Some problems are so complex that you have to be highly intelligent and well informed just to be undecided about them. - Laurence J. Peter

Monday, December 22, 2008

Three narratives about entrepreneurial motivation

Narrative One: entrepreneurs are motivated by financial incentives. Reduced regulation and reduced taxes can increase entrepreneurship.

Have you seen this editorial in the Wall Street Journal about the decline of entrepreneurship in Silicon Valley?
According to the National Venture Capital Association, in all of 2008 there have been just six companies that have gone public. Compare that with 269 IPOs in 1999, 272 in 1996, and 365 in 1986.

Michael S. Malone says that Washington is killing entrepreneurship with capital gains taxes and regulation such as Sarbanes-Oxley. The mechanism is that Sarbanes-Oxley makes the overhead of IPOs much more expensive, which reduces the incentive for entrepreneurs to start companies because the likely gains are lower, and reduces available VC capital for the same reason.

There were some supporting anecdotes from the discussion on Hacker News. From ohhmaagawd:
I know a CEO of an Internet company that planned on doing an IPO in 2008. Of course the economy tanked so it's not happening.

He told me that SOX required the company to have auditing/traceability and controls for everything. This meant they quit using any software as a service applications, they shut down IM, they have to keep track of everything on every machine, banned a whole list of applications that would interfere with SOX (iTunes, file sharing, and music app), etc.

They had to hire lawyers, more accountants, consulting firms. He told me they were looking at > 10m to comply. And that doesn't count lost productivity of having to act like a draconian big ass company where they had to have design docs for everything they do, detailed project plans, get rid of the tools they use (as listed above), etc.

In other words to go IPO now you give up agility, spend more money, and become less productive.

From russell:
I worked for a company a couple of years ago that was planning to public in a year or two. The CEO told us that complying with SOX would cost $3 million for the IPO and over $1 million per year after that. That's a huge burden for a company with revenues of $35 million at the time. I have read that it is now $5 million for an IPO and that no company with revenues under $100 million can afford to be public.

Narrative Two: entrepreneurs are not primarily motivated by financial incentives; they are driven by the joy of making a difference and creating value. Encouragement from national leaders can increase entrepreneurship.

In The Cure To Our Economic Problems, Mark Cuban (billionaire entrepreneur) says that financial incentives aren't as important as some people think:
Entrepreneurs who create something out of nothing don’t care what tax rates are. Bill Gates didn’t monitor the marginal tax rate when he dropped out of Harvard and started MicroSoft (btw, it was a ton higher than it is today). Michael Dell didn’t wonder what the capital gains tax was when he started PC’s Limited, and then grew it into Dell Computer. I doubt that any great business or invention started with a discussion or even a consideration of what the current or projected income or capital gains tax was or would be.

The impact of tax rates on productivity and development is something economists masterbate about, enterpreneurs don’t waste their time thinking about it. We have business to do.
Entrepreneurs live for the juice of making their dreams come true. Of having a vision and fighting to see it come true. The joy of mission accomplished and the scoreboard of the financial rewards.

The solution?
The cure to our economic problems is the Entrepreneurial Spirit of All Americans. Instead of bitching at each other, could one Presidential candidate please show even the least bit of leadership and character and stand up for and encourage the entrepreneurs in this country ?
What we need is our candidates to stop yelling at each other and starting looking at the American people and encouraging the best of who we are. That is who I want to get behind. That is what I would like to see for our country. That is what will energize and motivate people to create companies and invent products that will turn the economy.

That's a bit vague, but he's a billionaire and I'm not, so who are you going to listen to?

Narrative Three: Entrepreneurs are held back by concerns about health care. Universal health care can increase entrepreneurship.

Universal health care, it is argued, would encourage entrepreneurs in America, because:
-People who get health insurance through employment (which is nearly everyone) are reluctant to leave their job to start a business because they'd lose their health insurance and would pay a much higher rate for private insurance.
-People fear the cost of having to organize health care for their employees.

Morgan Wilkins argues:
Universal access to health care would not only increase individual liberty and alleviate wasteful spending, but would also increase entrepreneurial activity – another value central to conservative thinking. Many entrepreneurs are discouraged from embarking on their new business venture by fears about the high cost of providing employers with health insurance. Small business employers are then forced to make tough decisions about whether to absorb the high costs, pass them on to employees, or not offer benefits at all. A universal health care system would eliminate these concerns and encourage hesitant entrepreneurs to test their innovations and ideas.

Or Daniel Brook:
America acts as if all is well when in fact we’re one of the only developed countries with a rate of self-employment even lower than France’s. While surveys show that Americans are nearly twice as entrepreneurial as Europeans, we’re only half as likely to actually become self-employed.

What is holding Americans back? In two words: health care.
In other developed countries, where self-employment rates tend to be higher, taking the leap to working for yourself doesn’t affect your health care coverage or your family’s. In publicly funded health care systems, entrepreneurs pay less into the system during the few lean years that often accompany starting a business. Once you get off the ground, you pay more. That benefits the country’s health and its economy.

I did see a study about this though.
Some commentators have suggested that the absence of portable health insurance impedes people from leaving their jobs to start new firms. We investigate this belief by comparing wage-earners who become self-employed during a given period of time with their counterparts who do not. By examining the impact of variables relating to the health insurance and health status of these workers and their families, we can infer whether the lack of health insurance portability affects the probability that they become self-employed. The evidence does not support the conjecture that the current health insurance system affects the propensity to become self-employed. Hence, whatever its other merits, there is no reason to believe that the introduction of universal health insurance would significantly enhance entrepreneurial activity.

But it's just one study. You could apply motivated stopping or motivated skepticism at this point, if you want to.


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