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The Blog Of David Marks

Want to increase employment? Make it easy to start, finance, and grow a startup

Posted on | April 4, 2010 | No Comments

Thomas L Friedman wrote a short opinion pience in the New York Times today called Start-Ups, Not Bailouts. It’s worth reading and connects to several other trends I’ve witnessed recently regarding regulation and the startup ecosystem.

A short excerpt:  “…Between 1980 and 2005, virtually all net new jobs created in the U.S. were created by firms that were 5 years old or less,” said Litan. “That is about 40 million jobs. That means the established firms created no new net jobs during that period.”

If you’re an entrepreneur, you probably already know this. But if you’re in politics, you may not. The people who lobby politicians for economic incentives are almost never from the kind of startups who actually create the jobs. They don’t have the capital or the time to do this because they’re trying to survive. Who does lobby in DC? Established businesses who can afford to hire lawyers and lobbyiests to represent their interests in government.

It’s a systematic representative bias which makes it hard for the government to achieve it’s own economic goals, because the key stakeholders are unlikely to be involved in the discussion.

This is a big problem — it’s far too easy to create laws which unexpectedly hard the startup ecosystem, squashing jobs and economic growth along with the innovation startups create.  And think of all the missed opportunities to create effective systems to grow the economy through startup incentives!

This lack of representation is not theoretical. Right now the current banking bill contains language which if passed will directly hamper one of the primary sources for startup capital: friends and family investments. Fred Wilson highlighted these changes on his article Startups Get Hit By Shrapnel In The Banking Bill.

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1) Changing the definition of a “qualified investor” in angel and venture deals. Not just anyone can invest in a startup company. You have to be a qualified investor. A qualified investor is currently defined as anyone with a net worth of over $1mm or net income of over $250k. Dodd’s bill would increase that to $2.3mm and $450k respectively. And then index those numbers to inflation.

2) Eliminate the existing federal pre-emption over state regulation of “accredited offerings.” Angel and venture financings could be regulated state by state creating a fairly burdensome set of rules  and regulations that each financing would need to be subject to. Currently there is a federal pre-emption that makes getting these kinds of deals done fairly easy.”

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Both of these elements reduce the amount of investment capital available to startups, and the latter also increases legal expenses for startups as well. This is the last thing a new business needs — and it’s likely to impact job and economic growth at just the wrong time. And it’s entirely unintentional. The issue is that there isn’t a very strong channel of communication between the government and the fragmented startup ecosystem.

My question to the audience is: How can we bridge the gap so we can create some smart, effective startup-friendly legislation?

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