Why We Need Startups

Finally! Venture Capitalists have crawled out of their bomb shelters and are funding startups again. This welcome development hasn’t come a moment too soon. America needs startup companies. Oh, how we need them! They are our economy’s secret sauce, the only thing that distinguishes the still-dynamic U.S. economy from those of sclerotic Europe and Japan.

Rich Karlgaard Forbes.com

Truth is, America’s tax burden–after you add up state and local and pile on the cost of complying with our buffoonish 54,000-page tax code–is not much less than Europe’s. Whereas Europe employs regulations to gum up the gears of commerce, we use a tort bar. Our entitlement monster is catching up to theirs. Witness President Bush’s cave-in on prescription drugs. This from a conservative!

France, Germany, Japan–we would join you in economic purgatory but for the saving grace of startups.

Because of startups and fast-growing young companies known as "gazelles," America’s unemployment is only 6.1%. Not bad for a punk economy. Here’s a little-known fact: Startups and gazelles have added 1.2 million jobs this year. Subtract these jobs, and America would slide closer to a Gallic unemployment rate.

Startups and gazelles exert competitive pressure on large companies. We all benefit. Example: For a decade now America’s large telcos have yawned and dithered on supplying high-speed data lines to homes. It sickens one to learn that South Korea has more than 70% home penetration while we have a pathetic 15%. Worse, South Korea’s fiber lines operate much fasterthan our typical DSL and cable connections. In Seoul you can watch a soccer match on the Internet and catch every bead of goalie sweat.

Why is the U.S. so far behind? Telco execs have always told me: "Not enough demand for it. We can’t invest because we have to pay dividends and–oops, gotta go. I’ve got a 3 p.m. tee time." The real story, of course, is that the big telcos futzed on broadband for the simple reason that they didn’t have to build it–there was no competitive pressure. But now Wi-Fi has suddenly taken the U.S. by storm, along with myriad Wi-Fi startups nobody had heard of 18 months ago. Surprise!–our shuffling telco beasts have awakened to the idea that America wants broadband. Funny how that works.

Startups put the U.S. on a steeper learning curve. This is not an obvious point, yet it is crucial to understanding why startups make America dynamic. Begin with the well-known fact that most startups fail. Statistics vary, but a good rule of thumb is that 90% of startups die within their first three years. Startups backed by professional venture capital do better–maybe three out of ten succeed in some fashion.

Armed with these facts, the rationalist might be tempted to ask, "Why waste all that talent, energy and capital? As national policy, it would be damnably foolish to incentivize startups with regulatory breaks, favorable options treatment and low taxes–because most of them puke anyway. Better to put our national efforts behind big, viable companies." Yep–that’s precisely what Japan and France do.

What’s missed in the rationalist’s argument is that startups are a major source of America’s R&D efforts. Every time a startup takes a risky chance and careens over the guardrail, something beneficial is learned. A valuable technology or marketplace experiment has taken place. Looked at this way, no other country in the world invests as much in R&D–i.e., in its own future–as America does.

Startups are profoundly democratizing. Consider Japan and France. For the most part they are run by an elite cadre (known as dirigistes in France). With rare exceptions in Japan and France, one must graduate from the top university to gain entrance to this elevated group. Germany and England similarly confera bloated majesty on credentials. But in America you can drop out of college and start Microsoft, Oracle or Dell. You can get a "C" grade at the Yale School of Management and still launch FedEx. You can dropkick your Ph.D. pursuit and start Google.

Deflation versus Cheap Revolution
In 1996 Alan Greenspan saw stock prices soaring and hissed: "Irrational exuberance!" Now he sees falling prices and yelps: "Deflation!" You’re twice wrong, Alan.

Deflation and cheap prices are not the same thing. Deflation is strictly a monetary phenomenon–too little money in circulation chasing too many goods. You’d expect the chairman of the Federal Reserve to know this.

The Cheap Revolution is something else. Best symbolized by a 120-gigabyte storage disk on sale for $99 on Amazon.com or by a Bangalore radiologist poring over e-mailed MRI scans for $18,000 a year, it results from Moore’s Law, excess capacity and Internet pricing arbitrage. Put another way, even if we had inflation (too much money in circulation), prices for many products and services would still be falling! Such is the power of Moore’s Law and the Net.

Give us stable currency, Alan. Leave prices to the market.

Visit Rich Karlgaard’s home page at http://www.forbes.com/karlgaard or email him at [email protected].

http://www.forbes.com/columnists/free_forbes/2003/0721/033.html