A lot of people have been asking me if I think the current global pandemic will generate a new wave of startups.
Many of them have seen this Forbes video quoting venture capitalists or this Axios piece quoting investors, accelerators and Silicon Valley founders. They wanted my perspective on whether we were in for a boom in new companies because, in the wake of the Great Recession, I led Startup America’s initiative to build startup ecosystems across the country and, more recently, I spent three years researching economic thriving in communities.
Had they asked me before I embarked on that research journey, I would have joined the optimistic chorus. Now, I have a much different, and decidedly less rosy, view.
First, our communities are deeply broken.
Communities across the nation are the epicenter of deep, systemic brokenness. They have been for over a decade.
Many of us are still struggling to recover from the Great Recession, the housing crisis, and globalization. Our towns are grappling with the impact of automation and the shift to the digital economy. We’re struggling to jumpstart job creation, deal with declining economic mobility, shore up fractured social safety nets, stem the opioid crisis, confront loneliness and suicide epidemics and grapple with rising “deaths of despair.” All while dealing with deeply divided citizens who don’t trust the government, elected officials or each other.
Now we have the gut punch of a global pandemic, a snowballing economic crisis that is surpassing the Great Depression, and a flash pan of growing racial division that threatens the very foundation of our democracy.
These are complicated, painful, deep systemic wounds that need more than the salve of a few startups. And we do a disservice to one another when we glibly skip over this brokenness. When our neighbors’ and our communities’ pain is not heard and acknowledged, it festers. When hurt is met only by silence and never hears the words “I hear you,” sorrow swells. We injure one another when we refuse to acknowledge, to receive, to sit uncomfortably with the lament of others.
Showing up in love to recognize one another’s heartache is a necessary practice of community and building. We cannot begin to build meaningfully if we don’t first stop to listen, acknowledge and understand our broken places. This has been and will likely continue to be the single largest impediment to building new things unless we learn how to do this with and for one another.
Second, we don’t need a startup wave. We need a tsunami.
Nearly a third of the country’s small businesses have already shuttered, and another 25–30% are likely to follow. Every business that closes is another tear in the economic and social fabric of its community. Each one means more jobs lost.
Our nation’s 30.2 million small businesses employ over 56 million people. If half of them fail as feared, we are looking at catastrophic impact. That’s on top of the 40 million people who filed jobless claims in the last 10 weeks. 40 million people who either need jobs created for them or need to become job creators themselves.
To put it in perspective, during the Great Depression, unemployment went up 8% in one year. We went up 10% in a single month! And, historically, during “boom times” unemployment comes down about 1.5% per year. At that pace, we’re looking at a decade or more before employment resets.
It’s easy to turn optimistically to the idea that startups will come along to provide new jobs. After all, the media is chock full of stories glorifying startup life. But, contrary to media hype, entrepreneurship rates have been declining for decades, and the 2008 stock market crash had a further detrimental effect. Even after a decade post-recession, we are still feeling the loss of a generation of startups. And, the new firms that have been created are employing fewer and fewer people in fewer places around the country.
We find ourselves in a position where nearly every entrepreneurship data point — from small business failure rates to the steep declines in new business applications — tells us this recession is cutting far deeper than those that have come before. We’re in rough shape, and it’s going to get worse before it gets better. There’s just no putting lipstick on that pig.
Third, we’re asking and listening to the wrong people.
When we read prognostications about how the current crisis perfectly positions the country for a boom in new companies, it’s important to pause and consider who is making those predictions. In many of the articles that I’ve seen or have been sent to me, the predictors are largely venture capitalists.
On face value, there is absolutely nothing wrong with that. Some of the most intelligent, capable and passionate people I know are investors. But, we have to be very careful not to translate venture capitalist enthusiasm into optimism for the greater economy and, even more so, optimism for job creation.
Most Young Companies Are Not VC Funded —
While 99% of all of our nation's companies are small businesses and all of them have the potential to create jobs, only an infinitesimal fraction of them are considered venture-backable startups. Less than 0.05% in fact. New businesses are 1,000 times more likely to fund themselves through personal savings, friends and family and credit cards than through venture capital.
