In 2021, the nearly 60 million Americans who are entrepreneurial in some way might have an easier time starting and financing businesses, if a groundswell of support for entrepreneurs in Washington, D.C., and statehouses turns into action.
The formal startup rate in the United States has been declining for 40 years, even as an increasing number of Americans are taking part in entrepreneurial ventures.
“2021 has the potential to be in the most significant year in pro-entrepreneurship policy,” said Victor Hwang, founder of Kansas City-based Right To Start, a nonprofit that advocates for a national movement around entrepreneurship. “Where there was this was much in the pipeline? This could be a game-changer.”
The problem isn’t so much that small businesses need a lifeline to survive the pandemic – it’s that it’s become increasingly difficult to run a profitable small business at all in America. As the pandemic laid bare a 40-year decline in startup rates, federal and state lawmakers – and others – are starting to pay attention.
“In Washington, the planets occasionally align,” said John Dearie, founder and president of the Washington, D.C.-based Center for American Entrepreneurship.
Some 90% of the typical businesses in America — a salon, corner shop, restaurant or fitness center, those hit hardest by the current crisis — employ fewer than 20 people, according to data from the Census Bureau’s Annual Survey of Entrepreneurs. If you include the 24.8 million businesses that are sole proprietorships, 98% of U.S. businesses employ fewer than 20 people. Overlapping with these businesses are the 57 million Americans who freelanced in 2018 (what’s popularly termed the gig economy), according to the Upwork: Freelancing in America Survey.
The pandemic and the Black Lives Matter movement opened a window onto the different realities of life in the United States. Now, for the first time, entrepreneurship is becoming part of the conversation about inequality. “Collectively, these symptoms of inequity are part of a broader pathology in which systemic barriers create a fundamental imbalance between those with privilege and those with uneven access to opportunities. This imbalance is pronounced for America’s entrepreneurs, who face an increasingly difficult path to turn their ideas into reality,” said the Kauffman Foundation-led Start Us Up coalition’s revised America’s New Business Plan, released this week.
Faith In The Future? Maybe Not
The latest round of stimulus, the $1.9 billion plan that has now shifted to the Senate for debate, provides a sharp illustration of the problem in the small business economy – which could boil down to the fact that many people who want to be their own boss, can’t afford the time or money to try. Even Americans with a track record of running a small business might be giving up on the idea, based on the current state of the PPP, the federal program to aid small businesses in the pandemic. The stimulus contains only about $7.25 billion in additional funding for the PPP.
That’s because about half of the last round of PPP of $284 billion was still available in late February, according to The Journal of Accountancy.
In other words, there’s a new appetite for systemic change, and entrepreneurs may benefit from that in the short and long term. A handful of ideas, represented by a handful of major pieces of legislation in Washington and initiatives in state capitols, are emerging this year to help change the dynamic at the small end of the economy.
States May Move Faster Than Washington, D.C.
Dearie said initiatives to help small businesses and entrepreneurs could be part of President Joe Biden’s next big spending plan, “Build Back Better,” expect to focus on infrastructure, or other legislation. With control of the House and Senate in Democrats’ hands, Biden’s agenda has a good chance of passing. In addition, entrepreneurship initiatives often have bipartisan support.
In Missouri, legislation was introduced last week that was also a milestone, according to Hwang.
The state legislation is unusual because it takes a broad approach, lowering taxes on startups, offering more financing help for small companies, banning non-compete agreements and setting aside 5% of state contract dollars for young companies.
“It’s a multi-faceted problem,” he said. “You need a multi-faceted approach.” He said he’s heard from about 15 other states where ecosystem builders are interested in helping to shape similar legislation.
Among the ideas that are coming to the fore:
• Expanding pools of capital for startups. Less than 20% of all startups are able to access capital of any kind – that is seen as a key reason for the 40-year decline in startup rates. One of the ideas on the table is renewing an Obama-era program, the State Small Business Credit Initiative, and expanding funding from $1.5 billion to $10 billion over some number of years. The program allowed states to use the money to expand credit through banks or other institutions, or to use it help de-risk venture capital funds. About a third went to the latter. Don Graves, nominee for Deputy Secretary of Commerce, is reportedly one of the prime movers behind the program. But there are many other mechanisms to do this, including expanding the money that the federal government uses for Community Development Finance Institutions, or changing banking regulations to make it easier for banks, especially community banks, to compete and invest. State-level changes to regulations could also make a difference: For instance, recent legislation introduced in Missouri broadens eligibility for an existing state program for startups, according to Victor Hwang, TK title
• Using the tax code to make it easier to start and sustain businesses. The Ignite American Innovation Act would amend the tax code to enable small businesses to monetize the assets on their balance sheet, according to Dearie. The legislation in Missouri exempts startups from state income taxes for the first year and only gradually begins taxing them over five years, Hwang said.
• Expanding federal funding for innovation.
The pandemic brought home the value of DeepTech research and companies that can take scientific innovations to market. The last golden age of entrepreneurship in Silicon Valley, was touched off by U.S. government funding designed to beat the Soviet Union in the Space Race. Here, a handful of ideas are competing for attention. Longtime small business advocate Jere Glover, a partner at law firm Seidman & Associates, is speaking out for expanding SBIR, which awards grants to promising innovative companies, often outside the technology hubs of the East and West coasts.
Other proposals, including the The Endless Frontier Act, would designate $100 billion to reform and rename the National Science and Technology Foundation, and deliver $10 billion to provide matching grants to regional tech hubs that would be formed by higher education institutions and industry groups, among others. Last Spring, a report by Different Funds sponsored by Schmidt Futures said that out of $131 billion invested in startups in the United States in 2018, only about $11.8 billion went to Deep Tech companies outside Life Sciences, which got $19.3 billion.
Other proposals would similarly try to bring the United States’ investment in line with other countries, such as China. Since 1964, U.S. federal spending on R&D has declined from more than 2% of GDP to .6%. Meanwhile, China’s spending on R&D rose to 2.4% of GDP in 2020, Bloomberg reported this week.
• Broadband access, universal childcare and health care. Entrepreneurship is the bridge between business interests, restarting the economy and creating a safety net for workers. People who have a safety net are more likely to be able to launch companies. Expanding access to broadband technology especially could become a bigger part of the entrepreneurship agenda. It showed up for the first time in the Start Us Up New Business Plan, released this week.
• A handful of ideas are also aimed at expanding participation in entrepreneurship by women and people of color. For instance, the Next Generation Entrepreneurship Corps Act would make a six-year investment of $330 million, the bill will identify talented entrepreneurs in underserved communities through a national competition, offering them a $120,000 two-year stipend for living and basic startup expenses, health care, and interest-free federal student loan deferral for two years. The sponsors said the bill would create 320 new businesses a year. But making it easier for women and people of color to succeed as entrepreneurs is harder than it looks: Systemic bias means they’re less likely to benefit from targeted approaches that flow through the existing system.
• Regulations – not so much. What’s not presently a big part of the conversation – probably because it lacks the flash of other initiatives – are the regulations that trip up many small business owners in their first months of business. Especially in a world of remote work, 50 different and expensive state systems of regulations remain a major barrier to entrepreneurship, according to the New Business Plan. It grouped the approach to restoring entrepreneurship into four categories:
- Access to Opportunity: A level playing field without red tape
- Access to Funding: The right kind of capital everywhere
- Access to Knowledge: The know-how to start a business
- Access to Support: The ability for all to take risks