Is America Losing Its Startup Edge?

from the not-good dept

We’ve talked, in the past, about the paradox of job creation by the government. Too often the government acts as if “job creation” is about propping up or subsidizing big companies, hoping that they’ll hire lots of people. And, intuitively, you can see the appeal there for two reasons. First, it’s much easier to think that Giant Telco A will likely hire another 5,000 workers to dig ditches if the government gives them a bunch of money, than it is to think that random startup A will hire 5,000 people. Second, often the disruptive innovations that actually do create economic growth and jobs comes at the expense of legacy companies in older industries. And the fear there is always job losses. So, some new startup comes along with a technology that makes life more efficient and makes stodgy old legacy company obsolete… and upfront you’re going to see job cuts at the legacy company, even if the end result is many more jobs (and greater economic efficiency).

But the truth is that if the government wants to really create new jobs, it needs to support the startup ecosystem. Research from the National Bureau of Economic Research (NBER) and the US Census Bureau last year found that startups really are the key to both gross and net job growth. So if the government really wants to encourage economic growth and new jobs it should be focused on making sure the startup ecosystem is strong and vibrant. Unfortunately, that doesn’t appear to be the case. When we see proposals like SOPA, which will hinder startups by placing tremendous liability on them and scaring off investors, we get worried.

Already, the situation isn’t great. While the US certainly has the reputation for being friendly to startups, Aaron DeOliveira, points us to a report that shows that the US is actually 23rd on a list of startups per working-age population within countries that are members of the OECD. Even France is ahead of us.

This does not bode well for the US economy or for job growth. For innovation to thrive, we need the creative destruction and economic and job growth brought about by startups and entrepreneurs. We don’t get that when the government is “captured” by the large legacy players who are only focused on “protecting” and defending their turf, rather than fostering innovation, growing the economy and creating jobs.

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Comments on “Is America Losing Its Startup Edge?”

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Mike C. (profile) says:

Ask yourself why start here?

I think the bigger question is why would someone choose to start a new company in the USA vs somewhere else. In the US, there’s an incredibly large chance that you’ll get sued out of existence (Veoh) as soon as you start to be perceived a threat. If you’re not sued over patent infringement, there will likely be a copyright claim or a trademark issue. And if, by some miracle of fate, you manage to avoid all three, don’t forget to prepare for the inevitable class action lawsuit when someone gets offended by your product for whatever reason.

To be honest, I can’t see why anyone would even want to try…

bwp (profile) says:

Startups aren't just tech companies

I know that many people that follow this site think of startups as only being tech companies but really startups are any new company. If I’m in the IT world and I think I can do a better job consulting than PWC or IBM then I can open a firm and start trying my luck. If I’m as good as I think I am then I can start hiring and the business grows. Same goes if I’m an auto mechanic or farmer or almost any other profession. As much as I agree that we need technological innovation and firms to produce new tech, it’s not the only sector in which we need startups.

Killercool (profile) says:

Re: Startups aren't just tech companies

Agreed, but the problem carries over. In my hometown, an auto shop was sued out of existence by a flower shop (I kid you not) because their logos were too similar.
1: The store names were very generic (they were both named Rick’s, or something)
2: The auto shop was about 2 years older than the flower shop, but they had finally started doing well enough to get a new sign.
Apparently a generic flowing script font was questionable enough for the judge to let it rock on for long enough that the auto shop went bankrupt.
Sure, they weren’t a very good mechanic, but that’s not what put them out of business. It was a ridiculous copyright claim that those other jackasses never would have had the balls to file against anyone who WAS doing well. It was so stupid. They weren’t even in competition.

TtfnJohn (profile) says:

While it’s not just the US government that favours large business in “make work” programs there does seem to be a different effect up here in Canada.

By a couple of news reports there have been more start ups per capita in Canada last year than in the United States. On way of measuring it has been single owner proprietorships, partnerships and limited liability company’s. For whatever reason, Canadians seem to be becoming more entrepreneurial than Americans are. All this despite our “high” taxation as well as near endless paperwork according to the Canadian Federation of Independent Business. A lobby group, of course.

One reason that could be is that it’s an order of magnitude harder to file a frivolous lawsuit up here and the pentalies for doing so are more than in the States.

