July 19, 2010
As this year’s college graduates desperately search for jobs, New York Times‘ op-ed columnist Thomas Friedman asserts that that the best gift they could be given is a position with a start-up company [“A Gift for Grads: Start-Ups,” 8 June 2010]. He writes:
“Good jobs — in bulk — don’t come from government. They come from risk-takers starting businesses — businesses that make people’s lives healthier, more productive, more comfortable or more entertained, with services and products that can be sold around the world. You can’t be for jobs and against business. … I’m talking about people who actually make stuff and sell it. I am talking about entrepreneurs and innovators.”
Friedman laments that current government efforts to foster a better business climate for entrepreneurs “are not well coordinated or a top priority or championed by knowledgeable leadership.” He asserts, “Innovation and competitiveness don’t seem to float Obama’s boat. He could use a buoyant growth strategy.” He goes on to discuss some of the things that such a strategy might include.
“I asked two of the best people on this subject, Robert Litan, vice president of research and policy at the Kauffman Foundation, which specializes in innovation, and Curtis Carlson, the chief executive of SRI International, the Silicon Valley-based innovation specialists. Carlson said he would begin by creating a cabinet position exclusively for promoting innovation and competitiveness to ensure that America remains ‘the world’s new company formation leader.’ ‘Secretary Newco’ would be focused on pushing through initiatives — including lower corporate taxes for start-ups, reducing costly regulations (like Sarbanes-Oxley reporting for new companies), and expanding tax breaks for research and development to make it cheaper and faster to start new firms. We need to unleash millions of entrepreneurs. Litan said he’d staple a green card to the diploma of every foreign student who graduates from a U.S. university and push for a new meaningful entrepreneurs visa (the current one, the EB-5, requires $1 million of capital that few foreign entrepreneurs have). It would grant temporary residence to any foreigner who comes here to establish a company and permanent residency if that company generates a certain level of new full-time jobs and revenues. One of the best moves we could make, adds Litan, would be a long-term budget deal that would address the looming Social Security/Medicare payouts for baby boomers. Proving to the bond market that we have our long-term fiscal house in order would keep long-term interest rates low and thereby ‘encourage private investment more than any tax cut.’ Nevertheless, I’d also cut the capital gains tax for any profit-making venture start-up from 15 percent to 1 percent. I want our best minds to be able to make a killing from starting new companies rather than going to Wall Street and making a killing by betting against existing companies. I’d also impose a carbon tax and balance that with a cut in payroll taxes and corporate taxes. Let’s tax what we don’t want and encourage what we do.”
With jobs so scarce, undoubtedly a number of college graduates would like to be their own bosses. With more women than men now graduating from college, more women than men should have that ambition. Historically, however, there have been many more male entrepreneurs than female entrepreneurs. The glass ceiling that challenges women business executives has been even lower when it comes to women attracting support for their business ideas. Fortunately that seems to be changing. Gaebler.com notes, “Women entrepreneurs barely merit special treatment these days. There are 9.1 million women-owned businesses in the United States, and they employ 27.5 million people. Together, women-owned business contribute over $3.6 trillion to the economy each and every year.” The gaebler.com site provides links to other sites offering entrepreneurial resources for women.
Despite the statistics quoted above, Vivek Wadhwa, a senior research associate at the Labor & Worklife Program at Harvard Law School and executive in residence at Duke University, asserts that “there are too few women running high-tech companies; that’s too bad, considering evidence shows female-led businesses outperform those run by men” [“Addressing the Dearth of Female Entrepreneurs,” Bloomberg BusinessWeek, 4 February 2010]. In a study of 549 successful entrepreneurs, Wadhwa discovered that only 8 percent of them were women. He and his research team came to the following conclusions:
“Female and male entrepreneurs differ in some subtle ways, we learned. Women were more motivated by a business partner who encouraged them. Women also relied on business partners as a main source of funds more often than men. And the average female entrepreneur rated prior experiences as more important than the average man rated his, with regard to the success of their current startups. Women put a higher value on their professional/business networks. Finally, women were more cautious and expressed more concern about protecting their company’s intellectual capital. On the other hand, financial pressure to keep a steady job was more acutely felt by men than women. That’s understandable considering that men still make a lot more than women on average and are still more likely to be the primary breadwinner. Yet, men and women entrepreneurs are similar in many respects, the results show. They had equivalent levels of education, the same early interest in starting their own business, and similar other advantages, including work experience, access to financing, and lessons learned from prior successes and failures. … Men and women also had similar motivations to launch a business. They shared the desire to build wealth and capitalize on business ideas. Both were drawn by the appeal of the startup culture and always wanted their own company. Neither wanted to work for someone else.”
