Buld a Stronger America State of the Entrepreneurship 2010

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AddressEntrEprEnEurship

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2010 by the Ewing Marion Kauman Foundation. All rights reserved.


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STATE OF ENTREPRENEURSHIP ADDRESS | JANUARY 19, 2010

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Now, in the time it took or me to say those ew

sentences, one new company was ounded in the United

States, creating our new jobs. By the time I nish this speech,

20 new rms will have been started, creating roughly 80 new

jobs. This is the hope and power o entrepreneurshipandwhile entrepreneurs are not the sought-ater silver bullet,

economic recovery will not happen without them.

I approach this as an economist, a class o thinkers

now notorious or their ailure to oresee the nancial crisis

and recession, yet insistent on their ability to bring us out

o it. But I also stand here as the president o a oundation,

whose donor, Ewing Kauman, appreciated the contributions

entrepreneurs make to our economy and society.

And yet, entrepreneurs are too oten lost in glib

economic policy discussions that center exclusively on interest

rates, large-scale banks and ederal programs. These are

indisputably important issues. But these policy instruments or

institutions are not the primary engines o economic growth

and advances in human welare. Only new companies bring

orth new innovations and new jobs.

Increasingly, I am pleased to report, economists and

policymakers are beginning to recognize the vital role o

entrepreneurs. Happily, their heightened interest is due, in

part, to the Kauman Foundations signicant unding o

economic research. But even when policymakers do speako entrepreneurship, it is most oten in abstract termshow

much entrepreneurs contribute to this or that indicator, as i

they were more a statistic than a l iving, human phenomenon.

And even that perspective cant be taken or granted.

The dominant schools o economic thought in the 20th

century downplayed or ignored the role o entrepreneurs,

preerring instead to see all economic activity as the creature

o three undamental orces: big business, big labor, and big

government. Forgotten in this equation was the undamental

act that every big company had to start small. There are no

Athenas in business, no companies that spring ully ormedrom the mind o their ounder. They all begin with one person

and an idea.

That person is an entrepreneur and the idea is what

sets him or her apart rom the crowd, what compels him to

We are meeting here today at a grave moment in our national economic lie.

The recession that began just over two years ago has taken a horrifc toll on

this country. Despite so-called green shoots that economists claim to see

sprouting up around every corner, the recession continues to be all too real or fteen

million unemployed Americans, a number that worsened last month despite this incipientrecovery. While there is no magic solution to this, I want to talk today about a possible

answer.

State O Entrepreneurship AddressNational Press Club, Washington, DC

January 19, 2010

By Carl J. Schramm,President and CEO, Ewing Marion Kauman Foundation


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STATE OF ENTREPRENEURSHIP | JANUARY 19, 2010

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leave a job, strike out on her own, and take a big risk. When

that risk pans out, the result is a ast growing company,

hundreds and possibly thousands o new jobs, new wealth

invested in every sector o the economy and spent in every

corner o society, andmost undamentallya new product,

service, or business model. Nearly everything we take or

granted in our daily lives today began its own lie in this

way, as the creation o an entrepreneur. Think about

automobiles, air conditioning and, more recently, sotware

and search engines.

Given that entrepreneurs are vital to our nations

economic success and social health, how are they doing?

What is the state o entrepreneurship today?

I hav both th povbial goo nw an ba nw

to pot.

First, we know that in spite o everything, entrepreneurs

are still active. Entrepreneurs are still the primary engine o job

creation in the United States (Figure 1). In the last thirty years,

literally all net job creation in this country has taken place in

rms less than ve years old.

To illustrate this point better, consider that eBay, in itsrst ve years o existence, hired 640 peoplean average o

128 new people per year. The eBays o the uture are out there

doing the same thing right now. A more recent example is

Mary Naylor, ounder and CEO o VIPdesk (based in Northern

Virginia), who is here today and who will be joining our panel

discussion later. Mary started her company with only $2,000

and now runs the nations largest corporate Concierge service.

Thi, lai an gntlmn, i how covi

a ma.

New and young companies and the entrepreneurs thatcreate them are the engines o job creation and eventual

economic recovery.

