5 ms·

America doesn’t have a small business problem. It has a startup problem.

20 points by rpavlick 15y ago

ewoodrich 15y ago
I would say (at least from personal experience) that the funding issue is a bit of an easy culprit (especially since the article highlights three tech companies in the graphic). In my experience, the barrier to entry for a sufficiently skilled founder or founders is fairly low, as long as one has the skills, and motivation to learn. But for biotech and other industries, I can definitely see the potential for grants and other support to "jumpstart" these companies.
- FD3SA 15y ago
  Precisely. Markets such as social, search, and cloud were the low hanging fruits because they required relatively small seed capital. The reason why PG is complaining about a lack of truly unique startup ideas is because, frankly, many of the low hanging fruits have been picked. The next generation of fields ripe for innovation (AI, robotics, transportation, biomedicine, energy, space, etc) require orders of magnitude more seed capital. Some of these are on Manhattan project scales, requiring billions of dollars invested for a decent probably of an acceptable return on investment. Some big spenders, such as Peter Thiel, are paving the way forward with their personal initiatives; yet few organic investment communities exist to support such endeavours. I doubt that such an investment community would spring forth without government support. Unfortunately, government largesse is a critical issue in most developed nations at the moment, so I am pessimistic of government assistance in these sectors. Thus, we are constrained to our narrow fields of low capital startups for the time being.
  - ewoodrich 15y ago
    I think your observation that "social, search and cloud" as you point out, are extremely over-saturated is especially relevant. One of my main draws to programming was the extremely law barrier to entry -- a weekend spent with a Python compsci text and Google was enough to get me started on Django. But even though I have interest in biology, genetics and related fields, I don't see how someone in my position with more time and motivation than money could "break" into the startup world.
    - FD3SA 15y ago
      Indeed. High capital fields such as medicine are the great entrepreneurial challenges of our time. Everyone on HN knows of the decaying behemoth that is academic research. It is an unsustainable system built upon a terrible incentive architecture. Graduate students and postdocs are used as cheap labor in a Ponzi scheme, while Principal Investigators have no incentive to engage in difficult, high risk research due to salary caps and tenure. The market failure of academic research is the primary reason for the grinding pace of progress in fields such as medicine. Again, there are individuals such as Craig Venter who are changing this paradigm, but the sheer magnitude of funding being dumped into the academic research black hole is unfathomable. Our collective tax money is in the government's hands, and as such, only they have the power to dismantle such terribly broken schemes. I'm not holding my breath.
BerislavLopac 15y ago
"It’s easier, after all, to take a risk, quit your day job, and start a new business if you don’t have to worry about getting health-care coverage." Actually, I think it's the other way around. First of all, countries with national health care have introduced it precisely because is citizens are less risk-tolerant on average. Also, with a bunch of social parachutes such as health care, solidarity pensions and the like, the willingness to risk actually decreases, as there is less incentive to "make it big".
- dylangs1030 15y ago
  As with most other gambles, greater risk entails greater reward. Reduced risk (read: more comfortable safety net) means more competitors, a more diluted market for startups, and a lower payoff to fewer successes. Convesely, Google rose from America in precisely the quasi-starving artist mentality that makes a startup riskier with a less comfortable safety net. I agree.
- bobbles 15y ago
  Sorry, but I think this is delusional. The fact that I can break my leg and pay for nothing more in the hospital than a pair of crutches to take home in no way is related to what I want to do professionally. On the other hand, the fact that it could cost some ridiculous amount in the states would definitely drive me to wanting to stay put in a reliable salary position in corporate world.
  - dylangs1030 15y ago
    To play devil's advocate, there are different ways of looking at this. While in theory you're right, I'm not sure startup founders are thinking of their health insurance when they decide to quit their jobs. They are probably more concerned with immediate requirements, like raw shelter, food and utilities. But again, there's several ways to look at it.
  - mixmax 15y ago
    I'm from Denmark, maybe the country with the best social safety net in the world. The state pays your medical bills, your school and education (you even get a state allowance to live on while you study), if you lose your job the state will give you money, and so on. You can actually live a whole life with nothing but statemoney. The startup culture here is terrible, exactly because of this. People become cosy and risk averse because they don't really need to fight, and because there's no need to. So i think the parent hits the nail pretty much on the head.
dylangs1030 15y ago
One of the reasons I see startups being more significant for fueling the economy is momentum. A startup with 2 or 3 well collaborating founders without internal conflict is following an exciting vision - there's a certain glorification to beginning the venture on an idea, and being a founder of something new and practical. On the other hand, more mundane small businesses, once established, aren't known for adapting and changing much, so much as fitting into an industry niche and remaining predictable (i.e. a small software brand which isn't superlative in any way, but is stable and profitable).
temphn 15y ago
