Want more jobs? Support Entrepreneurship

There’s a great CNN opinion piece out today by Amy M. Wilkinson that argues strongly (and correctly) that the government needs to do more to support entrepreneurship and small businesses. I whole heartedly agree.

Quoting from the piece: “According to the Census Bureau, nearly all net job creation in the U.S. since 1980 has been generated by firms operating less than five years.” This conclusion is backed up by the National Venture Capital Association which tracks the impact of private companies who receive institutional venture financing. You can read the recent NVCA report on the impact of venture capital on the overall economy here (the quick take-away is that this impact is extremely significant).

With that as a backdrop, why is the US taking so many steps to stifle the innovation economy? Here are some thoughts, including and expanding on what Wilkinson proposes in her article.

1) Look to start-ups for job creation. Given the conclusions above, this may seem obvious, but it’s not how the government behaves. The vast majority of stimulus money that has gone to companies in the past 18 months has gone to prop up the nations largest employers (many of whom have continued to shed jobs). Instead of always looking for companies that are “too big to fail,” let’s look at some that are smaller and more likely to drive growth in the economy. With Obama about to endorse using bail-out funds for new job creation, let’s make sure that money actually gets directed to companies most likely to actually create jobs.

2) Stop being so xenophobic. As Wilkinson points out, “We are a country of immigrants, and yet in recent years, we have made it incredibly difficult for immigrants to launch companies in the U.S.”. The absurdity of our immigration policy is mind-blowing to anyone who has lived through the experience of trying to obtain a work permit in the US (or watched a friend or colleague do so). My partner Brad Feld along with Paul Kedrosky wrote a passionate argument in the Wall Street Journal yesterday about one immigration reform idea, the Start-up Visa movement (worth reading the entire piece, see it here). But let’s take this idea further. For example, how could it possibly make sense to deport a recent graduate school graduate (someone with the kind of technical degree that we so badly need here in the US and who received significant federal and state subsidies to study here)? We should be doing everything we can to keep smart, educated, motivated immigrants here – we want them contributing to our society and to our economy.

3) Stop putting up barriers to investment and making it hard for start-up companies to operate. My partner Jason Mendelson wrote about Senator Dodd’s recently proposed changes to the accredited investor regulations, the result of which would be significantly increased costs for companies raising money. This will surely result in fewer companies being able to obtain financing (and as far as I can tell provide no meaningful added investor protections). Fred Wilson wrote about this a few days ago as well. This is bad for investors, bad for companies and bad for the economy.

While we’re talking about administrative and costly burdens, can we please address 409(a)? (here’s a quick explanation of 409(a) for those that want a refresher) As far as I can tell the only ones that benefit from 409(a) are the valuation firms that charge $6k-$8k to provide companies reports that allow them to price the stock options they issue to employees. Collectively, it amounts to a massive tax on private companies – but one where the neither the government, the companies or employees benefit.

4) Stop treating venture capitalists as the enemy. Honestly, we’re really not bad people. And we’re not here to take advantage of the system. Most of us are passionate about entrepreneurship and about helping companies grow and prosper.  We don’t need to be regulated more than we already are (it looks like we’ve avoided this for the moment), we don’t need our taxes raised for the long term work that we do and we definitely need to have some clarity on FAS 157 which is a complete mess at the moment and is at best going to introduce significant incremental costs into the system (which will take time and money away from our investing activities). [note: we have more to say on FAS 157 – look for that in an upcoming post]

  • http://blog.american.com/?p=7665

    http://ben.casnocha.com/2009/11/book-notes-from-p… — you might like this book, covers these issues with a more academic / macro-econ bent. Easy to read too.

    • sethlevine

      Thanks Ben! I'll check it out.

  • I like most of this, but I call bullshit on the carried interest thing. The NVCA blows a bunch of smoke about how VCs create companies, but so do bond investors — or do you think Level 3 didn't really use that money to create a company? And do you think maybe VCs might benefit from that leverage too?

    You should only get taxed at the capital gains rate when there's a possiblity of capital loss. Carried interest doesn't even come close.

    • sethlevine

      i figured someone would pick on that point, derek. it surely deserves its own post. while i think there are arguments against treating carried interest as long term gains (principally the question about “capital risk” that you bring up), comparing venture capitalists to bond holders isn’t one of them. vc’s are typically extremely involved in the building of the companies in which they invest, bondholders are passive … and have a security interest in the assets of the company, etc.  

  • I am thankful to Tim O”Reilly for tweeting this post. Jobs are the biggest challenge we face as a country today . . with 70 % of the so-called stimulus plan still not yet spent, there should be careful thought about reallocating money to support lending and financing of businesses in this country that can help people, job retraining programs, etal.

    • Anon

      thats old thinking from a W2 minded slave
      forget the government… its a dying entity.
      Own your life.

      • sethlevine

        i don’t follow your comment at all. to the extent the government is going to spend money on “stimulus” intended to create jobs it should be spending it in a way that might actually result in the outcome it desires (and that benefits us all). i don’t see where “old thinking” comes in at all…

        • Anon

          The title is old thinking… current government structure follows it religiously. Entrepreneurs create jobs… universal employment is the goal, not the strength of the entrepreneur… thus, “W2 minded slaves” refers to people that believe the point of creative entrepreneurial thought is job creation. Thus, Lockheed Martin and Northrop Grumman are immense benefits to society, even tho the masses they employ are one step removed from welfare, pushing buttons on a keyboard to succeed in their “job descriptions”. And our schools are spectacularly designed to create W2's, with the goal being to get good grades (test scores), so you can get a good degree, so you can get a good job, so you can retire with benefits one day. You buy that formula still too?

