The Startup America program is being organized to help a relatively small number of companies they believe have the potential for "hypergrowth". The program had great promise, but as currently organized is elitist, seems to be taking on elements of cronyism, has several built in conflicts of interest and may have been captured by big business. In many ways, it is reminisent of the bank bailout and stimulous programs - both of which helped the well off, but did nothing for small business.
This approach of the Startup America Partners could be a political disaster, and might even cost Obama the Presidency in a close election. Specifically, they are ignoring the huge number of "zero employee companies", a vast constituancy that could number as many as 40 million Americans, but has been virtually ignored by our political system. As currently structured, it will do nothing to help these companies realize their potential, and there is no sense that they even understand or want to help them.
There is a better way, but first we have to acknowlege the serious problems with this program, and begin to explore alternatives that could be far more effective. Small business and startup companies are the one best hope for America, and they deserve better than this.
The U.S. Government and both our political parties have seldom paid much attention to small business, and almost never new or start-up businesses. This is strange, because there are so many small businesses in America, that reaching out to them should really be a political “no-brainer”. Still politicians seldom do more than spew platitudes about how important small business is to our economy, or talk about how terrible taxes and regulations are, but they almost never propose anything that would actually help. As a result, existing government programs that are supposed to help are old, bureaucratic, and ineffective
Now, seemingly overnight, everyone is talking about small business and start-ups and it will almost certainly be an issue in the next Presidential election. New Federal Initiatives: Startup America and the National Export Initiative demonstrate that the Obama administration is starting to take a more proactive approach to business development. Will this help President Obama win reelection - or is it too late? More importantly, will it really help small business and startups? Before we can answer this, we need to look back.
We Have Seen This Movie Before
Towards the end of the first term of the Bush administration, people became alarmed at the rapid loss of American manufacturing jobs. The 2004 presidential election was getting underway and Democrats were pointing out that more than 2.5 million manufacturing jobs had been lost during that administration. Bush was even protecting tax breaks favoring corporations that move their headquarters overseas, his opponent John Kerry had charged, and some of those tax breaks still have not been eliminated to this day.
The Bush administration, known for its laissez fair approach to business, didn't want to touch this one, but there was no way to avoid the evidence. America WAS losing manufacturing jobs at a rapid clip, and they had to at least look like they were doing something. Bush made a few moves - he dispatched the Commerce Secretary Evans to Japan to complain- somewhat pathetically - about their competition, and he admonished China for manipulating its currency, but nothing much came from any of this.
Then they then did one of those “listening tours” and ran around the country to meet with the leaders of manufacturing firms. After that, they wrote a report summarizing their findings - It had a few good ideas, emphasis on American standards, training, etc, but that was about it. The response of the Bush administration to the loss of almost our entire industrial base was to go on a road trip!
Hope for the Little Guy
When President Obama was running for office, there was hope that government would take a more active interest in small business, and at least a sense that that government would again be on the side of “the little guy”. Right in the middle of the Presidential campaign, however, everything changed- Lehman Brothers failed and the economy nearly collapsed. McCain put his campaign on hold and rushed back to Washington to “fix the economy”. Obama remained cool and calm, and people started to think of him as the guy who really could fix the economy.
Even before Obama was elected, the government was forced to come to the rescue of the big banks and corporations: the very ones who had caused the problem in the first place; the very ones who never lifted a little finger to help us. Unfortunately, and these programs continued after Obama took office and his Presidency became associated with this baggage. Help for “The Little Guy” would just have to wait a while.
Would the Stimulus Help?
As President Obama began his term in office, the economy continued on its course of rapid decline. We all remember - the auto industry had completely failed, the housing market crashed, corporations were laying people off left and right, local governments could no longer make their payroll and teachers were being laid off. Credit was pulled back and it seemed no one had money anymore. Suffering more than most were the small businesses of America. They did not have the same kind of safety nets that are available to other people “in the system”.
Enter “The American Investment and Recovery Act” - aka “The Stimulus Program”. The stimulus was intended to create jobs and promote investment and consumer spending during the start of “the great recession”. Perhaps this was “the Calvary coming over the hill” that small business in America so desperately needed. The government was going to spend a whopping 800 billion dollars - surely some help for small business would be in that package.
The release of stimulus funds set off a veritable feeding frenzy among government employees and well connected contractors, but the program bypassed small business entirely. I myself saw some of the corrupt deals from this program - akin to bid rigging, where RFPs were written for the friends and associates of government employees. Essentially, the money was used to save the jobs of people who already have great jobs - complete with medical insurance and even retirement accounts. Any hope that their might be some help for “the little guy” were once again dashed.
