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WSJ - "Starting a company 'is harder than it was at any time I can remember.'"

Today's economy is the worst period in decades for small businesses and startups to obtaining financing, writes The Wall Street Journal:

Ensconced in a strip mall behind a Carpeteria outlet, Derek Smith has been tinkering for two years with a wireless electrical system that he says can help schools and office buildings slash lighting bills. With his financing limited to what he earns as a wireless-technology consultant, he has yet to hire his first employee.

This is a far cry from his last start-up, which he cofounded in 2002. At the two-year mark, that company, which makes radio-tracking gear for hospital equipment, had five employees, about $1 million in funding from angel investors and offices with views of downtown San Diego.

"When I started this the plan was to go out and raise a bunch of money," says Mr. Smith, who is 36 years old. That was in late 2008, just as financial markets around the world collapsed. "I quickly discovered I can't do what I did before."

Tough economic times have pushed more Americans into business for themselves, working as consultants or selling wares online. But many are not taking the additional step of forming a company and hiring employees.

For people like Mr. Smith, lack of funding seems to be the biggest problem. Two traditional sources of start-up cash--home-equity loans and credit cards--have largely dried up as banks wrangle with massive defaults and a moribund housing market. Venture-capital firms that typically invest in young companies, as well as angel investors that focus on early-stage start-ups, are pulling back as they struggle to sell the companies they already own.

Venture-capital firms invested $25.1 billion in the year that ended in September, up 10% from the same period a year earlier but still down 27% from two years earlier, according to Dow Jones VentureSource. Angel investment amounted to $8.5 billion in the 2010 first half--30% below the average level in the five years leading up to the financial crisis, estimates Jeffrey Sohl, director of the Center for Venture Research at the University of New Hampshire.

"I've never seen seed capital so low," says Mr. Sohl. "This is alarming."

Startup businesses are the primary source of capital creation and job growth. According to economists, without small business startups, net job growth will be almost nil -- exactly where we are right now.

But the current dry spell in small business loans and venture capital investment is only half of the problem. The other major factor? You guessed it -- crony capitalism:

We are creating so much regulation - over tax policy, health care, financial activity - that smart people have figured out that they can get rich faster and more easily by manipulating rules on behalf of existing corporations than by creating net new activity and wealth. Gamesmanship pays better than entrepreneurship.

It is always hard to start a business. It is especially hard to start an innovative business, one that will foster a new technology or business method. Incumbent players in a market have an inherent advantage: Momentum counts for a lot, and it takes tremendous effort to get customers comfortable with a new product - or even to hear about it in the first place.

Given the difficulty of starting a company from scratch, and how economic activity is generated today, you can start to see why, if you were a rational market actor, you would be trying to get a piece of the government action.

... The two largest pieces of legislation enacted in the past two years - health care and financial reform - are very vague. Take the new Consumer Financial Protection Bureau. It has a broad mandate to protect us from financial abuse, but when it comes to the actual implementation, the Brookings Institution wrote that unelected regulators will decide "almost everything" about how the organization works.

This is highly dangerous to innovation, which depends on clear and transparent rules. The more complexity, the more incumbents are favored. They have the capital to participate in complicated regulatory proceedings. They can hire high-priced lobbyists to present facts in a light most favorable to them. The more incumbents are favored, the harder it is for new companies to gain traction.

Witness the recent award of over 100 exemptions from new government employer health insurance requirements awarded by HHS to big corporations, unions, and other entities that generally fall under the category of "special interests".

Leftists firmly believe that their vision of "justice" (i.e. big government micromanagement of business and the economy in order to ensure fair distribution of wealth) trumps proven free market principles of economic growth and prosperity. They would rather have a heavily-regulated "fair" economy even if the result was high unemployment, tight credit, crippling debt, and heavy taxation, because the thought of a "free market" is simply too much for them to bear.

The Tea Party movement and the recent election show conclusively that this view is limited only to a small minority of Americans; unfortunately this elitist progressive minority has been in charge of government policy for the past two years. There is a lot of damage that needs to be undone before small businesses and our economy can once again flourish.


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Comments (9)

Liberals scream about the n... (Below threshold)
GarandFan:

Liberals scream about the need for 'government oversight'. Where was this 'oversight' when Madhoff was making his millions? Oh, yeah, watching porn on their computers. Where was the 'oversight' of BP violating established regulations? Oh, yeah, the "inspectors" where out partying with BP employees. Where was the 'oversight' when Fannie and Freddie were engaging in practices that brought down the housing market? Oh, yeah, Barney Frank and Maxine Waters were "blinded by ideology" and too busy praising Franklin Raines, excusing his $6 million bonus overlooking his juggling the books and accounting procedures. Raines was just another Ken Lay, only with political backing.

Government 'oversight' has such a sterling record of success. 2012 cannot come soon enough.

We've foreclosed on the Hou... (Below threshold)
Roy:

We've foreclosed on the House. We've fix the rest in two years.

"Leftists firmly believe th... (Below threshold)
alanstorm:

"Leftists firmly believe that their vision of "justice" (i.e. big government micromanagement of business and the economy in order to ensure fair distribution of wealth) trumps proven free market principles of economic growth and prosperity. They would rather have a heavily-regulated "fair" economy even if the result was high unemployment, tight credit, crippling debt, and heavy taxation, because the thought of a "free market" is simply too much for them to bear."