The solutions proposed here are to increase the number of startups by increasing government spending/taxation and increasing extension of credit/financing. However, if the goal is to have more startups that are "the envy of the world", then increasing the number is not necessarily the way to do this. We need to stop harassing those startups that do become successful. Startups by their nature are disruptive in the common sense of the term, and will violate the cozy arrangements made between established businesses and governments. Two recent examples: http://www.betabeat.com/2011/05/31/airbnb-takes-manhattan-with-2k-bookings-a-night-but-many-listings-may-be-illegal/ http://www.betabeat.com/2011/05/31/airbnb-takes-manhattan-wi... http://venturebeat.com/2010/10/26/ubercab-ryan-graves-cease-and-desit/ http://venturebeat.com/2010/10/26/ubercab-ryan-graves-cease-... Of course, on a larger scale the government is now harassing Google with antitrust, even though Google is being nipped at the heels by Facebook. The government also denied the Blockbuster/Hollywood merger in the mid 2000s (http://www.washingtonpost.com/wp-dyn/articles/A2310-2005Mar25.html http://www.washingtonpost.com/wp-dyn/articles/A2310-2005Mar2...) on antitrust grounds. Of course, just a few years later these "trusts" were blown up by Netflix, which is itself being blown up by Amazon and iTunes. To have more successes, we need to stop the dynamic in which government goes after successes and tries to destroy them. What we don't need are government policies that encourage more marginal entrepreneurs to jump into the pool.
- dylangs1030 15y ago
  That is an issue of extremely successful startups making their predecessors "irrelevant." Google eradicated the market and became a de facto monopoly for searching anything on the internet. Netflix entirely dissolved physical movie stores. On the flip side, Gamefly, a similar venture, has not done this - people still buy video games from stores instead of renting them or downloading them. I agree that some of the problem is the government being a "trust buster" - however, some of it is simply the faultless way the market works. The government makes blanket anti-trust policies which are universal enough that, when one company revolutionizes an industry to the point that it's the only one of its kind, it's caught by policy without really having any bad intentions. Unfortunately this is happening to Google.
  - 15y ago
Daniel_Newby 15y ago
> ... IPOs under $50 million have plummeted since the 1990s. IIRC it costs around $10M to run an IPO, thanks to a mountain of financial regulations. Regulations that have had little apparent effect on large scale fraud. Some states charge high fees to start a corporation. If you just want a place to park the IP for a bright idea, California charges an $800 per year franchise tax.
DanielBMarkham 15y ago
Gosh this column is muddled. It's no wonder there's a problem. If you can't think clearly about an issue it's highly unlikely you're going to be able to shed light on it. Startups are businesses that make something people want that are highly scalable. So no, "startups" and "small businesses" are different things. Your dentist has a small business. At the same time, it's very possible to make something that people want and simply have no desire to scale. That's what I'm seeing for a lot of American startups. Yes, there are all the wide-eyed younger folks who are out to imitate Zuck and be the next Facebook, but for every one of those there are a hundred people out in the hinterland who aren't out to conquer the world. Why? Lots of reasons. First, people who change the world get punished. They get punished by competitors, by the government, and sometimes even by the popular opinion of the people who use their startups. Why make yourself a target? Second, a disruptive startup's relationship to the government is far from clear. Is AirBnB an appointment service or a hotel service? Do the guys that offer ride shares run a taxi business? Or a bulletin board? The government, over time, has come up with thousands of little boxes that businesses are supposed to fit inside. Depending on which box you fit in, various rules apply. What this has done is create lots of stovepipe business systems. So when a business comes along that crosses many boxes, which ones apply? A lawyer can help here, but she's just going to be able to offer an legal opinion, not protect you from possible problems. Third, there's the big business overhead hit. There's a huge difference between 3 guys in a garage and 3 thousand guys in an IT center. You need all sorts of administrative resources for the IT center, and lots of training for management on how to act. That doesn't come overnight, and you don't get there without taking a productivity hit. Now, if you're Google and revenue figures give you the slack to know you're going to be around for a while, you take the dive and go through the hassle. But if you're some fly-by-night, just-getting-started business which might have a huge staff for just one year and then disband? You can't make the overhead numbers work. I can't go out and hire 3 thousand guys to build my human-powered recommender engine for next year. It'd take a year or more of scaling just to approach that level of staffing. And even then I'd probably screw it up. All those laws to make sure "big business" behaves properly have an assumption that the business is an ongoing concern -- they have lots of money and lots more on the way. That assumption is not always true. Finally, even if you had an idea to conquer the world, do you really want to be an executive? You can be a Derek Sivers and have all the money you want and the lifestyle you choose, or you can spend your time managing bureaucratic systems and endless people problems. Does that second forty million spend any differently than the first forty? The idea of what it's like to be a business overlord and the reality are vastly different things. The smart choice for many might be to ditch the fast-growth and large-scale scene entirely. I constantly see wonks who understand little bits and pieces of the startup scene -- that young, fast growing startups count more than small businesses in general, for instance -- yet miss out on huge chunks of what's really happening. They offer to tweak the existing environment by adding still further complexity, thinking they are helping out. They are not. There's not a lack of people creating business opportunities that are scalable. There's a lack of people wanting to scale businesses. Totally different thing.

