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MidasMoments: Where Art Thou, Green Shoots?

MidasMoments: Rob Slee’s Comments on the Nation

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        April 29, 2013

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Rob is widely recognized as the country’s foremost authority on the capitalization and financial management of privately owned companies.  Read MidasMoments for Rob’s views on marketing, operations, skill leverage and the legal and economic environments affecting private business.

Where Art Thou, Green Shoots?

The “green shoots” of economic revival are already evident, Bernanke told “60 Minutes” back in 2009.  To leave nothing to chance, he then proceeded to apply more stimulus fertilizer to those shoots than had ever been done before.  Alas, four years later we’re still waiting for the green shoots to show themselves, especially as it relates to growing businesses in the private sector.

Historically, small businesses have been the primary engine of new job creation in the United States.  If the economy was getting healthy, we would expect to see the number of jobs at new businesses rise.  Instead, we are witnessing just the opposite.  We are constantly told by the Wall Street media that the economy is “recovering”, but the number of “startup jobs” at new businesses has fallen for five years in a row.

According to an analysis of U.S. Department of Labor data performed by economist Tim Kane, there were almost 12 startup jobs per 1000 Americans back in the year 2006.  By 2011, that figure had fallen to less than 8 startup jobs per 1000 Americans.  According to Kane, the number of jobs in the United States at businesses that are less than one year old has fallen from 4.1 million in 1994 to 2.5 million in 2010.  Overall, the number of “new entrepreneurs and business owners” has fallen by more than 50 percent as a percentage of the population since 1977.

The United States was once known as “the land of opportunity”, but now that is fundamentally changing. At this point we truly do have a “crisis of entrepreneurship” in this country, and that is a huge reason why America is in decline. We are witnessing the slow death of the small business in America, and as I’ve written numerous times in the past five years, that is incredibly bad news for all of us.

Economic theory states that the shoots should have bloomed:  historic low interest rates; historic amounts of liquidity provided by the government (stimulus); and improving personal and corporate balance sheets.  What happened?

Of course, interest rates don’t matter if you can’t access the money.  For four years the Pepperdine capital surveys have consistently shown that small firms have little/no access to low cost capital.

I believe the bigger reasons for the decline of entrepreneurship in America can be found in the lack of an ecosystem to support such growth.  Let’s review the cast of characters who are in position to make a positive difference.

Business owners – the vast majority of owners are lifestylers.  They themselves have no strong desire to create the kind of businesses that can compete in a global economy.  As I wrote in Midas Marketing, the Aggregation Age is destroying lifestyle businesses at a rapid rate.  Creating growth on Main Street starts with the owners.

Professionals – few lawyers, CPAs or financial planners aggressively help owners increase the market value of their businesses.  If anything, most professionals try to inhibit owners from making strong moves, because if anything goes wrong, they may lose a client.

Academics – I’ll combine business valuators with the academics, because both groups are completely clueless as to what it takes for a private company to compete in a global economy.  With their theoretical teachings, business academics are doing far more harm than good to the American private economy.

Consultants – I truly believe that many management consultants know what owners need to do to compete in a global economy.   But since most (80%+) owners will not change their behavior in this area, consultants have to offer mainly tactical solutions, and these do not remake the business sufficiently to create substantial value.

Institutional Equity – it took me years to figure out the real motives of most private equity groups:  it’s all about the management fees (ordinary income along the way).  Sure, a couple portfolio companies will hit pay dirt, so capital gains are important for those.  If even our institutional equity players are not generating risk adjusted returns for investors, and they are not, we’re in serious trouble.

America’s Wealthy – Prior to ten years ago, a large percentage of our successful entrepreneurs invested 10-20% of their wealth back into American small businesses.  They accomplished this through angel networks and direct investment in early stage companies, mainly located in the communities in which they lived.  After the tech crash of 2000, it seems our entrepreneurially wealthy decided the Asian market was a better bet, and many took their money and intellectual capital to China.  That move helps explain why China has had so many green shoots in the past decade.

Government – the federal government is killing the private capital markets.  Even as the politicians gratuitously say how important small business is to America, they are busy pouring sand into our gas tanks.  I believe that no one with any power in D.C. has the least understanding of what small business is facing in terms of the lack of a value creating ecosystem.

So when will green shoots blossom again in America?  That’s easy:  it will happen as soon as we get the characters above fully engaged in the business of value creation.

– Rob

Comment directly to Rob at r.slee@midasnation.com