BRINGING INNOVATION TO MARKET

A World Without Start-Ups

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Today, the New York Times ran a thoroughly depressing article on the availability of credit, which, despite the government's efforts, has yet to improve. Lending to small companies fell from $710 billion in the second quarter of 2008, to $670 billion in the first quarter of 2010, the Times says.

That's scary, particularly because no one seems know why exactly this is happening. And then there's this:

Zoltan J. Acs, an economist in the School of Public Policy at George Mason University, said that in Japan stagnation had stifled entrepreneurship, and that the United States might be following a similar path. "What I worry about is, are we on a trajectory where start-ups are not going to recover?"

Yikes! I called Professor Acs and asked him to elaborate. He suggested that if lending doesn't pick up, the U.S. faces a "Japanese scenario," which would mean, essentially, a world without start-ups. Acs pointed out that when Japan's credit crisis hit in the 1990s, the rate of start-up creation, which had hovered around 8 percent, fell to zero. Acs is afraid the same thing might happen to the U.S. during this decade.

This is not to say that there would be no new businesses. Self-employment would likely go up, since you don't need a lot of capital to start a one-person consultancy. (In fact, this is why the Kauffman Foundation, which treats the self-employed the same as people with employees, has reported such rosy numbers.) And existing businesses would probably still be able to expand by using free cash flow.

But ambitious start-ups wouldn't be able to raise the money necessary to ramp up, which could make the prospects for job creation dim. "Think of a leaky bathtub with hot water pouring in," Acs says. As long as hot-water continues to flow--that is, as long as new start-ups are created--the economy is able to replace jobs being lost. But if the rate of start-up creation falls to zero, the tub would eventually empty out. "It's not a very pretty picture," he says.

Acs says that in this scenario, the SBA might have to become the lender of last resort, and he imagines an expanded role for the agency.

That's a controversial proposal--a lot of conservatives want to axe the SBA altogether, and Andy Grove wants to direct funds to established companies rather than start-ups--but it's intriguing. We've got a few suggestions of our own in the current cover story

What do you think? What role should start-ups play in an economic recovery?

Last updated: Jul 13, 2010




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