Director's Note: Straight from the Hearth Vol. 2

May 28, 2020

Safety Nets: Why Local Focus and Long-Term Thinking are Vital for Startup Success and Economic Recovery

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This week, for Volume 2 of our Straight from the Hearth series, FORGE Director, Brian Ellerman takes aim at federal pandemic relief (or lack thereof) and the missing social safety net for entrepreneurs.


In a letter this month to US congressional leaders urging passage of the New Business Preservation Act, a consortium including the Center for American Entrepreneurship and Small Business and Entrepreneurship Council stated:

“Repeated research has demonstrated that startups are disproportionately responsible for the innovations that drive economic growth[1] and job creation.[2] Startups, therefore, are crucial to the U.S. economy’s capacity to sustain and recover from the coronavirus emergency and the damage it has inflicted on economic growth and the labor market. […] Meanwhile, thousands of fragile startups have been shut out of the Paycheck Protection Program[3] and the Federal Reserve’s Main Street Lending Program,[4] with many forced to lay-off employees[5] or close their doors permanently.”[6]

While the Small Business Administration does deserve some criticism for not being better prepared and connected to its constituency, it has been underfunded and understaffed for years. If it is well understood that startups are responsible for driving economic and job growth, why didn’t the $2T CARES Act, whose name includes Economic Security, make the SBA (and startups) a focus? After all, there isn’t a Startup Administration.

One reason is the federal government is a blunt instrument, doling out amounts founders and VCs only dream of.

State-level organizations such as the Arizona Commerce Authority do an admirable job of bridging the gap, but entrepreneurs and startups – especially those just beginning – operate hyperlocally. [This was a concept behind FORGE’s founding.]

Another reason is that helping startups is a long-term solution, and CARES was aiming for immediate relief. In fact, the Congressional Budget Office predicts that, without further stimulus, unemployment will be 9.3% at the end of 2021.

But this is a long-term problem that’s been coming for a long time.

Recall that at a recent Arizona FORGE entrepreneur roundtable, founders and small business owners talked about the challenge of growing profitable businesses while paying for healthcare and childcare, among other things. This draws a curious parallel to the state of employment benefits:
 

“'In the U.S. you need to keep pumping money into the economy so that people continue to be employed, because it is through being employed that they are protected,' says Economist Andre Sapir, a senior fellow at the Bruegel research institute in Brussels. Nearly half of Americans receive health insurance through their employers. The United States is the only country in the OECD to not offer paid leave to new mothers. The U.S. ranks 30th among 36 OECD countries in spending on all forms of disability related to work or illness.”[7]
 

Millions will be without work for the next few years. Babies will still be born. People will still get sick.

Entrepreneurship might well be the answer, but not if starting a company is the same as being unemployed.

If startups are indeed the engine of the economy, and entrepreneurs the fuel, we need to adopt regional, long-term thinking that supports entrepreneurial sustainability. Next month, I will look at examples that draw upon this concept of creating strong sustainable entrepreneurial ecosystems.


[1] “Innovative Growth Accounting,” Peter J. Klenow and Huiyu Li, NBER Working Paper No. 27015, April 2020

[2] “The Role of Entrepreneurship in U.S. Job Creation and Economic Dynamism,” Ryan Decker, John Haltiwanger, Ron Jarmin, and Javier Miranda, Journal of Economic Perspectives, Volume 28, Number 3, Summer 2014, pp. 3–24

[3] “U.S. Seeks to Ease Small Business Loan Process, but Startups Fear Being Shut Out,” Kate Davidson, Rolfe Winkler, and Dave Michaels, The Wall Street Journal, April 4, 2020.

[4] “Startups Are Struggling to Get PPP Money – Now a Fed Rule May Freeze Them Out of Loans, Too,” Emily Birnbaum and Biz Carlson, Protocol, April 23, 2020.

[5] “Startups Are Pummeled in the ‘Great Unwinding’,” Erin Griffith, The New York Times, April 1, 2020.

[6] “The ‘Undertaker of Silicon Valley’ Stays Busy as Startups Lay Off Thousands,” Bobby Allyn, National Public Radio, April 20, 2020.

[7] “Pandemic shows contrasts between US, European safety nets,” David McHugh, AP News, May 10, 2020