Startups: Job Creation Engines (Are You Listening Obama?)

In this week’s issue of BusinessWeek, we published the inaugural list of “The World’s Most Intriguing New Companies.” I am thrilled that we launched the package right as Global Entrepreneurship Week kicks off, taking place Nov. 16-22, in 85 nations.

In my lead story for the package, “Fertile Ground for Startups,” I made two big points:
1. Startups are playing an increasingly important role in American business
2. Startups may play a central role in any recovery.

There was one startling new study, based on 2007 Census data, I was unable to work into the story that I want to highlight now, which provides some empirical evidence supporting the second point.

According to a new study by the Ewing Marion Kauffman Foundation, which was co-written by the respected economist Robert Litan, companies less than five years old generated nearly two-third of the net new jobs created in the U.S. in 2007. Without these startups, “net job creation for the American economy would be negative in all but a handful of years.”

The upshot: It is clear more than ever that new companies and the entrepreneurs that lead them are the engines of job creation and economic recovery.

It is well known within economic circles that new companies produce the majority of new jobs in the U.S. economy. What this reports reveals for the first time is extent of that trend, and the fact that startups play a particularly important role in growing jobs out of a recession. New companies have produced all of the net new jobs in the U.S. from 2001-2007, and also from 1980-1983, the last big American downturn, according to the study.

Read the rest of the BusinesssWeek blog post here and also see an embedded link of the report.

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Healthcare: Startups Big But Hidden Problem?

Yesterday, I posted a question on Twitter to entrepreneur and investor Manu Kumar, who recently launched his own venture firm, K9 Ventures.

The question was: How do startups provide health care coverage for their employees? Manu said venture capital firms do not provide group coverage because it is messy and risky. “Small startups end up with catastrophic coverage only,” wrote Manu. “It is a HUGE recruiting issue. One of the biggest reasons folks stay in big companies and don’t do startups is healthcare costs.”

I would love to hear from more entrepreneurs and investors about this problem–and potential solutions. You would think this is one area where the government could help small business?

Instead small businesses are being penalized by the Obama Administration’s proposals to reform healthcare.

Silicon Valley Rallies Behind Obama’s CTO Pick

Over the weekend I did some more reporting about the new U.S. chief technology officer Aneesh Chopra. Here’s my revised story showing that Silicon Valley is rallying behind this Easy Coast outsider.

Silicon Valley Rallies Behind Obama’s CTO Pick
As secretary of technology, Aneesh Chopra expanded Virginia’s high-speed Internet. He now stands to become U.S. Chief Technology Officer

By Spencer E. Ante

For all of its attributes as the world’s epicenter of innovation, Silicon Valley remains an insular region in some ways. But that hasn’t stopped many technology leaders from rallying behind President Barack Obama’s surprising choice for the nation’s first Chief Technology Officer: Virginia Secretary of Technology Aneesh Chopra.

Chopra was educated on the East Coast and has never worked for a California tech stalwart or startup. But giants such as Google, industry trade groups such as TechNet, and top Valley luminaries such as Intel Chairman Craig Barrett and prominent blogger Tim O’Reilly are applauding the 37-year-old Indian-American as a superb choice for the nation’s top technology czar. Chopra has the chops, say Valley veterans, to have an impact.

“Aneesh Chopra is one of technology’s leading lights and we are lucky to have him as our nation’s Chief Technology Officer,” said Intel’s Barrett in a written statement. “Aneesh demonstrated outstanding leadership as Virginia’s secretary of technology and believes to his core that innovation and technology are the backbone of our economy.”

Click here to read the rest of the story.

Fresh Hope for Broadband: 4 States to Apply for Stimulus Funds

Today, Arik Hesseldahl and I broke some news on the broadband beat. Colorado, Ohio, Tennessee, and Virginia are all aggressively going after some of the $7.2 billion being handed out by the federal government as part of the stimulus program.

Here’s the top of our story.

