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In the first wave of the internet, there was AOL and other companies laying the foundation for people to connect. In the second wave, Google and Facebook dominated with search and social capabilities. And now, the Third Wave is here. A wave that will be shaped by entrepreneurs who are set on disrupting entrenched industries. A wave where entrepreneurs outside of Silicon Valley will thrive. A wave that will be driven by collaboration between entrepreneurs and elected officials, programmers and policymakers.
And as I stated in my book: “if you want to go far in the Third Wave, you must go together.” In that same spirit, I want to collaborate with you.
Before the paperback version of The Third Wave comes out next spring, I want to hear from you. I want to see what new information has surfaced and what insights could be beneficial to Third Wave riders. That is why I am posting “America Disrupted,” a chapter from my book, here on Medium.
Even if you haven’t read The Third Wave in its entirety, give the chapter a read, and let me know what you think by commenting below.
I will be reading all of your responses and highlighting my favorites through my social media channels. If your edit is picked for inclusion in the book, your name will be listed in the afterword of the paperback edition.
Ch. 11 — America Disrupted
One of the pioneers of the early motion picture industry was a producer named Irving Thalberg. Thalberg produced films for MGM, hundreds of them, and he had a reputation for being an obsessive workaholic. He’d overbook his schedule, miss meetings, make important people wait for hours for an appointment. He became nearly impossible to get hold of, creating bottlenecks in his productions and frustrations among his colleagues. As legend goes, the Marx brothers once arrived for a meeting, only to hear that Thalberg would be thirty minutes late. Frustrated, they lit two cigars each and began blowing smoke under Thalberg’s door.
“Is there a fire?!” Thalberg exclaimed, bursting from his office.
“No:’ said Groucho, “there’s the Marx brothers:’
Too often these days, it seems as though the only way entrepreneurs can get the government to pay attention to them is to follow Groucho’s strategy: Blow smoke… blow a lot of smoke …and hope someone thinks it’s fire.
For our purposes here, however, I’m not interested in blowing smoke. I’ve made it clear that I think that government has an essential role to play in Third Wave entrepreneurship, and that I have little patience for people who are dismissive of that role. But I am not naive. I understand that, as important as it is for entrepreneurs to take government seriously, it’s even more important for government to take entrepreneurs seriously.
Due to the magnitude of the Third Wave, we know that the benefits for American consumers can be profound. But what we don’t yet know is which economy will accrue the benefits that come from Third Wave entrepreneurship. It is true, of course, that the United States has spent the better part of the century in a global leadership position. But increasingly, our incumbency has led to complacency. During the Third Wave, it may well be America that is disrupted.
This may sound overblown. But it wouldn’t be the first time other countries challenged American dominance. There have been numerous occasions in our history when a great industry, born in the United States, ended up relocated elsewhere. In 2015, none of the top five automakers were American companies, and not a single American company manufactured television screens in the United States. These are industries that were born in America. We have a way, it seems, of ceding opportunities rather than seizing them. If the same holds true during the Third Wave, the most significant economic transformation of the next two decades could be the great achievement of others.
What can the United States do to prevent that future? How can we ensure that Third Wave companies choose to start here, to put down roots here, and find success here? I believe there are six areas where the government should concentrate.
Stop Confusing Startups and Small Businesses
Especially where policy is concerned, there is a meaningful difference between startups and small businesses. Both are critical to the U.S. economy, but founders who hope to build a “startup’’ are looking to do something fundamentally different than those looking to start a small business. In general, “startup” is a term reserved for companies that can scale quickly and that can disrupt an existing category. Startups are generally backed by venture investors who see the potential for ten or even one hundred times the return on investment. Small businesses, on the other hand, are generally funded with debt financing-a small business loan from a local bank, for example-and their aim is to grow steadily over time. They aspire to have a steady number of employees, customers, and revenues over a long period. The difference between the two is reflected both in the kinds of problems they are trying to solve and in their effect on the broader economy. Indeed, it is not small businesses but new business startups that account for nearly all of the net new job creation in the United States. The top-performing I percent of startups-often referred to as gazelles-are responsible for roughly 40 percent of new job creation each year.
The following chart helps illustrate the importance of start ups to job creation.
Startups Create Most New Net Jobs in the United States
The Importance of Startups (Young, High-Growth Companies) in Job Creation
When you hear most politicians talking about job creation, they tend to lump small businesses and startups together and to pursue policies that help the former more than they do the latter. It should be the opposite: If politicians want to spur job creation, their focus should be on making it easier for new startups to succeed.
