Is the U.S. in Danger of Becoming Second-Rate in High Tech?
Updated Aug. 16, 2010 – 1: 18 p.m.
An entrepreneurial scholar, Dr. Scott Shane, ostensibly believes the United States has surrendered its global lead in technology. Dr. Shane is a professor of Entrepreneurial Studies at Case Western Reserve University in Cleveland.
He was prompted to publish his analysis in Small Business Trends, following a speech by Secretary of Commerce Gary Locke, the former governor of Washington state.
“America’s innovation engine is not as efficient or as effective as it needs to be, and we are not creating as many jobs as we should,” he quoted Mr. Locke, who spoke in introducing the President’s new National Advisory Council on Innovation and Entrepreneurship.
“A study by the Information Technology and Innovation Foundation looked at the progress at innovation that 40 countries made over the past decade,” wrote Dr. Shane in the publication. “The U.S. came in dead last. That is, whether they were ahead or behind us at innovation in 1999, the 39 other countries examined gained ground on us over the past ten years.”
He added U.S. entrepreneurs were at the top of their game in 1999.
“Other studies also show our less-than-stellar innovation performance,” he asserted. “A recent report by the Organization for Economic Development and Cooperation (OECD) looked at the per capita rate at which inventors in 38 nations filed for triadic patents – patents for the same invention filed in the United States, Japan, and Europe. The data shows that, in this event, we’re out of medal contention in eighth place, well behind countries like Switzerland, Japan, and Sweden.”
He cited more OECD data.
“Looking at two measures – the share of companies less than five years old that file patents and the share of patents that went to companies under the age of five – across 13 industrialized countries, the United States came in third, after Norway and Denmark,” wrote Dr. Shane. “While a respectable showing, it’s not where we need or want to be.”
He indicates the number of U.S. patents continue to drop. In 2001, he states 25.9 percent of patents were held by small tech firms. But the share of patents decreased to 19.9 percent by 2009.
“The number of deals made, capital invested, and exits are all down from their levels back in the mid 1990s, before the Internet bubble hit,” he pointed out.
“Venture capital accounts for less of U.S. economic activity than that of many other countries,” he worries. “…in 2008, the U.S. invested a smaller share of its gross domestic product in venture capital than ten OECD countries, and a larger share than only twelve of them.”
A widely acclaimed Los Angeles consultant sheds more light on the decrease in the U.S. VC activity: “Venture capital in the U.S. is more conservative and more limited now than it has been, even before the dot com bubble,” explains Joey Tamer, a strategic consultant to entrepreneurs in software, Internet, technology and digital media.
“And the U.S. Patent office has advised at least one of my technology clients to expect a response sometime in the next six years,” adds Ms. Tamer. “So, if venture capital and patent awards are the measures used, these reports may generate some concern.”
Seattle attorney Joe Wallin, a partner at Davis Wright Tremaine, says “Congress appears hostile to entrepreneurialism and entrepreneurship,” which naturally means public policy is part of the problem.
“Our Congress has demonstrated an hostility to startups and venture capital, and has tried to pass laws which would have effectively destroyed the startup industry in America,” adds Mr. Wallin.
Indeed, as a strong advocate, he was one the players who was instrumental in helping to get a change in the 2010 financial regulatory law. One component of the original bill would have been hostile to the angel investment community. (For an explanation, see this Biz Coach column: Why Startups Get a Reprieve from Financial ‘Reform’.)
In addition, the most-read topics on this Web site have been the 50+ public-policy columns. Most entrepreneurs are tired of being hamstrung. (As a business-performance consultant, no entrepreneur has ever contacted me to praise public policy. But I’ve had countless businesspeople complain about government or ask me to help them in public affairs and policy).
Math and science education needs a boost. High school drop-out rates of 50 percent aren’t acceptable, but this is not necessarily a criticism of education although there are many underperforming teachers and schools. More importantly, a child’s attitudes are generally formed by the age of six.
This means parents need to encourage their kids to learn at the earliest possible age, to get more involved with their kids’ education at school, and to encourage math and science studies when feasible.
To promote personable responsibility in education, parents and kids apparently need a positive role model, such as a political leader with vision and the inspirational capabilities of President John F. Kennedy. It was JFK, who inspired the best in America’s youth in his brief presidency – everything from 50-mile hikes for physical fitness to the Peace Corps for volunteerism.
But for now, Ms. Tamer sounds a valid note of optimism over America’s high-tech regression.
“On the other hand, entrepreneuring is deeply embedded in the American culture as a positive, even heroic, endeavor,” adds Ms. Tamer. “And many of our most successful entrepreneurs are starting their fifth and sixth companies, and are now only entering their 40s, and so have a long productive and inventive life ahead of them.”
Therefore, Mr. Locke, who indirectly started this discussion, is correct in his assessment, and I extend my congratulations to Dr. Shane for an astute commentary. His message needs to be repeated over and over and over. Mr. Wallin raises a good point about public policy. Public policy should be encouraging economic development, not looking for ways to inhibit it. Parents need to get involved with the education of their children. And to Ms. Tamer’s point about the big delays in the U.S. Patent office, six years is unconscionable.
