2014 State of Entrepreneurship Address: Fostering a Faster-Growing Entrepreneurial Economy

State of Entrepreneurship Remarks

Tom McDonnell
President and CEO
Ewing Marion Kauffman Foundation

February 12, 2014

Good afternoon. Thank you all for being here today.

A primary goal of the Kauffman Foundation is to cultivate and strengthen the entrepreneurial spirit in America. Our founder, Ewing Marion Kauffman, was an entrepreneur, an innovator, a visionary. He understood that a novel idea could become a growing business, generating economic growth, prosperity, jobs, and better lives. Today's State of Entrepreneurship event, now in its fifth year, is one of the ways we carry out this important mission.

In my short remarks this afternoon, I will touch on the ideas set forth in our new State of Entrepreneurship report—which you all have—as well as recommendations for how policymakers, foundations, research institutions, and others can take action to boost entrepreneurial activity.

But first, a story.

Last November, during Global Entrepreneurship Week, an American startup won an international competition in the Netherlands called Get in the Ring, which recognized entrepreneurial ventures from around the world. This young firm, which happens to be based in the Kauffman Foundation's hometown of Kansas City, Missouri, had already prevailed over 282 other startup contenders from 34 states to win the American finals of Get in the Ring—an event Kauffman brought to the U.S. for the first time in 2013. The startup went on to win two awards at last month's Consumer Electronics Show.

This company is called EyeVerify. It has created a patented system that allows smartphone and tablet users to secure their devices with a simple, safe eye scan rather than using passwords. You'll appreciate that an eye scan is much more secure than a numeric or alpha-numeric password.

EyeVerify's founder, Toby Rush, is a serial entrepreneur. He commercialized a technology that was developed by Dr. Reza Derakhshani, an Iranian immigrant professor at the University of Missouri-Kansas City. Toby also participated in Pipeline, a nationally renowned mentorship program for high-potential entrepreneurs.

Toby and EyeVerify's story illustrates several points:

  • The importance of university research to entrepreneurship;
  • The role of immigrants – both as researchers and entrepreneurs; and
  • The importance of mentorship and dedicated entrepreneurship programs.

We need more EyeVerifys, and more Toby Rushs. Improvements in standards of living depend on new ideas, new ways of organizing, and new skills. Entrepreneurs are prime movers in this process, and today entrepreneurship is more prevalent than ever. Entrepreneurs are recognized as important economic contributors, and being one is also considered "cool."

This isn't hard to understand. After a financial crisis and severe recession, jobs were scarce. The American people and their elected officials cast around for solutions and discovered entrepreneurship. For good reason: over the past century and a half, the pain of economic downturns has typically been a forge of future entrepreneurs. Over half of the companies on the Fortune 500 were founded during recessions or bear markets.

This pattern has been repeated today. Many of the high-growth companies around—judging by their multi-million-dollar valuations—were started during the recession. This includes mobile payments company Square, transportation startup Uber, and Airbnb, which is disrupting the hospitality industry. And innovative startups are no longer the domain of the Silicon Valley. New hotspots have emerged in places not usually known for entrepreneurial ventures—Kansas City, Chattanooga, St. Louis, Atlanta, Des Moines, Reno, and Omaha to name a few. Entrepreneurs are everywhere.

Meanwhile, the number of entrepreneurship education and training programs ballooned during the recession and its aftermath: today, nearly every college and university in the country offers something in entrepreneurship.

Now, after four and a half years of a stop-and-start recovery, the macroeconomic picture is looking up. Economic growth in 2013 was strong; two million jobs were created; and the unemployment rate fell below seven percent.

There are, however, some persistent negative forces that we should recognize and address. The unemployment rate has fallen because thousands of people have left the labor force. Median income has been flat for over a decade. And job growth has been primarily at the low and high ends of the skills spectrum, with little growth in the middle.

With economic indicators pointing in contradictory directions, we need to recharge our economic engine of entrepreneurship. Some worrying trends are underway.

New business formation—which fell steeply during the recession—has not yet recovered, and had been flat or falling for a number of years prior to the Great Recession. Furthermore, the types of new businesses being created over the last several years have not necessarily been the kind of dynamic, high-value firms that generate large numbers of new jobs and groundbreaking innovations. We need business builders, not business flippers.

To sum it up: In the American economy today, short-term trends are moving in the right direction, but long-term trends could potentially erode the dynamism that is at the core of economic growth. As Senator Jerry Moran of Kansas, coauthor of the Startup Act, said recently, we need an "economic boost powered by entrepreneurship."

How can we do that?

I'll touch on a few of the ideas outlined in our State of Entrepreneurship report.

Let's start with the issue of immigrant entrepreneurs. The Kauffman Foundation has developed and supported extensive research that demonstrates the strong propensity of immigrants to start new companies. They have founded or co-founded a large share of high-tech, high-growth companies in the United States, creating hundreds of thousands of jobs for Americans. Despite this overwhelming evidence, the debate continues.

Thousands of people from around the world want to come here, build businesses, and create jobs. Yet we continue to erect barriers that make it difficult for them to do this. New pathways are needed for immigrant entrepreneurs.

There are sound proposals being debated on Capitol Hill to remedy this—by creating, for example, a new Startup Visa. These provisions can be improved by raising the number of visas available and reducing the asset qualifications that will keep many entrepreneurs out.

Next, the Securities and Exchange Commission is currently finalizing rules to implement that portion of the JOBS Act pertaining to equity crowdfunding. This is a potential new source of finance for new and young companies, and the SEC should prioritize capital formation. It will be unfortunate if overly restrictive rules hamper crowdfunding before it has a chance to develop.

Third, it is essential that the United States examine the human capital needs of an entrepreneurial economy. There are increasing worries today about jobs lost to innovation and never recovered. Looked at one way, this represents the continuous process of capital-labor substitution and reallocation that helps drive productivity.

But, that process puts new demands on educational institutions—new talents and skills, new forms of human capital are necessary to respond.

These are two sides of the same coin. We need more entrepreneurs and more successful entrepreneurs, and we need more people prepared to create new companies, new jobs, and otherwise successfully participate in an entrepreneurial economy.

To do all of this, we need evidence: good policy decisions can't be made in the absence of solid data, derived from credible, rigorous research. While the state of economic and education data is far better than it was even a few years ago, our data collection efforts must stay contemporary. There are so many opportunities for public and private resources to measure and analyze the entrepreneurial economy. Our State of Entrepreneurship report outlines a few ways this can be done, with government agencies and private organizations working together to modernize the structure of data collection and analysis. This should provide stronger bases for policymaking.

Many questions obviously remain regarding these challenges. This event and accompanying report are really just the launch pad for a new effort the Kauffman Foundation is kicking off today called "America's New Entrepreneurial Growth Initiative." Through research, conferences, and work with partner organizations, we are going to focus on addressing these challenges and helping devise the proper policy framework that can stimulate an era of renewed entrepreneurial growth.

And we're not wasting any time in getting started. We have two distinguished panels here with us today. In the spirit of entrepreneurship competitions, we've asked some leading thinkers to pitch their best ideas for spurring new entrepreneurial growth. These are The Washington Wonks. The other group, The Policy Pundits, will assess those ideas and tell us why they might – or might not – provide some of the answers we're looking for.

For now, please enjoy your lunch, and we'll begin our program soon. Thank you again for your time.