New business formations rates are declining, even as the country’s interest in entrepreneurship seems to be peaking. And perhaps nowhere does that trend pose a greater risk to the economy than in the high-tech sector, where start-up companies have historically been responsible for a large share of American innovation and job growth.
So what’s holding back innovative, technology-minded entrepreneurs from starting and growing new businesses? Moreover, taking the problem a step further, where along the process do start-up dreams get dashed?
Here’s some rather good insight into both of those questions.
Compiled by the Small Business Administration’s Office of Advocacy, the chart above reflects feedback the agency’s researchers received from an array of players in the start-up community, including entrepreneurs, investors, lawyers, universities, trade groups, business incubators and public officials, many of them involved in the emerging 3D printing sector. In each case, respondents were asked to identify the barriers that tend to derail start-ups that are trying to commercialize a breakthrough technology, as well as at what point during the business life cycle those challenges commonly arise.
An overwhelming amount of student debt, scant access to research-and-development funding and a shortage of start-up capital prevent many entrepreneurs from even getting started, researchers found. Not surprisingly, that third challenge — not having enough money — never seems to go away.
For those who do start pursuing a technology-focused start-up, many are driven off the tracks by a lack of reliable market research and a dearth of talent, particularly in fields such as science and engineering (this challenge doesn’t tend to disappear either). If they manage to survive those struggles, companies often run into problems later related to the high cost of new technology and equipment, customer acquisition and new business development, as well as legal and regulatory uncertainty surrounding their innovations.
“While most of the barriers identified occur between the Discovery stage through the Commercialization and Market Entry stage, the importance of growing and scaling these small businesses for maximum economic impact cannot be overstated,” the SBA Office of Advocacy wrote in the report released Tuesday.
Of the relatively small number of entrepreneurs who make it to the international growth stage, the final challenge researchers identified was related to exporting. It’s worth pointing out, they added, that “two other issues, immigration policy and infrastructure improvements, which are typically part of any discussion regarding challenges for growing small innovation firms, were not noted as major issues.”
With so many challenges standing in the way, where should policymakers start when looking to foster entrepreneurship and help innovative companies grow? SBA’s advocacy office asked that question, too, and shared some of the top recommendations.
Respondents urged elected leaders to consider, for instance, student loan deferment arrangements for individuals who start or work for a new, still-small company after college. To qualify, the firm would have to have been in business for less than four years and bring in less than $5 million in revenue a year.
“This program would be specifically targeted to allow students to pursue entrepreneurial opportunities without the immediate burden of repayment of student loans,” they wrote. “Those pursuing entrepreneurship need special incentives for the risk they take.”
In addition, the authors recommend making permanent and expanding existing research-and-development tax credits, so that more small and new businesses to take advantage of them. They also pitched a new program that would allow new companies to borrow money through the SBA using their intellectual property as collateral, as well as more tax incentives to encourage investors to pour more of their capital into start-ups.
Small innovative companies are often able to access government funding to develop their product through the proof of concept and/or technology demonstration stage,” the report states. “However, they face major challenges finding capital to move from proof of concept to completing product development and introducing the product to the market.”
In order to expand new business opportunities, the advocacy office says the federal government should also take steps to award more contracts to small and innovative firms, both by expanding recently introduced innovation competitions on its Challenge.gov portal, and by cultivating a database of reliable and innovative small businesses that agencies can turn to for any number of technology solutions.