On the campaign trail and in the White House, President Barack Obama has embraced the idea of providing high-speed Internet access to every community in America. But the plans for universal broadband have gotten off to a rocky start. Some technology executives complain that the $7.2 billion allocated in the federal stimulus plan isn’t half the amount needed to do the job. Telecom companies, including AT&T (T) and Verizon Communications (VZ), are so wary of the program’s potentially onerous rules—the strings that usually come attached with federal money—that they may sit out the first round of grants.

Now, the Obama Administration’s broadband plan looks to be getting a new group of unexpected partners: state and local governments eager to play a leading role in bringing fast Internet connections to the nooks and crannies of the American landscape. Colorado, Ohio, Tennessee, and Virginia are planning to seek broadband stimulus money, BusinessWeek has learned. Tennessee says it expects to receive as much as $150 million in broadband grants.

Click here to read the rest of the story.

Repost: Harvard Professor’s Plan for Fixing the Banking System

I have never reposted a post on this blog but I am going to make an exception today.

The reason? In mid-February, I blogged about a Harvard professor’s plan to fix the banking system. The essence of the plan was to use public money to subsidize the creation or financing of numerous investment funds that will be privately managed and dedicated to buying troubled assets.

This morning, Treasury Secretary Geithner announced a plan to buy toxic assets from the banks that looks very similar to the plan I touted. More important, the financial markets are applauding the plan and think it could actually work.

The big challenge now is that the public is so outraged at Wall Street that Congress may increase taxes on the potential profits of these funds.

That would be a BAD IDEA for two reasons. One, it would scare away large swaths of the investment community from actually participating in the program. Two, the public already stands to be benefit because the U.S government will be providing up to 50% of the equity capital of these funds. So we are part owners of the funds.

Here is the old post:

Now that Obama has pushed through a stimulus package, his administration has to crack a much tougher nut: Putting the banking system on sound financial footing and re-opening the credit markets.

We all know that TARP I has not worked out as planned. Yes, it averted a total catastrophe. But the banks are still not lending that much and the credit markets remain closed to all but the most stable companies. Our capitalist system remains a giant clogged artery in need of major bypass surgery.

So far, I have not heard any great ideas that could help solve this incredibly complex challenge. And there is no consensus emerging around how to get the banks to sell off the hundreds in billions in toxic assets clogging their balance sheets–unlike the stimulus program, which was a far easier problem. CNBC’s Dennis Kneale just floated an idea from an unnamed stock trader to turn the toxic assets into exchange traded funds.

But yesterday I got an email from Harvard touting a new plan and paper from Harvard Law School professor Lucian Bebchuck. His proposal to establish a “significant number of competing funds that will be privately managed and dedicated to buying troubled assets – not on creating one, large public-private aggregator bank” is the best idea I have yet to hear.

I think it has a shot at working because it designed to introduce much more competition in the market for these distressed securities–unlike one single “bad bank” that would only inject a limited amount of competition.

One myth about the current financial crisis is that there is no market for these troubled assets. That is just not true. Some of the smartest hedge fund managers in the world are trawling through these assets and scooping them up for super-cheap prices. Hedge fund kingpin John Paulson, for example, believes some of the best investment opportunities in 2009 and 2010 are in distressed mortgages.

So there is a market. It just needs to be far far bigger and more active and liquid so the majority of these assets can be bought and taken off the balance sheets of the banks. Bebchuck’s plan to use public money to create 25 or so new subsidized but privately run and financed funds designed to purchase these assets just might be able to spur the creation of that market.

“Establishing competing funds, I show, is necessary both to securing a well-functioning market for troubled assets and to keeping costs to taxpayers at a minimum,” writes Bebchuck.

“Each new fund will be partly financed with private capital, with the rest coming (say, in the form of non-recourse debt financing) from the government’s Investment Fund planned by the Treasury. One important element of the proposed design is a competitive process in which private managers seeking to establish a fund participating in the program will submit bids as to what fraction of the fund’s capital will be funded privately.

The government will set the fraction of each participating fund’s capital that must be financed with private money at the highest level that, given the received bids, will still enable establishing new funds with aggregate capital equal to the program’s target level. Overall, I show that the proposed design will leverage private capital to the fullest extent possible and will provide the most effective and least costly mechanism for restarting the market for troubled assets.”