          No one should believe in modern Government structure. Even the flu vaccine gets mired in the loss of good faith in the intent of government policies (30% participation). You think government policies seek outcomes that might benefit us all…? but the evidence is stacked against that perception. Government pursues policies that seek outcomes to preserve its own structured existence.

          America was founded by men who willingly and entrepreneurially gave of their lives and treasures to become citizen entities within the system of law enabled by the Constitution. It should have been a recursive Agreement, renewed with each new life. When you were born, did you make such a conscious Agreement? Or did your Government seize your existence under the current definition of citizenship? Where is the conscious choice? America was created to do away with a King, not create a paper one in the form of our Constitution. Our government will do no right until it is restructured to make owners of every citizen at birth, as reflected by the inherent design of their birth identity.

          You need to own your life… people dont get that enough. Thats why they think its okay to be W2's… slaves to the system… called so because thats what the intent of the Civil War really was… not to free slaves, but to make self-fed, self-clothed, self-housed W2's of all people… universal employment runs counter to life ownership. Thus my comment.

    • sethlevine

      i’m thankful tim tweeted it as well! thanks for the comment. i think we often forget that small business is the engine of growth for this country (we celebrate our large companies much more than we do smaller ones). i hope the government uses some of that remaining 70% for job training, small business loan programs, etc.

  • You touched a nerve with this piece, Mr. Levine.

    I am part of a biotechnology start-up. We want to develop a handheld, inexpensive device for DNA tests, DIY biology and educational purposes. We already manufactured a prototype device, looking for funding now. I needed to get a replacement visa, my old one was damaged, but valid until 2015. I got my old one cancelled and my new one denied.

    And it was a B1 visa, not even a green card. Having that visa allowed me to go to the US and talk to people, learn, gather attention and a great team. A year later, we have results, we secured IP, and I am stuck here because according to a functionary, I am a risk, I will stay as illegal. I do not think that realizing the importance of a start up in times of recession is that difficult.

    • sethlevine

      unbelievable. while the entire system has problems (we should be letting many more people work here), this kind of story really highlights how broken it really is.

      btw, my father worked at clinical microsensors (which motorola bought a few years ago) – so i’m also sympathetic to the problem your company is trying to solve.

      good luck. i applaud your efforts!

      • Thanks a lot for your reply.

        It is very frustrating, as in the US I found opportunities I cannot get elsewhere. An undergrad, from a 3rd world country, no experience, managed to get support and set a start up. To me, that's incredible, I didn't expect to make it, but I tried anyway, and I made it happen. And now, boom, the dream is gone, or at least delayed,

        Here is a bit of information about our prototype:

        Thanks a lot for your good wishes.

  • Abhi

    I agree startups create jobs.

    Though, VCs are not really helping right now. Stop blaming the Government and look what is really going on.
    Instead of investing in decent companies at fair valuations, VCs are looking for a “lot of value”. That means, good companies at heavily VC favorable term-sheets.
    VCs are getting greedy. Nothing technically wrong with that, but then don't call yourselves the saviors of startups or the engines for job creation.

    • sethlevine

      i don’t agree with your assessment, although the point of my post wasn’t that we should focus on venture backed companies, but that if we’re trying to create jobs in the economy we should look to all sorts of emerging and entrepreneurial businesses (almost all of which won’t be venture backed, as very few companies are). with respect to VC’s investing at “fair” valuations, my experience is that that vast majority of VCs are extremely fair in their dealings with entrepreneurs (after all, we’re investing in THEM as much as we are their business idea).

  • Anon

    stop trying to create jobs, start owning your own life

  • I enjoyed reading your post.

    Jumpstarting jobs with equity capital must become America’s #1 domestic priority. Innovative small and mid-sized businesses are job-ready, but in desperate need of equity capital. With equity capital, they are the true job creators.

    Wealth creation comes from private sector efforts. Obama said, “There is only so much government can do. Job creation will ultimately depend on the real job creators: small businesses. But government can help lay the groundwork on which the private sector can better generate jobs, growth and innovation. “

    To create a significant number of jobs, a public/private partnership needs to be formed. Government provides the set-aside funds, while private “job creation” investment managers provide know-how and mentoring, which are directed exclusively at growth and U.S. job creation. Job ready companies can’t get bank loans because they can’t demonstrate a historical repayment capability. Therefore, job ready companies need equity!

    America needs the private sector to create high-value, sustainable jobs for the economy to thrive. What has helped the economy recover in the past? Innovations, integrated with capital management teams, that created new employment opportunities to replace jobs lost during the downturn.

    President Obama said innovation could return America to the stature of being #1 again. The Catalyst Fund concept was established to create tens of thousands of jobs by investing in 400 innovative, job ready companies. To bring America back as the #1 innovator, we need venture capitalists as business builders, and Catalyst Funds as the national delivery system to provide both the equity and mentoring to create thousands of high-value, sustainable jobs for Americans.

    Because of the unique circumstances of having a national delivery system already in place, investments could begin immediately. The delivery system is available by selecting 20 teams from the existing network of 700 venture capital companies.

    The national catalyst group of companies would be the integrator of SBA, bank loans, angel investors, private equity and traditional venture capital. We must not delay in taking advantage of this unique strategy to dramatically impact job creation in America.

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