MisterHux (profile) says:

Re: Re:

There is also this little thing called health insurance. Canada has it and we don’t. Down here in ‘merica we usually get it through employers, and the health insurance companies don’t deal with small companies. Since they don’t its really expensive to get it. There was actually an article in Inc. about this a few months ago, but the example they used was Finland.

Anonymous Coward says:

Funny that, the government routinely tries to prop up big companies, to create thousands of jobs. The big companies, on the other hand, routinely destroy thousands of jobs in order to prop up the exorbitant salaries of their CEOs and upper management. Quite the vicious circle, all designed to drive America back to our pre-industrialized roots where a few uber-wealthy owned the rest of us.

vruz (profile) says:

For me, fascism is the deal breaker

I don’t need to see the OECD report really, some time ago I was excited about the prospect of starting up in the US.
You know what killed it?
The crazy fascists killed all they joy.
I am perfectly aware that those idiots are a minuscule minority in the developed states of the US.

Look what happened to a well-established executive of Mercedes in Alabama:

The same happened to a Toyota executive a while later:

I know, I know, such crazy cases are “just” in Alabama…
But do you think it’s reasonable for an immigrant to be risking everything in the minefield of US-wide state laws whenever she needs to travel for business?

Just crazy.

You can only think these are isolated cases if you are 1) white 2) american. Being white alone didn’t save the Mercedes executive the trouble.
It’s not racism, it’s unlimited, rampant, xenophobia.

Why do you think entrepreneurs would be willing to risk their mental and physical integrity in order to give jobs to the USA?
Only the unaware who have too little to lose would jump in such sorry state of lawlessness.

The America the world used to admire is being destroyed by the crazy idiots, and you’re not doing nearly enough, nor seriously taking up the fight to preserve that precious legacy.

Rant over.

Anonymous Coward says:

If you are a concerned about jobs, is techology really the best investment for job growth? Some of the biggest names in the techonology sector only employee a few thousand employees. Facebook for example has slightly over 3,000 employees. Netflix who you mention quite frequently (though given their performance over the past two quarters I often wonder why) employs approximately 2810 employees. You mentioned telcos, so I would like to inform you that AT&T employs over 256,000; Verizon employs over 217,000. Google, a very mature and extremely large tech company only employs a little over 31,000. Rovio the makers of Angry Birds, perhaps the most successful multi-platform game of all time only employs 55 people.

PaulT (profile) says:

Re: Re:

“Some of the biggest names in the techonology sector only employee a few thousand employees.”

Only if you consider the direct employment and not the knock-on effect across the economy.

Facebook, for instance, have proven to be a very valuable services for advertisers and other services – such as Zynga, an employer of 3000 people who have very much been a success due to Facebook. Its success has been mirrored by other services like LinkedIn, which while having under 2000 employees is used extensively for business in the non-tech sector.

Google have also been a great help to other companies in many ways – not only search and other marketing services, but also providing inexpensive mail, document apps and other services that help even non-tech sector companies grow. All of these services are in turn dependent on companies like AT&T and Verizon for people to access them, and other companies are dependent on their mobile services to do business. The effects of these companies on employment and GDP stretch well beyond what they directly produce or employ.

Also, “Rovio the makers of Angry Birds”… are based in Finland, so they’re not really relevant to a discussion of US job creation – though their success is definitely an example of foreign startups being competitive against the US.

Suja (profile) says:

This does not bode well for the US economy or for job growth. For innovation to thrive, we need the creative destruction and economic and job growth brought about by startups and entrepreneurs. We don’t get that when the government is “captured” by the large legacy players who are only focused on “protecting” and defending their turf, rather than fostering innovation, growing the economy and creating jobs.

um.. good luck changing that

that type of behavior has been around as long as there’s been a newer generation (or since the words “you whippersnappers and your XYZ today! back in MY day .etc .etc” have been uttered)

Violated (profile) says:

US to HK

Well ain’t this a complex subject. A start-up has to consider taxes, regulation, markets, opposition, wages and more.

The main attraction of the United States has always been the one huge home market of rich (or not so rich these days) customers. Taxes and transport seem good enough.

