Startups: government help and hindrance

Aaron Swartz writes about what government might do to encourage entrepreneurship:

http://www.aaronsw.com/weblog/prostartup

As an American who has lived in Europe for a while, I’ve seen both sides of the coin (or pond, as it were), and feel qualified to add a few things to the conversation, even if many of these points merit a discussion of their own.

  • He’s right about health care. It’s one of those things with a huge downside risk that people in Europe simply don’t have to think about. You can change jobs, take a break from a job, start a company…whatever, and you never have to think about “what if”. Even if you have the sort of preexisting condition that can hang like a stone around your neck in the US. How to implement such a system (which of course has potential disadvantages as well) is well beyond the scope of this journal.

  • Universal education. I don’t think it’s as great as Aaron seems to think, but I don’t think it’s very influential one way or the other on startups. People get good educations in both places, although, by and large, the best Universities are in the US because they have more money, and have in the past attracted highly qualified people from all over the world. In both places, students manage to meet other like minded people with whom they can start companies. There are definitely improvements to be made to the US system, but that’s really just a political discussion: like I said, differences in universities are not the limiting factor.

  • Minimum income without having to work or even having to look for work sounds like an enormous can of worms. Might be good for startups, but has big risks associated with it, and wouldn’t be politically feasible in the US. Even in most European countries with that sort of thing, you don’t just get money: you have to look for work, do job training, or prove that you’re just not capable of doing anything productive.

And here are some thoughts of my own:

I think it’s best to focus on the startup “curve”, and costs associated with various points on it: when people are just getting started, keep state-imposed costs low. If someone makes a lot of money, worry about taxing it then.

This is quite different than what has previously been the norm in many places in Europe, which have policies akin to slaughtering the goose before it lays any eggs, let alone golden ones. Italy is a particularly bad example, but it’s the place I know best, and not too far off what happens elsewhere in terms of policy: fixed, sunk, startup costs are in the order of 10,000 Euro, which for most people is a lot of money. This creates a bias towards people who already have a lot of money, and away from random people who happen to have good ideas and a strong desire to execute on them. This is something that the US more or less gets right: it cost me $55 in state fees to start DedaSys LLC as a limited liability company (even throwing in money for lawyers and the like, you’re still far under the thousands it costs in many European countries).

Incidentally, it looks like Germany may be on the right track, if you look at the “Mini-GmbH” mentioned in the article. It’s progress, if nothing else.

Beyond that, there is a lot more red tape in Europe, and that, I think, rather than a bit higher taxes for companies that are profitable, is the thing that, outside of culture, probably weighs most heavily on European startups.

Culture, however, is also a very key factor, and not something that will change soon or easily. In Italy, there’s a lot of pressure to land a permanent job, from which you can basically never be fired. The idea of striking out on your own is probably simply not on most people’s radar screens. I think culture is what means that Europe produces tons of great open source software, for example, but relatively fewer startups (if you’re just counting open source startups though, Europe does ok). Perhaps this is slowly changing, but it will take a while, and without some policy changes, the incentives won’t even materialize.

Returning to things that government can do, something critical that many people don’t get is that government funded startups are usually big failures (see the French “Google competitor”) and a big waste of money that would probably simply be better to spend in lowering taxes, improving education, or other “level playing field” initiatives, rather than having government employees attempting to “pick winners”. This is a common problem in Europe, but also in many areas of the US that want to replicate Silicon Valley’s success.

Going back to the US, which was Aaron’s original point of focus, beyond health care, what could the US improve? At the moment, immigration seems to be the big problem: people from all over the world want to go to the US to work and start companies, but look at what kinds of hoops someone (who is coming to spend money and create jobs!) has to jump through to do so:

http://www.techcrunch.com/2008/05/02/coming-to-america-getting-visas-to-do-business-in-silicon-valley/

Embarrassing and shameful.

In conclusion, I think the common theme is that the government can’t really do much to actively promote startups, but can certainly hinder them by setting too high a bar in terms of bureaucracy and fixed costs. Lowering those fixed costs for new companies, be it through at least basic health care for everyone, or lower taxes and less paperwork should be what governments aim for. Given the right conditions and incentives, bright, hard workers will do the rest.

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