Startup America - is it really for Startups?
Now the Obama administration has turned its attention to small business, but it is late in the game and they seem to be repeating history. The Startup America program was announced with great fanfare, and it sounded great. A massive “public private partnership” to help small startup companies. Unfortunately it was short on details. How would people participate? What were the benefits? We know that some kind of backroom deal was made with the Kaufman Foundation and they in turn made a deal with TechStars - a company that operates incubators for Startup companies. From the press release, here is the gist of the program:
As part of the initiative, the U.S. Small Business Administration (SBA) will commit $2 billion in matching funding through its Small Business Investment Company (SBIC) program. According to the administration, this effort rests on existing authority and an infrastructure already in place in the SBIC program. Through the SBIC program, SBA-guaranteed bonds “will match private capital raised by these privately-owned and managed investment funds and serve as a catalyst for accelerating capital support for startups and high-growth firms. An Impact Investment Fund, aimed at investments in underserved communities and emerging sectors, like clean energy, will be provided with up to $1 billion in a 2:1 match to private capital. The remaining $1 billion will be allocated—in a 1:1 match to private capital—to an Early-Stage Innovation Fund, aimed at addressing the “Valley of Death” for financing rounds between $1-4 million”.
I have a little struggling start-up, so I have been watching and learning as much as I can about this program since it was announced. To my surprise, they had no registration system at all - not even a simple one, until months after the program had been announced, but I read everything I could about the program, participated in all three webinars, and when the registration system came online officially joined the program and also requested partnership status. since I have developed some networks that could benefit startups and small business.
So far, the program’s most visible activity seems to be extolling virtues of startups, and cheer leading for existing programs. The presentations have been sloppy - almost like they are winging it, and It seems that their major activity has been another "road show" - running around the country talking to business associations about the value of entrepreneurship - preaching to the converted, before the basic elements of the program have even been put in place. Here is what I have concluded:
1. It is missing a vision. The Startup America programs seems to have started without any coherent vision of what it is or where it is going. It is not even clear who can participate, how they participate, or what the benefits will be. They are still “scoping” the project, and the numbers for the people they intend to help have changed with each presentation. As near as I can determine, they see their major role to be the identification of companies that have the potential for "hypergrowth". This is a good strategy maybe if you are a venture capitalist, not so much if you have public responsibilities or if you really want to help startup companies in America. After all this time, they still haven’t answered the critical “what’s in it for me” question.
2. It is elitist and exclusionary. There is a real sense with the Startup America Partners that small, humble companies “need not apply”. Could a small landscaping firm join Startup America - even if it really was a startup? What about a tiny computer repair company or a pet care business? Will Startup America be able to help people like this? Will they even try? From everything I have been able to determine, they seem to be discouraging startups like this from joining as they have pre-determined that they will not be job creating “winners”.
3. It reeks of cronyism. It is no coincidence that Startup America wa called “a bailout for the venture capital industry” by Forbes Magazine. During the presentations they constantly reemphasize that they are “the private sector” and it seems they almost immediately forgot about the “public” part of “public-private partnership”. It is almost as if they are giving themselves “high fives” for scoring two billion dollar from the government to play with and have absolved themselves of responsibility for even attempting to help the vast majority of startup companies in America. It is almost scary how much this is reminiscent of the bail out of the banks and financial industry.
They also keep pushing their “partner program” but no one seems to know how do they decide who gets to be a partner- their online application reveals nothing. This may seem like it is not that big of a deal, but wen you scratch a little below the surface, you realize there is a big problem with this. What if everybody wants to be a partner? They almost certainly will be picking some of the more powerful companies as “partners” and seem to have a built in bias for companies already working with the Kauffman or Case Foundations. Their very first move, for example, was to plunk down $200,000 for one of their “partners” - TechStars - with a no bid, sole source contract for design of the registration system. There are dozens - maybe hundreds of online services for startup companies - by giving public money to TechStars without a competitive bid, they have not only given them an unfair advantage, they seem to have endorsed a single model for information intake and matching. If this model is wrong, it could spell real trouble. Can anyone really be blamed for suspecting there might be some “crony capitalism” at the root of the Startup America Partners?
