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Is Startup America Bound to Fail?

Friday, April 1, 2011

The White House’s Startup America program’s diversity goals clash with its economic aim of boosting growth.

“We look forward to taking swift action to support our nation’s entrepreneurial economic engine,” blogged Aneesh Chopra, President Obama’s chief technology officer, earlier this month. Later he spoke on a panel at the South by Southwest festival about reducing barriers to entrepreneurship.

Chopra visited the festival to promote the White House’s new Startup America initiative, a series of programs and commitments “to celebrate, inspire, and accelerate high-growth entrepreneurship across all corners of the country.”

At first glance, Startup America appears designed to fuel the economy. Its first two goals are to “increase the number of new high-growth firms that are creating economic growth, innovation, and quality jobs” and to “celebrate and honor entrepreneurship as a core American value and source of competitive advantage.” The program includes a $1 billion investment fund to match private-sector investment in early-stage companies. It also proposes to simplify the regulations and administrative processes that burden small businesses, by eliminating the capital gains tax on some small business stock and allowing patent applicants to request fast-track or delayed examination. The White House will also solicit public feedback on how to remove regulatory barriers for small companies, as it did at the South by Southwest festival.

Let’s put aside the question of whether encouraging more veterans and low-income individuals to become entrepreneurs, or supporting green technology, is a worthy goal.

While heavy on the economic rhetoric, the Startup America program has features that are incompatible with its economic aims. These stem from its third core goal: “To inspire and empower an ever-greater diversity of communities and individuals to build great American companies.” The program has various initiatives that promote entrepreneurship among disadvantaged groups. For example, another $1 billion investment fund is reserved for “underserved communities,” which includes both poorer areas and “emerging sectors” like clean energy. The Treasury Department plans to simplify the rules governing tax credits for investment in low-income communities, and the Department of Veterans Affairs will create two startup accelerators to help veterans start businesses. Another $12 million of funding will be available for six local teams to provide services for green entrepreneurs, and the Small Business Administration and the Department of Energy are teaming up to offer mentorship programs to clean-technology startups.

Let’s put aside the question of whether encouraging more veterans and low-income individuals to become entrepreneurs, or supporting green technology, is a worthy goal. Simply from the standpoint of good policy, Startup America is a haphazard assortment of conflicting programs. The economic aim of boosting growth and the social aim of encouraging diversity in entrepreneurship are not compatible. (As Scott Shane explains, the federal government had similar issues trying to increase contracts with small businesses.)

For example, imagine that Startup G, which is producing electric golf carts, receives funding from the $1 billion “underserved community” investment fund. Even if Startup G has the best chance of success among the clean-energy startups that applied for funding, other startups outside the clean-energy sector likely have better economic prospects. If the administration’s ultimate goal truly was economic growth, it would choose to fund the other startup. The point is that using any metric other than profitability will—at least in some cases—work against the goal of boosting the economy.

And the Startup America program implicitly recognizes this. The first $1 billion investment fund, for early-stage funding, provides a 1:1 match of private-sector investment. But the second $1 billion fund, for “underserved communities,” matches 2:1. Why? Do the program’s designers realize that such communities have more trouble finding funding—i.e., that investors are less likely to bet on economic success from such groups?

Despite its flaws, Startup America has some positive aspects. Simplifying regulations and cutting bureaucracy for small business owners is probably good for our economy. But what is bad for the economy and misleads the public is mixing economic rhetoric with social policy. Our “entrepreneurial economic engine” cannot propel us forward when steered in opposite directions.

Kira Newman is an editorial assistant at the American Enterprise Institute.

FURTHER READING: Newman has also written “What’s the Big Idea?” and “Curiosity Thrilled the Cat.” AEI’s Kevin Hassett and Alan Viard discuss another Obama administration initiative in “The Small Business Tax Hike and the 97 Percent Fallacy,” Alex Brill pens “Book Review: Start-up Nation,” and Viard and Amy Roden explore “Big Business: The Other Engine of Economic Growth.”

Image by Rob Green/Bergman Group.

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