Venture Capital Funding Barely Touches Most Communities —
There are more venture capital funds than ever, but that capital lives and is deployed in just a handful of geographic regions, while the rest of the nation shows very little investment activity. 42% of all active VC fund portfolio companies and 56% of the VC capital funding are attached to Bay Area VC firms. The Acela Corridor (Boston, New York, Washington), comprises another third of venture capital invested. Together, these two geographic regions attract nearly three-quarters of America’s venture capital investment.
Sadly, Venture Capital Also Passes Over Segments Of The Economy Critical To Economic Recovery —
If we look back at the Great Recession, minority-and women-owned businesses were more likely to have been shuttered, but they also helped stabilize the economy in the recovery period. From 2007 to 2012, MWBE’s added 1.8 million jobs while firms owned by white males lost 800,000 jobs. MWBE’s could single-handedly fuel the COVID-19 economic recovery. Yet, only 1% of venture backed founders are black, 1.8% are Latino and 2.2% are women.
Fourth, communities lack the banking backbone they need to fuel a startup wave.
While more VC funding is needed outside the Bay Area and Acela corridor and for a more diverse set of founders, the bigger need is community finance. Banks, not venture capitalists, have long been the primary source of funding for the nation’s young companies.
Unfortunately community banks that have a high propensity to fund small businesses have all but disappeared. Between 1990 and 2018, half of the country's banks closed, creating a capital shortage for entrepreneurs, while a handful of megabanks took over. Now, just four banks are larger than all of the nation’s community banks combined — megabanks that provide significantly less small business or startup funding.
We saw how risky this is to the well-being of our nation's small businesses as the Paycheck Protection Program unfolded and big bank behavior was unveiled. Beyond stemming the immediate crisis, without a significant fix to community finance, startups outside venture capital dominant markets will lack the fuel they need to start and grow. Their communities will continue to lack the lifeblood their economic engines need to function. And any startup wave that might start to swell will fizzle out before it builds any meaningful momentum.
Fifth, we’re citing (and glorifying) misleading (and dangerous) examples.
Throughout history many notable companies have been founded during economic downturns and that can give us cause for optimism. General Motors was founded in 1908 during an economic recession. Hyatt Hotels and Trader Joe’s both opened during the 1957–1958 recession. Microsoft was founded during the oil embargo recession of 1973–1975.
But there is something decidedly different about many of the companies founded during and following the Great Recession of 2008–2010. Companies like WhatsApp, Venmo, Uber, Slack, AirBnB, Instagram, or Pinterest. Using them now as a guidepost for startup enthusiasm is an enormous mistake.
These platforms went from startup to superstar in the blink of an eye because they operate with entirely new economic theories, playbooks and rules for winning — winner-take-all rules and blitzscaling techniques that enabled a handful of firms to hoover up the majority of the capital, market leadership positions and profits. They built global powerhouses that captured exponentially greater profits and shareholder returns while employing a fraction of the people than their historical counterparts (contrary to the oft-quoted Kauffman Foundation reports that herald startups as job creators).
The result of all of this is individuals and firms with more power than most nations, emboldened by their proprietary knowledge and use of technologies and in control of the platforms that power society. Thus far, they’ve used that trifecta of power, wealth and technology to further their own advantage, and along the way they’ve damaged common resources and society without regard for the implications.
Now, an Internet originally designed to democratize information, innovation and competition is centralizing in the hands of fewer and fewer firms, fueled by a handful of investors concentrated in just a few cities (the very venture capital and private equity investors making the predictions about a coming startup boom) who are sitting on $2.1 TRILLION in capital they need to put to use.
So…
Do I hope the pandemic touches off a tsunami of new startups? Absolutely. We’re in a world of hurt if it doesn’t. But the tides are pushing hard against any startup wave that might be trying to form.
We have a lot of hard work to do to build the companies and jobs we need and to repair the brokenness of our communities. Until we grasp that those two things go hand in hand, the tides will continue to pull us further and further from shore.