Kauffman Calls for States' Startup Acts

If America wants to encourage startups, states need to pitch in on the effort.

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The Kauffman Foundation today issued a “Startup Act for the States” report, shifting its focus from how the federal government can boost entrepreneurship to what state and local governments can do to nurture new businesses.

Benno Schmidt, the foundation’s interim president and CEO, said there are two reasons for this shift:

“First, with gridlock in Washington, states and localities have more opportunities for reform and fewer institutional obstacles. Second, our scholars’ discussions with entrepreneurs turned up a finding that will be surprising to some of you—it’s state and local regulations that matter to them as much, or more, than federal statutes and regulations do.”

Healthy economic growth in America depends on creating a better environment for entrepreneurship. Until the recession hit in 2008, new businesses generated almost all of the net new jobs in the U.S. But startup activity has been declining for the past several years. That trend continued in 2011, when startup activity dropped 5 percent, according to new Kauffman research.

States and localities can help reverse their trend by taking several steps outlined by Schmidt in his “State of Entrepreneurship” address at the National Press Club.

First, they should stop basing their economic development efforts on “smokestack chasing”—trying to lure large corporations through subsidies and tax breaks. That’s a shortsighted strategy, since “there’s no guarantee companies will stay once their benefits end,” Schmidt said.

“A much more beneficial long-term strategy is to create an environment that supports innovation and entrepreneurship and attracts the individuals who will launch companies that create jobs that remain where they are created and generate valuable tax revenue for state and local governments,” he said.

Here are some specific recommendations from Kauffman, a Kansas City-based foundation that researches and promotes entrepreneurship:

• Reduce the paperwork, time, and effort needed to start businesses—providing a one-stop website for business registration and consolidating physical space for in-person registrations as well. Also, make it less expensive to shut down businesses, since some ventures fail.
• Reverse the boom in occupational license requirements. More than 20 percent of the American workforce is now covered by occupational licensing requirements, compared with 5 percent in the 1950s. Occupational licensing stifles competition and makes it harder for entrepreneurs to introduce new business models that could benefit consumers.
• Bring more innovation to K through 12 education by lowering the barriers to the formation of charter schools.
• Make it easier to commercialize new technology by allowing faculty members at state universities to license the technologies they develop without having to get the approval of their universities’ technical transfer offices.
• Stop enforcing noncompete agreements, “which stifle the spread of talents and ideas and, thus, a state’s economic performance,” Schmidt said. “Studies have found that full enforcement of noncompetes reduces startup activity, patents, and venture capital.”
• Simplify taxes and avoid credits and incentives that favor one business sector over another.

Implementing some of these proposals may be difficult. For example, lawyers are going to resist allowing paralegals or other nonlawyers to provide routine legal services such as wills, said Nebraska Governor Dave Heineman, who also spoke at the “State of Entrepreneurship” event.

Plus, fostering entrepreneurship requires an attitude change as well, said Delaware Governor Jack Markell. To be successful, states must make sure “entrepreneurs feel welcome and wanted,” he said. They need to understand that 400 million-dollar companies will have a bigger impact on their economy than one $400 million corporation, he said.