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Small Business Week: The Economy and Entrepreneurs

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Tim Kane
Economist and Senior Fellow, Kauffman Foundation
Tuesday, May 19, 2009; 12:00 PM

Tim Kane, an economist and senior fellow with the Kauffman Foundation, will be online to discuss how entrepreneurs and small businesses can survive the recession on Tuesday, May 19 at Noon ET.

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Kane, who founded multiple software firms, co-authors the Growthology blog, which tracks key research and policy ideas that are accelerating economic growth and changing the world.

For more from our Small Buinsss Week series of live discussions, click here.

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Tim Kane: Hello everyone. Tim Kane here. I am an economist with the Kauffman Foundation (kauffman.org) where I write a blog (growthology.org) and try to advance good ideas to help grow the economy and promote entrepreneurship. I am open to questions, about the economy, about new firms, about the latest Star Trek movie, bring 'em on!

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Auburn, Wash.: I have been in Business for about 2.5 years. I am not on a major street, in fact more of an older downtown area. There is traffic that drives by, although I do not have a lot of traffic in my store. How can I make my traffic in store busier? What is a good marketing method to bring the customers in?

Tim Kane: Hi Auburn. I would advise building mentor network. Ask some folks that you respect in business to serve on an unpaid advisory board. There are thousand questions about business tactics that a board can guide you in ways that online answers never can. That said, I am in favor of big signs that you change with some frequency. Depends on what you are selling, of course.

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Washington, D.C.: A new Kauffman study says immigrants are becoming entrepreneurs at a higher rate than natives. Why do you think that is and what are the characteristics imigrants have that may be fueling this trend?

Tim Kane: Hi D.C. Yes, my colleague Bob Litan and I have written another paper advancing what we call "knowledge economy immigration" so I have a strong opinion here. Immigrants have probably always been more entrepreneurial than the native born, just by the nature of their efforts and personality in migrating. But Vivek Wadhwa (http://www.businessweek.com/bios/Vivek_Wadhwa.htm) has identified some key facts that bear attention by Congress. We've sponsored some of his research which you can find at kauffman.org, but I recommend his BizWeek columns highly also.

Bottom line: migrants not only create more companies on average, but they crate more jobs, too. It's a win-win for the U.S. to have high skill migrants here, and Congress should be working on an "entrepreneurs visa."

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Alexandria, Va.: One of your peers said on Growthology recently that recessions don't matter that much to entrepreneurs because they act as their own economic stimulus package. However, many small business owners are suffering from lack of access to credit and low capital. What's your position on this?

Tim Kane: I agree. Restrained credit is tough and will cause some companies to fail. On the other hand (hey, I am an economist) entreps are very diverse. Many entreps don't want to load up on debt. They can and should bootstrap.

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New York, N.Y.: Do you think entrepreneurs and small businesses will be some of the first to benefit from any economic growth in the country, or will it take a while to trickle down?

Tim Kane: Turn that question around. Entrepreneurs will CREATE the recovery, not get trickle down benefits. Fact is, in good times and bad, all net job creation comes from young companies (under five years old).

There is a mindset based on old economic models and data than saw the economy as a kind of static thing. So many jobs, so many companies, zero-sum. But in the last 10-15 years, a revolution in economic data shows the economy is literally in constant revolution with massive gross job flows. Read up on John Haltiwanger (a UMD prof who I think should be near the front of the line for a Nobel prize).

New businesses under 5 years old create 100% of net new jobs in America. Yes, failure rates are high for young firms, but success rates are higher.

See BDS data that Kauffman funds at

http://www.kauffman.org/research-and-policy/business-dynamics-statistics.aspx

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Alexandria, Va.: The Growthology blog doesn't talk a lot about health care, but health care reform is all the rage these days. It's also almost always one of the top issues of concern for small businesses in many polls. Do you think small business owners are getting a fair shake when it comes to paying for or finding affordable health care?

Tim Kane: Hi Alexandria. Great point. Health care is the big issue for all business, and frankly the wrong-headed 3rd party payment status quo is bankrupting the nation. To answer your question, no, small firms are not getting a fair shake at all. The field is tilted against small firms and it has been national policy for decades. Ther fix is easy economically, but not politically.

As for solutions, I have to believe you can find lots of material at kauffman.org and/or entrepreneurship.org (which we have built in coordination with the Commerce Department). I would like to point out a survey I did of top economic bloggers

http://www.kauffman.org/uploadedFiles/economic_bloggers_survey_033009.pdf

where two of the questions identified health care as the biggest barrir to more entrepreneurship in America.

