By Alex Schiff and Chase Lee, University of Michigan
Over the past decade, the financial barriers to starting a web-centric business have plummeted, and technical developments, fueled by open-source technology, have made once unprofitable ideas extremely lucrative. Combined with the rising information economy, this has spurred a wave of entrepreneurship across America—one that won’t be stopped, bubble or not.
Despite the promise of such innovation, many structural challenges threaten to halt its pace. The legal barriers to entrepreneurship keep it out of reach for wide segments of society, our crippling educational infrastructure is failing to turn students into leaders, and our leaders in Washington continue to favor demagoguery over pragmatic solutions.
Policymakers can and must solve these problems. The old pro-business paradigm of encouraging growth through favorable policies to large corporations will not create a sustainable recovery. We can and must turn entrepreneurship into the economic engine this country desperately needs.
Lower the legal barriers to entry.
The legal bill associated with creating a viable business is often quite steep. This is especially true for student entrepreneurs, who don’t have a few thousand dollars of disposable income in the bank. That cost scares a lot of good ideas away.
You can often avoid some fees here and there by digging for forms online, but that shouldn’t even be necessary. Even when going through a law firm, the vast majority of founding documents are simply copy-and-paste, so why do they cost so much? Standard forms and templates for documents like operating agreements, equity/option grants, etc. should be made freely available and easily accessible by the states, or even better standardized on a national level. Lawyers are specialists, and as such, they should be engaged for specializing agreements and documents tailored to the needs of the industry or business. The government could instantly turn more ideas into businesses if it made the real legal cost of starting up free or at least nominal. It need not be in the business of providing legal services or grants, but standardizing forms and leaving the customization to the lawyers would take down one major roadblock.
There is also the thorny issue of securities and tax law. This is one giant black box that turns the most universal of startup and general business issues into a massive headache, requiring precious time and money on expensive outside counsel to find a solution. Sample documents and clear, concise guidance for basic issues like granting equity to early employees or what sort of taxes you can expect in the first year of business would go a long way. It would make it far easier for people to bootstrap an idea without playing the Russian Roulette that is pursuing institutional financing. Entrepreneurs should pursue angels or VCs because they want their capital and connections to grow, not just so they can afford to pay their accountant and lawyer for basic business functions.
For too long startups and small businesses have been confused with large corporations. Small businesses are the ones creating jobs, yet they are often taxed just the same as a large business (without the ability to enlist a top-notch accountant to find loopholes). By removing tax barriers for small businesses we can help them reinvest profits in innovation and job creation. Tech startups in particular can face difficult changes rather quickly as their growth rate is not the same as a brick and mortar business, so half of their team could quickly become accountants and lawyers.
Overhaul our educational system.
Our educational system produced the leaders who went on to turn this nation into a world superpower, but today there is no escaping its failure to keep pace with our new economy and the rest of the world. This is a problem of both funding and management as well as the overall approach we take to teaching new material.
Schools have long been squeezed by budget cuts. First the line was “we need to cut the fat.” Then, it was “we all need to make sacrifices.” But at some point, we began cutting into the real meat of our educational infrastructure. If we want to encourage young entrepreneurs, we need to ensure that we are providing the funding to teach students how to be leaders, solve problems and achieve goals. This can not be done without the adequate teaching personnel and diverse extra-curricular activities that are being axed every budget season.
But it’s not all about the funding. We need to look at the way we’re teaching people and who those teachers are. Think about how backwards your educational experience has been. In elementary school, teachers emphasize all sorts of creative projects, field trips and hands-on learning to convey new concepts. No one is asserting that we should be playing with macaroni until we’re 18, but why does the educational innovation stop when you enter middle school?
The impact of the No Child Left Behind Act (NCLB) is still far from set in stone, but one thing is for certain— t placed a new and enormous emphasis on standardized testing. Since kids are all cookie-cutter humanoids, this worked out perfectly…except for the fact that kids aren’t all cookie-cutter humanoids. In reality, our culture’s emphasis on standardization and testing began to elevate fact memorization over understanding processes and concepts (in other words, actually learning and internalizing the material). We’ve begun to train our children to be excellent fact-spewing robots that can regurgitate a textbook for an exam but forget everything after it’s over. This problem exists from elementary school through PhD programs, and teachers rarely consider changing their fundamental methods of teaching.
We need “new” programs where students are allowed and encouraged to work independently at their own pace (“new” because many programs existed but were cut after schools realized NCLB merely required the bare minimum, offering no incentives or requirements for gifted and talented programs). With oversight, such programs can be very effective as slower learners are afforded the necessary time to absorb material and faster learners are given the freedom to blaze their own trail and go beyond the bounds of an average classroom education.
In this way, students begin learning for themselves, and intrinsic motivation is much more powerful than an arbitrary letter grade. We need more flexible criteria and evaluation metrics that measure what you understand, not what you can memorize. This means getting students more actively engaged in the classroom with investigative group projects that require greater creativity than a fill-in-the-blank worksheet. These projects help prepare them for the real world—where there is no standard assignment except “get the job done.” That’s how entrepreneurs operate, and we should be teaching the nation’s youth to do the same.
Government, please start acting like adults.
If we ran our business with the same sort of bickering and immaturity that is endemic to the U.S. Congress, (and that goes for both sides of the aisle), it would fail. Immediately. This month, we narrowly averted defaulting on our debt for the first time in history. Whether you lean left (like Alex) or right (like Chase), we can all agree that these sorts of manufactured crises do our country a lot more harm than good.
We find ourselves starting a company in spite of the political landscape. The fact that we as 20-year-olds can work out our differences better than seasoned negotiators is pathetic at best and dangerous at worst. Gridlock is not good for society or business. Not knowing what the rules will be in two years keeps hiring at bay and ideas on the sidelines. With smaller payrolls and more flexible business models, it is not the content of reform that halts innovation and entrepreneurial hiring—it is the protracted uncertainty surrounding politically-charged industries like health care, financial services and energy.
Lastly, take entrepreneurship seriously. All we hear is “small businesses create the most jobs” and “we need to encourage innovation.” But if small businesses have generated 64 percent of new jobs over the past 15 years, we need real entrepreneurs advising our government on how to make job creation easier, not more CEOs of gigantic corporations. Moreover, after health care reform, financial regulation reform and all sorts of other major legislative undertakings, there has yet to be a serious effort of equivalent scale to make it easier to start a business in this country. Give initiatives like the Startup America Partnership the same political weight that the Affordable Care Act had, and we’ll go a long way.
If the government ever wants to do anything more than pay lip service to entrepreneurship, it must get serious about these three issues. At every defining moment in our nation’s history, we have succeeded only by mobilizing a unified, dedicated and comprehensive effort to solve the problems that lay before us. We still think that can happen. Politicians, please don’t let us down.
Alex Schiff and Chase Lee are the co-founders of Fetchnotes. Alex is also a co-founder of The New Student Union.