20 points by rpavlick 15y ago

I would say (at least from personal experience) that the funding issue is a bit of an easy culprit (especially since the article highlights three tech companies in the graphic). In my experience, the barrier to entry for a sufficiently skilled founder or founders is fairly low, as long as one has the skills, and motivation to learn. But for biotech and other industries, I can definitely see the potential for grants and other support to "jumpstart" these companies.

FD3SA 15y ago
Precisely. Markets such as social, search, and cloud were the low hanging fruits because they required relatively small seed capital. The reason why PG is complaining about a lack of truly unique startup ideas is because, frankly, many of the low hanging fruits have been picked. The next generation of fields ripe for innovation (AI, robotics, transportation, biomedicine, energy, space, etc) require orders of magnitude more seed capital. Some of these are on Manhattan project scales, requiring billions of dollars invested for a decent probably of an acceptable return on investment. Some big spenders, such as Peter Thiel, are paving the way forward with their personal initiatives; yet few organic investment communities exist to support such endeavours. I doubt that such an investment community would spring forth without government support. Unfortunately, government largesse is a critical issue in most developed nations at the moment, so I am pessimistic of government assistance in these sectors. Thus, we are constrained to our narrow fields of low capital startups for the time being.
- ewoodrich 15y ago
  I think your observation that "social, search and cloud" as you point out, are extremely over-saturated is especially relevant. One of my main draws to programming was the extremely law barrier to entry -- a weekend spent with a Python compsci text and Google was enough to get me started on Django. But even though I have interest in biology, genetics and related fields, I don't see how someone in my position with more time and motivation than money could "break" into the startup world.
  - FD3SA 15y ago
    Indeed. High capital fields such as medicine are the great entrepreneurial challenges of our time. Everyone on HN knows of the decaying behemoth that is academic research. It is an unsustainable system built upon a terrible incentive architecture. Graduate students and postdocs are used as cheap labor in a Ponzi scheme, while Principal Investigators have no incentive to engage in difficult, high risk research due to salary caps and tenure. The market failure of academic research is the primary reason for the grinding pace of progress in fields such as medicine. Again, there are individuals such as Craig Venter who are changing this paradigm, but the sheer magnitude of funding being dumped into the academic research black hole is unfathomable. Our collective tax money is in the government's hands, and as such, only they have the power to dismantle such terribly broken schemes. I'm not holding my breath.