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Laurel, Md.: Are there any basic books or other resources (blogs, Web sites, etc.)about economics and business growth that you could recommend to a small business owner who is trying to grow her business?

Tim Kane: The Knack is a good book. Very how-to oriented.

For inspiration, I like everything by Bob Cringely, especially his PBS documentary "Triumph of the Nerds."

And you have to visit SBA.gov. I thought SBA was a joke for many years, and most entreps I know simply are not interested in SBA loans, but the website is one of the best resources you can find. Must visit.

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Bethesda, Md.: As an economist you rely a lot on data to boost your theories, but do you think there's truth in many small business owners saying some of their success has just been plain luck?

Tim Kane: No. Good luck equals smart work.

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Baltimore, Md.: I've heard people say that the recession is good for this country because it will spur innovation and more people will create their own businesses. Do you believe this to be true? Have we already begun to see any examples of innovation coming from someone that may have been laid off? Or is it still too early to see such results?

Tim Kane: Great question, Baltimore.

It's tough because recessions are in some sense natural, but that doesn't mean they are "good for you" in the same way that veggies are. While downturns in a snese create higher rates of self-employment, a lot of that is driven by necessity as well as a shift in opportunity costs. Bottom line, it is hard to imagine that recessions yield higher rates of innovation. That said, I don't think they hurt innovation either. Innovation is the result of creativity (a kind of human capital), so two points on that. One, there is a long lag between the development of creativity and experience yielding an innovation. Maybe a 20 year lag or longer. Business cycles won't correlate. Two, I think our long-term economy will be okay so long as the education system doesn't bett 100% of the creativity of our children!

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Tysons Corner, Va.: I'd really love to go into business for myself as a consultant in a professional industry, but I fear that with all the layoffs, companies aren't interested in hiring consultants or contractors for that matter. Do you have any words of advice for someone like me? Or am I better off sticking with my big firm?

Tim Kane: Hi Tyson's. Consulting is a unique and economically sensitive sector. I agree with your skepticism. Don't rule it out, but make sure you have customers lined up before you leap. That's the upside of consulting: you can test market your service quite easily. Good luck!

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Washington, D.C.: Is Obama's stimulus package doing enough to help small businesses?

Tim Kane: No, it is not. The word entrepreneur was literally left out of the 130,000 word bill (I think that word count is right. I actually did read a lot of it, and did the word search).

That said, I'm not sure if government can stimulate small business. It can try to stimulate the overall economy, but there is much more uncertainty about the effect than any administration will admit. (fair and balanced alert: the Bush administration had its own failed stimulus policy.)

Does this mean Keynesianism is stupid? No. But it does mean there are stupid attempts at Keynesianism. If the government wants to stimulate growth, I think a progressive tax cut is the answer. Guess how much it would "cost" to have a 1-year payroll tax holiday? And keep in mind that every American workers pays essentially 15% of each paycheck in payroll taxes on the first 100k of income. Answer: $800 billion. About the same as the $787 billion Obama stimulus.

Personally, I like the idea of every employee getting a higher paycheck and every employer having a lighter payroll (and possibly hiring more). Simultaneously.

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Philadelphia, Pa.: Not only are many immigrants highly motivated, yet I recall a study years ago that has shown, throughout history, that the most productive workers typically are second generation Americans. Thus, might this spell hope into the future that there may be a devote future generation workforce emerging?

Tim Kane: Agreed Philly. Maybe some clues for our education system in there, too.

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Takoma Park: To me you really have to be on top of your marketing right now. You can't waste money on advertising. You need to be aware of who you are trying to sell your product to and target them.

Obviously financing is an issue, but that is always the case with small business and start ups.

Tim Kane: Takoma is right, but I'm not sure we can make this general advice. Each business is so unique, and there are some firms will probably fail unless they increase their advertising. In my personal experience, getting the most money for your marketing dollar is the ultimate business challenge. It is just so easy to waste cash if you don't know what you are doing. You need advice, and then again, I always hated to see my firm's cash going to consultants. Again, I can't say the word "Advisory Board" enough. Maybe because it's two words.

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Prescott, Ariz.: I've thought about starting my own business (consulting), but I had cancer as a child and I seriously doubt I can get anything but worthless health insurance on the "open" and "free" market. Thus I have been and indentured servant working for "the man" throughout my life so I could provide insurance to my family. I am hoping that health care reform that had a public option to compete with the un-noble insurance industry would help people like me take more economic risk and it would help the economy grow. Am I getting my hopes up just to get them crushed?

