, job creation plan. Hundreds of billions to rescue Wall Street, but not a dime to help the country’s single greatest facilitator of private sector job creation, to do its job properly. It just doesn’t make sense to me.
To be fair here, the log jam in patents issuances is not the only impediment today to start-up job creation. Although it is certainly a big one. Tax and regulatory burdens on start ups have reached a critical mass in the last 10 years. A fact recognized by President Obama when he signed an Executive order last Tuesday ordering the removal of burdensome regulatory rules on business. Hopefully something will come out of this effort. Also a problem are the post 9-11 immigration policies that are driving many of the world’s best and brightest scientists and engineers to other countries where they built their economies instead of our own. But probably the biggest job killer beside the patent backlog is the systemic destruction of our high tech manufacturing capacity.
For 30 years now we have all been fed the carefully cultivated myth, that so long as America did the creative work, the inventing, then we can let other nations like China do the so called grunt work, the manufacturing. Simply, we would think; they would sweat. So we let manufacturing go and in so doing we lost the greatest economic force multiplier in history. For manufacturing not only supplies middle class incomes to the three-quarters of all Americans without a college degree, it also creates up to 15 additional jobs outside of manufacturing for every position on the factory floor.
We now know this policy was an unmitigated disaster. In my new book Great Again, coming out from Harvard Business Press in May, we finally assembled irrefutable proof that when manufacturing is off shore, R & D always follows. And sure enough, already 20% of US R & D is now moved off shore. If this keeps up, what’s going to be left of America’s fable innovation leadership? In our arrogance and naivete, we seem to have forgotten that the nation that no longer makes things will eventually forget how to invent them.
If there’s one thing I wish all of us would resolve today it would be to spread the truth about patents. Because they are hardly the archaic legal instruments most people, citizens and lawyers alike think they are. They are the most potent job creators on the planet.
Thank you very much.
Speech transcribed by Renee C. Quinn.