May 7, 2013

MY USA TODAY COLUMN ON THE START-UP DROUGHT has engendered some comments.

I should also invoke Deirdre McCloskey’s Bourgeois Dignity.

But reader Jeffrey Levin offers a different theory:

I enjoyed reading your column on missing startups at USA today. I would however like to point out that you completely missed the real reason why all those start-ups are missing. As a CPA with 20+ years of experience, I have a pretty decent idea of why. The idea of companies being started up in garages by 20 year old whiz kids, while fun, are totally and completely not representative of the vast majority of start-ups. When you think those are the real start up stories, its why you miss the boat on why we have not seen any for the past 5 years.

Prior to the past 5 years, I will give you an idea of what a real start up was like. 35-40 year old Joe cannot stand working for the large company he has worked for since graduating college and knows that with the recession he will have to (a) kiss some serious ass towards a superior he cannot stand or (b) knows his pink slip is coming down the pike. He decides he no longer wants to work at large company (or is shown the door) and decides instead of doing the same old again, decides to start up his own business. He has some cash in the bank but doesn’t want to use that right off the bat, so he goes to his local bank and asks for a loan. The community bank loan officer’s first question is what collateral do you have.

This is where this recession diverges from all modern recession for the past 50 years. You see, in past recessions, the bank officer would kindly ask about the house Joe has lived in and owned for the past 10 years and the ability to take a second or HELOC to use to start up that new business. This recession, the bank officer asks how much cash in the bank Joe is willing to deposit (or securities in a brokerage account) and doesn’t bother asking about home equity, knowing that it is highly unlikely he has any.

If you dig around and research start-ups you will find that the majority of start-ups are funded by second mortgages or HELOC draws. Due to the housing crash, that equity is just not there for the vast majority of people looking to start up a new business. Its one of the large reasons why commercial credit expansion has been so moribund. Without getting off the ground from seconds or HELOC’s all those startups that would have made it past year 1 and then been able to obtain standard commercial business loan never got off the ground and thus never graduated to commercial loan financing. You have to walk first before you can run. Startups don’t start in the commercial loan department (at least most of them don’t).

Hmm. Good point. I do think, though, that all the “you didn’t build that,” and class warfare, coupled with regulatory uncertainty and tax increases, doesn’t help.

Also: Entrepreneurship And The Prairie Fire. And — perhaps related to the regulatory uncertainty and tax increases — there’s this: America’s Venture Capitalists Are Now Risk-Averse.