Despite all the talk of Lean Startups, millionaire app developers, and Shark Tank, we are less of an entrepreneurship economy than we were in the 70s. So says a new Brookings study(PDF). Really? Before we had the iPhone, the Prius, Google, and Justin Bieber? Before MTV, Atkins, Pokemon, and Clear Pepsi? When there were half as many obese adults and twice as many Germanies? That was our entrepreneurial heyday? Apparently so. We talk about startups as job creators. But we don’t give them priority. Our question is, why? The evidence, co-author Ian Hathaway says, “is pretty overwhelming.” Big, old firms are driving job creation and economic activity. Young firms like Twitter (though they may get the headlines) are employing less than a quarter of us.
By our estimate, about three-quarters of private-sector employees and nearly 80 percent of total employees (private + public) work for organizations born prior to 1995. This is especially remarkable considering the volume of product innovations and household-name businesses that have emerged in the last two decades.
How is it that so few jobs are coming from new businesses? One reason is familiar to anyone who has held onto a job they hate just to keep the health insurance. Fear of going bankrupt because of an injury or illness isn’t good for risk-taking. Now that even Republicans are saying, “keep your government hands off our Obamacare,” maybe the House GOP will decide that 50 tries to repeal it are enough. But let’s not get distracted arguing about so-called “entitlements”; they aren’t the big problem. It’s our whole attitude toward risk-takers. We pay lip service, but we don’t work to find the best risk-takers, extend them low-interest, long-term credit, and then share their risk and minimize it. We cling to myths about who is credit-worthy. Hint: the next Steve Jobs won’t look like Steve Jobs. We also have a failed vision of how to take on risk. Young, new firms based on new ideas are more likely to fail, more likely to need long incubation time, and less likely to quickly become profitable.
The rate of new firm formation has fallen by half during the last three decades, and has contributed to the decline of American “business dynamism…” In short, fewer firms are being born, and those that are born are increasingly likely to fail very early on, as are firms that survive into young- and medium-aged years. Those that are old, on the other hand, tend to persist, allowing them to constitute a larger share of economic activity in the United States over time.
The American Dream lives in the idea that you can start with nothing and create something that makes the world a better place and maybe makes you rich as well. We talk about it, but we don’t put our money where our national mouth is. We don’t take on the reasonable and necessary risk of investing in the boldest and brightest among us. Here are some of the reasons:
The short-term, “build a company and sell it” focus of many entrepreneurs.
Few entrepreneurs are trying to build something that will grow and last. Look at a Google search for “build company to sell”: not one top 10 result talks about it being a bad thing. In short, not many companies are trying to be the next Facebook. They’re trying to get bought by Facebook, the way Instagram and Whatsapp did. Serial entrepreneurship is fine. But you can’t build an economy on disposable companies.
The refusal of banks to lend generously to small firms and startups.
Instead, big banks are taking the 2 trillion-plus the Fed has paid them and putting much of it into reserves. Quantitative easing was based in part on the hopeless notion that massive amounts of free cash, no conditions attached, always brings out the best in people. Instead, banks have disproportionately used it to benefit themselves, investing in large-cap stocks and big funds, not lending to the new small-caps the economy needs. A friend of mine, former editor of a leading financial site, told me the investor buzz lately is about emerging market small-caps. The American Dream is alive, it seems, and getting funded in Bangalore and Buenos Aires.
The education debt weighing down many of the same young graduates who typically start businesses.
It’s hard to get a business loan when you already have 30 or 40K in student loans to pay off. Some just give up when the banks say no, without realizing they’re more likely to get startup funding from family and friends than a bank or angel investor. Such investments are a challenge for all but the richest families. So why not help parents who co-sign loans for their children starting small businesses? A tax credit or insurance against loss would allow parents to invest in their children’s talent and ambition without risking their retirement savings. Surely if we can let banks use taxpayer welfare to pay tens of millions to CEOs who caused the financial crisis, we can help parents invest in their kids. The new Obama model, where repayments are a low, fixed percentage of monthly income, is like that of the most successful lender in the world, microcredit pioneer Grameen Bank, which has a 97% repayment rate. It works so well that Grameen stopped accepting donations in 1995. They are one of the most consistently profitable banks in the world. Another big reason for their success? They lend mainly to women.
The biggest reason for the world’s (and America’s) economic difficulties is our failure to invest in women.
We underestimate the value of women as an economic power in ways that, well, hardly qualify us to lecture others. Few of those big, older firms employing 75% of us are run by women.
Marissa Mayer, CEO of Yahoo (L) and Sheryl Sandberg, COO of Facebook
Discrimination is particularly awful in the tech sector of all places. Tech firms run by women “show significantly better returns,” yet they get less funding. You’d expect all those bearded hipsters and the moneyed old guys who want to hang with them to find such blatant sexism as outdated and noxious as Clear Pepsi. But Issie Lapowsky of Wired found one “angel investor” saying “I don’t like the way women think,” and another proclaiming he doesn’t invest in women he doesn’t find attractive.
The solutions are obvious.
As I revised the above I had to ask myself, is this what I’m accusing us of: being short-sighted, greedy for quick and easy profits, more eager to make a quick buck off our students and graduates than invest in them, and unfair to women who want to create new jobs, new products, new services, and new ways of doing business? Yes, but saying it will just make some people defensive, so let me ask it this way: is there any good reason not to do the following and do as much of it as possible?
- Invest for long-term, sustainable growth and stop looking at quarterly returns like they mean anything. (They don’t.)
- Use taxpayer funds to promote lending to entrepreneurs (who are also taxpayers) who want to create opportunities for themselves and others. Taxpayers need not fund the stock market speculation of big banks or subsidize an ever-smaller group of corporations, some with earnings larger than the GDP of most countries. Most of them don’t even pay their fair share of US tax. (Legal does not equal fair.)
- Invest in our students so their most productive, risk-taking years are not clouded by massive debt.
- Unleash the full power of half our citizens and immigrants.
I haven’t discussed the value of raising the minimum wage. To those OldCaps who insist that it kills jobs, the New Capitalist reply (which is also Reality’s reply) is simply: you’re wrong. 1400 different studies show no effect on employment. Every time Congress has raised the national minimum wage, two things have happened: Republicans screamed and unemployment stayed the same. Plus, consumer spending usually rose, since poor people spend more of their income. What’s more, most small business owners favor an increase in the minimum wage. This issue boils down to a question about democracy in a capitalist society. Do America and the world continue to move to a system where a few giant entities create most of the jobs and products and set most of the rules? That’s China. Or will the land of opportunity set an example of doing what is both right and profitable? Our failure to invest in women is the clearest sign of our failure to treasure the best of ourselves. It’s great that women are speaking up and “leaning in” and all. (Facebook and its COO are model New Capitalists.) But in a larger sense, women shouldn’t have to lean in, should they? How much better than a man do you have to be before male investors consider you good enough? [From TheNewCapitalist.org]