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The right way to nurture start-ups

The right way to nurture start-ups

The recent Chapter 11 collapse of a solar energy company called Solyndra, which received a $535 million loan guarantee from the U.S. DoE, unfortunately, generated headlines. The Solyndra affair has degenerated into a lot of finger pointing and partisan politics over the use of taxpayer dollars for funding promising startups.

That's too bad, because despite the missteps associated with Solyndra, the government's underlying motivation for getting involved was sound: To help accelerate a new technology and create jobs. The problem lay in the federal government's approach to this virtuous goal. It amounted to little more than throwing money at a firm working in a trendy area favored by bureaucrats.

There are more effective ways to encourage job creation that don't involve writing government checks. One source of such ideas is the Kauffman Foundation. This organization specializes in finding ways of promoting startup companies. It points out that in the past, the single most important factor in pulling economies out of recessions has been an uptick in the creation of entrepreneurial businesses.

That's certainly true in the U.S. where on average, new firms have each created seven new jobs a year. But starting in 2009, that figure dropped to less than five new jobs a year. So the issue, as Kauffmann researchers see it, is to get startup firms again hiring more people in the first and second years of their businesses.

That is the point of a proposal from Kauffmann economists called the Startup Act. The beauty of the Startup Act is that it costs the government little or nothing to implement. Among its ideas: Low or no taxes for a year or two on new firms once they are profitable. Another concept is to reduce the fees small businesses pay for patent applications. The Startup Act would as well introduce a fast-track patent application process. Firms that want a quick turnaround on their ideas would pay more, though small firms would still pay less than big firms.

Another target is the $30 billion which the federal government spends annually on academic research. Kauffmann researchers claim this process is broken, exemplified by the National Institute of Health, an agency that has enjoyed a steady increase in R & D funding. Despite the higher funding, the rate of drug approvals has fallen over time. Kauffman researchers think part of the problem is that academic researchers are forced to use their own universities as the licensing agents for the technologies they invent. The cure: Have the federal government disperse academic research funds only to schools that give researchers a choice of licensing agents.

Finally, the Startup Act would adopt sunset requirement on legislation so that rules go away ten years after their enactment. The reasoning is that the world constantly changes and old rules often rapidly become obsolete. Moreover, the Act would force all new regulations to pass a cost/benefit analysis. Some statutes, in fact, must hurdle this obstacle now. The Act would make it a universal idea.

But, alas, there is one thing the Startup Act is missing which may ensure its common-sense ideas aren't adopted: It eliminates the opportunity for politicians to hold press conferences when they shower money on start-ups in their districts.

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