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October 03, 2011

Entrepreneur-Friendly Policies (Finally) Showing Promise - But Leadership Required

The policy conversation regarding jobs and economic development is starting to show some promising signs, particularly in helping young companies flourish.  The fact that the entrepreneurial ecosystem is critical to job creation should be obvious, but there remains a misperception that small businesses create jobs.  In truth, it’s not small business that represents the country’s job engine.  It’s new businesses.  The Kauffman Foundation’s research on this matter is clear:  from 1997 to 2005, job growth in the US was driven entirely by start-ups.  What this means is that any economic development effort must be framed in the context of the following central question:  how can the government help more young companies be formed, grow faster and achieve long-term success?

Fortunately, there is a constructive policy conversation in this area on both sides of the political spectrum.  Unfortunately, it's going to take leadership and bi-partisan cooperation to push them through, and it's not clear where that leadership is going to come from.  Here are some recent policy developments worth tracking, as well as my own two cents on the policies I think should be getting more attention to support company formation, growth and ultimate success:

Policies:  Company Formation

One of the most valuable resource for American start-ups are immigrants who come to the US to pursue entrepreneurial careers.  Such household names as Google, Intel and eBay were started by at least one immigrant founder.  Yet, we make it very difficult for immigrant entrepreneurs to pursue their dreams and build their companies in America.  To address this, Senators Kerry and Lugar proposed a Start Up Visa in March 2011, providing “Entrepreneur’s visas” for immigrant entrepreneurs.  This bill needs to be passed immediately (it is in the midst of hearings and keeps getting caught up in partisan bickering over broader immigration reform) and should be expanded to provide green cards for those with degrees in science, technology, engineering and math.  For more on this important bill, read here and here.  The administration has proposed additional changes to process immigrants in a more streamlined fashion, including a recent set of policies that the US Citizens and Immigration Services department has advocated which can be found here.

The other major lever to improve company formation is facilitating the flow of ideas out of our university system.  Flybridge Capital recently created an organization called URES (University Research and Entrepreneurship Symposium) in partnership with the National Council of Entrepreneurial Tech Transfer (NCET2), to bring together researchers, investors and entrepreneurs to act as catalysts for company-building.  Greater attention and support for these efforts will help accelerate the process for research to be commercialized.  The recently passed Patent Reform Act is a good step forward in this area as well, simplifying red tape and reducing the backlog (despite last-minute, dysfunctional nods to special interests). 

But to really jumpstart company formation, the government should consider meaningfully increasing NIH funding – perhaps 2-3x its current level.  Most medical research labs around the company are dependent on NIH funding and it is one of the highest leverage investment we can make – supporting 325,000 researchers at over 3,000 universities around the country.  Yet, NIH funding is at a ridiculously low $31 billion per year, roughly the same in constant dollars as it was ten years ago.  We spend $21 billion on tax breaks to the oil and gas industry and tens of billions of dollars on farm subsidies.  This anemic NIH funding level remains despite the well-known fact that the impact on health care costs and job creation is enormous.  In diabetes alone, the total government support for research is a mere $1 billion in contrast to the $200 billion per year that diabetes costs the economy.  In addition to the clinical impact, each dollar of NIH funding generates more than twice as much in state economic output, not including the jobs generated by the companies who are spun out of NIH funding.  I'm shocked that there isn't more discussion about channeling more dollars towards this inmportant institution.

Policies:  Grow Faster

Once new companies are created, they need access to both financial and human capital to grow faster.  Just to prove that good ideas can come from unusual sources, Republican majority whip Kevin McCarthy proposed in September the Access to Capital for Job Creations Act, a piece of legislation that would widen the universe of potential investors for small businesses around the Securities Act of 1933.  Packaged with other proposals around expanding the number of shareholders private companies can have, this act would be an accelerant for small companies seeking access to capital from a broad range of sources. 

Access to human capital is another critical component to allowing young companies to grow faster.  The dearth of trained computer science and engineering is crippling the growth of many Innovation Economy companies.  Worker training efforts in combination with educational efforts, such as the emphasis on STEM (Science Technology, Engineering and Mathematics) is a start, but are woefully underfunded and under-supported.  For example, Congress nearly cut the $181m Department of Education’s Math and Science Partnership Program and the NSF’s programs in this area also do not get enough attention.  In thinking through our investment choices, we should keep asking ourselves, if they had a massive shortage of software engineers, What Would China Do?  The President’s Jobs Bill contains some good ideas in this area, such as a “Bridge to Work” program, which could have a big impact when the details are fully worked through.

Free trade is another critical component to support small business expansion.  Coming out of the recent economic crisis, there has been protectionist pressure that threatens to choke off the opportunity for small businesses to expand via global exports.  The free flow of capital across borders is one of the most critical ways to expand opportunities for US companies.  In September, the Council on Foreign Relations issued a new report that concludes that America is at risk of being left a bystander in the global trade arena as our share of exports and direct investment has plummeted.  Huge emerging economies in India and Brazil need to be opened up more aggressively with the help of the Congress and White House.  A more aggressive free trade policy, coupled with stricter punishment for unfair trade practices, must be embarked on.

Policies:  Achieve Long-Term Success

For young companies to truly have a shot at achieving long-term success, they need to be able to access the public markets through an IPO.  Unfortunately, the IPO market was the victim of excessive regulation in the wake of the Enron scandal, leading to the passage of the very restrictive Sarbanes Oxley, among other things.  Policy makers have finally been listening to the start-up and entrepreneurial community to adjust the policies to prevent the choking off of growth.  In September, Congressman Ben Quayle introduced the Startup Expansion and Investment Act, which seeks to make it easier for new companies with a market capitalization of less than $1 billion to go public by opting out of some of the more onerous regulations imposed by Sarbanes-Oxley.  This is a good start.  The National Venture Capital Association (NVCA) has put forward a comprehensive list of policies that need to be followed to make an event larger impact here.  Hearings on this have started.  Action needs to be taken.

Conclusion

Despite the partisan rhetoric and bickering, the last few months have seen substantial progress amongst policy makers in the areas of helping the startup economy thrive.  The link between startups and jobs is becoming more broadly understand, as are the policies required to help business form, grow and ultimately succeed.  It will require extraordinary leadership to step forward and advocate these policies in a comprehensive way that transcends the classic “left” vs. “right” debates.  I sure hope that leadership is on its way.

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While I agree with just about everything you talk about in the article, you don't do yourself any favors by quoting the Kauffman Foundation's research as a catalyst for some of the changes you suggest. Kauffman certainly has its merits, but would you expect an organization that focuses solely on supporting entrepreneurship to report anything different than "from 1997 to 2005, job growth in the US was driven entirely by start-ups"?

Nice piece. Passage of this Bill will help entrepreneurs as well.

http://www.massachusettsnoncompetelaw.com/2011/01/articles/legislation/ma-noncompete-bill-has-been-refiled/

Let your representatives know!

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Agreed, Paul. I'm a fan of lowering the noncompete barrier locally as well.

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