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More About Chickens and Eggs

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“Small businesses are responsible for nearly all of the new jobs generated in the US.” If this is true, and there seems to be no credible source contradicting it, we’re screwed. Everyday I see more small businesses closing their doors; hear about decades old companies laying off workers; and watch companies shifting from a majority of full time staff to a majority of part time staff. Banks are not underwriting new and small business through loans or offering favorable deals on credit cards (as in funding a company by family/friends/fools/and credit cards). Venture capitalists are investing only in existing businesses they already know or have some skin involved. And the Small Business Association will only lend money to companies with positive sales on the books.

In contrast to the go-go nineties, venture capitalists are now charging $300 and more per ten minute slots at their meet-and-greet startup luncheons. Resume and employment campaign companies get as much as $7,500 and more to conduct job searches even with scores of job search sites available. Companies are shedding tens of thousands of newly minted consultants and “small business owners” each month. Bottom line: lots of smart people, plenty of good ideas, no way to start a company.

Problem is the chances are slim for a big cash payout through an IPO. There is so little spending by consumers and companies that competition is tight for what business there is available. This is true even though most company’s needs are modest. What many valuable product and service companies need is a safety net to weather the downturn until they return to business as normal just as many of them did in the seventies and eighties. Tax credits aren’t going to do it and neither are reductions in monthly health care costs.

With all this being the case, innovative products, technology and services from startup companies are impossible to create. Granted there will always be examples to point to to disprove the point. But when you consider the inherent risk in the process itself to create true innovation, it’s easy to understand why an investor would turn away from it. Why else would all of the startups that make the news turn out to be the brainchildren of innovators who made their millions in companies that were successful in the nineties. They are self-funding their companies. With their money on the line, and their track record and experience as credibility, getting the next rounds of investment from venture capitalists desperate to find a home for their funds is a lot easier.

As someone who has taken part in and observed the creation of that most illusive product, computer software, I can say that time, money and luck must exist in goodly proportions for success to happen. Moving from brainstorm to napkin to business plan to investment is a hard but important start. Building a proof of concept, prototype, engineering and functional specification plan is the next big stake in the sand. Follow all of that with multiple releases, testing and marketing and sales and the process is almost complete. Ongoing support and upgrades are necessary for the life of the product. All for something that you cannot hold in your hand and may change in form and substance 180-degrees from inception to completion. Risky business. Try getting money to underwrite this type of product today. Impossible for a category of products that is so important to us an in which we have exhibited the most innovation.

Unfortunately, today, only large companies can support the process described above. Small companies can’t get the money and as a result the marketplace loses much of its dynamism. If only large companies can hire and buy new ideas and mold them to serve their own interests and product interoperability then we lose choice and competitiveness. The world becomes less open and we have fewer choices.

But that’s where we are today. The example above can be substituted with any green energy product, kitchen appliance or entertainment device. The only area that is active is health care. In most areas we’re copying existing products, lowering prices and in the process moving more and more jobs offshore. The downward pressure on pricing is getting so bad with Chinese tainted products and low quality Indian customer services for example that it is becoming like it was in the fifties and sixties when it was generally accepted that everything from Japan was junk.

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About roguebutterfly

  • http://www.republicofdave.com Dave Nalle

    While I think your general points may be valid, there are some huge exceptions where innovation and large-scale success is happening for small businesses and entrepreneurs. One outstanding example of this is the boom in small companies making iPhone apps and turning huge profits on minimal investment from a few clever ideas.

    Dave

  • roguebutterfly

    I totally agree that there are exceptions. But where would those applet be without iTunes and Apple? There are thousands of applications listed on VersionTracker and Download.com that are deserving of users. Apple is supplying hardware and marketing. Very expensive components.

  • http://joannehuspek.wordpress.com Joanne Huspek

    What about those of us who deal with nuts and bolts and not the techy stuff that can be a runaway best seller? I’m talking about people like me who just want to earn enough to be able to ensure a retirement, seeing as the government is going to be broke and our 401Ks are going to be worth pennies on the dollar. Add to that where we are (SE MI) where even in my suburb every other commercial property is empty and has a For Sale or Lease sign on it. The recession has been here for almost a decade. Our business has declined steadily since 2001 due to more factors than I care to think about. What happens here is going to happen everywhere. I give it about three to five years for all y’all to catch up with us.

    We are more than screwed. We are royally skewered.

  • roguebutterfly

    I agree. Ninety-nine percent of all of the businesses I see closing their doors are not high-tech companies. But the talk is usually about innovation and new technologies that drive new hires and the other small companies that supply these industries.

    For example, there wouldn’t be so many small players making money on eBay today if the US government hadn’t supported building the infrastructure to carry the internet 30 years ago through DARPA. Venture capital from the US government. There would be no APple as we know it if Xerox hadn’t built a research group. No UNIX powering servers to run companies without Bell Labs. There is a trickle down effect that gets things moving.

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