Tech Tuesdays
The collective struggle of political leaders to understand startups
A crash course in startup policy and why it matters
This is the first post in a new series from FiscalNote called “Tech Tuesdays,” in which we’ll talk about policy issues facing the tech industry.
“I’m going to be talking about how we empower entrepreneurs with less red tape, easier access to capital, tax relief and simplification,” said Hillary Clinton, the former U.S. Secretary of State and current presidential candidate in her first economic address back in July.
Similarly, former Republican presidential candidate Jeb Bush, in his first-ever LinkedIn post, also touched on this idea of supporting innovators by writing “I want to continue the transformation of our economy through technology and digital innovation.”
There is no shortage of buzzwords around technology, entrepreneurship, and startups turning up in election speeches — but is there any substance to these statements?
Small-business owners don’t believe so. When polling entrepreneurs, 90 percent of respondents didn’t believe the presidential candidates had their best interest in mind.
At the 2016 National Governors Association winter meeting in February, Kevin Plank, founder and CEO of Under Armour, told an inspiring story of how he started his business and its plans to give back to the city of Baltimore. After Plank’s presentation, Pennsylvania Gov. Tom Wolf asked “how do governors and states foster the growth of companies who are just getting started?”
In response, Plank emphasized the impact a single U.S. Small Business Administration loan had on his success along with the suggestion for political leaders to reach out to young business leaders in order to open a dialog on their needs.
In fact, financial programs have become fairly common in the last few years as state governments try to attract and support tech companies.
But, while communication and financial support are important, Plank’s answer fell just short of addressing the numerous challenges he noted a few minutes prior in his presentation; such as securing the necessary office space and finding manufacturing partners in the U.S.
This brings me to the fundamental set of questions Tech Tuesdays will address in the ensuing series of posts: What exactly are the core issues in startup policy our political leaders need to address? Are our current policies best matched for today’s businesses? And, when we talk about entrepreneurship, are we discussing small-business owners broadly or venture-backed, high-growth technology companies?
The Problem
The first challenge lies in defining policy priorities for startups. Tech startups, for example, are rapidly expanding into every traditional industry. This creates a vast range of policy issues in specific industries that are hard to solidify into a single policy movement.
Additionally, startups are not in a position to voice their concerns. Time and finances are at a premium for busy entrepreneurs, so ventures like Uber and Airbnb knew they needed to scale tremendously before they could afford to attack their inevitable policy challenges head-on.
Lastly, policymakers also tend to have an inherent interest in existing industries. Look at New York City’s taxi economy and New York Mayor Bill De Blasio’s fight against Uber, for example.
“Sixty-five percent of New Yorkers said they believe officials like the mayor target Uber because they get mountains of cash from yellow-cab folks,” wrote the New York Post in August.
The traditional industries which face disruption from startups are often the same industries that employ your neighbors and place your leaders in office. This means policies may support your efforts if you are joining the local economy, but block you if you are looking to disrupt it.
The benefit
If policy priorities for startups are so difficult to define, why do our leaders and candidates keep talking about startups?
The reality is that technology and entrepreneurship are an essential part of America’s rapidly changing economy. In a previous post, I noted that cities, states, and the federal government all began a push after the 2008 financial crisis to foster a new, innovative economy. In 2014 alone, small businesses created nearly 75 percent of the new jobs, as the unemployment rate plummeted. The Kauffman Foundation reported that between 2000 and 2010 new startups were the largest source of job creation.
Meanwhile, more than $58.8 billion was invested in startups this past year, making 2015 the second highest investment year since 1995.
Entrepreneurs are also becoming a more pronounced part of the voting base for political leaders, as their demographics are shifting. The Kauffman Foundation wrote in 2015 that new entrepreneurs are becoming increasingly diverse. Since 1996, the percent of Latino and Asian new entrepreneurs has doubled, and more veterans are starting businesses. Additionally, there are more 45- to 65-year-old new entrepreneurs than 20- to 44-year-olds for the first time.
However, tax revenue is the real benefit to focusing on startups. Unlike traditional industries, startup investment gets dumped right back into the local economy. With states and municipalities struggling to balance their budgets, tech investment is one of the few ways leaders could raise revenue where it is otherwise declining.
This revenue occurs in several ways. Technology startups, in particular, attract higher paying engineering jobs. These hires also tend to be younger as well, meaning they are residents who could stick around for awhile. Additionally, in order for companies to grow, ventures have to raise and burn through cash at a higher rate than an established company. This means whatever investment they get tends to go right back into hiring, office space, and local services.
If a municipality were to luck out with one of those businesses, it could end up with a new venture that anchors its local economy for years to come, or draws a new group of investors that otherwise wouldn’t have known the town had startups to invest in.
Even the notorious startup disaster of the late 1990s, Webvan, put nearly all of its $800 million in venture capital back into the economy before it collapsed from a unicorn-like $1.2 billion valuation as it tried to build out an expansive network of delivery trucks to bring groceries to your doorstep.
So what is startup policy?
In order to better understand this issue, let’s highlight the fundamental themes that are behind a startup’s needs to grow:
- Bridging the old economy to the new economy. The old economy was not designed to be adaptable, which naturally creates challenges for the often-adapting startup.
- Removing barriers to entry. Policies designed to hedge against risks and protect the old economy have created barriers for startups that can force premature death.
- Educating tomorrow’s workforce. Less obvious than the first two, but equally important as skilled human capital is a critical part of a successful startup.
These three core elements boil startup policy down to transitional policy for national, state, and local economies. Ad-hoc policies for every new and budding startup have been the norm to-date, but this creates disjointed policies focused on the short-term issues as opposed to the systemic problems.
In contrast, effective startup policy should be focused on creating a framework that addresses the common set of issues new companies face in an economy that was not designed with them in mind. Over the course of the next few weeks, Tech Tuesdays will look at old aspects of the economy — such as commercial real estate, government procurement, infrastructure, and education — that are begging for more forward-thinking policies and strategic investment. These are the areas where lawmakers could actually help the next generation of entrepreneurs like Kevin Plank.
The U.S. economic machine has been running for over two hundred years and it’s about time we grease its gears with twenty-first century policies in favor of tomorrow’s job creators.
