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A Look Back at Entrepreneurship in 2010

Jonathan Ortmans, President, Public Forum Institute

Jonathan OrtmansSince the economic crisis broke out, entrepreneurship has attracted increased attention as a key path to economic recovery. I was happy to see that entrepreneurs have been set apart from some of the negative perceptions of big business and the blame being placed on large financial institutions for the economic meltdown. The question is whether such recognition of entrepreneurs as an engine for growth and innovation translated into concrete pro-entrepreneurship policies.

This past year brought new, sobering data that defied conventional wisdom that all businesses contribute to job growth at least to some degree. “The Importance of Startups in Job Creation and Job Destruction” by economist Tim Kane documented that net job growth occurs in the U.S. economy only through startup firms. While older companies lose 1 million jobs annually, new firms add an average of 3 million jobs in their first year. Moreover, during recessionary years, job creation at startups remains stable, while net job losses at existing firms are highly sensitive to the business cycle. Simply put, entrepreneurs are the primary engines of job creation in the country. If you zoom in further, you will see new firms that scale—those that grow in revenues and jobs—are especially important. More precisely, the top 1 percent of all companies generates 40 percent of new jobs, and the vast majority of these firms are no more than five years old. If we look even closer at the most rapidly growing young firms (those between ages 3-5 years), they represent less than 1 percent of all companies in the economy, but account for 10 percent of new jobs created each year (see High-Growth Firms and the Future of the American Economy).

Yet, despite their impressive resilience and track record, entrepreneurial firms, like all of us, felt the burden of the economic crisis. What have we done to help them thrive? If we take the Kauffman Foundation´s State of Entrepreneurship Address delivered last January and its data- and research-based recommendations as a benchmark, this is what a checklist might start to look like:

Policy Action

What has been done?

Reform immigration policy, granting citizenship for foreign students graduating from American universities and other immigrants who want to start new companies and create jobs. (Why? Over the last decade and a half, immigrants started 25 percent of all technology firms founded in the United States).

- Senators John Kerry (D-Mass.) and Richard Lugar (R-Ind.) introduced the Startup Visa Act to create a new type of visa for foreign entrepreneurs looking to start businesses in the U.S, the EB-6. It would be a two-year visa available to any immigrant entrepreneur who has secured at least $250,000 in capital from accredited venture capitalists or angel investors in the U.S. After two years, EB-6 visa holders would have the option of becoming a permanent U.S. resident if his or her startup has met one of three criteria: created five full-time jobs in the U.S., raised an additional $1 million from investors, or achieved $1 million in revenue. (In the opinion of this author, that entrepreneurial immigration has gained traction in Congress is great news, but hopes that job creation, not money, be the criterion for qualifying for the new visa). The bill is currently with the Committee on the Judiciary.

- More than a dozen rockstar entrepreneurs and startup financiers took 3 days of their busy schedules in March to push for the passage StartUp Visa Act of 2010.The Startup Visa movement was an unprecedented campaign.

Revise Sarbanes-Oxley regulations to allow company shareholders to choose whether their companies must fulfill some of the most onerous reporting requirements if they think the costs of compliance outweigh the benefits. (Why? SOX was enacted, after all, to protect shareholders. So why not allow shareholders to vote on whether their companies will fulfill certain SOX requirements?)

Limited action.

Provide a temporary payroll tax holiday to companies less than five years old. (Why? To strengthen the incentive to hire to our proven job creators.)

- Congress recently approved a one-year payroll tax cut. However, a better approach would have been to create an exemption from payroll taxes for young companies. The most recent research, some of which I have referred to above, should point policymakers to one new direction: growth would be best boosted by supporting young firms.

Give academic entrepreneurs the choice of multiple avenues to commercialize their research so their innovations can reach consumers more quickly.

- U.S. Secretary of Commerce Gary Locke inaugurated the new Office of Innovation & Entrepreneurship in February, calling for more action to encourage entrepreneurship and innovation.

- The Office of Innovation and Entrepreneurship hosted a forum in February 2010 with university leaders and key stakeholders on the roles of universities in innovation, economic development, job creation, and commercialization of federally funded research.

