No funding, no startups

No funding, no startups

20:55 05 March in Blog

Screen Shot 2014-03-05 at 3.54.07 PMThe primary source of funding for all start-ups in 2008 was from what we often call the three F’s – family, friends and fools. These were the connections entrepreneurs knew and could solicit for funding. However, the savings and funds that were available for American’s who wanted to engage in a form of direct capitalism has been shrinking rapidly as an unhealthy alliance of government regulators, politicians and massive (too-big-to-fail, too-big-to-jail) have consolidated control over these savings. Twenty-five years ago, local or regional banks redeployed a far greater share of American’s savings. Indeed, the largest building in most communities was the dominant local bank.

Identifying the 1% that brings us the 40% of net new jobs remains a challenge but there are active agents in this market. Reaching nearly $23 billion, US organized angel investors are not only responsible for funding over 67,000 startup ventures annually, but their capital also contributed to helping to finance 274,800 new jobs in 2012 according to the Angel Market Analysis by the Center for Venture Research at the University of New Hampshire. While Angels are seeking wealth creation, this correlates with job creation. That is, the 1% high growth firms are what both investors and economic policy makers seek to find and fund.

Over the past century America became known as the caldron of technical innovation. In the words of Joseph Schumpeter, we were driven by the creative destruction of the free markets. The world has become envious of this ability and has captured our best practices and emulated our behavior. At the same time, America may have retained the destruction of the market but has damaged the creative side. Our largest firms lower the costs of goods by reducing the labor required. Indeed, that is the definition of labor efficiency – more output with less labor. The freed up labor historically was redeployed in the new high growth companies. However, this is no longer the case.

There is a single factor that stands out clearly that correlates with the long slow decline in start-ups the subsequent drop in 2008 – the availability of seed capital.

Ken Kousky
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