Figure 1. Source: U.S. Census Bureau, Business Dynamics Statistics, at http://www.ces.census.gov/index.php/bds.

Figure 1. The First Source of Job Creation: Startups

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Kauffman Foundation


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Mary Naylor, Founder and CEO o VIPdesk

The past eighteen months have been difcult or Mary Naylor, ounder and CEO o VIPdesk, a business-to-businessfrm that provides customer service and concierge support. While the recession temporarily drained her pipeline o newclients, she was re-organizing her business structure to make sure that her employees could keep their jobsall 400 othem.

We made every cut imaginabletrade shows, sodasbut we didnt cut a single person, Naylor said. In act,

VIPdesk managed to increase its workorce, hiring almost 400 temporary employees rom October through February toaccommodate the companys busy season.

A career entrepreneur, Naylor has been running a company and creating jobs since she was twenty-our years old.Her frst venture was a Washington, DC-based concierge service, unded with $2,000 she borrowed rom her mother.In the frst ew years, the company grew so quickly that Naylor decided to spin o VIPdesk as a virtual version o herservice.

Naylor had potential clients and was able to raise startup capital rom the beginning. Her challenge was to build asta quickly enough to keep up with the growth. In the frst three years, we went rom zero to 100 employees. By yearfve, we had 300, she said.

Her solution was to set up a system o home-based agents who would work remotely. We were among the frst todo this and everything had to be created: how do you connect with employees, how do you train them, Naylor said. Itallowed us to tap into a whole new workorce and create proessional positions.

During those early days o growth, VIPdesk invested so much in training its employees that every penny saved intaxes mattered, and she sought out incentives or developing skilled workers. Businesses are what create the tax basesor everything else, she said. Additional dollars that have to go out the door are crucial or a small business.

Second, entrepreneurs are not easily

discouraged. We know rom our own research at

Kauman that past recessions have not prevented

the ormation and growth o great companies: hal

o todays Fortune500 companies were ounded in

a recession or bear market. In boom times and in

tough times, roughly 600,000 new rms are ormed

every year in America: about one per minute (Figure

2). That number is surprisingly constant. One might

expect to see it all in recessions, but it doesnt

in part because laid-o and underemployed workers

oten take the entrepreneurial leap, a step they

perhaps avoid in more stable times.

Roughly 600,000 new frms are ormed every year in America:about one per minute.

Figure 2: Annual Number o Startups

Figure 2. Startups, 19772005. Source: Business Dynamics Statistics,at http://www.ces.census.gov/index.php/bds/bds_overview.


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Third, as America ages, the pool o potential

entrepreneurs only increases. Contrary to popular belie,

entrepreneurs by and large arent kids working in their

parents garages. The average age o company ounders in this

country is orty! Moreover, there are more people aged

ty-ve to sixty-our starting businesses than there are people

aged twenty to twenty-our (Figure 3). These are seasonedproessionals, bringing the benets o their expertise and

activity to the communities and institutions that nurtured their

talents and careers.

so, what th ba nw?

In a new poll we just completed, entrepreneurs paint

a pretty grim picture. One-third o entrepreneurs tell us they

have had to reduce their head counts in the past year, and

close to two-thirds have seen their sales volume decrease.

Two-thirds have seen their protability decline as well.

Additionally, and this is very worrisome, over 70 percent oentrepreneurs say that they dont expect to add additional

employees this year.

Worse, with this continuing unemployment, consumers

are understandably nervous about spending. In such an

environment, it wont just be more government spending

that will get consumers to open their walletsresponsibly,

I might add, we dont want consumers overdoing it, as too

many were pre-crisis by using their houses as ATMs. But this

responsible spending, both here and abroad, wont happen

until consumers are once again excited to spendnot on the

things that were around beore the housing bubble popped,but on novel products and services. Once these are developed

and widely commercialized, a virtuous cycle can begin. As

consumers spend more, businesses have reason to invest and

hire. And the more hiring that occurs, the higher incomes and

spending will be. And then we will have the recovery we all

want and are waiting or.