 

Offer fellowships for doctoral graduates in scientific fields to educate them about how to start companies. (Why? This would allow our smart graduate and post-doctoral students in the hard sciences, engineering, and other fields to commercialize their breakthrough ideas).

Limited action.

Provide entrepreneurship education and training to students in high school and college. (Why? The earlier we can interest students in entrepreneurship the better.)

Limited action.

The year also saw lots actions to boost energy-sector entrepreneurship and innovation. A Clean Energy Roadmap: Forging the Path Ahead was released by the Kauffman Foundation based on outcomes of the three clean energy summits convened this year to explore ways to propel innovation and job creation in the sector. For example, in March, policymakers, thought leaders, entrepreneurs and investors gathered in Washington, DC for the first ARPA-E Innovation Summit. The outcomes of this event encompassed much more than thoughtful discussion. Secretary Chu announced that a third round of ARPA-E funding of $100 million would be made available to accelerate innovation in three new areas for ARPA-E (Grid-Scale Rampable Intermittent Dispatchable Storage, Agile Delivery of Electrical Power Technology and Building Energy Efficiency Through Innovative Thermodevices), and Carl Schramm, President of the Kauffman Foundation, launched the Energy Innovation Network, which has since then been providing links to technologies, entrepreneurs, finance, buyers and policymakers to make the pathway for energy entrepreneurs more transparent.

But perhaps one of the most unique policy events of this year was April´s Presidential Summit on Entrepreneurship hosted by President Obama in Washington, D.C. The White House took a political risk in hosting a Summit on “global” entrepreneurship in a climate when so many Americans, anxious about their local economy, were blinded to the vital role entrepreneurs play in building the stable economies overseas essential to our growing firms back home. The summit though was a foreign policy success and a solid statement of support for the role all entrepreneurs play in creating jobs and economic growth.

In this way, the Obama Administration began a much-waited era of diplomacy through entrepreneurship export, announcing, for example, a new two-way professional exchange program that brings 100 entrepreneurs to the U.S. and, working with private sector partners sends 100 American entrepreneurs abroad. The Overseas Private Investment Corporation’s Global Technology and Innovation Fund is now making investments in start up and growth-oriented companies in telecommunications, media and technology. The Department of State's Middle East Partnership Initiative and U.S. Small Business Administration in turn are partnering to promote small and medium enterprise growth in the Middle East and North Africa. The State Department is partnering with online platforms to and coordinating a corps of entrepreneurship mentors, the “E-Mentor Corps. Many other agencies are launching related initiatives. The convening of the Summit and the array of follow-up events, programs and announcements around the world (e.g., Prime Minister Erdogan from Turkey hosting the next Global Summit on Entrepreneurship) suggest that the world’s risk takers and innovative entrepreneurs are perhaps less thought of as mere adjunct players on the sidelines of our economies but central to their well-functioning.

Nevertheless, as I pointed out in earlier posts, there were no economic policy announcements at the April Summit. Entrepreneurs rarely lament a lack of government engagement in their business, but many Summit delegates noted the absence of government in many of the panel discussions asking for US government help in taking on the challenge of identifying barriers to entrepreneurship in their countries and replacing them with entrepreneurship-friendly policies and programs. Well-known entrepreneur, Dr. Mohamed (Mo) Ibrahim suggested at the Summit that this was about setting rules and a legal system that fosters a competitive environment, keeps regulation under control and keeps government away from picking winners while leveraging public investment in mitigating non-market risks. Perhaps future summits can establish better global standards for leaders to aim for in creating an environment friendly to entrepreneurs.

The call to President Obama and leaders around the world remains the same - to focus now on enacting policies conducive to entrepreneurial capitalism. While creating new businesses and new jobs is the work of entrepreneurs, governments around the world can create supportive environments for start-ups. Together, we can shape the next generation of entrepreneurs and economic leaders for our own nations but also for the world at large.

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Jonathan Ortmans is president of the Public Forum Institute, a non-partisan organization dedicated to fostering dialogue on important policy issues. In this capacity, he leads the Policy Dialogue on Entrepreneurship, focused on public policies to promote entrepreneurship in the U.S. and around the world. In addition, he serves as a senior fellow at the Kauffman Foundation.

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