Get in Front of the Third Wave
In 2015, journalist Darren Samuelsohn wrote an article for Politico, “What Washington Really Knows About the Internet of Things:’ in which he set out to determine “how well government was keeping up” with an industry that he predicted could end up being as much as 10 percent of the global economy.
“What I found, overall:’ Samuelsohn wrote,
is that the government doesn’t have any single mechanism to address the Internet of Things or the challenges it’s presenting. Instead, the new networked-object technologies are covered by at least two dozen separate federal agencies-from the Food and Drug Administration to the National Highway Traffic Safety Administration, from aviation to agriculture-and more than 30 different congressional committees. Congress has written no laws or any kind of overarching national strategy specifically for the Internet of Things.
Samuelsohn’s reporting is both worrying and unsurprising. Because of the size and bureaucratic nature of government, political leaders tend to act more like the fire department than the police force. Rather than patrolling for problems, they wait until something is burning.
But even once policymakers focus on it, the effort won’t be easy. Because Third Wave entrepreneurship will touch so many distinct industries across every sector of the economy, the jurisdiction problems alone are overwhelming. The federal government isn’t designed to regulate issues that affect so many different sectors at once. And when it tries, the result is often a patchwork of inconsistent, even contradictory, rules and a maze of confusion for the businesses trying to follow the rules.
One option would be to reduce the size of the cabinet, which now includes twenty-two people, all reporting to the president. I don’t know of any CEO in America with so many direct reports. Government and business are not the same thing-not by any stretch-but this is one lesson from business that government should embrace. In 1971, President Nixon proposed reducing the cabinet to just seven departments, consolidating agencies and providing more authority to the officials who run them. Unlike other cabinet-reduction proposals, the goal here would not be to reduce the size of the federal government. Rather, it would be to reduce the inefficiency that comes with its size. There would be fewer cabinet officials, yes, but they would be meaningfully more powerful. The vice president might even act as a COO would, running a coordination effort across government and freeing up the president to be more strategic, much like a CEO.
At the same time, we should reform the Senate confirmation and vetting process, which is so long and so overreaching that it discourages some of the country’s most talented people from serving, even when called upon by their president.
Of course, in Washington, something this sensible would likely be considered radical. It is not something that can be accomplished overnight. And in the meantime, businesses will keep bumping up against a deeply inefficient government, slowing the pace of innovation and allowing competitors to catch up. As a stopgap measure, we might at least consider a temporary fix. Toward the end of 2014, an outbreak of Ebola in Africa snowballed from an isolated incident to a growing epidemic of potentially global proportions. The American public began to panic when, for the first time, Ebola made its way to the United States, infecting people who had traveled to West Africa and the medical staff who cared for them. Congress called for immediate action. President Obama recognized the growing discontent and grew increasingly concerned about the federal response. He knew the effort would have to be coordinated across several agencies. That’s when my friend and colleague Ron Klain got a phone call.
Ron oversees our investment activities at Revolution and also helps provide guidance and support to The Case Foundation. He has served in many government roles, including as chief of staff to vice presidents Al Gore and Joe Biden. Ron is known for his intelligence, management skills, and problem-solving ability, and for his steady hand. That’s why President Obama thought that he would be the perfect choice to become the Ebola czar. There were too many agencies working on different aspects of the crisis, and it meant that a lot of efforts weren’t being coordinated. The president needed a single person reporting to him, someone to whom all of the different agencies reported- someone with the authority to work across every aspect of the federal government to clarify strategy and then execute it.
We need the exact same thing for the Third Wave. We can not afford to have such an enormous economic opportunity get stifled by a government too slow and too fractured to respond in time. What we need is a single person within the executive branch with the authority to work across-and above-the myriad agencies, putting a dear strategy in place and managing the day-to-day execution of it across government. What we need, I believe, is a Third Wave czar.
I believe that this is only a temporary solution-that the real need is to reboot and reorganize the executive branch. Many presidents have tried, but Congress has always blocked the changes, in part out of self-interest, worried they might lose authority over an industry that supplies them with campaign contributions. More czars are a Band-Aid, not a long-term answer. In a rapidly changing world, only a government that is nimble and strategic can keep America on track.
Invest More Money in Research and Development
Thirty years from now, it’s unlikely that the country will view Google (also known now as Alphabet) as our most inspiring, path-breaking, and big-thinking company. The cachet that Google now enjoys will belong to a newer, younger company. And, like Google, this new company will have made its name off technology that, in its early stages, was developed with the help of the federal government’s investments in research and development-assuming, of course, that we make those necessary investments.
