Seed Capital, Entrepreneurs and Economic Recovery

Posted by: Jonathan Ortmans on September 21, 2009 Source: Policy Dialogue on Entrepreneurship

Last week, I participated in the NASVF Annual Conference inOklahoma City where experts discussed again how to ensure that creditcrunches do not negatively impact start-up performance.

The goodnews is that those gathering at this conference started from a commonappreciation that entrepreneurship cannot be on the sidelines ofeconomic and financial policy.  Breakfast speaker Rick Wade, DeputyChief of Staff to the Secretary of Commerce, noted rigorous research atthe Kauffman Foundation that revealed that entrepreneurs drive jobcreation in the U.S. with firms less than five years old accounting for all net job growth in the U.S. Moreover, job creation from startups is much less sensitive to downturns thanjob creation in the entire economy, according to research by Kauffman’sDane Stangler. This may seem counterintuitive. However, this does notmean that entrepreneurs do not respond to business cycles. As Stanglerpoints out, "a downturn might actually act as an extra spur to foundinga new company, if the founders perceive that their prospectivecompetition might be weakened." Others see starting a company amid arecession as a way to take their future into their own hands. Perhaps amajor economic restructuring actually produces a lot of new unexpectedopportunities. What is clearly understood is that entrepreneurssteadily recreate the economy, generating jobs and innovation.

Anotherencouraging sign was a confidence among participants that less ismore.  Under-funded entrepreneurs exhibit an impressive resilience. Thecurrent financial crisis has been threatening to stump entrepreneurshipand innovation since external debt financing is the more common source of funding formany startup companies (contrary to popular beliefs that startups relyheavily on funding from friends and family). Yet, in the past, economicturbulence did not deter innovative entrepreneurs. Entrepreneurs havedeveloped revolutionizing innovations even in the hardest economictimes. In Entrepreneurs and Recessions: Do Downturns Matter?Paul Kedrosky highlights that many of today’s renown companies, such asMicrosoft, Disney, Genentech, McDonald’s, Southwest Airlines andJohnson & Johnson were all founded in recessions, depressions orbear markets. Another Kauffman Foundation study showed that over halfof the companies on the 2009 Fortune 500 list were started during a recession or bear market, along with almost half of those on the 2008 Inc. list.

InOklahoma City, I witnessed a gathering of investors who seem lessinterested these days in whether they define themselves as venture orangel investors and more interested in smart use of more limitedcapital.  All seemed, for example, beyond the current popular rush toinvest in clean tech. It seems like space commerce and new rounds ofstart-ups trying to address lingering connectivity problems among alldevices were much hotter areas being eyed.  There was a universalagreement, bar one person, that now is an excellent time for investorsin new start-ups and that entrepreneurs should be cautious aboutaccepting too much outside capital.  In fact, ironically, all threeserious start-ups I met last week had not accepted any outside fundingat all.
 
Let’s hope that scarce capital means more smarts and better success rates for the entrepreneurs. 

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JonathanOrtmans is a senior fellow at the Kauffman Foundation where he focuseson public policies to promote entrepreneurship in the U.S. and aroundthe world. In addition, he serves as president of the Public ForumInstitute, a non-partisan organization dedicated to fostering dialogueon important policy issues.

Tags:  nasvf, kauffman foundation