Wadhwa claims that the fact that there are many fewer women entrepreneurs in the U.S. than men reflects “a societal failure.” He notes that in India, “a country that is in many respects more conservative than the U.S.,” women are rising much more rapidly through the top ranks of business leadership.” Wadhwa, however, believes there is reason for optimism even though “much more needs to be done to encourage talented women to pursue tech entrepreneurship.” Sharon Vosmek, CEO of Astia, a nonprofit that helps startups headed by women, claims that nearly half of all start-ups in the U.S. are now begun by women [“Closing the Venture Capital Gender Gap,” Bloomberg BusinessWeek, 24 June 2010]. The problem, she sees, however, is that “only 7 percent of [those] companies [are] backed by equity financing.” She writes:
“To address this problem, former Cisco Systems marketing executive Catherine Muther in 1999 founded the Women’s Technology Cluster (later rechristened Astia, a name derived from the Greek word for star). The group was created to help companies run by women that need outside capital. At the time, less than 2 percent of the businesses funded by venture capital firms were headed by women. While that percentage jumped for a few years, it had fallen back to just 3 percent when I took over as Astia’s chief executive in 2007. Since 2003, Astia has connected [with 226] startups founded by women with investors and other entrepreneurs, who offer contacts and coaching. Within a year of joining our program more than 60 percent of them have gotten financing, had an initial public offering, or were sold. I’m proud of that record, but I have to admit Astia has had less success in bringing about deeper change. We have focused on solving problems for one company at a time as opposed to generating broader venture support for companies founded by women. We have failed to develop a common strategy with other organizations pursuing similar goals. In short, we have failed to create a movement.”
Vosmek, like Wadhwa, notes that “successful entrepreneurs running high-growth businesses are similar in almost every respect. Male or female, entrepreneurs have largely the same education, economic background, needs, and challenges. Women, though, are better at building relationships and place greater importance on the moral support, expertise, and financial backing of business partners, while men need far less encouragement from others.” She concludes with an assertion that supports Thomas Friedman’s claim that what graduates need are more start-ups. She writes:
“There is a robust body of research demonstrating women’s impact on job creation and economic growth. One Babson College study I find particularly compelling in today’s recessionary climate shows that if female entrepreneurs started with the same capital as their male counterparts, they would add 6 million jobs to the economy in five years—2 million in the first year alone. How’s that for an economic recovery?”
As a side note on financing, some entrepreneurs are using individual development accounts (IDAs) to capitalize their businesses [“IDAs Offer Small Boost To Aspiring Entrepreneurs,” by Jonnelle Marte, Wall Street Journal, 2 June 2010]. Marte reports:
“At a time when many people short on income are calling on their inner entrepreneurs, some start-ups are finding relief in a little-known resource—individual development accounts. These accounts, which have grown in popularity since their inception more than 10 years ago, aim to help low-income individuals purchase homes, pay for higher education or develop a small business. IDAs are typically offered by nonprofits, state or local agencies and low-income credit unions, which raise private funds and combine them with federal funds to match an account-holder’s savings. While IDAs are most popular with aspiring homeowners, program coordinators say they’re seeing aspiring entrepreneurs – some of whom have lost jobs or taken big pay cuts – use the accounts to start enterprises with low upfront costs, such as catering, cleaning, landscaping and children’s day-care businesses.”
Such businesses, however, don’t have the potential of creating a large number of jobs. Start-ups with that kind of potential normally require the backing of venture capital groups. An article in Bloomberg BusinessWeek provides a case study about how one woman is proceeding to get financing for her company [“An Entrepreneur Prepares to Pass the Torch,” by Nick Lieber, 29 September 2009]. Lieber writes:
“It’s a classic dilemma. A first-time entrepreneur creates a thriving company from scratch with the potential to be The Next Big Thing, but her investors thinks she needs an experienced CEO and management team to take it there. They also bet future investors will want to see seasoned leaders in place. To make this happen, the first step, traditionally, is to forge a succession plan that keeps the company’s momentum going and doesn’t disrupt the culture the founder labored to create. This is one big challenge facing Michelle White, the founder of Leland, Mich.-based Michele’s Miracle, which makes a dietary supplement from tart cherries. White thinks her $800,000, four-person company, with its 2,200-plus regular customers who enthuse about the cherry concentrate’s health properties, relieving arthritis and providing better sleep, could quickly become a $100 million company (think POM Wonderful) if it landed the capital necessary to hire a dream team to complement her existing team.”
Lieber tells his tale by: introducing the entrepreneur; discussing the challenge she faces; describing the help she is receiving; and detailing the way ahead.
“The entrepreneur: Michelle White, 44, is the founder and president of Michelle’s Miracle. She stumbled onto the idea of building a business to commercialize the health properties of tart cherry concentrate while working at a fruit processing plant as an office assistant. After doing research about the health properties of the fruit, she launched the company in 2001. Three of her four employees have been with her since its inception. The team has managed to create a market, get national distribution, and now sells in over 300 stores. A year and a half ago, White decided to look for equity capital. She landed an investment from an angel group earlier this year and is preparing to secure another by yearend. She’s also seeking venture capital.
“Her challenge: White wants to put together an experienced management team of individuals who have been successful in the consumer packaged-goods industry. She wants to raise venture money to hire a controller/vice-president of operations, a CEO, a vice-president of marketing, a vice-president of sales, and more sales people. Her challenge is to communicate this succession and management expansion to potential investors. … [She says,] ‘I was surprised at how investors really thought I would resist that changeover, and I don’t have that resistance at all. I guess I can’t say it enough: I know how successful it can be. I also know it takes people who are far more experienced than me. I’ve created something out of nothing—out of a byproduct—and taken it this far.’