That’s not an easy assumption to make. We should be mortified by how little we’ve been investing in possible breakthrough technologies. In 2015, federal investments in R&D amounted to 0.69 of a percentage point of GDP-the lowest level it’s been at since the 1950s. And we’ve been cutting back R&D steadily over the last twenty-five years-even as federally supported R&D continues to prove its value. No wonder we now lag behind China and Germany in high-tech exports-with Singapore and South Korea following closely behind. 1
The lack of investment has crippled programs and institutions that have been among the most critical launch pads for innovation. The National Institutes of Health, for example, has a track record of success in the field of medical research. But in 2014, the NIH’s budget was 25 percent lower than it was a decade earlier. In the past, the NIH could fund one out of every three research proposals they received. By 2014, they could fund only one in six.2
The National Science Foundation, NASA, the Centers for Disease Control and Prevention, the Department of Defense, and the Department of Energy were among the most important government-funded R&D centers to see significant budget cuts.3 Fifty-four percent of scientists and researchers who receive some federal funding to conduct their work were forced to lay off staff. Some began considering moving their work overseas, where more stable funding options exist.
In the field of biomedical research, federal investment has dropped every single year since 2003.4 From 2007 to 2012, the U.S. share in total biomedical research dropped 9 per cent, while the Asia-Pacific region’s investment levels rose 51 percent in the same period. The new jobs and companies are following the money.5
Budget cuts may have been enacted out of concerns over deficits, but decreasing our investment in research and development guarantees future deficits. According to Nobel Prize winning economist Robert Solow, we owe more than half of our GDP growth over the last fifty years to scientific breakthroughs. Yet we’ve been reducing our ability to undertake cutting-edge research that gives rise to disruptive technologies. In shrinking our commitments to research and development, we are decreasing our long-term economic potential and squashing our ability to create tomorrow’s great innovations.
Make It Easier for Startups to Raise Money
Every single day, Americans come up with great ideas they could conceivably turn into a business. But few of them go forward with it. One of the greatest difficulties of starting a business is finding capital. If you don’t have a network of contacts, it can be hard to get in front of investors. The hustle involved could turn people off from pursuing what could end up being a successful business. But it doesn’t have to be this way. In the age of the Internet, connecting ideas and investors could be a much easier process-and the federal government can facilitate it.
Congress and the White House took a big step when they passed the JOBS Act, which, among other things, legalized equity-based crowdfunding. Before the JOBS Act, people could only invest in a startup if they were “accredited” by the SEC which requires either a net worth of more than $1 million or an income of at least $200,000. And if a company had more than 500 shareholders, it had to be registered with the SEC.
These paternalistic rules had two negative effects on the economy. First, they have kept billions of investment dollars on the sideline, money that isn’t being used to create companies and jobs and the value that comes with them. Second, by making it so that only the wealthy can invest in startups, the accredited investor system only exacerbates income inequality. The rich get richer, as only the accredited investors get the opportunity to invest in the startups that could become the next Facebook.
This system was modified in an important way with the JOBS Act. But after its passage in April 2012, the Securities and Exchange Commission, which was in charge of writing the rules to implement the law, took more than three years to do so. The end product was a set of rules that are still burdensome (albeit less so) for young companies. They will certainly require fine-tuning over time. I understand the need to take a careful approach to these rules. But these kinds of delays are the antithesis of the speed and nimbleness that startups require. Once fine-tuned, the SEC rules will help, but they won’t, on their own, make capital accessible for any worthy startup. There are other approaches that can increase the flow of investments into startups that Congress ought to explore. Tax incentives like reducing tax rates on capital gains earned from certain startup investments-would drive dollars into young ventures at key stages. Any conversation about tax reform, therefore, must include these considerations. Long-term investments that can create jobs and drive growth must be encouraged.
Make It Easier to Hire Top Talent
Many consider immigration reform to be a “third rail” of American politics. Touch it and you die (or, at least, your electoral future does). But in the entrepreneurial sector, there’s no such controversy. What there is instead is a recognition that we are in the middle of a global battle for talent.
There are many, many immigrants with good ideas. They come from Asia and Africa, Europe and the Middle East. Ac cording to a 2012 Kauffman Foundation study, roughly one in four tech companies established between 2006 and 2012 had at least one foreign-born founder. In Silicon Valley, nearly half did.6 As I noted when I testified in front of the Senate Judiciary Committee advocating in favor of immigration re form, those businesses accounted for $52 billion in revenues in 2005 alone.7
Elon Musk, founder of Tesla, emigrated from South Africa to Canada and then from Canada to the United States. Sergey Brin, co-founder of Google, fled the Soviet Union with his family and came to the United States as a six-year-old. As the New York Times put it: “Were it not for the Hebrew Immigrant Aid Society, there might be no Google:’8
Yet even as more and more immigrants flock to the United States, the uncertainty and insecurity generated by outdated and inadequate immigration laws have hobbled our ability to compete for the best talent. The percentage of companies founded by immigrants has declined more than 16 percent since 2005,9 and just about any startup founder can tell you what a nightmare it is to obtain a green card for a prized employee. Talented scientists and engineers are still coming to American universities to study-but all too often they are then returning home with their entrepreneurial ideas, even when they would have preferred to stay.