4. It has a built in conflict of interest. Startup America is trying to be all things to all people but they have made it clear that their real goal is to “cherry pick” a small number of companies they believe will be “winners”. They are simultaneously trying ensure the success of a limited number of companies in a few pre-selected industries, while at the same time positioning itself to be the central organizing point for startup companies. A position that will give them and their associates a massive advantage in the market. The relationship between the Federal government and the entity known as “The Startup America Partnership” is not clearly spelled out. The granted this program two billion dollars of taxpayers money. Who decides who gets this funding? Who gets access to the information about the startup companies. Noneof this has been answered in any of the presentations. Even worse than all this, however, is that the Startup America Partners seem to be trying to represent the interests of both investors and small business. It cannot be done; it is impossible.
6. It has been hijacked by big business. While we can respect the help that big corporations are offering, it is reasonable to question their motives. If they were, for example, to announce that they would be cutting 100,000 small business contracts, I would certainly be be impressed. That is not what seems to be happening, however. Rather, these large corporations seem to want “a piece of the action” - probably to get the benefits of small business innovation - especially from the “cherry picked:” winners of the Startup America program.
More disturbing, they seem to want to use Startup America as their own private marketing platform. For example, Intuit Corporation is offering: “special offers and pricing for the company’s flagship products and services, including QuickBooks “ HP will offer discounts across its commercial product categories, Google will offer 50 percent off add words, etc.
There is something else that needs to be considered here. Assume for a minute, that Startup America ends up being fantastically successful, and most Startup companies in the U.S. register with their program - almost like a monopoly. By giving their corporate "partners" first shot at this information, the "cherry picking" process they have already been putting in place will be greatly amplified. These corporations will be able to pick off the most innovative and promising Startup companies in America, thus elimination potential future competition. It is already known that this kind of investment and acquisition is often used to "clean up the market" - corporations do it all the time. This could me the end to "disruptive technologies" - of little companies flying under the radar, and suddenly giving big corporations a run for their money. Now they will be "nipped in the bud". The United States already has a problem with too few employees, and this could harm the "creative destruction" that has been the hallmark of American business success in the past.
7. It doesn’t scale. Anyway you look at it, the Starutp America partnership is a top-down effort. They started by making partnerships with the largest corporations in America, and now are touring the country talking to existing startup programs - usually run by government economic development groups or community colleges - few of which have ever had a startup business. Now they have had the audacity to be asking for “success stories” for their website - before they have helped a single business. This approach is not only insulting, it will almost certainly be ineffective - they still haven’t given the vast majority of startup companies any compelling reason to join this program. .
As far as I can see, almost none of the mechanisms for providing services for a large number of Startup companies have been put in place. They won’t even say how many companies they intend to help with the program - the number changes with each presentation. Perhaps the one thing they have done where they might be on the right track is their announcement that they will be recruiting 10,000 mentors for startup companies. Still, this is basically just a continuation of the top down approach that has been the hallmark so far of this initiative, and while 10,000 may sound like a big number, it is just a tiny fraction of what is needed. Also, while there are some great business mentors and advisers, it is also a field that is filled with hucksters and con men. How will they be screened and matched? How will they avoid conflicts of interest?
A Political Disaster?
Will Startup America diss more people than they help? Honestly, it seems like a very real possibility. What will happen when millions of Americans with small businesses realize again that “there was nothing in it for me”?. Startup America is seriously broken - perhaps even flawed in concept. We already know what conservatives are saying about the program - and it is a valid criticism - that they are “picking winners”. We know what progressives and liberals will likely be saying about this program if it doesn’t change- that it is elitist, exclusionary and even corporatist. So if you have conservatives saying it is picking winners, and liberals not liking it because is smells like a gift to the rich, you have a recipe for political disaster. It is essentially a “worst of both worlds” program.
An even bigger political problem with Startup America is that they have set themselves up for failure. Conservatives had a field day with those recent studies that each job created by the stimulus program cost over $200,000. Even if this isn’t true, it doesn’t really matter - it is political information, not statistical situation. Does anyone seriously believe that Startup America is going to create any significant number of jobs by the time the election rolls around? A few hundred, maybe. Someone is going to do the math and say that this program is costing 10 million dollars of taxpayer money for each job created. It won’t be fair, but it won’t matter. The public will put this together in their minds with the bailout and the stimulus as another reckless government program that helped very few people.
Given the certainly that Republicans will be using the “we are good at business” mantra and even the possibility that a venture capitalist will be their nominee, this poorly conceived program could be the perfect target for them - and I believe it could even cost Obama the Presidency in a close election.
Zero Employee Companies
Before we can even begin to figure out how to fix Startup America - if it even can be fixed, we should know who it is supposed to serve - the program was never really properly “scoped”. There is an almost perfect target population for this program, however, and one that would align policy and political goals almost perfectly, and give this program a chance of making a real difference in job creation while helping millions of Americans. I am talking about that population of Americans who run small companies and startups that have no employees at all.
