Increasing Entrepreneurship

Inc Magazine asserts that a dramatic increase in the number of start-ups is key to economic recovery, and proposes a 16-point plan to accomplish exactly that. I agree with the premise–start-ups are indeed key to the economy–but find quite a few flaws and omissions in the plan, along with some good ideas.

Read the article first, then come back, read my commentary, and join the discussion if you feel so inclined.

Here are my comments of several of Inc’s 16 proposals:

Step 1: Take Entrepreneurship Out of the Business Schools. The writer argues that science students, arts and humanities students, indeed students in all majors–not only those pursuing a business degree–should have the opportunity to take entrepreneurship courses. I agree with this, with the caveat that it is very easy to construct such courses in such a way that they consist mostly of useless fluff. This obviously needs to be avoided.

Step 2: Tap the Best and the Brightest Wherever They May Be. The writer supports a proposals such as the Kerry/Lugar bill “to create a new visa for those who intend to form U.S.-based start-ups…Under the proposal, a foreign-born entrepreneur who has secured at least $250,000 in funding from qualified U.S. investors would be permitted to stay for two years. At the end of that period, if the business has generated at least five full-time jobs, attracted $1 million in additional capital, or hit $1 million in revenue, the founder would be granted a green card.” I’m on the fence on this one, but leaning against. People who are going to be successsful entrepreneurs don’t have a big “E” branded on their foreheads. When Andy Grove (Intel) came to the U.S., he was not a well-funded entrepreneur, rather just another Hungarian refugee.

Step 5: Give Manufacturers the Tools They Need to Get Started. The article praises manufacturing-oriented incubator–shared spaces which provide aspiring manufacturers with access to machine tools, 3-D printers, CAD systems, etc. Agree. Also, it would be worthwhile to give high school and college students an opportunity to learn about manufacturing technologies, and to work hands-on with machine tools, without the necessity of their being on a vocational track.

Step 6: Cut College Graduates Some Slack. Observes that heavy student-debt overhangs are making it difficult for recent graduates to pursue careers that don’t have guaranteed salaries attached, and proposes a repayment break for those who start businesses–as is now done for those who pursue careers in “public service.”

I’m inclined to vote “no” on this one. I don’t like the “public service” exception, and don’t see further expanding the exceptions as the solution to the student debt problem. I’d rather get the governmental thumb off the career-choice scales, and focus on the solving the problem of excessive growth in higher-education costs.

Step 7: Give Angel Investors a Tax Break. Some states are already doing this. Possibly a good idea.

Step 9: Cut the Incorporation Red Tape. Yeah, this would be a good thing, but it kind of misses the point. The main governmentally-inflicted delays that plague new and growing businesses do not stem from the incorporation process per se, but from various forms of regulation. This is especially true for businesses that want to produce a tangible product.

Step 10: Pass an Energy Bill, Already. Argues that clearly-defined standards for “renewable energy” will create opportunities for entrepreneurs to invest in this field. Completely misses the point that businesses use energy, and that standards which drive up energy costs will make many types of U.S. enterprises, especially in manufacturing, much less competitive with those in other countries.

Step 15: Stop Enforcing Noncompetes. I think this one is questionable. For one thing, noncompetes are often used by venture-backed start-ups, not just by large companies as the article implies. I think it might well be a good idea to establish limits on the term and scope of noncompete agreements, but not to ban them altogether.

Step 16: Bank the Unbankable With Microfinancing. It’s certainly true that banks aren’t doing what needs to be done in financing of new and growing businesses, and new institutions are needed for this purpose. I tend to agree with Joe Weisenthal, though, that most small-business financing should take the form of equity rather than debt.

Overall, there are some useful ideas in the article, but it misses a very key point, which is that the greatest single inhibitor to start-ups and to small-business growth is excessive and badly-designed regulation, with the dreadful Consumer Product Safety Improvement Act serving as Exhibit One. There are also issues of tax policy, with asset-intensive businesses such as manufacturing and transportation being discriminated against relative to asset-light businesses. Overall, the article is too focused on things that the government should do the encourage entrepreneurs and not focused enough on things that the government should stop doing in order to avoid discouraging and inhibiting them.

Your thoughts?

10 thoughts on “Increasing Entrepreneurship”

  1. Warren Meyer gives an example of the realities of running a business in the face of excessive and badly-though-out regulation:

    “On January 10, 2008, our company actually, shockingly, had a creative idea. Instead of refueling our boats at a lake in Ventura County, CA using zillions of 5 gallon gas carriers, lets put in a small double wall gas tank. It would save a ton of useless labor, it would greatly reduce fuel spills on the lake (the nozzle, unlike the 5 gallon cans, has overflow protection), it would save lots of trips into town to fill gas tanks — a winner all the way around. Granted this was a pretty small idea, but sometimes success in small business is a lot of bunts and singles.

    After hundreds of manhours of effort, numerous checks written to the County and the state, and I don’t know how many forms filled out, on July 1, 2010, exactly 901 days after we got the creative idea, Ventura County gave us the last permit we needed to go forward.”

    901 days. That’s a lot more serious than the incorporation delays upon which the Inc writer chose to focus.

    Also see Warren’s Forbes column: What Fresh Hell is This?

  2. The Kerry/Lugar bill just creates another massive risk for the investor(s) and entrepreneur. What happens to a successful company that fails to meet the criteria? Is the entrepreneur sent packing and the business fails? Just start the company in your home country, and avoid any of these issues and more. The US is quickly (if it hasn’t already) losing its ability to dictate the economic rules to the world, politicians need to learn this fast.

