Startups are like children. They are imaginative, growquickly, and will define the world for the next generation. Unfortunately, they’vehave been stuck with a bad set of parents. Whereas most parents do their bestto indulge a child’s creativity and nurture their innate talents, the federalgovernment has actively set up roadblocks to startups’ success. And it’s leftour economy grounded.
The negative impact this has had on the economy cannot beoverstated. New researchfrom the Kauffman Foundation reveals that job growth in the United States isdriven entirely by startups, not established firms. Their study reveals that from1977 to 2005, startups create an average of 3 million new jobs per year whileexisting firms are responsible for 1 million net jobs lost. Or, as the KauffmanFoundation so bluntly said, “Without startups, there would be no net job growthin the U.S. economy.”
Sadly, since the mid-2000s, this engine of innovation hasbegun to stall. According to a separate studyfrom the Kauffman Foundation, startups are starting smaller and growing moreslowly, reducing job creation by a full percentage point since the 1980s.
Given that data, the federal government should be doingeverything it can to help get startups off the ground. Unfortunately, in recentyears Washington has done just the opposite. Regulation FD (Fair Disclosure), agingSEC regulations, and now, Dodd-Frank, have contributed to a hostile environmentfor many start-ups.
But Sarbanes-Oxley is perhaps the worst offender. Section404 of Sarbanes-Oxley requires publicly traded companies with a worldwide valueof $75 million or more to write an assessment of internal controls and use apublic accounting firm to audit the report and attest to its adequacy.
The rule proved incredibly expensive - often exceeding $1million for small companies. Set against the backdrop of myriad other costlyrules and regulations, many startups made the financial decision to avoid goingpublic.
As Second Market founder and CEO Barry Silbert explained intestimony before the House Subcommittee on Capital Markets and GSEs, thisthicket of rules is leading many startups to avoid going public.
“Companies are electing to remain private longer than inprevious decades, and the average time a company remains private hasessentially doubled in recent years,” testifiesSilbert. “Moreover, the profile of companies going public has dramatically changed.Today, only the very largest companies are going public, and are receiving thesales and research needed to successfully navigate the public markets.”
The result of this “systemic failure,” Silbert notes,is a lack of liquidity for upstart companies that “inhibits our economy’sability to create jobs, innovate and grow.”
Fortunately, some in Congress areendeavoring to fix this “systemic failure.” This week Sens. DeMint (R-SC) andBarasso (R-WY) will introduce the “Startup Expansion andInvestment Act,” which would allow shareholders of public companies with marketvaluations below $1 billion to opt out of Section 404 regulations. This follows Rep. Quayle who introduced a nearly identical bill in the House of Representatives earlier this year. Quayles bill includes an additional requirement that companies could only opt out within the first ten years of going public.
Such a move would encourageyoung, high-growth companies to go public in order to take advantage of the newliquidity. It’s the equivalent of nurturing a child as he grows towardadulthood. And as these startups grow into the next Apples and Facebooks of theworld, Washington can look on as a proud parent knowing they eased the path tosuccess.