A few years back, I was writing a newsletter article about California business and came across what I thought was an amazing statistic: California had over one million "zero employee companies". I thought this was a huge number, even for a big state like California, and it occurred to me that no one seemed to know very much about these companies. Were they doing well, or were they struggling? What problems and opportunities did they face? I looked, around but no one seemed to know much about them.
Zero employee companies are exactly what the name implies. Small companies that are run by their founder. They seem to come in all shapes and stripes but no one really knows all that much about them or even how many of them there are. Still, if the problem we need to solve is “job creation” doesn’t it make sense to find out who these companies are, and why they have no employees, and if there is anything we, as a nation, can do to help them grow?
Even when I wrote this article though, the data was old - from the last census in 2000 - and I suspected the number could be far higher. Practically everyone I knew had a small or side business - or at least was thinking of starting one. I looked around was able to find a more current statistics about zero employee companies from the SBA. It confirmed my suspicions that the numbers I was looking at was too small. California, for example, now has 2.5 million zero employee companies by official estimate. and nation-wide it was a stunning 21 million as of the most recent statistics in 2008, The study also contained the shocking fact that Non-employers in America now count for three quarters of all business !
This data was unfortunately compiled before the financial crises and the rise of the "involuntary entrepreneurs" - of which I might be one. Also, and more significantly, no business that had less than $1000 in revenue was counted, unless they are in the construction industry. This may have seemed reasonable to the designers of the study. They had to draw the line someplace, but doing this they have left out all "pre-revenue companies". Since almost by definition, most startups are “pre-revenue” - this means that the SBA left almost every American startup out of their count!
So how many zero employee companies are there in America? There most be at least as many pre-revenue companies as there are post revenue companies, so a back of the envelop calculation would indicate that there are at least 40 million companies with no employees in the United States. That alone should be a breathtaking number - it means that there is a vast, under-served and under-represented constituency that has somehow flown under the radar for some time.
I wanted to validate my “40 million” number so I posted the question on Quora. One person weighed in on the post and noted that even if you took the low ”21 million” number from the 2008 SBA study, and subtracted that number from the total number of businesses in the U.S. - “27 million” from that same SBA study, you come up with the equally shocking statistic that there are fewer than 6,000 companies in the United States have employees.
The conclusion is inescapable. A huge “shadow economy” is operating right under out noses, and the implications are massive. It means that most of America’s job creation efforts have been horribly misdirected, and the situation is only going to get worse unless we do something about it. It should be obvious that all our efforts in the area of job creation should now be concentrated on these “zero employee companies” - a vast and untapped constituency, that has been almost completely ignored.
The Real Startup America
The number of “zero employee companies” in America is so huge that is almost reminiscent of the old “everything you know is wrong” parody. It means that almost all of our job creation policies and our strategies are.wildly off base, and Startup America is just one more manifestation of this false assumption, and it could cause a huge amount of damage as a result.
So who and where are the real American Startups? Here is a hint. They are NOT just in Silicon Valley, they they are in your cities and towns everywhere, they are your neighbors and friends, and they go by many names: entrepreneurs, freelance workers, independent contractors, and a dozen other names. They don’t usually think of themselves as “zero employee companies” but that is what they are, and they are a huge part of the American economy.
There is really no way to characterize such a massive number of Americans. Some of them are doing really well, others are struggling, and many more would be doing ok if they were able to get just a little help. Some are professionals with well established practices, others are just trying to get something going. Some have part-time work of some kind and are working on their ventures on their own time, others are more traditional “Silicon Valley” type startups and are looking for venture capital or some kind of funding.
There is another kind of startup we tend to forget, or don’t want to acknowledge - they are called “involuntary entrepreneurs”. They turn up in the employment statistics as “people who have given up looking for work”. Conservatives love to sneer at these people - the implication being that they are “lazy bums” who don’t want to work, but in actuality, they are far more likely to have a business of some sort to keep them going- or are trying to start a business. It would be more accurate - and more polite - to say they have given up looking for “traditional work”.
Being an “involuntary entrepreneur" does not necessarily mean you are not passionate about what you do - it just means you really have no other choice - there is no longer a place for many of us in “Corporate America”. For some, this was because of the pandemic of age discrimination in the market, for others, it might be something in their background that disqualifies them - even something as common as bad credit. There are currently five job openings for every job. Those 6000 companies that control all tradition employment in America can pick and choose those who best fit the corporate mold. We didn’t burn our bridges, they were burned for us.