“Her coach: Lauren Flanagan, the managing director of Madison (Wisc.)-based Phenomenelle Angels Fund is one of White’s five coaches. She’s also the primary investor in White’s business and wants others to invest. Flanagan has been an entrepreneur as well as an investor. …
“The plan: The hiring will take place over time, with White serving on the search team and the interviewing team—and weighing in on the pros and cons of each potential hire. When pitching to investors, White will refer to herself as the founder and current president. When she gets to the management slide of her presentation, she will explain that one of the uses for the requested funds is to expand the management team and find a packaged-goods veteran to help lead as CEO.”
I tried to find out how the plan is going, but couldn’t find any follow-up articles. Although the original plan was to hire a controller/vice-president of operations, a CEO, a vice-president of marketing, a vice-president of sales, and more sales people, the company’s web site indicates that only a vice president of finance and operations has been hired.
Let me conclude with an upbeat story that touches on many of the subjects discussed above: college students, a female entrepreneur, Babson College, jobs, and hope for the future [“Student’s winning approach to entrepreneurship,” by Rebecca Knight, Financial Times, 28 June 2010]. Knight reports:
“It was already one of the best days of her life. Waed al Taweel, a 20-year-old Palestinian college student and budding businesswoman, travelled to Washington, DC, shook hands with Barack Obama and spoke at his Presidential Summit on Entrepreneurship, an event aimed at deepening economic ties between the US and the Muslim world. But for Ms Taweel, who grew up on the West Bank, the real excitement came after her speech. On hearing Ms Taweel’s presentation about a company she started aged 17, the president of Babson College, Wellesley, offered her admission to the school’s graduate business programme and a full scholarship to boot.”
The West Bank might seem to be unlikely place to find a female entrepreneur; but, Thomas Friedman notes that the West Bank’s economy is beginning to heat up [“The Real Palestinian Revolution,” New York Times, 29 June 2010]. One of many things the West Bank is missing, however, is a good educational system. Knight continues:
“‘In Ramallah [West Bank], if you want to get your MBA you’ve got to go abroad,’ says Ms Taweel. ‘It’s something I’ve always wanted to do.’ As a high school student, Ms Taweel started Teen Touch, an event management business that employed fellow students to organise and staff events for customers. The company had 72 investors – mainly relatives, friends and community leaders – who contributed seed money equivalent to about $800. Over several months, the company earned its ‘shareholders’ a profit of 200 per cent. Teen Touch was named ‘best company’ in the Injaz student entrepreneurship competition, launched by Jordan’s Queen Rania in 1999 to help nurture young entrepreneurs. Ms Taweel was subsequently named best student chief executive officer of the Arab World. The contest, she says, left a deep impression on her. ‘It made me realise I can do something.’ After discussing the success of her business on the panel, she was asked about her future plans. Ms Taweel, a student at Birzeit University in Ramallah, said she would like to secure a scholarship to help her study her MBA in the US. That was when Leonard Schlesinger of Babson, made his move. Babson played an advisory role to the United States Agency for International Development (USAID), the State Department and the White House, laying the groundwork for the summit and is involved in other projects to teach entrepreneurship round the world.”
Professor Schlesinger told Knight what it was that prompted him to offer Ms. Taweel a scholarship:
“‘When she described the event planning business, it was the sort of thing where normally, you’d say, “Oh that’s interesting. That’s cute”,’ says Prof Schlesinger. ‘But the level of insight and the level of sophistication she described, the way she structured the start-up and the basic operating model that she executed when she was only 17, led me to conclude that here was a rather extraordinary young woman.’ Prof Schlesinger does not make a habit of offering scholarships on the spot. ‘You can’t programme stuff like this. It was a private act of philanthropy on behalf of Babson,’ he says. … ‘We’ve never had someone from Palestine and we’ve never had someone who’s won a competition on this scale this early in life,’ says Prof Schlesinger. ‘It’s a logical opportunity to expand our reach to another part of the world.'”
Knight goes on to point out that over a third of Babson’s MBA class is made up of non-U.S. students. Many of them, like Ms. Taweel, are (or are likely to become) entrepreneurs. That is why Friedman, in the article at the beginning of this post, writes about stapling “a green card to the diploma of every foreign student who graduates from a U.S. university.” Don’t look for Ms. Taweel to remain in the United States, however. She “plans to open a recreation centre for Palestinian youth in the West Bank” after she graduates. Knight explains:
“Poverty and unemployment continue to be big problems in the region, and lack of security and checkpoints that restrict freedom of movement have had a devastating impact on the economy. ‘I want to help other people in my community and give them job opportunities,’ says Ms Taweel.”
I have repeatedly asserted that the U.S. needs to do more to foster a climate favorable for new businesses. New businesses create jobs and America desperately needs jobs. Women represent a reservoir of entrepreneurial talent that has yet to be fully tapped. There couldn’t be a better time to figure out how to open the spigot and let women help innovate our way out of the recession.