The main problem would be wages when this often quickly becomes a business’s primary expense and well to start in say India instead is only 25% of the wages cost.

Opposition is a large problem in the U.S when it is a sue or be sued world there. A start-up does have big problems against a major rival who can sue them in court for some aimless reason into liquidation. I would not say Government regulations were too bad when in America there are a thousand different ways to make money.

My top choice for a start-up though would be Hong Kong when no one there cares at all what you do which makes a good place for any business wanting to keep to itself. It is a major transport hub in Asia. Then there are no end of Chinese worker imports (or Thai, Pinoy etc) happy with some small wage and some floor space to sleep on.

What more can a business want as long as it can still tap the North American and European markets?

Hephaestus (profile) says:

Re: US to HK

With robotics and things like Microsoft’s robotic studio, you can remove most of the labor costs, unless you are in a service industry. Even then, with smart planning, you can get rid of most of the labor costs. So america is cost effective if you can afford the time and effort to automate everything, and create designs that can be built via automation.

JavaBean.Anon (profile) says:

Sounds like they want to recommend the U.S adopt Capitalism.

That would be an excellent thing to do for the the economy, But(and this is huge) it would get in the way of the MASSIVE Corporations that give “Career Politicians” Untold BILLIONS of dollars every year.(discussions on “Career Politicians” will have to wait for an appropriate topic)
But Mr. Bean(joke intended) how would Capitalism effect the Massive Corporations?…

Capitalism def2 wiktionary # (economics, uncountable) a socio-economic system based on the abstraction of resources into the form of privately-owned capital, with economic decisions made largely through the operation of an unregulated market.

Note the last little bit….Operation of An Unregulated Market…. what does that mean?

Stay with me now……Nothing like Patents….what is a patent?….a monopoly on an idea…..why can’t Capitalism work with patents?….. because in order to innovate in such a way that different companies have different but similar products differing only slightly(like one is red and round but the other is rectangular and blue) they would use similar ideas or even the same ideas to get to different ends.

what proof do you have that patents stifle capitalism/competition/innovation?…..The “mobile device patent war” is one example that is only a google away.

gorehound (profile) says:

America has been slowly getting screwed for decades now.There already were cracks in the system but now in our time you can really see them in front of you.
1.more and more lawsuits
2.broken patent system
3.losing our Freedoms
4.bigger and bigger divide between the rich and the not rich many of these Anti-Science Politicians
6.most Citizens in the real world are kind of mindless consumers
7.bad education system
8.complex Government Regulations & Taxes,etc

Anonymous Coward says:


Short Answer: No.

Long Answer:

I was a player in the Silicon Valley Start-up Game for over a decade. The last “boom” decade. Have been living abroad for some years since then. America, more specifically California, still crushes the world when it comes to “start-ups”. Much of it has to do with cultural issues that would take generations to change, elsewhere. If they could. And those cultural issues feed right into the start-up mentality and it’s matching VC environment.

Other countries are considerably “risk adverse” and over-regulated compared to the US.

I used to think that the over abundance of law suits was a bad indicator. After living and working abroad (still in the start-up space – tech, energy, etc.) I see those lawsuits as a positive indicator. My reasoning goes like this:

Innovation takes place in the grey areas. The gaps. Basically, market space that has not been defined, staked out, and/or regulated into the ground. Lawsuits will natural play heavily in that space, due to a lack of regulations and legal precedence, which is such an important aspect (perhaps too much) in British derived legal systems. DOn’t get me wrong. It’s the best system in the world, so far. But a lot of lawsuits tells you that the “wild west” innovation stage is coming up to an end. It tells you that the market space *matters* and the major players are attacking each other and shoring up their defenses.

In most countries, the governments immediately stamp out those lawsuits through regulation. Mostly to save the court costs with the claim that it’s about making the playing field level. Its not. It’s heavily skewed to the first to market companies. However, that reaction also prematurely ends the innovation stage. That “premature” regulation essentially freezes the market in it’s current conditions, which almost certainly are not as optimal as if they had been allowed to progress a few more years.

