The Kauffman Foundation released a study last month that concluded that new companies are “starting smaller and staying smaller” and this study was then used to form the basis of the proposed “Startup Act” – a set of policy proposals that they say will help American startups and job creation. It will do nothing of the sort, and apparently was produced mostly to benefit major corporations. Unfortunately many of our politicians seem to believe the so called "Startup Act" will somehow help startup companies and entrepreneurs and the proposal got a huge amount of positive and mostly uncritical press in major business publications. Something clearly needs to be done to help the 40 million self employed Americans, and those starting companies because traditional jobs have all but disappeared, but this is not it.
The Kauffman Foundation released a study last month that concluded that new companies are “starting smaller and staying smaller”. This study, which was not produced from original research, but rather an “analysis of government data” was then used to form the basis of the proposed “Startup Act” – a set of policy proposals that they say will help American startups and job creation.
While I am sure the Kaufman Foundation had good intentions, I believe the original study had some terrible false assumptions, and the conclusions they draw from this flawed study clearly seem to have a political agenda. It is almost as if they reached their conclusions first, then went back and made a study to support the conclusions they wanted to reach. The press release for the study summarized it as follows:
The new study, the next in a continuing series on firm formation and economic growth, found that the new businesses that continue to generate the bulk of the economy’s net job gains in recent years have been starting up with fewer workers than historic norms and are also adding fewer workers as they grow.
Right off the bat, something seems wrong here. Don’t almost all companies start with no employees at all? Companies don’t form out of nothingness with 10 or 20 employees. At one point, every company – no matter how large they eventually grew, was just a guy, or maybe two, with an idea. Only later did they plan and organize, perhaps get some funding, and then hire a staff. To be sure, some businesses must have a staff before they can generate revenue – a restaurant for example, but this study has made the fatal assumption of confusing “startup companies” with “established businesses” – and they are very different. The study authors go on to warn against:
the false hope that growth in the number of self-employed workers can resolve the U.S. employment shortfall. “We need to find a way to start more employer businesses, ensure that they are larger and nurture their growth” (study author) Litan said.
So based on shaky data and false assumptions they immediately dismissed the biggest and best hope for America – the forty million self employed and “zero employee companies”. They certainly made quick work of that.
That would be bad enough, but they went on to translate this flawed study into a set of specific policy proposals, and proposed legislation – the so called “Startup Act”. The press release for the Startup Act was released only one week after the study, which seems to provide pretty good circumstantial evidence that they had formed their conclusions before this study was even released. There was really nothing scientific or objective about it at all.
Unfortunately, this study and the Kauffman foundation seems to have a huge amount of credibility among politicians – perhaps because they are hungry to hang their hat on anything an influential group says will help “small business” and “entrepreneurs”. Republican House Majority Leader Eric Cantor, for example, offered unqualified and uncritical praise: “I want to thank the Kauffman Foundation for its leadership around the Startup Act… Now more than ever, our nation needs entrepreneurs to have the confidence to create and start their own businesses, and grow our economy.”
The study also got a huge amount of positive press – virtually every major business publication in America and and number of smaller local ones praised this “entrepreneurial approach” to business creation. Only a few lonely voices – now including this one, said “wait a minute – maybe the Emperor has no clothes”. You can read the press release for the study here: http://goo.gl/... but lets look at the recommendations in this study one by one:
1. Welcoming immigrants capable of building high-growth companies to the United States by providing “Entrepreneurs’ visas” and green cards for those with degrees in science, technology, engineering and math.
That sounds nice, and it might even help the economy, but it won’t do a thing to help home grown American Startups. Again, there are 40 million of us – why would they make this their very first point? The United States absolutely needs immigration reform, but why they would pretend this would do anything to help American entrepreneurs is beyond me. In fact, if they are going to do this I hope they at least make sure there is “something in it for us” – like making sure there are reciprocal agreements so that American entrepreneurs can get easily visas to work in other countries.
2. Providing new firms with better access to early-stage financing, creating capital gains tax exemptions for long-held startup investments, providing tax incentives for startup operating capital, facilitating access to public markets, and allowing shareholders of companies with market cap below $1 billion to opt-in under the Sarbanes-Oxley Act.
Other than the “better access of early-stage financing” which of course, everyone wants, this is all for big investors. This sounds like it was written on totally behalf of the ultra wealthy and major corporations – it has almost nothing to do with actual American startups. That part about the “Sarbanes-Oxley Act” has to do with the regulation of large public companies, and the “market cap below $1 billion” is just bizarre – it should make any small business owner wonder where on earth these guys are coming from.
3. Accelerating the formation and commercialization of new ideas by creating differential patent fees to reduce the patent backlog and providing licensing freedom for academic innovators.
Ok, again, nice, but really little to do with American startups, except a very small number of them. Certainly patent reform is also needed, but few startups are concerned with getting a patent right off the bat. This also seems like it was written on behalf of major corporations, for whom it has become a major issue. That part about “providing licensing freedom for academic innovators” apparently means that researchers who have those great university jobs should be able to use public resources for their own benefit, and own the inventions they made while on the public payroll.
4. Removing barriers to the formation and growth of businesses through the introduction of automatic 10-year sunsets for all major rules, establishing common-sense and cost-effective standards for regulations, and making assessments of state and local startup and business policies.
Again, which major corporation wrote this for them? Does anyone seriously this an “automatic 10-year sunsets for all major rules” has anything to do with startup companies? This has become a right wing talking point – that the government is creating “barriers” to company formation. It probably happens sometimes, but I have never heard someone who wanted to start a business say “I would start a business if only the government would get out of the way”. Unfortunately, they have suckered the Small Business Administration into taking this like with their “help us remove barriers” campaign. It is almost as if they are saying everything would be great as long as our government sits on its ass and doesn’t do a thing.
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What is really striking about this so called “Startup Act” is not just that each of these points has almost nothing to do with actual startup companies, it is that there are no new ideas here at all- none. It is really sad, because there is so much that could be accomplished with just a small amount of out-of-the-box thinking in the job creation policy arena. With 40 million “zero employee companies” in America, for example, if a way could be found for just one tenth of them to add one employee, the unemployment situation in this country would be more or less resolved. What about incentives for “recombinant companies” – there are all sorts of things that can be done.
I will admit right here and now that I don’t know much about the Kauffman foundation. I am sure they have done some very good things, but in reading their reports it is obvious to me that somewhere they have lost their way. Just by attaching the word “entrepreneur” everything you do doesn’t mean you are actually helping them. Everything I have seem from them so far – including the Startup America program, seems to be dedicated to helping big corporations.
In just a few days President Obama will be presenting his proposals for job creation to the American people. If history is any guide, he will ignore the 40 million independent business owners in this country and propose ways to help people who already “in the system”. On the off chance he does propose something for small businesses and the self employed, however, let’s hope he hasn’t been overly influenced by this Kauffman Foundation proposal. If he has, it will be a huge setback for startup companies in America.
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/.... . He has recently started working on a community portal for small startup companies and the self employed now that is now open for pre-registrations at http://American-Startups.com