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Why the Small Business Administration Should Make Startups a Priority

Economist Robert Atkinson wants to reinvent the Small Business Administration as the ‘New Business Administration’ with a broad agenda to foster startups.

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BY Leigh Buchanan - 02 Apr 2019

startups as priority

PHOTO CREDIT: Getty Images

In a recent interview about antitrust issues, Robert Atkinson, an economist who is president of the Information Technology and Innovation Foundation, suggested that the Small Business Administration should be reinvented as the "New Business Administration" to make potential, rather than size, the basis of government support. It's an idea that he and his co-author Michael Lind first suggested in their 2018 book Big Is Beautiful: Debunking the Myth of Small Business, which contends that contrary to popular wisdom large rather than small companies drive innovation and employment. Inc. asked Atkinson how a new version of the agency would improve the odds for startups.

Is the idea behind remaking the Small Business Administration into the New Business Administration to shift the emphasis from hair salons and luncheonettes toward startups with ambitions to grow?
That's part of it. There are the 80 to 85 percent of companies that just want one establishment and to hire their spouse and a few friends. A lot of SBA efforts are to provide aid and comfort and regulatory exemptions for those companies just because they are small. That doesn't make any sense. Small firms on average don't pay employees as much as larger companies, and they are not as innovative sometimes. So if we're going to tilt the playing field anywhere, let's tilt it to helping firms get off the ground. That could be someone who wants to start a knitting shop.

How do you prioritize new over small?
For the first five years these companies would get a little bit of leeway on all the rules and regulations that would normally apply to them. And after that time the regulations would kick in. Whereas now a lot of small businesses just get these exemptions for life. It is legal for a business of 15 people to discriminate on the basis of race. I don't see why that should be the case, if you believe that racial or gender or religious discrimination are bad.

What's an example of a regulation that could usefully be eliminated in the beginning?
Let me start with something that is really simple and doable, and it's almost criminal that we haven't created it in the U.S. Countries like Portugal and Chile have set up programs where you can open and register a business on the Internet within an hour. Not just the national requirements--all the way down to state and city. So that would be one thing. Just to say OK, you are a new firm. We are going to make it very, very easy for you to get your business off the ground in a day.

I know you think the tax system is also overly favorable to small business. But for young businesses, are there things that could be done in that five-year grace period to, for example, maximize the cash they have on hand and encourage R&D investment?
It would be worth thinking through some creative tax proposals to give startups more leeway, at least for the first few years, so they can spend their scarce capital growing the business. There is a provision that [the Information Technology and Innovation Foundation] helped push into law led by Christopher Coons, a Democrat senator from Delaware. If you are a startup and you aren't generating any taxable revenue and you are doing R&D it lets you deduct your R&D spending from your unemployment insurance tax. It's pretty clever because all companies pay unemployment insurance tax from day one if they have an employee.


Robert Atkinson Credit: Courtesy

How do you prevent companies from just reconstituting themselves every five years?
That's a tough issue. Most of these companies would be sole proprietors probably. You would know it is Sally Smith, because you have her social security number, who started a business in 2019. She was using these exemptions for five years. Then all of a sudden, in year six, Sally forms a new business and shuts this one down. You could have a computer program that flags these things. You get audited and if it is found you are trying to game the system you have to pay a fine. Hopefully that would limit the abuse.

So the New Business Adminstration looks after your interests for five years and then, if you are a genuine growth company, continues to be involved?
It wouldn't be a hard and fast rule, but if your business model is "I want to open one restaurant," then you are probably not going to be a fast-growing company. If your business model is "I have got this idea for a chain of restaurants," then the NBA would help that kind of firm. I think it would be in certain sectors. If you are in software or manufacturing or internet services of some kind, then it would be easier for you to get help under the NBA framework.

And those kinds of companies would be more likely to get the equivalent of SBA loans?
You would want to begin to move more SBA resources toward helping high-growth startups. The SBICs [small business investment companies] do that. It is a pretty good program that could be a lot bigger. But there are a whole slew of 7a loans that go to liquor stores. To dentists' offices. To car dealers. If those kinds of companies are not viable enough to go to their local banks and get a loan, then what are they doing in business?

There are other regulations that I think disproportionately hurt the truly innovative young companies that really do move the economy. You get regulators who apply to them the same old rules as they do to conventional companies, which may be inappropriate and hurt their development.
That is a really good point. If I were changing this to the NBA then the Office of Advocacy would have a new mission: Advocating on behalf of disruptive business models at the national and state level. [The SBA Office of Advocacy is charged with protecting and advancing the concerns of small business in matters before all branches of government.] I don't think they really do that now. It is much more like some agency is coming out with a rule affecting companies that are heat-treating metal, so let's exempt these small firms. I think it would be much better if they were proactive. The FTC does a little bit of that. They will send letters where they think incumbents are getting the government to side with them over competitive startups or new business models.

What else would the NBA do?
One of its jobs would be to work with local governments to beef up their entrepreneurial ecosystems. Every metro area should have a pretty good support system in place for entrepreneurs who really want to grow their businesses. The best way would be for Congress to give the NBA an appropriation to operate a regional innovation and entrepreneurship grant program where regions or cities could apply for funding that they would have to match. It would go for a variety of support programs, such as tech transfer, angel capital networks, accelerators, etc.

Do you think Washington has gained a better understanding of the distinction between small business and growth companies? What happens to the older small companies if the SBA in its current form went away?
You are still going to have lots and lots and lots of small firms. There are many industries where that is the nature of the business. And there are also people who like that. That is what the market wants. And that is great.

 

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