The US, with it’s very laissez-faire attitude manages to let innovation markets continue longer than other countries, before they’re locked down. Which allows those markets to mature into more optimal setups. It’s a matter of small degrees having very large results. The difference between the US and other countries doesn’t seem like much. But, given the size of the US, it translates into huge returns.

The fact that markets mature quicker than before seems like the trend is more lawsuits sooner in the market cycle. But it’s not. it’s an illusion caused by the fact that modern market cycles are just a lot shorter than they used to be.

Which probably says that the length of copyright and patents needs to be tuned a bit downward, in order to spur innovation. Possibly, they need to be turned back to about post WWII standards, which spurred a multi-decade boom.

Bottom line: I’d put the California start-up environment several orders of magnitude ahead of any other country. Sure, you can always find exceptions. But embed yourself for a few years in the respective start-up environments and you’ll see: cali still crushes the world. Add to that a liberal social environment. Most truly creative people are outside of the norm. Sometimes, substantially. Pretty much by definition. Finally, the weather. It never really sucks in cali. And the occasional earthquake keeps things lively and every few hundred years clears the slate. 🙂

I miss it. VC money is *so* easy to come by there…

The “US is 23rd” is, I suspect, a kind of statistical misdirection. US start-ups account for vastly more money, which is what the economy needs. How many other countries have start-ups the size of Google? Or Facebook (once they go public and the company has an actual market value)? Why are companies like that started in the US? Because they *can* be. Facebook would have been squashed by the EU, upon the first privacy complaint. Google as well.

Seriously. Live the start-up life in multiple countries and you’ll see.

Lawrence D'Oliveiro says:

Re: The US, with it's very laissez-faire attitude manages to let innovation markets continue longer than other countries, before they're locked down. Which allows those markets to mature into more optimal setups.

And a classic illustration (or not) of your point is the US mobile phone market. Whereas the European Government regulators decided to mandate a common interchangeable standard (GSM) where switching network was as simple as changing a SIM card, the US chose to sit back and ?let the market decide?. The result is a hodge-podge of incompatible mobile phone networks, where the customers are essentially locked in.

Everywhere else in the world, you can buy mobile phones at an unsubsidized price, SIM-free, and then get a SIM for the network of your choice. And switch network if you?re not happy with the service. Only in the US do you have to choose which network you want to use first, and then get your phone through that network, so it only works with that network and no other.

And the limitations on competition are starting to affect the introduction of new products: for example, the current king of Android phones (at least as of this month), the Samsung Galaxy Nexus, was shipped first in Europe and elsewhere, with the US well down the list of priorities.

So tell me again, which market is ?locked down?, and which one has been able to ?mature into more optimal setups??

Anonymous Coward says:

Startups creating more jobs

Big companies cut labour costs on economically difficult time. It’s difficult to ask a big company to hire 3000 more people when it expects economical winter in next quarter.

On the other hand, in bad economic times, some released labours who gain enough experience on their industry will consider building startups. And startups, quite logically, need to hire people. It’s not difficult to create 3000 new position by 30 startups even if without government efforts. (Especially if you consider some of them will be chainshops or factories which will for sure have more than 100 employees)

So helping startups to flourish would be more effective than helping big companies if your target is to create more jobs when economy suffers and employment rate is low.

DannyB (profile) says:

Expanding Intellectual Property rights Enables new Startups

It’s all about job creation. For new lawyers. New and innovative business models based on intellectual property litigation will be created by expansive new Copyright, Patent and Trademark ‘rights’. Inalienable rights. IP should be added to the bill of rights.

Righthaven was just the beginning of this wonderful new business model.

AJBarnes says:

No longer have a chance

Back in the day, you could set up your business quickly, easily and go about trying to compete. Entrenched companies didn’t like the competition, so they paid off politicians to create all sorts of licensing bureaus to impede new startups. It’s a HUGE deal today to start a small business… license fees, inspections, tax fees, health inspections, etc etc etc.

Look at kids trying to learn free enterprise with lemonade stands… how many of these over zealous idiots shut them down because they don’t have health permits? TOO MANY.

I seem to remember that 80% of employees are employed by small businesses. If you want to increase employment, they need to make it much easier to start a business, reduce this stupid competition-killing paperwork and let the market do its job.

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