BerislavLopac 15y ago

"It’s easier, after all, to take a risk, quit your day job, and start a new business if you don’t have to worry about getting health-care coverage." Actually, I think it's the other way around. First of all, countries with national health care have introduced it precisely because is citizens are less risk-tolerant on average. Also, with a bunch of social parachutes such as health care, solidarity pensions and the like, the willingness to risk actually decreases, as there is less incentive to "make it big".

dylangs1030 15y ago
As with most other gambles, greater risk entails greater reward. Reduced risk (read: more comfortable safety net) means more competitors, a more diluted market for startups, and a lower payoff to fewer successes. Convesely, Google rose from America in precisely the quasi-starving artist mentality that makes a startup riskier with a less comfortable safety net. I agree.
bobbles 15y ago
Sorry, but I think this is delusional. The fact that I can break my leg and pay for nothing more in the hospital than a pair of crutches to take home in no way is related to what I want to do professionally. On the other hand, the fact that it could cost some ridiculous amount in the states would definitely drive me to wanting to stay put in a reliable salary position in corporate world.
- dylangs1030 15y ago
  To play devil's advocate, there are different ways of looking at this. While in theory you're right, I'm not sure startup founders are thinking of their health insurance when they decide to quit their jobs. They are probably more concerned with immediate requirements, like raw shelter, food and utilities. But again, there's several ways to look at it.
- mixmax 15y ago
  I'm from Denmark, maybe the country with the best social safety net in the world. The state pays your medical bills, your school and education (you even get a state allowance to live on while you study), if you lose your job the state will give you money, and so on. You can actually live a whole life with nothing but statemoney. The startup culture here is terrible, exactly because of this. People become cosy and risk averse because they don't really need to fight, and because there's no need to. So i think the parent hits the nail pretty much on the head.

dylangs1030 15y ago

One of the reasons I see startups being more significant for fueling the economy is momentum. A startup with 2 or 3 well collaborating founders without internal conflict is following an exciting vision - there's a certain glorification to beginning the venture on an idea, and being a founder of something new and practical. On the other hand, more mundane small businesses, once established, aren't known for adapting and changing much, so much as fitting into an industry niche and remaining predictable (i.e. a small software brand which isn't superlative in any way, but is stable and profitable).

temphn 15y ago

The solutions proposed here are to increase the number of startups by increasing government spending/taxation and increasing extension of credit/financing. However, if the goal is to have more startups that are "the envy of the world", then increasing the number is not necessarily the way to do this. We need to stop harassing those startups that do become successful. Startups by their nature are disruptive in the common sense of the term, and will violate the cozy arrangements made between established businesses and governments. Two recent examples: http://www.betabeat.com/2011/05/31/airbnb-takes-manhattan-with-2k-bookings-a-night-but-many-listings-may-be-illegal/ http://www.betabeat.com/2011/05/31/airbnb-takes-manhattan-wi... http://venturebeat.com/2010/10/26/ubercab-ryan-graves-cease-and-desit/ http://venturebeat.com/2010/10/26/ubercab-ryan-graves-cease-... Of course, on a larger scale the government is now harassing Google with antitrust, even though Google is being nipped at the heels by Facebook. The government also denied the Blockbuster/Hollywood merger in the mid 2000s (http://www.washingtonpost.com/wp-dyn/articles/A2310-2005Mar25.html http://www.washingtonpost.com/wp-dyn/articles/A2310-2005Mar2...) on antitrust grounds. Of course, just a few years later these "trusts" were blown up by Netflix, which is itself being blown up by Amazon and iTunes. To have more successes, we need to stop the dynamic in which government goes after successes and tries to destroy them. What we don't need are government policies that encourage more marginal entrepreneurs to jump into the pool.