It’s not that foreigners aren’t founding companies anymore. Rather, they’re being turned away from the United States, making it more likely that they’ll try starting a business elsewhere, either at home or in a more hospitable country. Snapdeal was co-founded by a Wharton graduate, Kunal Bahl, but he was forced to relocate when he couldn’t get a visa to stay in the United States. By 2015, Snapdeal was worth $5 billion and employed more than 5,000 people-in India.
Those jobs, and that economic growth, could have stayed in the United States if we had a more flexible immigration system. It makes no sense for us to invite students to come to the United States, train them to create economic value, and then kick them out.
America has been the most innovative and entrepreneurial nation in part because we’ve been an immigrant-friendly nation. As we’ve made it harder to come here and stay here, we’ve lost talent to other countries.
Most of the immigration debate within the tech industry has focused on reforming the H-1B visa program, which provides a temporary stay for foreign workers employed in specialized fields. The pool of H-1B visa holders is often a great source of employees for tech companies. But only 85,000 H-1B visas are awarded annually, with 20,000 reserved for applicants with master’s degrees, while demand is much higher-US. Citizenship and Immigration Services received more than 172,000 petitions in 2014.10 Increasing the number of immigrant entrepreneurs and engineers who can acquire an H-1B visa would be a boon to American businesses.
Yet, as James Surowiecki wrote in The New Yorker in August 2012, “In 1990, the number of employment-based permanent visas was capped at a hundred and forty thousand a year. Astonishingly, that number hasn’t changed since, even though the U.S. economy is now sixty-six per cent bigger, and, with the rise of India and China, the supply of global talent has grown sharply.”11
We need to create a Startup Visa program, one that opens the door for immigrant entrepreneurs with a proven idea to launch their startups in the United States and, should they find success and want to stay here, gives them a route to citizenship. Reforming the H-1B visa system is important to the big tech companies, but the Startup Visa is more con sequential. We’ve long talked about stapling a green card to graduate school diplomas-now it’s time to pass legislation to do it.
The United States can remain the most innovative and entrepreneurial nation, but only if we are a magnet for the world’s best and brightest. Immigration is not just a problem to solve; it’s an opportunity to seize.
Write Some New Rules for a New Era
What we saw in the First and, to some extent, the Second Wave of the Internet we are seeing once again in the Third: The economy changes far faster than the rules governing it. The system we have in place to regulate business is stuck on twentieth-century notions of how the American economy works-some of which no longer makes sense.
Companies such as Uber and Instacart (an on-demand grocery delivery service), which rely on individuals who work on a project-to-project basis, are leading us to rethink ideas about employment and what it means to be a worker. These companies give people the flexibility to work their own hours as they see fit, and the compensation to make a good income for those hours. But this new approach is not without some problems-for example, some workers are concerned that they don’t have protections against losing their contractor status for undue cause. Specifically, as the “uberization” of more and more industries takes hold, how will the middle class earn paid sick leave, vacation days, and unemployment insurance and contribute to their retirement plans?
A primary reason why these issues are emerging is that our legal system’s view of employment wasn’t designed for the freelance economy. Rather, it was written into New Deal legislation, which divided workers into two categories: full employees and independent contractors. That worked for decades, but it doesn’t work anymore. A large part of the labor force of these startups is now composed of people who work only a few hours a week.
There is a happy medium that can exist between full employment status, which usually confers benefits and stability to employees, and contractor status, which provides flexibility and mobility. Preserving the rights of workers and enabling economic growth do not have to be mutually exclusive aims but they will be if we stick to old definitions of employment. As Senator Mark Warner put it in the Washington Post, “Instead of trying to make the new economy look more like the old, Washington should encourage these innovations and work to create more opportunities and upward economic mobility for everybody:’ It’s up to the government to take an active role in establishing a fair compromise that allows us to do just that. There’s a tremendous upside in getting this right-not just for the companies in question but for middle- and low-income workers. If the government creates a new employment designation that both allows for this sort of on-demand work structure and provides basic worker protections, it could open a new path to socioeconomic mobility.
