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What's The State of Entrepreneurship in America?

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This week the Kauffman Foundation hosted their Fourth Annual State of Entrepreneurship Address at the National Press Club in Washington, D.C., a signature event where both government and business leaders are invited to discuss the state of innovation and entrepreneurship in the United States.

State of Entrepreneurship 2013 Report, by the Kauffman Foundation

I was invited to participate as a panelist and joined a group of distinguished speakers and fellow panelists including:

  • Jerry Moran, U.S. Senator, Kansas
  • Tom McDonnell, CEO of the Ewing Marion Kauffman Foundation
  • Karen Mills, Administrator of U.S. Small Business Administration
  • Jeff Fagnan, Partner at Atlas Venture
  • Donna Harris, Managing Director of Startup Regions at Startup America Partnership
  • Ramana Nanda, Associate Professor of Business Administration at Harvard Business School
  • Alan Patricof, Founder and Managing Partner of Greycroft Partners
  • Moderator: Robert Litan, Director of Research at Bloomberg Government

Tom McDonnell, CEO of the Kauffman Foundation, opened the event on an optimistic note, saying, "The good news is that there is a national consensus that encouraging entrepreneurship can help revive our sluggish economy, and the challenging environment for acquiring capital has sparked tremendous innovations in finance."

McDonnell continued, cautioning, "But for the financing innovations to pay dividends, there will need to be a variety of regulatory reforms, particularly related to the country's capital markets, on both the debt and equity side. We are presenting recommendations today that will help to do just that."

McDonnell presented the insights and recommendations published in The Kauffman Foundation’s report: The State of Entrepreneurship 2013.

Watch the Address:  2013 State of Entrepreneurship Address: Financing Entrepreneurial Growth

Download the brief PDF report:  The State of Entrepreneurship 2013

So what's in the report, and why should you read it?

The Kauffman Foundation is one of the largest organizations in the world doing research and giving grants towards the goal of advancing entrepreneurship.

Over the last several years, the foundation has issued several insightful reports, and has developed various entrepreneurial educational programs that demonstrate their top thought leadership and involvement in fostering entrepreneurial growth.(Kauffman is a big backer/owner of initiatives like Startup Weekend, Startup America Partnership, among many others.)

This latest report and the State of Entrepreneurship event address the main challenges entrepreneurs face today in accessing capital and focus on the foundation's policy recommendations for how to improve financing options for young companies.

What were the policy recommendations?

The policy recommendations in the report, and the final conclusions from the event, fall into three main categories:

Equity Financing (including crowdfunding, angel investors and venture capital financing)

The overarching recommendation in this category was around implementing regulatory change to promote innovation and advance capital formation. The Jumpstart Our Businesses (JOBS) Act, which passed last year with unprecedented bipartisan support, continues to be seen as a significant step forward in changing the financial regulatory framework to improve access to capital by small business.

The report highlights Crowdfunder as a leading crowdfunding platform and AngelList as a key disruptive player in the angel investment community.

While the regulations for crowdfunding are still being shaped, the promise of this model is clear. The report states the total market for equity crowdfunding could be as high as $4 billion within a year, and quotes The Crowdfunding Industry Report observation that, “Crowdfunding shows to be a viable alternative for raising capital to fund small businesses and startups.”

The key recommendations for equity financing are:

  • The S.E.C. should approve responsible regulations that won’t pre-emptively strangle crowdfunding.
  • Regulations need to broaden investor participation across the board (such as creating non-financial criteria for sophisticated investors with fewer assets).
  • Changes are required in the VC industry to include alternate fund structures, improved performance measures, standardized data reporting, and a focus on long-term results by reconsidering accounting rule FAS 157.

Public Markets (IPOs)

Initial public offerings (IPOs) have declined among smaller mature businesses. The reasons are still hotly contested, but most agree that it’s time to revamp the IPO model.

Two clear recommendations to stimulate business growth in the public markets are:

  • Allow more investors to participate in IPOs by shifting to an auction-based model, like the Google Dutch-auction IPO model. The auction model makes IPOs more efficient, provides transparency around pricing and reduces underwriting costs.
  • For smaller firms, Sarbanes-Oxley (SOX) accounting rules are often a deterrent to going public. Shareholders need to be allowed to vote on whether SOX rules should apply.

Debt

Debt is the most widely used source of funding for new companies, including credit cards, lines of credit, and bank loans. Bank loans to small businesses have decreased substantially over the past few years.

The report offers the following recommendations for making bank-loan debt more efficient and accessible to young companies:

  • Make existing one-size-fits-all bank regulations more flexible. This will reduce burdensome costs for smaller banks, lower their “regulatory risk-aversion,” and allow consideration of local information when evaluating risk characteristics of loans.
  • Get more data, across the board: Improve the collection and analysis of data on small business lending, including both bank loans and SBA loans.

So, what IS the state of entrepreneurship in America?

The overall feeling at the Annual Address was hopeful for the near-term future of entrepreneurship. Among the speakers and panelists who participated in the event, there was resounding excitement and support voiced for equity crowdfunding, and a renewed call for the Securities and Exchange Commission to follow through on their mandate to issue Rulings on crowdfunding.

The bright side of the recent downturn is that it’s birthed some incredible financing innovations, including crowdfunding. The power of these innovations is undeniable and we have a responsibility to harness their power. This means pressing for brave new regulations.

As a country it behooves us to empower all types of lenders, from the blue-collar worker who wants to invest $100, to community banks. If we can unlock the power of the crowd and of local financing, we can breathe life into entrepreneurship in this country, and ultimately further job creation and economic expansion.

The time is now. The state of entrepreneurship in America could be advanced significantly if policymakers give thoughtful consideration to the Kauffman Foundation’s policy recommendations and act quickly and judiciously.

How can you help?

I encourage you to show your support for JOBS Act legislation and crowdfunding, and to ask the S.E.C. to stop delaying and issue the much-overdue crowdfunding Rulings.

To show your support, simply cut and paste the following as a comment on this article:

I support the JOBS Act and crowdfunding, and ask the S.E.C. to cease further delays and swiftly issue crowdfunding Rulings.