Yup. The left's view is that it's better for everyone to be equally miserable than for some to win and some to lose. It's more "fair" or something. The discordant note in their vision is that it never seems to actually include "everyone" - an overclass, made up of the rich and politically-connected (who rapidly become one and the same) is always required, to make sure everyone else remains miserable.

The left can disagree with that notion all they want, but that's the evidence of the last hundred years. Denying it is like arguing against gravity.

garandfan- "2012 cannot com... (Below threshold)
zaugg:

garandfan- "2012 cannot come soon enough."

Pigs fly and we agree on something, though I don't mean it the way you mean it. We Teapartiers will be taking out the garbage- Barry and Michelle et al.

Leftists firmly be... (Below threshold)
Steve Crickmore:
Leftists firmly believe that their vision of "justice" (i.e. big government micromanagement of business and the economy in order to ensure fair distribution of wealth)

That is right in a sense, but I have heard that the the feds redistibute 45% of the federal budget, including the generous Bush medicare drug benefits scheme, to seniors over 65 years old, who are disproportionate tea partiers. They are not likely to vote against their own interest. As testament to that, the first order of business elect that John Boehner had promised, is to restore the Obama medicare cuts.

The wingnuts remind me of o... (Below threshold)
Steve Crickmore:

The wingnuts remind me of ostriches in the sand, cheered on by posters who should know better, while America gets further and further behind the rest of the world with so little investment in the future. Consume and cut and no taxes that is the GOP/teaparty watchword. America is no longer in the game as the rest of the world is moving further with combined public and private ventures.

crick: "America is no longe... (Below threshold)
Drago:

crick: "America is no longer in the game as the rest of the world is moving further with combined public and private ventures."

Yeah.

If only we could get the left out of the way to develop more nuclear power plants.

Alas, the luddites of the left would rather we all downsize into mud huts.

Except of course for the algores of the left. They get to own multiple palatial estates, fly private jets, own large yachts, etc. But we're all supposed to climb into smart cars.

And the lefty's here never, ever, ever complain about their left-wing elitists living this way.

The word "hypocrite" comes to mind.

Drago, nuclear as well as b... (Below threshold)
Steve Crickmore:

Drago, nuclear as well as being controversal is extraordianary expensive, and the prospects don't look much better now, even with the GOP in control of the House.

China now has about 60% of the world's solar cell panels, a US invention by Bell Lab in 1954- US production is now neglible. Republican Governors keep cancelling what little high speed light rail projects we are developing, while China develops and utilizes a train that goes over 640 mph, the fastest in the world., while the US debates patdowns and groping at airports. The tea party and wizbang wingnuts like Jay and Rick were even against rescuing GM, which will end up costing the government only a couple of billion and if they were greedy they could make money on their bailout. It is a good thing the wheel was invented, otherwise the tea party would be against public-private funding of that. We are competing in the real global world of Bomabardier rapid rail- Canadian governmenet subsidies, Embraer aircraft- Brazilain subsidies. US multi nationals are investing. but in branch plants and modern technolgy abroad.

While the tea party talking point is John Kerry has a yacht. I could say, Ralph Nadar lives or lived in a one room apartment, but I`m not sure how relevant that is. Sarah Palin the face of the tea party is making 10 million a year for her family while reprensenting herself as "a hockey mom" or "grizzly mom" or whatever moniker of the common people, is her latest incarnation.

Back to the topic... we need private and public investment in the future, particularly in the field of energy, preferably clean, and partnerships.

I'll chime in, since I work... (Below threshold)
SCSIwuzzy:

I'll chime in, since I work in the power sector, and work closely with a large nuclear fleet:
Nuclear is great for base load on the grid. But it takes a long time to recoup the costs. Some of the costs are imposed by the bureaucratic bastiches in various acronym-ed agencies and by our litigious society. Some is because they are big and complex facilities where the standards of quality are extremely high.

Now, where do we need more power in much of north America? Not base load, but peak power. In places where base load fails (California!) much of the problem could be alleviated by better transmission infrastructure to transfer power from other regions. That is, upgrade the grid.
Anyway, peak power, that is where we need more generation in the next decade or so. And nuclear plants are not peak power. What is? Not solar or wind. Not hydro (except for a few pumped reservoir hydro stations).
Coal and natural gas. And right now natural gas is very cheap, under $5 on the open market. Coal is also cheap, but the average coal plant is old, dating from the 40s or even earlier. There are some younger, cleaner coal stations, but they don't begin to offset rest. And lets not forget that the current administration has made it clear that they would like to shut down the coal industry in America.
Back to natural gas... with gas so cheap, new "clean" coal plants and new nukes just aren't cost effective investments. And unless cap and tax is passed, there is less incentive to go reduce carbon outputs (coal, then gas) enough to make nuclear look tempting.
If cap and tax goes in (doubtful with the Rs controlling the house) and/or natural gas goes above $18 (and looks to stay there) on the open market you won't see the energy industry lining up to build nukes.

When gas was above 16 and oil was at $100 a barrel and rising AND the Bush admin talked about making nuclear applications move again, I knew 4-5 (one of them was only interested in partnering with bigger players) utilities seriously looking at new nuclear stations. 3-4 years later with gas below 5 and the emphasis on the grid upgrades, and I only know of 1 utility still moving forward. 2 more say they are, but nobody in the industry believes them...
Even Exelon, about as pro-nuclear a company in the US you can imagine, is not in serious pursuit of another nuke. They're buying John Deere's wind farms instead.




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