That’s not to say that climbing the socioeconomic ladder will become easy. But it’s not as if the people who will be in a position to benefit from the freelance economy have it easy now. Undereducated workers today have few options to move up. By and large, it’s difficult for such workers to find the time or resources to dedicate to furthering their education. The people who manage to do so while working low-wage jobs are practically superhuman. But that shouldn’t be the requirement for living a good life in America.
TIME IS NOT ON OUR SIDE
Other countries don’t have the same preoccupations we do. They’ve watched America grow and prosper and have studied our methods, and now they are working to do the same for themselves. All around the world, nations are working to replicate the conditions necessary for a vibrant entrepreneurial environment. They’re encouraging entrepreneurship, making it easier to start and run businesses, increasing access to capital, and creating the support networks needed to better position their citizen entrepreneurs-and those they can attract to their shores for success.
In 2013, Canada launched its Start-Up Visa Program, offering permanent residence to entrepreneurs willing to move to Canada and start a business or relocate their current one. As Employment Minister Jason Kenney put it, “We’re seeking very deliberately to benefit from the dysfunctional American immigration system. I make no bones about it.”12 In Chile, the government launched a flagship seed accelerator program called Start-Up Chile in 2010. The goal was to create Chile’s own “mini Silicon Valley:’ which could provide a boost to an economy that was already one of Latin America’s fastest growing. Europe, too, is waking up and embracing the entrepreneurship imperative. Cities such as London, Helsinki, Stockholm, and Berlin are becoming thriving startup com munities. London leapfrogged San Francisco and New York as the world’s top city for crowdfunding in 2013. And the British government is trying to modify their regulatory environment to position the UK as the fintech capital of the world.
South Korea, meanwhile, is working to rid the stigma associated with failure-a fear that every entrepreneurial nation must conquer-through investing $2.9 billion in startups. And China wants to grow its skilled worker pool to over 180 million by the end of the decade.13 In doing so, they hope to reverse the trend in which Chinese citizens leave the country to study at premier universities and end up contributing to other economies-including ours.
We also see emerging startup sectors in the Middle East and Africa creating a more stable world and new competitors, all at once. Israel is widely praised as a preeminent “startup nation’’ and is making huge investments in basic technology.
We’ve seen the creation of venture capital funds in the West Bank to fund entrepreneurs who can create jobs, opportunity, and hope in the region. (I’m proud to note that The Case Foundation was a catalyst for the creation of one such fund when my wife, Jean, co-chaired the U.S.-Palestinian Partnership for President George W. Bush.)
Africa is on the move, with Nigeria and Kenya in particular emerging as hotbeds of entrepreneurial innovation. And we’re even seeing an entrepreneurial culture break out in Cuba. After a half century of being held back by socialism, Cubans are preparing for an innovation revolution. Small businesses, long banned, are now permitted, and some of those small businesses may, over time, become big businesses.
These regions and nations are moving forward at a time when America is trending sideways in certain areas and moving backward in others. And the tools that have long been available to entrepreneurs in America are increasingly available to entrepreneurs all over the world.
It seems everywhere you look in the world-from Australia14 to Zambia15 governments are working with the private sector to optimize a startup-friendly environment. Admittedly, these are not imminent threats. Lagos isn’t going to leapfrog Silicon Valley in the next six months, or even the next six years. Nor is Santiago, Sao Paulo, or Seoul. But that doesn’t mean we should be content with where we stand today. And it certainly doesn’t mean that we shouldn’t seek to be better. Losing our entrepreneurial edge is not just about how we are doing in comparison to other countries. It’s how we are doing in comparison to our own potential.
The American economy is an entrepreneurial ecosystem. To get growth, we need to support growth. We need new ideas coming out of R&D labs, which entrepreneurs can then adapt for commercialization, knowing they have the runway they need to scale and succeed. And then we need to do it all over again. That’s what will create the jobs and the economic activity that will maintain our position on the point of the spear. But if any of those groups fails to make a contribution, the system breaks down. Already, the government’s failure to support our entrepreneurial community properly is costing us countless jobs and economic growth.
America led in the First Wave, and again in the Second Wave. We can-and should-lead in the Third Wave. If we take the right actions and do it quickly, a bright future will be assured. If we fail to, the world will no longer look to us as a source of radical innovation. Instead, we’ll end up playing catch-up, attempting to emulate the creations of other nations rather than introducing the ideas that others try to copy.
It won’t mean the end of America. But likely it will mean the end of American leadership. And that’s a future we all must work to avoid.
People, if you got this far, please hit the ❤ below. We’re a team right?