Now there’s a negative way to start a post! But I believe in facing the facts; let me explain. Today on the news shows, people were talking about how the government has to incentivize entrepreneurs to
start businesses and businesses in general to hire more people. Some talking head on CNN actually proposed that if the government would simply subsidize one new job for every small business and that business had to keep the person for 5 years, we could get rid of unemployment. Sounds pretty simple, doesn’t it?
But wait! Businesses grow and hire because they have customers and because they feel confident and optimistic that those customers will keep on buying. They grow when they have access to capital (it costs money to grow), and they know how much they’re going to have to pay in taxes. The National Federation of Independent Businesses recently reported that its small-business optimism index fell from 90.8 in June to 89.9 in July. Now, that may not seem like a lot but this is the fifth consecutive decline in the index. I think we may have a trend here. Moreover, only 10% of SBOs intend to hire, while 11% plan to reduce their work force. Could it be because there’s just too much uncertainty out there?
And what about those intrepid entrepreneurs that everyone is counting on to start new businesses and hire people? The Bureau of Labor Statistics is reporting that the total number of startups has declined sharply in the year ending March 2010 and is actually lower than at any point since they began tracking startups in 1994. If the weak economy continues, and many are saying it will for at least another two years, “it will discourage future generations of entrepreneurs,” believes Robert Litan of the Kauffman Foundation, which has studied entrepreneurship for decades. I’m not sure I agree with that. It may discourage traditional type brick-and-mortar businesses, but it hasn’t discouraged the marketing-based, social media, ad-driven Internet startups that are seeking and getting huge sums from the VCs who seem to have forgotten the last tech bubble. The current bubble is about getting consumers to buy, whether it’s through Groupon coupons or Zynga’s games. The problem with this bubble is that unlike previous bubbles where the crash left technology that could be repurposed to spur innovation (for example, the dot com bubble that imploded in 2000 left us with an Internet infrastructure that could be leveraged and actually was leveraged to ultimately generate the current bubble) this bubble doesn’t seem to have the breakthrough innovation in it to spur a new round of high-value startups because it was essentially built on old technology.
People like Christophe Lécuyer, a Silicon Valley historian, claims that “It’s clear that the new industry that is building around Internet advertising and these other services doesn’t create that many jobs. The loss of manufacturing and design knowhow is truly worrisome.” When the current bubble bursts---and it will—besides the lost jobs, will we have more than “cute email” and funky ads? Glenn Kelman, CEO of Redfin, an online real estate brokerage, worries that Silicon Valley has become more like Hollywood, “an entertainment-oriented, hit-driven business that doesn’t fundamentally increase American competitiveness.” As great as those coupons and games are, I say to all of you out there developing serious new technologies that will give the U.S. a competitive advantage, stick with it. When the bubble bursts, you’ll be the future that everyone builds on.
Now, back to my original comment about counting on entrepreneurs to save the economy in the short term. Entrepreneurs grow businesses and create jobs when there are customers for what they sell and those customers pay for what they’re selling. Customers buy when they are confident that they will keep their jobs so they can spend the money and not risk their lifestyle. When the stock market slides as it did today, and the global economic news is troublesome; when people don’t know what regulations and taxes they will face next year, they tend to hang onto their cash. And the government subsidizing small businesses to hire doesn't fool anyone. If those jobs don't come from real economic growth, they'll go away the minute the money stops.
No matter how long this terrible economy lasts, I'm optimistic that the desire to start businesses won’t die—yes, it has taken a hit, but it’s not down yet. We must create a business environment that encourages startups and existing businesses to grow and doesn’t penalize them for their success. Then businesses will hire, and innovators will provide entrepreneurs the new technologies that will spur real economic growth.