But to get this virtuous ball rolling we need

guess whoentrepreneurs, who are responsible or

most o the breakthrough products that have changed

our lives or the better. We need entrepreneurs or todays

breakthroughs in energy generationonly they willdevelop and commercialize the successor to petroleum.

We need breakthroughs in health and medicineand only

entrepreneurs will bend the cost curve and continue to extend

lie expectancy. Entrepreneurs also will continue to provide

services we need and want, such as Rosetta Stone, Zappos,

and Mint.com.

We could wait or history to repeat itsel, to generate the

uture Fortune500, as entrepreneurs have done in previous

downturns. But with another 85,000 jobs lost last month, I,

or one, would be much more comortable i we had some

policies to help history along. Here, then, are some big ideas in

that spirit.

First, lets rationalize our immigration system. Over the

last decade and a hal, ully one-quarter o all technology rms

ounded in the United States were started by immigrants.

Factor in rst-generation Americansthe children o

immigrantsand the percentage rises. Reggie Aggarwal,

ounder and CEO o Cvent, has created some 500 jobs in

the Washington area. Reggie is here today and will share his

perspective during our panel discussion.

Our immigration policy needs to be riendlier to people

like Reggie and his parents. We could start by oering instantcitizenship to any o the thousands o bright young people

rom oreign countries who graduate rom our universities. We

also should change the provisions o the EB-5 visa, the so-

called entrepreneurs visa. Rather than requiring prospective

immigrants to bring cash into the countrythe current rule

requires $1,000,000 (or $500,000 i the company is in a

In every single year rom 1996 to

2008, Americans between the ageso fty-fve and sixty-our had

a higher rate o entrepreneurialactivity than those aged twenty

to thirty-our.

Figure 3. Kauffman Index of Entrepreneurial Activityby Age (19962008)


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Reggie Aggarwal, Founder and CEO o Cvent

As the son o Indian immigrants, Reggie Aggarwal grew up hearing stories about his Indian ather putting himselthrough engineering school by working at a restaurant. Just thirty years later, Aggarwal is now ounder and CEO o acompany with 500 employees.

Aggarwal had just fnished law school in 1996 when he started the Indian CEO Tech Council, an organization thatgrew to hundreds o CEO members, most o them frst-generation immigrants. Talking with these CEOs, he realized that

immigrants to the United States might actually have a leg-up when starting a business. These CEOs were oreign andmany o them werent articulate enough to compete in the corporate world. But they thrived in their own companies.

Aggarwal was inspired to try entrepreneurship. In 1999, he opened nine credit cards in one hour and used the cashto start Cvent, an event management sotware company. Cvent raised $18 million in venture capital and grew to 125employees in less than a year. But as the dot-com bubble burst, Cvent struggled with the same issues many entrepreneursdo: how to make payroll, trim costs, and avoid layos as much as possible. The company laid o people to survive, butwith a committed executive team, they survived the recession and began to grow.

In the startup phase, a ew thousand dollars each month meant the dierence between continued growth andlayos. Revenue that came in went straight to pay employees, but Aggarwal and his executive team remained committed,outperormed competitors, and expanded Cvents product lines. The company now boasts eighty-six consecutivemonths o proft, has 24,000 users in twenty countries, and has plans to hire an additional 120 employees in 2010 inaddition to the 100 new staers it employed in 2009.

Aggarwal believes that an open immigration policy will lead to more stories like his. You are taking the cream o

the crop o a country when you take immigrants, he said. They must be pretty driven people to leave their homelandlooking or more opportunity. They have chutzpa. They take risks and are by nature very entrepreneurial.

distressed area)we should avor those who plan to come

and start companies, and extend their visas once they begin

hiring American residents. Countries such as Singapore already

allow in new immigrant entrepreneurs who bring in ar less,

$50,000, than we require. The United States simply cannot

aord to lose the emerging global race or entrepreneurial

talent.

Another high-impact, low-cost reorm would be to make

some o the more onerous Sarbanes-Oxley requirements

optional. SOX was enacted, ater all, to protect shareholders.

