America has a dirty little secret, and it’s pissing me off. Well, okay, it probably has lots of dirty secrets, but this is the one that actually makes me angry enough to engage in politics.
Let me be clear upfront. I’m not a citizen, so I can’t vote. By rights, I should be a Republican, but I have no patience for all of the nothing-to-do-with-being-a-republican bullshit that the party now stands for. Having grown up in Europe, I don’t have a whole lot of patience for socialism and nanny states either. My point is, I’m relatively neutral in the big scheme of things.
So what pisses me off? The way America treats small business. And by America, I mean the House, the Senate, all of the hangers on, but sadly also much of the American public.
The Dodd financial bill is a prime example of shit being shoveled into the wrong mouths. But more on that in a moment…
The US Census Bureau tracks businesses by size and they routinely publish their data. I’m not spinning anything here, this is the raw data straight from their site. Do the math yourself.
There are 5,885,784 “employer firms” in the USA. i.e. 5,885,784 businesses. Together, they employ 115,074,924 people. Yes, 115 MILLION people. Quite a few by anyone’s count (well anyone except China).
What companies do we mostly hear about? Large ones. Who gets government bailouts and huge porky incentives (under any regime, not just Obama)? Large business. Surely there’s a good reason?
I don’t think so. In fact, support for big business from automakers to banks to anyone else who qualifies is, in my opinion, one of the poorest investments any government can make.
Let me back that up with some reasons why…
Let’s start with what counts as a large business? How about one that employes 2500 or more people. That sounds quite big. Almost husky. Care to guess what percentage of the US employers count as large businesses? Zero point zero six percent. Yes, 0.06 PERCENT. As in less than one tenth of one percent.
So what about small businesses? Compared to the big guys, 500 employees or less seems quite dainty in size. And companies of that size represent 86.08% of all US companies. Yes, EIGHTY SIX percent. Or if you prefer there are one thousand four hundred and thirty four times as many small companies as large companies.
Ahh, but I can hear you mumbling about big companies employing more people. Well, those teeny tiny good for nothing companies with less than 500 employees actually employ 50.92% of the American workforce. Yes, more than half. All of the big companies combined employ just 37.24%.
Okay. But aren’t big businesses a safe haven of stability and job security? Hell no. Ask anyone in RTP that worked for Bayer, Cisco, Glaxo, IBM, Lenovo, Nortel, Sony Ericsson or any of the other big companies that have shed thousands of employees over the past two years.
Big companies, with few exceptions, are driven by quarterly goals and people are an expendable resource that can be “edited” to help reach those goals. Ask anyone with big company experience that spans more than 5 years and they will tell you it is getting worse, not better. The good old days of spending 30 years with one company are dead and gone.
When I attended Defrag last year, I ended up sitting opposite Brad Feld over dinner. Brad’s quite a smart chap by any measure. I asked him how Boulder was faring in the economic downturn, and his answer was interesting. He said it was ugly, but not awful. The insightful part was the reason why… Boulder/Denver didn’t have that many large corporations doing massive layoffs, and the people being let go from smaller companies were having an easier time finding other small companies that were hiring.
Small companies are, by their nature, far more dynamic. Yes, individually they are riskier endeavors, but as a class of employer, I’d be willing to bet that employment with small companies is far more secure overall.
And yet no one really represents small business in politics. Worse still, the proverbial man (or lady) on the street is far more likely to be impressed by a job with Big Assholes Inc. than Small Company X.
So now back to the Dodd financial bill, which was the impetus for writing this.
As we all now know, the entire financial crisis was caused by risky investments made in small businesses by poorly informed investors.
Oh, wait. That wasn’t what happened.
Actually a large group of trained professionals got carried away with Vegas style gambling under the guise of clever mathematics and a nice investment banking title.
So why does the Dodd bill target small companies? I have no f*cking clue.
And what do I mean by target? Well there are plenty of folks that have done a better job of examining the bill than me. Check out this VentureBeat article for a good overview and lots of links.
Here’s the summary (more or less lifted from VentureBeat):
- The bill requires startups raising funding to register with the Securities and Exchange Commission.
- Startups will have to wait 120 days for the SEC to review their filing.
