Former SBA Chief on 3 Keys to a Better U.S. Entrepreneur Economy
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The government shutdown is thankfully behind us, but this needless crisis certainly damaged the economy -- particularly small businesses and entrepreneurs who lost sales and access to programs to help them expand. It’s now time to move our economy forward and focus on the key economic question before us: How do we create strong middle-class jobs and continue our economic growth?
When I served as Administrator for the U.S. Small Business Administration for President Obama, we made it our mission to find the formula for successfully creating jobs and growth. Ultimately, the solution is simple -- focus on America’s strongest asset: our entrepreneurs.
But providing them with the tools they need to turn good ideas into thriving businesses requires more than just good public policy. It requires private sector partnerships with America’s big businesses, universities and even banks.
The case for expanding investment in entrepreneurs and small businesses is clear: small businesses create two out of every three new private sector jobs and half the people who work in America own or work for a small business. Entrepreneurs are at the heart of America’s identity and the key to our economic strength. They have been instrumental in building the greatest economy in the world as well as the world’s strongest middle class. Coming up with a new, innovative idea and turning it into a business is the American way.
Related: Why Americans Love Small Business
But not all small businesses are created equal. There are really two types of small businesses: main street and high growth. Main street small businesses are the car repair, restaurants and dry cleaners that are the fabric of our everyday life. They’ll open and close, hire and fire. They’re essential to every community, but they don’t create the bulk of the new jobs our economy needs.
High-growth firms, or gazelles, create a disproportionate percentage of net new jobs.
Creating a successful high-growth startup doesn’t happen in a vacuum; it requires an entrepreneurial ecosystem comprised of three outside elements -- capital, people and institutions.
1. Capital. Here's a fact: 70 percent of venture capital goes to just three states: California, New York and Massachusetts. And 40 percent of all venture capital goes to just one region: Silicon Valley. That is up from 30 percent in the late 1990s, according to a study by PricewaterhouseCoopers and the National Venture Capital Association.
There are enormous opportunities in the undercapitalized regions of the country. The market is less crowded and the field is ripe with outstanding entrepreneurs who have experience across a broad array of growth industries. But they can’t get funding.
State and local governments across the country need to invest in their local entrepreneurs. One solution, the Small Business Investment Companies (SBIC) is a partnership by which the federal government provides matching funds to experienced private investment companies across the country. Almost $3 billion was deployed last year to growing companies at no cost to taxpayers.
2. People. No entrepreneur can go at it alone. A network of mentors and a skilled workforce are necessary. SBA studies show that small-business owners who have a mentor have more longevity in business and hire more workers. And today large businesses are starting to partner with community colleges to ensure a steadier stream of skilled workers.
3. Institutions. From universities to accelerators to manufacturing institutes, the organizations that are investing in research and development need to work together to create a fertile ground for the commercialization of innovation. These discoveries provide the foundation for the next set of high-growth companies.
Both the private sector as well as federal, state and local governments have an important role to play in supporting high growth businesses and job creation. But they must work together and focus on investing in the capital, people and institutions, not political posturing. These partnerships not only foster new job growth, but will also keep America competitive.
Over the coming weeks, I will take an in-depth look at the three ingredients needed for entrepreneurial success: capital, people and institutions. I will highlight what’s working in communities across America and offer readers a policy plan that puts jobs, not politics at the top of America’s agenda.