Wednesday, October 13, 2010

The Math

By: KLG Consultants, LLC
Our strategy advocates the  funding of 1,000,000 new start ups. Some of those start ups will fail for sure, but we believe there is a utility in failure. The aggregate intelligence of the  business world learns from mistakes.  They learn how to get better.
Let’s assume each new company receives $1,000,000 in new investment. To create and fund 1,000,000 new companies, this would then require 1 trillion dollars in new at risk venture investment. Assume now that each company on average hires 5 people as a result of that investment. That creates 5,000,000 (five million) new jobs over time.  It also creates tremendous economic activity within this process gets money moving into the system, causing an increase in velocity (the speed at which money flows through the economic system) throughout the entire economy.  There may also be a greater multiplier effect (how many times a dollar moves through the economic system) from this type of investment, as opposed to direct fiscal investment.
Assume now that one half of the new firms fail in the first year. That still leaves net new job creation at 2,500,000, if none of the other new companies grow. According to some venture portfolio theories, 10% of funded new companies will grow, 10% will stagnate at some point, 10% will barley survive, and the rest will fail. So then in the first year, 50% of the new firms will probably fail based on some portfolio theories, but 10% of them should be growing. That means 100,000 companies are adding jobs out of our original 1,000,000 new companies.  Let’s say in the second year, these hundred thousand companies each add 5 new jobs on average. That adds 500,000 new jobs and as a result there is   net new job creation of 3,000,000 after two years.
In the third year assume that another 200,000 of the new companies fail. That means 2,000,000 jobs are left from the original initiative, if there is no growth from the other 300,000 new companies left in business.
However, assume just 1% of the companies out of the original 1,000,000 are now in rapid growth mode. Assume those 10,000 rapidly growing companies each add 500 jobs in the 3rd year of the program. This creates another 5,000,000 new jobs. That means net new job growth is at 7,000,000 in the third year of the build up initiative. In the forth year the real bright stars emerge and   ½ of 1 percent  or 5,000 companies from  the original 1 million new companies add 2,000 more new jobs each, that means 10,000,000 new jobs. That means in the 4th year new job creation stands at 17,000,000, not including the external job creation due to the economic activity directly attributable to the new companies.

Now assume, in the fifth year, 1000 companies, 1/10th of 1% of the original 1 million new companies, achieve explosive growth and each add 10,000 new jobs. That adds 10,000,000 new jobs and job creation now stands 27,000,000 just inside the new companies at year 5. Assume in year 6-7, greatness is achieved at 100 of the new companies. They each add 50,000 new jobs.
With these assumptions, we believe in 7 years therefore, the build up  initiative creates 32,000,000 million new jobs, incredible economic activity, disruptive technologies, new medicines, alternative energy sources, new foods, and yes many new wealthy entrepreneurs and business owners.

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