dylangs1030 15y ago
That is an issue of extremely successful startups making their predecessors "irrelevant." Google eradicated the market and became a de facto monopoly for searching anything on the internet. Netflix entirely dissolved physical movie stores. On the flip side, Gamefly, a similar venture, has not done this - people still buy video games from stores instead of renting them or downloading them. I agree that some of the problem is the government being a "trust buster" - however, some of it is simply the faultless way the market works. The government makes blanket anti-trust policies which are universal enough that, when one company revolutionizes an industry to the point that it's the only one of its kind, it's caught by policy without really having any bad intentions. Unfortunately this is happening to Google.
- 15y ago

Daniel_Newby 15y ago

> ... IPOs under $50 million have plummeted since the 1990s. IIRC it costs around $10M to run an IPO, thanks to a mountain of financial regulations. Regulations that have had little apparent effect on large scale fraud. Some states charge high fees to start a corporation. If you just want a place to park the IP for a bright idea, California charges an $800 per year franchise tax.

DanielBMarkham 15y ago

Gosh this column is muddled. It's no wonder there's a problem. If you can't think clearly about an issue it's highly unlikely you're going to be able to shed light on it. Startups are businesses that make something people want that are highly scalable. So no, "startups" and "small businesses" are different things. Your dentist has a small business. At the same time, it's very possible to make something that people want and simply have no desire to scale. That's what I'm seeing for a lot of American startups. Yes, there are all the wide-eyed younger folks who are out to imitate Zuck and be the next Facebook, but for every one of those there are a hundred people out in the hinterland who aren't out to conquer the world. Why? Lots of reasons. First, people who change the world get punished. They get punished by competitors, by the government, and sometimes even by the popular opinion of the people who use their startups. Why make yourself a target? Second, a disruptive startup's relationship to the government is far from clear. Is AirBnB an appointment service or a hotel service? Do the guys that offer ride shares run a taxi business? Or a bulletin board? The government, over time, has come up with thousands of little boxes that businesses are supposed to fit inside. Depending on which box you fit in, various rules apply. What this has done is create lots of stovepipe business systems. So when a business comes along that crosses many boxes, which ones apply? A lawyer can help here, but she's just going to be able to offer an legal opinion, not protect you from possible problems. Third, there's the big business overhead hit. There's a huge difference between 3 guys in a garage and 3 thousand guys in an IT center. You need all sorts of administrative resources for the IT center, and lots of training for management on how to act. That doesn't come overnight, and you don't get there without taking a productivity hit. Now, if you're Google and revenue figures give you the slack to know you're going to be around for a while, you take the dive and go through the hassle. But if you're some fly-by-night, just-getting-started business which might have a huge staff for just one year and then disband? You can't make the overhead numbers work. I can't go out and hire 3 thousand guys to build my human-powered recommender engine for next year. It'd take a year or more of scaling just to approach that level of staffing. And even then I'd probably screw it up. All those laws to make sure "big business" behaves properly have an assumption that the business is an ongoing concern -- they have lots of money and lots more on the way. That assumption is not always true. Finally, even if you had an idea to conquer the world, do you really want to be an executive? You can be a Derek Sivers and have all the money you want and the lifestyle you choose, or you can spend your time managing bureaucratic systems and endless people problems. Does that second forty million spend any differently than the first forty? The idea of what it's like to be a business overlord and the reality are vastly different things. The smart choice for many might be to ditch the fast-growth and large-scale scene entirely. I constantly see wonks who understand little bits and pieces of the startup scene -- that young, fast growing startups count more than small businesses in general, for instance -- yet miss out on huge chunks of what's really happening. They offer to tweak the existing environment by adding still further complexity, thinking they are helping out. They are not. There's not a lack of people creating business opportunities that are scalable. There's a lack of people wanting to scale businesses. Totally different thing.