Tim Kane: Prescott, thanks for the message. You define what we can think of as the pit of American health care. There are two ways out of the pit: (1) nationalize the system or (2) allow a truly free market for care. The status quo is neither, and as a consequence leaves a lot of potential entrepreneurs locked-in.

I do think the Obama administration is making the right move in changing the tax treatment of employee-sponsored health care taxable as income. Benefits, normally untaxed, are another advantage of the rich over the poor, but more importantly a distortion to health care economics.

My advice, Prescott, is to work on your startup idea on your "off-duty" hours. Also, keep in mind that many entreps have a spouse whose insurance covers them both. That fact has been reported in some research as a reason why job lock isn't such a problem for entrepreneurship.

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Anonymous: Tim : What fields are most promising for entreprenuers? Am I better in goods or services? Is a franchise still a viable way to go?

Tim Kane: The best fields for you to start a company is the one you enjoy and know the most about. I'm serious. If you treat a startup as a job, I think your chances are slim. If you instead have an idea you love, your chances are good. You will probably work 90 hours and hate to close your eyes at night.

In the aggregate, I think there are three sectors that will get ever bigger in the next 30 years. Health care, education, and entertainment. I tend to believe that modern life is so profoundly prosperous, that the basics challenges of life - food and shelter and stuff - are pretty much statisfied. Increasing consumption demand will shift more towards the "luxury" sectors -- lifelong education, arts, fun technology, and the quest for eternal youth.

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Indianapolis, Ind.: What do you see as the top 5 trends for small businesses? Is it more innovation as a result of the economy, more small business government contracts as a result of the economic recovery package, etc? Also, what are the fastest growing industries for small businesses?

Tim Kane: Hi Indy. To continue the previous answer, I don't think people have fully appreciated how deeply America has become a service economy. Nearly 17 in 20 jobs is a service job. Probably everyone reading today is in a service job (since we are all at our computers, right?). Even Alicia, the host here, is a service worker. I'm a PhD economist and former military officer and former entrepreneur -- all service jobs.

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Southwest Florida, Ground Zero: As an entrepreneur with a really good idea and no capital, I've become what I recently saw described as a "Radical Optimist." We have no choice but to succeed, and anything pessimistic -- which doesn't exclude realism about challenges -- will only stand in our way. Many of my compatriots in this area are acting the same way, and we're coming out of the funk we've been in for a couple of years.

Tim Kane: Hi Florida. I like your note, and it reminds that many entrpereneurs will find a way forward by self-financing. Face it, it's not like investing in the stock market in 2007 was yielding a higher return than investing in yourself. I have to believe that studies in the next few years will show that Angel investors fared the market meltdown much better than the day-traders. And don't you think the Wall Stree meltdown is pushing a lot more money into the Angel channel? For potential entreps, this suggests that there are some good sources of capital you can tap, but you have to beat the local bushes.

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Washington, D.C.: "Tysons Corner, Va.: I'd really love to go into business for myself as a consultant in a professional industry, but I fear that with all the layoffs, companies aren't interested in hiring consultants or contractors for that matter. Do you have any words of advice for someone like me? Or am I better off sticking with my big firm?"

Right now is the perferct time to start a consultant business. I started my business right after 9-11, when everything contracted. I have been sucessuful for 7 years now. I suggest this person inquire about consulting for their employer they work for now. it's a win-win for them because they still get your skills without all the loaders (health-SS-FICA-Taxes). Just make sure your hourly rate wil cover your current obligations including the cost to pay for your own expenses i.e health-SS-taxes.

Tim Kane: D.C. has good advice here. Very good advice. My only caveat is that after 9/11 (2002) was a much better economy than now (2009). A misperception is that the economy was in recession after 9/11, but the economy literally began its recovery the month after (October 2001).

I hate to end on a sour note, but I can probably be described as a "Depressed Bull" this year. The long-run potential of economic growth is super strong. But this downturn is, in my estimation, the worst of our lifetimes. It will be a very tough year, and the smart entrepreneur needs to be lean and very careful. Good luck!

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Brenda Starr: how do you see things going for the new hyperlocal news blogs? former journo needs a job! I have found and know well a great growing area to cover, that is ignored by papers and TV, outside Orlando.

Tim Kane: Would love to say yes, but you have to make sure there is revenue there. There is a future in original reporting, but the business models will be elusive for a long time.

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Tim Kane: Okay, everyone. Thanks a million for joining me today! I think this wraps it up. Please join me at growthology.org and share your questions in the comments there. I will answer any and all!

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Editor's Note: washingtonpost.com moderators retain editorial control over Discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions. washingtonpost.com is not responsible for any content posted by third parties.


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