So why not allow shareholders to vote on whether their

companies will ulll certain SOX requirements? This would

permit companies whose shareholders dont eel the benets

o SOX outweigh the costs to access public capital more

quickly and less expensively than is the case now.

Our third idea wont be cheap, but it would be eective.

Lets exempt rms less than ve years old, the ones that

historically are responsible or virtually all net new jobs, rom

payroll taxes. Doing this on a temporary basissay, two

yearswould strengthen the incentive to hire while limiting

the impact on the decit. In this spirit we might also consider

measures that encourage local banks to steer money into

new companies.

The nal three ideas all concern education. Lets start

rom the topthe aculty. Its time to implement a model

o choice or academic entrepreneurs. Currently, proessorscan choose where to publish the results o ederally unded

research but cant choose what might even be more important

to our economythe appropriate expert to commercialize

and license their technology. Proessors are required to ollow

one path, the one dened by their university. Lets instead

nd multiple avenues to commercialize our ederally unded

research and use the right people to ocus on economic

outcomes. We are not talking about changing the Bayh-Dole

legislationit was the correct decision to have the university

own ederally unded inventions, but that does not mean

universities have to control the licensing o these innovations.

Rather, lets allow a ree market in the licensing o technology

developed by university aculty to fourish, which would bring

consumers the benets o new technologies much more

quickly. Frank Douglas, another o our panelists, a ormer

pharmaceutical industry leader, and now the president and

CEO o the Austen BioInnovation Institute in Akron, Ohio,


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has dealt with many university scientists attempting to

commercialize their technologies. Hell have more to say about

all this shortly.

Our universities also are teeming with very smart

graduate and post-doctoral students in the hard sciences,

engineering, and other elds. A great many o them alsohave ideas that can be commercialized, but no idea how to

go about the process. The post-doctoral ellowship, to enable

students to continue their research, perhaps as a route to

an academic career, has become a part o the academic

landscape. We have 47,000 postdocs in the U.S.highly

educated and potentially underutilized talent. Its time or the

ederal government to pay or commercialization ellowships,

along with special training and mentoring to allow the

right ones to become scientic ounders. Our new initiative,

Kauman Labs or Enterprise Creation, is doing pioneering

work in this area.

Finally, we have to make much better eorts to capture

the imagination o the young. The earlier we can interest

students in entrepreneurship the better. Programs that

introduce undergraduates to the possibilities o business

creation can open up new horizons or talented kids and

unleash an entrepreneurial drive that hitherto had lain

dormant. The Network or Teaching Entrepreneurship, or

NFTE, does great work in this area with high school students,

primarily in the urban core. At the collegiate level, theres

a promising new model at the University o Miami called

LaunchPad that is housed in the schools career counseling

center. In just a year o putting a sign on the door, nearly

1,000 students rom all elds o study got involvedproo

that the entrepreneurial spirit is al ive everywhere and oten

just needs a bit o nurturing.

This list o suggested policy steps is hardly complete.

I oer these ideas merely to jump-start a much-needed

conversationat a time when our nation is bleeding

jobs and needs some resh solutions. Happily, 85 percent

o the entrepreneurs in our new poll still believe this is a

great country in which to start a business. And close to

three-quarters o Americans want policies that will supportentrepreneurship.

Unleashing these innovatorsthese risk-takersthese

job-creatorsis the best way to assure a sustained recovery,

and to assure that the state o our union is strong.

Frank L. DouglasPresident and CEO o Austen BioInnovation Institute in Akron

An award-winning industry veteran with more than twenty-our years o experience in health care, pharmaceuticalresearch, and entrepreneurship, Frank Douglas serves as day-to-day chie strategist or the Austen BioInnovation Institutein Akron, Ohio, a new biomaterials institute built on a unique collaboration o fve leading medical and educationalinstitutions.

A proven biomedical thought leader, Douglas ounded Massachusetts Institute o Technologys Center orBiomedical Innovation, a program designed to bring industry heavyweightsmedical researchers, ederal regulators,and philanthropiststogether to solve critical real-world problems related to health care innovation and delivery.

