At WSJ’s Real Time Economics blog, Justin Lahart reports on Census Bureau data that indicate the most recent recession has been exacerbated by a dearth of start-up activity, which is down 17.3% from a year ago and is the lowest level since records began in 1977. Even more worrisome is the fact that the slowdown in investment activity in the last three years is far worse than we have experienced in past recessions.
One reason that fewer companies got started in the most recent recession is that the availability of financing dried up. Angel investors and venture capital funds cut back on putting money into new businesses, and opportunities for self-financing, like taking on additional mortgage debt, became more limited.
Mr. Haltiwanger [a University of Maryland economist] worries that the drop in start-ups could make the U.S. economy less vibrant. Fewer new businesses amount to the country not rolling the dice as often on creating the innovative, fast-growing companies that will help drive the economy. “Not only did we lose all those jobs, we may have lost future, successful businesses,” he said.
Although it does remain a challenging environment for entrepreneurs – due to both the scarcity of early stage capital and an uncertain tax/regulatory environment – the good news is that venture financing has rebounded and is higher than last year. The bad news is that venture financing is still well below where it was two years ago. While we’ll take any movement in the right direction, it is clear that legislators at both the national and state level need to think hard about enhancing the incentives for both individual and institutional investors to invest in small, private growth companies as key elements of their economic recovery strategies.
Professor Ghosh describes three categories of “failure” for start-ups, and estimates the occurrences of each:
1. Liquidate all assets, investors lose most/all money: 30-40%
2. Not realizing the projected return: 70-80%
3. Falling short of initial projections: 90-95%
With “failure” this common, he urges executives to distinguish between business failure and personal failure. It’s vital to not let the former, which can be a valuable learning experience, pressure you into the latter, which can become a career-damning ethical lapse:
A personal failure is one in which an individual does something that violates a fiduciary duty, commits a crime, or acts in a way that goes against the normal tenets of morality and fair play… Ironically, a personal failure often occurs because an entrepreneur is trying too hard to avoid an enterprise failure. Trying to keep the venture capitalists happy and the bankruptcy at bay, the founder or CEO will resort to illegal acts such as fraud, or to morally problematic acts such as blatant misrepresentation of the company’s capabilities or prospects when talking to customers or financiers. And when you do that, you’re then on the slippery slope of taking an enterprise failure and making it a personal failure.
Professor Ghosh closes with an endorsement of Schumpeter’s gales of creative destruction: “manage failure so that enterprises fail but people can still succeed…[and] build a society that can reinvent itself as the world changes.”
“The widely repeated claim that small businesses are the vital source of new jobs isn’t supported by the facts,” (Schramm) said. “It may sound good on the campaign stump, but here’s the reality: Companies with fewer than 500 employees—the official definition of a small business—account for roughly four out of 10 jobs. Firms of less than 100 employees—a more commonsense definition of small business—account for less than one-third of American jobs.”
The key to growing the U.S. economy is helping more new businesses become billion-dollar companies over time. Currently about 15 of the 600,000 new businesses launched every year in the U.S. grow to become billion-dollar businesses, according to Kauffman. If we could increase that number to 45 to 70 a year, “we’d permanently increase the economy’s growth rate by one full percentage point.”
Schramm’s recommendations (discussed in his address and in Kauffman’s Rules for Growth) include: enabling more high-skilled immigration, streamlining university technology licensing practices, tax reform, and patent/IP reform.
As we’venotedbefore, new businesses do account for a large percentage of the NEW jobs created each year, so encouraging new business formation remains critical to putting Americans back to work. Beyond that, it’s a numbers game. The more new businesses, the more likely that some of them will go on to be billion dollar businesses. But you don’t get the latter without the former, so it’s critical that our tax and regulatory policy encourages new business formation.
Everything else from credit to money supply to quarterly earnings releases to minimum wages is just a tool or else a meaningless characteristic of an economy. Without that “increasing living standards” thing, you and I would still be living in caves, chasing squirrels and shoveling [crap]and dying young from minor infections. Increasing standards of living doesn’t happen automatically. It’s not a gift from heaven. Someone has to invent the future…
Yeah, sure, none of [the free radicals – e.g. Walton, Jobs, Carnegie, Rockefeller] discovered penicillin or cured polio. But these folks increased my standard of living, your standard of living, half the world’s standard of living, on par with any scientist or philanthropist. They created wealth for themselves, yes, but also for society as a whole, by making all of us more productive.