WSJ – "Starting a company 'is harder than it was at any time I can remember.'"

Today’s economy is the worst period in decades for small businesses and startups to obtaining financing, writes The Wall Street Journal:

Ensconced in a strip mall behind a Carpeteria outlet, Derek Smith has been tinkering for two years with a wireless electrical system that he says can help schools and office buildings slash lighting bills. With his financing limited to what he earns as a wireless-technology consultant, he has yet to hire his first employee.

This is a far cry from his last start-up, which he cofounded in 2002. At the two-year mark, that company, which makes radio-tracking gear for hospital equipment, had five employees, about $1 million in funding from angel investors and offices with views of downtown San Diego.

“When I started this the plan was to go out and raise a bunch of money,” says Mr. Smith, who is 36 years old. That was in late 2008, just as financial markets around the world collapsed. “I quickly discovered I can’t do what I did before.”

Tough economic times have pushed more Americans into business for themselves, working as consultants or selling wares online. But many are not taking the additional step of forming a company and hiring employees.

For people like Mr. Smith, lack of funding seems to be the biggest problem. Two traditional sources of start-up cash–home-equity loans and credit cards–have largely dried up as banks wrangle with massive defaults and a moribund housing market. Venture-capital firms that typically invest in young companies, as well as angel investors that focus on early-stage start-ups, are pulling back as they struggle to sell the companies they already own.

Venture-capital firms invested $25.1 billion in the year that ended in September, up 10% from the same period a year earlier but still down 27% from two years earlier, according to Dow Jones VentureSource. Angel investment amounted to $8.5 billion in the 2010 first half–30% below the average level in the five years leading up to the financial crisis, estimates Jeffrey Sohl, director of the Center for Venture Research at the University of New Hampshire.

“I’ve never seen seed capital so low,” says Mr. Sohl. “This is alarming.”

Startup businesses are the primary source of capital creation and job growth. According to economists, without small business startups, net job growth will be almost nil — exactly where we are right now.

But the current dry spell in small business loans and venture capital investment is only half of the problem. The other major factor? You guessed it — crony capitalism:

We are creating so much regulation – over tax policy, health care, financial activity – that smart people have figured out that they can get rich faster and more easily by manipulating rules on behalf of existing corporations than by creating net new activity and wealth. Gamesmanship pays better than entrepreneurship.

It is always hard to start a business. It is especially hard to start an innovative business, one that will foster a new technology or business method. Incumbent players in a market have an inherent advantage: Momentum counts for a lot, and it takes tremendous effort to get customers comfortable with a new product – or even to hear about it in the first place.

Given the difficulty of starting a company from scratch, and how economic activity is generated today, you can start to see why, if you were a rational market actor, you would be trying to get a piece of the government action.

… The two largest pieces of legislation enacted in the past two years – health care and financial reform – are very vague. Take the new Consumer Financial Protection Bureau. It has a broad mandate to protect us from financial abuse, but when it comes to the actual implementation, the Brookings Institution wrote that unelected regulators will decide “almost everything” about how the organization works.

This is highly dangerous to innovation, which depends on clear and transparent rules. The more complexity, the more incumbents are favored. They have the capital to participate in complicated regulatory proceedings. They can hire high-priced lobbyists to present facts in a light most favorable to them. The more incumbents are favored, the harder it is for new companies to gain traction.

Witness the recent award of over 100 exemptions from new government employer health insurance requirements awarded by HHS to big corporations, unions, and other entities that generally fall under the category of “special interests”.

Leftists firmly believe that their vision of “justice” (i.e. big government micromanagement of business and the economy in order to ensure fair distribution of wealth) trumps proven free market principles of economic growth and prosperity. They would rather have a heavily-regulated “fair” economy even if the result was high unemployment, tight credit, crippling debt, and heavy taxation, because the thought of a “free market” is simply too much for them to bear.

The Tea Party movement and the recent election show conclusively that this view is limited only to a small minority of Americans; unfortunately this elitist progressive minority has been in charge of government policy for the past two years. There is a lot of damage that needs to be undone before small businesses and our economy can once again flourish.

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