  3. Entrepreneurs, true entrepreneurs, need less government assistance, not more. The only proposal that suggests cutting government interference is to cut the incorporation red tape. While this has some merit, it is spit in the ocean of government distortion of the free market through subsidies, taxes and regulations. You want more start-ups? Repeal SarBox.

  4. Entrepreneurship, like sex, does better with less attention by non-participants paid early on. The more the government tries to help, the more it gets in the way. Of course, that assumes it is trying to help.

    I would not want to try to start a solo medical practice now. My brother-in-law was planning to build about 70 beds of high end assisted living homes in Tucson. This is a big and growing field. He wanted me to be medical director. The idea was that I would be on-site and could do my other consulting-type activities from a small office there. I looked into it and even went to the Geriatrics Society meeting last year. I found that NO geriatrics practice is making its expenses UNLESS the physician is running a cash only practice. They cannot survive on what Medicare pays. All geriatric practices are subsidized by universities on federal grants.

    So far the assisted living plan is a victim of the times.

  5. Re: pt.5
    I’m all for it. The bigger problem is the perception in the broader community. On one hand people say we need more domestic manufacturing. On the other, they decry factories as dank, dirty and mind numbing. Sweatshops, ya know? They don’t want their kids working in a factory much less themselves. The first problem is image.

    Maybe having more places like TechShop would turn that around and make it sexier. I hadn’t thought of it but I have a nice workshop that is often not being used. My reluctance in offering my space is hand holding. If they need too much, I couldn’t do it. Also, I wouldn’t know how to go about offering it. I would be very selective about who I let in here, liability and all.

  6. Almost all of these measures avoid the real barriers to start-ups, which are, overwhelmingly, financing, regulation, and liability. A real entrepreneurial stimulus program would:

    1. Repeal all criminal penalties for financial- and regulatory-related violations save for deliberate fraud within the classic common-law definition;

    2. Permit public offerings on small exchanges with a minimal, clearly-defined disclosure standard;

    3. create a clear safe harbor for risk disclosure in fundraising such that entrepreneurs do not have to pay massive legal fees for grossly-overwritten risk disclosure sections that are counterproductive because they bury the real risks under mountains of disclosures of highly improbable risks;

    4. Repeal Sarbanes-Oxley in its entirety, plus of course this new monstrosity that just passed;

    5. Ban shareholder suits against profitable companies based on theories about possible alternate courses of action that might have made more profits;

    6. Curb excessive liability either through limitation on punitive damages, or adopting a Commonwealth-style “loser pays” system, or some other approach;

    7. Reform regulatory systems on an industry-buy-industry basis to shorten decisions times; create clear safe-harbor standards and practices, adherence to which bring rapid approval; and provide a realistic means of appealing or rebutting regulatory decisions within a time frame and cost small enough so that start-ups don’t go out of business while waiting for a decision. Designate some reasonable set of first-world countries with competent regulators and transparent record-keeping and permit experience bases within those countries to have weight in the US regulatory processes. (Especially in the FDA)

    8. I’d like to find a way to prevent most money in the SBIR system from going to wired proposers pre-selected by the agency, but there’s no good way to do so just by re-writing the regulations. Possibly it would help to have one agency write the request for proposals and a different agency (which wouldn’t administer the proposal or benefit in any way) make the selection. Or, you could just screen proposals for basic reasonableness and basic qualifications of proposers, put them all into a pool, and select the winners from among the qualified proposers by lot. If you did half the SBIRs by that method, and half by the traditional method, it would be interesting to compare their success rates.

  7. Cut (ideally, to zero) tax rates on capital gains. Eliminate all taxes on corporate income and, where applicable, on gross receipts. Kill all inheritance taxes, which are nothing more than punitive taxes levied discriminatorily on one type of capital. Modernize and rationalize depreciation rules. Stop the regulatory war against small and mid-sized banks. Cut tax rates overall.

    Capital availability isn’t the issue. There’s a huge amount of available capital. The problem is that current high levels of taxation and regulation, and of regulatory and legislative uncertainty, severely reduce the expected returns and increase the risks of capital investment.

  8. My only experience in this area is watching the local shops and shop-owners around me. It is a very strange world in which there are community development “experts” that are involved in handing out grant money to small business which seem, to me anyway, to have no rhyme or reason for being. It’s as if the grant givers are interested in “how cool would it be to have X type of shop?” And then everyone else, including the local property owners and small business, pony up the taxes that make up the grants.

    It’s bizarre, it’s a world of TIFs, it’s a world of federal stimulus money being used for truly head-scratching projects like paving over public roads with bricks. This should not be a priority.

    The world of local governance is utterly bizarre.

    – Madhu

  9. OPS…”It’s as if the grant givers are interested in “how cool would it be to have X type of shop?”

    About 12 years ago, I knew someone who wanted to start a small manufacturing business and wanted to take advantage of startup funding from a local government program. They made it clear that they were only interested in “high technology” businesses: metalworking companies need not apply. (This was not an environmental issue: the business in question was clean light manufacturing)

    I wonder how many of the “high tech” companies that they *did* fund are still around…my guess would be not many. This is probably typical for local govt involvement in business funding: give $ to someone trendy, especially if the trendiness is in a field that the government officials know nothing about and are incapable of evaluating intelligently.

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