Click here to read the entire paper.

Why AIG Should Not Pay Out Any Bonuses

I haven’t written that much on this blog about the financial crisis writ large but given the public furor over the AIG situation I want to weigh in with my thoughts.

I don’t believe AIG execs should get $165 million in bonuses for their performance in 2008. Here’s why:

1. It’s just not right. I don’t think of myself as a moralistic or sanctimonious person but c’mon people! This is just too much to swallow. AIG is one of three companies that the U.S. government had to take over because their collapse threatened the integrity of the global financial system. We, the U.S. taxpayers, own 80% of the AIG, after spending $170 BILLION to save it from collapse (and we’ll probably have to give it even more money). Now, the company wants to pay out hundreds of millions in bonuses to executives who ran a company that helped to drive our economy into a deep recession. I think not.

2. The executives don’t deserve it and they don’t need to be retained. These payments have been called bonuses and retention payments, depending upon who you talk to. Either way you look at it, the company can not justify these payments. Bonuses are supposed to reward performance. Clearly, AIG’s performance was horrific. It’s like a baseball player getting a bonus for taking steroids or striking out every time he was at bat with runners in scoring position.

NY attorney general Andrew Cuomo produced evidence today showing that many AIG employees in the infamous financial products group received bonuses. This is the group that created all these exotic derivatives that caused AIG’s near collapse. That is unconscionable. But even the employees that had nothing to do with the financial products group that ruined AIG should not be paid bonuses since the entire company lost lots of money and had to be taken over by the government.

The second argument, which was actually made by AIG’s CEO, is even more galling. “We cannot attract and retain the best and the brightest talent to lead and staff the A.I.G. businesses — which are now being operated principally on behalf of American taxpayers — if employees believe their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury,” wrote AIG CEO Edward Liddy to Treasury Sec. Timothy Geithner on Saturday.

Really? Many of these executives were supposed to manage the risk of the firm. Clearly, they did an awful job and should not be seen as stars that need to be retained. Get rid of ’em I say. Moreover, last time I checked Wall Street was filled with tens of thousands of highly qualified and unemployed people. Many of them would be happy to take those jobs at AIG in a heartbeat.

3. Contracts are malleable. This week, New York Times columnist Andrew Ross Sorkin audaciously put forward the best argument for paying out the bonuses: that the government should not break a contract. Sorkin is a great reporter but I have to say he’s wrong about this one.

As one law professor put it, “contracts get repudiated, renegotiated, modified, delayed, worked out, managed — pick the euphemism — all the time.” I know this from personal experience too having covered the tech bust. Giant multi-billion outsourcing contracts were renegotiated many times during that period because both sides knew the contracts did not make sense with business volumes falling off so much.

That’s why I applaud President Obama’s efforts to stop the bonuses. He is using the bully pulpit to pressure and shame these executives to give up their bonuses. I agree the government should not unilaterally break the contracts but it has every right to use its power to get the executives to give up what they don’t deserve. I think he’s going to get his way, and that’s a good thing for Obama and America.

Then we should focus on the bigger issues. Like, why did AIG pay out more than $100 billion of the money the government gave it to counter-parties. Goldman Sachs got $13 billion, Société Générale received $12 billion, and $12 billion went to Deutsche Bank, nearly 100% of what they were owed.

That strikes some financial professionals as egregious. If AIG had filed for Chapter 11 bankruptcy in September, those same firms would have gotten in line with other creditors and received pennies on the dollar. There’s no reason AIG–or the U.S. government–couldn’t have negotiated better terms.

Tech CEO Survivor

This week, eBay CEO Meg Whitman announced she was stepping down after a ten-year run. That got me thinking about what other tech leaders may be headed for the exits in 2008. Check out this video in which BusinessWeek reporters Stephen Baker, Heather Green, Catherine Holahan and Spencer Ante play CEO survivor–and also talk about technology and the Presidential elections, and why the Internet is so annoying sometimes.

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