I probably would categorize myself as an “involuntary entrepreneur. Coming back from some contract work in Africa, I found that my skills weren’t much wanted by Corporate America any more - I was too different, and no longer fit into their boxes. As everyone knows, if you are out of work for any extended period of time you have almost zero chance of getting a traditional job ever again. My plans for a business network with a trade opportunity matching system took much longer to get off the ground than I thought. A series of setbacks, including the loss of a developer caused significant delays, and though there was a market need, and it did manage to get paying customers, it was always resource starved. Every once in a while, I would get contacted by a venture and it was always a ridiculous hoop jumping exercise and a waste of time.
So am I a typical “startup” or “zero employee company”? I doubt it. I don’t think there is any such thing as “typical”. Still, I can tell you there are millions like me, and while I was enthused at first, it has become obvious that Startup America has no interest in us. They only seem to want people who fit the Silicon Valley mold of being “winners”.
So let me try to explain it to the folks that the Startup America Partnership, because I don’t think they get it. Who are we? Many - probably most, Americans with startup companies are struggling in this economy. We don't get unemployment insurance, if business goes down for us, we just starve. We watched in amazement as people expressed so much sympathy the “99 weekers” - those who have had unemployment insurance for nearly two years who still can’t find work. No one begrudges them this benefit, but it is amazing at how generously the government rewards them generously for losing their corporate jobs, while not caring at all about us.
Millions of us still have no medical insurance - we can’t even go to the doctor when we get ill. I myself had the sad experience to have to sit on a man’s deathbed earlier this year, who had worked independently all his life, but had to wait till three days before his death to gain admittance to a hospital A huge number of people who own these independent businesses are on food stamps Did you know that 40 million - one in every eight Americans need to use this assistance? Lots of them are running their own little small businesses that just haven't made it yet.
The fact is, that millions of Americans are now on the “outs” from our own society, and almost all of them have a startup or small business of some kind. There are no programs at all to help us, and it often seems that no one cares. We don't have a Union - there is no AFL CIO or SEI to speak out for us and to look after our interests, and sadly the Startup America partners have not stepped into that role.
What we do have in common, however, is that we all want to succeed. The Airplane was invented by two guys running a bicycle shop, the founders of Apple couldn’t afford the parts to build their first computer, the founders of Hewlett Packard could barely scrape together the $500 they needed to get that business started. Who is the “Startup America Partners” to say that companies with humble beginnings can’t be a success?
Where do we go from here?
I’m certainly not saying that Startup America can solve all of America’s social problems - or that it should even try, but to me the way it is being organized represents not only a potential danger to the Obama Presidency, but a huge lost opportunity.
It is probably not fair to write a critique like this without saying what Startup America should do instead, and I will. There are literally dozens of things you could do with two billion dollars that would be vastly more effective than what they are doing. First, however, it is important to express express that I am almost positive that their “top down” approach will fail. How ridiculous that they would have us sit through three presentations now, and instead of describing how the program will work, presume to give us business advice. While we may be impressed with the business success they have had, their advice is all but useless. Far wiser men and women then they know that you cannot step in the same river twice.
The only concrete thing they have said they will do is to help help young companies find “mentors”. This may sound good, but what if this mentor isn’t really all that qualified, or was disinterested, or was a con man? No, it is not going to work. The only thing that really will work is if we find a way to help each other. I will do a follow up article to describe how this would work, and it wouldn’t be all that hard to set up a system to make it happen. Most of the technology is already in place, but it will require a radically different kind of organization and certainly a very different attitude on the part of the Startup America Partnership, and maybe even different kinds of leaders.
People don’t like being patronized, and eventually they will get sick of the “tweets” about the value of entrepreneurship and their “pearls before swine” approach. Oh, there will be lots and lots of meetings and events, there will be press releases and “success stories” - there will be “contests” where thousands of struggling businesses will be tricked into jumping through hoops, there will be even more “road trips” meeting with the already successful. After the parades have ended, however, will anything be left of lasting value? Will we have better access to information, systems for sharing, market intelligence?
After the fiasco of the bank bailouts and the stimulus program, it is heartbreaking to see this happening again with a program that was supposed to help us, but now we are being put in the awkward position where we may even have to mobilize fight this program, unless it can change direction. Small business and startups are the only thing that can save America right now. We deserve better.
Rob Gordon is a small business entreprenuer living in San Diego, California. He is currently developing ventures related to international business, economic development, and startup companies. You can follow him on Twitter at http://twitter.com/... or contact him through his Google+ profile at http://profiles.google.com/... . This post was originally posted on a blog he recently started at http://American-Startups.com/...