According to Douglas, the problem with much o todays academic research is that it is oten unocused anddisconnected rom the real-lie needs o the patient. Scientists and engineers at universities and hospitals need to beprovided with the knowledge and skills necessary to advance their discoveries beyond the laboratory.

There are countless academics who are interested in application, but many dont have the time or the inclination tobe entrepreneurs, noted Douglas. Whether the topic is neuropathic pain or obesity, taking science to market requirescommercialization skills and a knowledge base not typically taught in our universities. Ultimately, it requires partnershipswith entrepreneurs and/or industry veterans with both skills and resources. We must break down university and industrybarriers and build new models o collaboration i we are going to oster the economic outcomes o university-undedinnovation.

Douglas has served as senior ellow o the Ewing Marion Kauman Foundation, senior partner o Boston-basedPuretech Ventures and chie scientifc advisor or Bayer Healthcare, AG.


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These people are pessimistic in the short-term about the

economy, but optimistic about the prospects or their business.

Prospective entrepreneurs are more optimistic about their

personal economic situation and about our countrys economic

uture, as they hope to start a business, than are actualentrepreneurs, who are on the ront lines and struggling in

this current economy. But there is a clear consensus in both

groups about what needs to be done to create jobs: tax

credits or investing in research and development, payroll tax

cuts, expanding lending and access to credit, and removing

red tape.

Many entrepreneurs are sitting on the sidelines. They

are worried about economic prospects, reluctant to hire and

spend, watching their own businesses shrink, and believe

that many policies either currently enacted or expected to be

enacted will make conditions worse.

Potential entrepreneurspeople who would like to start

a businessare not prepared to take that risk at this time,

or most o the same reasons. Both groups reported that their

own personal economic situation was one key cause o their

reluctance to hire and invest, but potential entrepreneurs

were more condent in their own nances than active

entrepreneurs.

More specically, 61 percent o entrepreneurs say that

the economy is on the wrong track. A solid majority say that

the recession is not over, and will not end or at least anotheryear. Two-thirds or more report that their own businesses have

shrunk, that protability is down, and that they dont expect

to hire in the coming year. More than one-third say that they

have had to lay o employees in the past twelve months.

Current entrepreneurs assessment o the economic

problem acing the country that worries them most varies.

They site adverse policies, rom bailouts to decits, but also

broad external events such as the nancial crisis. None is

cited with anything close to a clear majority, with the scalcrisisin the number one positionbeing mentioned by just

17 percent o this group. However, 42 percent o potential

entrepreneursthe highest response or any category by

either groupsay that the ability to generate jobs is the

countrys most worrisome economic problem.

Entrepreneurs are clearer about what they believe needs

to be done. Above all, they believe that real tax relie would

help jumpstart the ailing economy. Three-quarters want to

see more tax credits or research and development and an

elimination o the payroll tax, a move that would greatly

spur hiring. Additionally, two-thirds said they would like tosee more lending rom the Small Business Administration,

and state aid to help prevent layos. Potential entrepreneurs

responded even more avorably to these ideas, supporting

them in some cases by more than 80 percent.

Both active and potential entrepreneurs remain optimistic

about the near-term prospects or the American economy, but

are more troubled about the long term. Eighty-ve percent

say that now is a great time to start a business, but only

two-thirds believe that will still be true in ten years, a gure

that shrinks to 62 percent when asked about the prospects or

business two decades rom now.

The poll was conducted between January 4 and January

8, 2010. A representative sample o 1,200 Americans was

interviewed, among which about 350 entrepreneurs and

215 potential entrepreneurs were identied.

Anew poll, commissioned by the Ewing Marion Kauman Foundation and

conducted by Douglas E. Schoen, LLC, fnds that entrepreneurs and prospectiveentrepreneursthe primary job creators in our economyare by and large not

playing the role we need them to play to get our economy moving again.

Poll on Entrepreneurship


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4801 ROCKHILL ROADKANSAS CITY, MISSOURI 64110

816-932-1000

www.kauman.org

To join the Entrepreneurs Movement, and to view a video o the

ull State O Entrepreneurship Address, including the panel discussion,go to www.BuildAStrongerAmerica.com.

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