Entrepreneurship 101: Here's What Works--Or Doesn't
|Wednesday, April 9, 2014 at 10:07 AM
New companies likely will be the ones bringing new jobs to the U.S. economy, and most of those will come through entrepreneurs, said Yasuyuki Motoyama, a senior scholar for policy and research at the Ewing Marion Kauffman Foundation.
“It has been demonstrated that the companies under five years old basically have created all new jobs in this country in the last 30 years,” Motoyama said.
For that reason, states should be looking for ways to help entrepreneurs. But, he cautions, not everything a state does helps grow jobs. In fact, evidence shows that many of the things states have tried don’t work, according to Motoyama.
And entrepreneurs aren’t like a business that needs to be lured to an area. Most entrepreneurs, Motoyama said, will start their business in the community in which they live. Tax rates don’t really matter for these business people, he said.
“What matters is the tax code—how complicated it is,” he said. “That seems to affect the entrepreneur’s perception of the business climate.”
With that in mind, Motoyama offers a list of do’s and don’ts—more don’ts than do’s—for states to consider.
PUBLIC VENTURE FUNDS
“If you talk to entrepreneurs, they almost always say ‘we need money, money, money,’” Motoyama said.
Research shows public venture funds don’t work. Half of all new companies go bankrupt within five years, Motoyama said.
“Various cases have shown that if the public sector tries to pick the winners, quite often, it will end up with the politics of the local area,” he said. “It’s very hard to pick winners.”
Likewise, states have created incubation centers with little success.
The idea behind them, Motoyama said, is to give startup companies the capital infrastructure—like office space and support services—they need. More than 1,400 incubators across the country, according to the National Business Incubator Association, have provided support like accounting and legal services. But incubators have a very small staff—an average of 1.8 full-time staff serving 25 client companies.
“What happens is there is no way to provide support services with this small number of people for that number of companies,” Motoyama said.
Other studies show that businesses formed in an incubator die faster than companies that didn’t start there.
“The incubator seems to function as prolonging dying companies,” he said.
A derivative of an incubator is an accelerator, which typically has a highly competitive application process. Accelerators create a cohort of entrepreneurs rather than accepting companies one by one.
Motoyama said no evaluation research on accelerators has been conducted but, “at this moment, there is no evidence that accelerators are better.”
“Many entrepreneurs say they don’t know other entrepreneurs in their town and they struggle to try to solve everything,” Motoyama said. “Frankly, that’s a very lonely, difficult process.”
Creating a peer learning network can help to link entrepreneurs, he said. While that happens at the local level, Motoyama said states can play a role by connecting the key people organizing networking activities.
“State government and local governments, with their connection to the local people, are a lot better equipped to promote entrepreneurship in this sense, compared to the federal government,” he said.
Startup weekends provide an opportunity for teams of people to create a business plan in the span of one weekend. The focus is not on the sophistication of the business plan.
“The business plan is only a means where people get inspired and connected,” Motoyama said.
“Through the event, they will keep their connections, keep the information and exchange for future entrepreneurial activities,” he said.
1 Million Cups