In other words, leadership is badly needed to facilitate entrepreneurial growth – along with Ms. Tamer’s continued optimism about our entrepreneurial capabilities. Let’s get it done.
From the Coach’s Corner, here are four resource links:
Joey Tamer’s Web site – www.joeytamer.com
Joe Wallin’s Web address – www.dwt.com/People/JosephMWallin
Dr. Scott Shane’s bio – Case Western Reserve University
Small Business Trends article – America Is Losing Its High Tech Entrepreneurial Edge
Why Startups Get a Reprieve from Financial ‘Reform’
Updated May 24, 2010
As House and Senate conferees debate their differences on the financial regulatory reform bill before Congress, the angel investment community and entrepreneurs are celebrating – thanks, in part, to two Seattle attorneys.
At first, it appeared no one was listening. The financial regulatory reform bill was advancing through the U.S. Senate. But Sen. Chris Dodd’s bill was flawed. It threatened job creation by restricting startups and angel investors.
Thankfully, the provision hurting startups was deleted by amendment just before passing the Senate.
“It would have hurt angel investing and would have wiped us out,” says attorney Joe Wallin, a partner in the Seattle office of Davis Wright Tremaine, www.dwt.com.
He and another Seattle attorney, Bill Carleton, a member of McNaul Ebel Nawrot & Helgren, labored with others to kill the provision affecting startups and their ability to attract angel investors for job creation. It resulted in an amendment, SA 4056, which was co-sponsored by Senators Maria Cantwell and Patty Murray (D-WA) and others including Sen. Dodd.
“Congratulations to Marianne Hudson of the Angel Capital Association, and Dan Rosen of the Seattle Alliance of Angels!” exclaimed the attorneys in a statement. “Thank you Senators Murray and Cantwell!”
So the bill would have mandated that unemployment would continue as a bigger economic threat than it needs to be.
“Over the next three years, the economy must create nearly 13 million jobs to bring unemployment down to 5 percent – still higher than pre-recession levels,” wrote economist Dr. Peter Morici in an Op Ed column on this site. “That requires 360,000 jobs every month and economic growth at 5 percent a year.”
And credit lines for small businesses as catalysts for new jobs are still not widely available via the normal pipelines.
“Obama spent the TARP to bail out Wall Street banks, GM and his pals at the United Autoworkers but left the 8,000 regional banks to sink or swim,” Dr. Morici added. “Cash strapped, those banks can’t lend enough to small and medium-sized businesses, which create most new jobs.”
That’s another reason why a heavy economic burden falls on startups and others in the angel ecosystem. SA 4056 was imperative for the financial regulatory reform bill.
“It could have reduced funding for small companies by probably $10 billion per year,” Mr. Wallin adds. “Small companies are the source for new jobs.”
In a March 28, 2010 column, “How Sen. Dodd’s Financial Reform Would Hurt Financing of Startups,” I quoted Ms. Hudson of the Angel Capital Association, who forecast the bill would prevent up to “77 percent of accredited investors” from investing in new firms. In that column, Mr. Wallin explained why the financial regulatory reform bill contained flaws.
“Before companies could accept money from investors they would have to file paperwork with the SEC and wait 120 days,” Mr. Wallin told me in that interview.
“If the SEC didn’t review the filing and conclude that the filing qualified for the federal securities law exemption, companies would have to file paperwork with the states in which the investors lived and wait for the states to determine that the sale of the securities qualified for the securities law exemption,” he explained.
After the reprieve for startups, to confirm what’s been at stake, the attorney cites data from the University of New Hampshire Center for Venture Research. The report is entitled, “The Angel Investor Market in 2009: Holding Steady but Changes in Seed and Startup Investments.”
Even in a down economy, of course, we’re talking big numbers.
“Total investments in 2009 were $17.6 billion, a decrease of 8.3 percent over 2008 when investments totaled $19.2 billion,” wrote Jeffrey Sohl, director of the school’s venture research center.
“However, a total of 57,225 entrepreneurial ventures received angel funding in 2009, a reserved 3.1 percent increase from 2008 when 55,480 entrepreneurial ventures received angel funding. The number of active investors in 2009 was 259,480 individuals, virtually unchanged from 2008’s 260,500 individuals,” he added.
He said the average deal size was reduced by 11.1 percent in 2009.
“Software accounted for the largest share of investments, with 19 percent of total angel investments in 2009, followed by healthcare services/medical devices and equipment (17 percent), industrial/energy (17 percent), retail (9 percent) and biotech (8 percent). “Industrial and energy investing is a significant increase from 2008, reflecting a growing appetite for green technologies,” he said.
He indicated 54 percent of the exits stemmed from mergers and acquisitions. Forty percent involved bankruptcies.
So, all is well as normalcy returns to the startup-funding process. But one has to wonder why all this political maneuvering was necessary.
From the Coach’s Corner, the Silicon Valley has some good news following another law firm’s survey: Venture funding improves for some startups.
