This past week, a group of “young Internet entrepreneurs” were invited to meet with Obama’s economic team to discuss innovative ways that the government could help entrepreneurs grow in this economy. Despite my (1) avatar pledging my support of the Obama campaign and administration, (2) Illinois birth and residence, and (3) decidedly loyal Democratic activity, I was not invited despite being (a) young, (b) involved with the internet, and (c) and an entrepreneur. Next time.
I’ve seen some tweets and the aforelinked blog post, but I haven’t seen a lot of concrete details on what was discussed. However, if Mint CEO Aaron Patzer’s post is an indication of what was discussed, the ideas were more abstract and less immediate (more education, yay H1-Bs) than I would like. I’m also concerned that the ideas presented only apply to a minuscule subset of businesses (AMT only kicks in for employees with compensation at more than double the national average for household income). Again, I don’t have a formal list of what was discussed, so I’m projecting based on Aaron’s post.
I don’t want to just find fault with the ideas I’ve seen, but rather, I’d like to examine why the ideas that were presented were presented. My thesis: because those invited were unqualified successes, and not those of us who are small but growing organically without outside funding, the ideas they proposed reflected their reality, not the reality of the rest of us. (Threadless has revenue of $30 million a year — they have have grown organically, but they’re not small any more.)
Because small bootstrapped businesses and traditional small businesses (corner coffee shop, neighbourhood laundromat, fledgling architect) don’t have the resources of the companies invited to speak, we’re both more constrained by the things government imposes on us and more likely to benefit from changes that could occur in the short term.
Here are some suggestions that would help both internet startups and your traditional small business and could be changed in this Congressional session. I’ve grouped my four suggestions into two buckets.
Bucket One: The federal government needs to simplify the incorporation process among the various states and jurisdictions.
Incorporation is a mishmash of state and federal law. The Cono Project, Inc. (the legal entity that owns Dawdle.com) has a federal tax ID, is incorporated in Delaware, and is headquartered in Illinois (so we’re a “foreign corporation” to Jesse White and his tumblers). In addition to that, I had to file paperwork with the city of Chicago as a resident business. I only knew that I had to register The Cono Project with the city because I happened to be in the office when Table XI had a city inspector drop by and fine them. I dare you to guess which documents you need, and in what order you need them to get the next document in the process.
The federal government should simplify this process, whether by legislation or regulation. It clearly has this authority under the Interstate Commerce Clause of the Constitution. There’s no such thing as a purely local business anymore. Making it easier to start a company and file annual paperwork would surely make it easier for tinkerers, students, freelancers, and others to incorporate, providing them the flexibility and protection of incorporation. Quarterly estimated taxes, annual reports, and so on introduce “soft friction” that complicate the foundation and continued operation of a small business. These should be simplified and streamlined. Note that I have no complaints about the fees — just the process. It’s the friction of uncertainty and the different requirements of the various overlapping jurisdictions that causes me heartburn.
I propose that the federal government set mandatory guidelines for all states regarding incorporation and tax jurisdiction to simplify the incorporation and ongoing filing process.
Bucket Two: The federal government needs to revamp the SBA.
The SBA is a wonderful agency in theory — it has a large number of various programs tailored to an equally large number of niche constituencies. However, when you really consider all the programs, they have a single thing in common — increasing business liquidity. Loans, grants (SBIR/STTR), and investments (SBIC) are all just ways of helping companies meet expenses and grow. Helping companies navigate the cumbersome process of federal contracting is just helping companies raise funds through customers (the least dilutive source of capital). However, these programs have not adapted to the 21st century.
The SBA loan program most applicable to start up small businesses — SBA Express — sends companies to private lenders for loans up to $350,000. Private lenders have collateral requirements that effectively restrict companies to use the funds for capital expenses. These banks are looking for the funds to go into inventory, large capital expenditures, or seasonal buildups that will be torn down. However, many new small businesses need funds for hiring — not secured property. As we become a knowledge economy, where we want to have jobs that cannot be exported, the current loan program should be revamped and the requirements altered to better encourage the type of companies — high intellectual capital — that are likely to provide our best jobs.
I propose a new SBA lending program for amounts up to $350,000 that cannot be secured by collateral to encourage investment in knowledge workers instead of physical implements.
The SBIR/STTR grant process is cumbersome and has a bias towards companies building “protectable” IP. The existence of grant writers working for profit to navigate the SBIR/STTR grant process is proof enough of the cumbersome process. It’s been clear that proprietary IP has gotten out of hand and actually stifles innovation in current practice. The sponsoring government agencies for the SBIR and STTR programs require a multiple-year process to migrate from Phase I to Phase III of the programs. The most frustrating requirement is that the the entity receiving the SBIR or STTR grant must exist as a company even though SBIR and STTR grants are intended for pre-commercial research. The only pre-existing companies that can reasonably qualify are those that already have a commercial product line with researchers available to divert once the grant is received, if they are lucky enough to win grant funds from a sponsoring government agency. This reiterates the problems with the incorporation process discussed above. The SBIR/STTR grant process and structure has the perverse effect of retarding actual innovation by emphasising the grant process itself and increasing the risk to spinning out technology from host institutions.
I propose that the SBIR/STTR programs be entirely replaced with a program to spin out companies from from our nation’s land grant universities via the existing technology transfer offices of those schools using standard terms and forms.
The SBIC investment process is also broken. Almost any fund with actual LPs can apply to be an SBIC licensee, but many of our best investors are not SBIC licensees. Those who are in the SBIC program are restricted by geography, but there are no requirements on disbursed funds on an annual basis. And the list of SBIC investment companies by state is full of useless information – here’s Illinois’. If the federal government is going to co-invest, it should demand that companies invest a set amount annually to encourage stable economic development. Given the inability of traditional VCs and early stage investors to make capital calls in this economic environment, the SBIC program could be critical in keeping the innovation engine humming while the private credit and investment markets recover. I am unpersuaded by the argument that “there is more money available than good investment opportunities”. That argument appears to only be plausible — if true at all — for traditional VC investment amounts in thematic “frothy” investment cycles.
I propose that the SBIC program be revamped to encourage the formation of new SBIC licensees based on industry, not geography, and that all SBIC licensees to required to disburse a given amount, which is public, per year to new investments.
These four proposals would require no new money, no new institutions, no new government regulation (indeed, the first proposal would eliminate and streamline regulation), and are uncontroversial regarding incentives and purpose. All they do is bring existing institutions into the needs of the 21st century — they would reduce entrepreneur risk and make government an enabler, not a hindrance, to new company formation and hiring. There are other concerns for small businesses and startups — among all the entrepreneurs I speak to, healthcare risk comes up the most, and by a wide margin — but baby steps first.