- The wealth requirements for an “accredited investor” who can invest in startups will be raised. They would need assets of more than $2.3 million (up from $1 million) or income of more than $450,000 (up from $250,000).
- The bill eliminates federal pre-emption which means that every state will get to define and enforce its own rules for both Angel and Venture investing.
So #1 means attorneys will make money off clients who cannot afford to pay. #2 means many early stage companies will die on the vine waiting for bureaucratic approval. #3 just makes it even harder to find investors. And #4 is the icing on the cake — certain states will get smart and make it easy, and many many others will do the opposite. The net result will be the death of most Angel investing in all but a few states. Great way to create a whole new kind of decaying rust belt in America.
Think I’m being overly dramatic? Let me give you a real life example from personal experience trying to raise $100,000. That’s not big money. It’s certainly not the kind of price tag that destroys an economy. But for an early stage company, $100k is tough to find and it takes a long time. You’ll need at least six months, maybe more.
Under Dodd’s proposal, you’ll need to first register with the SEC. That’s going to take a few hours of legal advice and a bunch of paperwork. Time to welcome $1000 – $2500 of new expenses. Think of it as an extra 2.5% tax on the money you raise. Now wait an extra 120 days, holding your breath and not talking to investors. Good luck with that — it’s always fun to add 50% to the turnaround time on financing.
Okay, ready to go. But wait. More than half of the Angel investors in your state no longer qualify as accredited investors. So (a) the number of targets just got way smaller and (b) the remaining Angels are now looking at twice as many deals.
More competition and less supply. That sounds like fun.
Oh but wait. Almost forgot about no Federal pre-emption. Now you are at the whim of the state you live in. Think they’re friendly to small business? Think again. Expect stupid hoops to jump through, complete lack of understanding and yet more legal fees. Not to mention yet more reasons for your local Angels to hang up their investor badge and get out of the game.
Let me give you two examples of just how well States handle small business.
In North Carolina, we had a great program called One North Carolina. It’s primarily a grant program for small businesses. If you compete for, and win, a Small Business Innovation Research grant from the federal government, you can apply for matching funds from the One NC program. The program has been shown to help launch companies, create jobs, drive investment and generally be a great return on investment. The NC legislature, in its infinite wisdom gutted the program this year. I believe the budget was cut by more than 70%. Less than one month afterwards, our illustrious governor convened a panel to discuss what could be done to help early stage businesses in North Carolina. <sigh>.
In Connecticut, there’s a great group called Connecticut Innovations. They provide seed stage investment and mentoring for early stage companies in Connecticut. They were created by the CT legislature in 1989 and since 1995 they have supported themselves with the returns from their own investments. Impressive.
Some other stats:
Over the years, CI has helped over 100 emerging companies research, develop, and market new products and services. This activity has attracted over $1 billion dollars in additional investments from private equity providers. CI has brought the State of Connecticut over $510 million in Gross State Profit and over 5,000 additional job-years.
So all in all, they are doing a good job. What’s their reward?
“Early Saturday morning, the State Senate passed S.B. 492 AAC Deficit Mitigation for the Biennium Ending June 30, 2011. The bill contained the following language:
Sec. 89. (Effective from passage) On or before July 1, 2010, Connecticut Innovations, Incorporated, the Connecticut Development Authority and the Department of Economic and Community Development shall be consolidated into one agency. Such consolidation shall eliminate at least three executive level positions from the Department of Economic and Community Development and shall achieve savings by aligning functions and services.”
Sounds like a good thing, no? Except that if this becomes law, Connecticut Innovations can no longer make or hold equity investments. Yeah. It kills their primary reason for existing and their source of revenue while destroying any future work they could do. Well done Connecticut!
So let me recap. Small business drives more than half the employment in the US. Our beloved politicians choose to ignore that fact. Support goes to big companies that can afford contributions and lobbyists while small companies get the finger. Worse, we get the kind of restrictions only big companies can afford to pay for put in place by the kind of cretinous individuals that will happily kill job creating programs.
Every small company needs money to get started, whether it’s a loan, credit card debt, friends & family, Angel investment or Venture Capital. That money is now officially under threat. That means small businesses and their employees are under threat too.
Look at it this way: if a mentally challenged child was playing with knives, someone would step in to protect them from themselves. It’s time to do the same for our clueless politicians.