While the Obama Administration’s American Recovery and Reinvestment Act may help simulate overall economic growth, according to longtime Silicon Valley strategist, author and Forbes contributor Sramana Mitra, it does almost nothing to help entrepreneurs in early-stage small businesses.
These folks would be much better served, she argues, by the creation of a 401(k)-like, tax-free pool of funds that could serve the place currently being filled by not just entrepreneurs themselves, with their relatively small after-tax earnings for this purpose (typically $50,000 to $100,000, she says), but more often by their circle of friends or family members, who can sometimes invest up to another $100,000 each.
Mitra sees government/taxpayer funds going toward this type of pool (as opposed to where it has been primarily directed as part of recent legislation: large banks, infrastructure projects and tax relief) serving as a multiplier of not only revenue creation in the private sector, but – more importantly in the short term given our rising unemployment – an engine for robust job creation.
“If we can stimulate a million entrepreneurs to create 25 jobs each, we’re talking about 25 million jobs,” she says. “I think this could be a very powerful, sustainable definition of growth, as opposed to the government taking on the whole burden of job creation, which I think just doesn’t work. Government is not going to be able to create jobs at the scale at which we need jobs created right now.”
Mitra has put her thoughts in a plan she calls a “Stimulus Package for Entrepreneurs.” She announced this plan in her Forbes column last fall and emphasized key parts of it again in Forbes just last week.
In addition to providing tax relief to early-stage entrepreneurs, she identifies these three constituencies as vital to the success of her plan:
- Angel investors – those mentioned above and others could take advantage of the tax-free fund she proposes so that they, like entrepreneurs themselves, won’t have to fund early-stage startups from their after-tax income.
- Venture capitalists – proposed two-tier capital gains tax to reward VCs who invest in early-stage companies and, perhaps, penalize VCs who invest the late-stage game where the risk has been removed. “The late-stage investors are behaving more like bankers as opposed to VCs,” she says.
- Corporate VCs – create tax incentives and refocus the tax structure to encourage venture capital investing by corporations, which Mitra says is not as active and effective as it could be.
Regarding the latter constituency, she uses the example of large energy company whose primary focus is on solar power.
“They could be investing in lot of smaller solar farms or solar utility ventures in the early stages,” she says. “Eventually these companies would become their clients – they’re part of the ecosystem, they’re part of their strategic expansion process and they could also get a tax break for that. There’s a lot of knowledge and expertise in that process, in those companies, and they could play an effective role, I believe, in strategic venture capital.”
Ironically, while many on both sides of the aisle in Washington now believe that large-scale government intervention is the only way to pull ourselves out of the mess created by the mortgage and credit crises, Mitra believes that President Obama’s embrace of big business over small business and entrepreneurs (in terms of his Administration and key advisors) is the primary barrier to adoption of the kinds of policies that would serve to transfer the weight of our economic woes from the government’s shoulders to entrepreneurs.
“My huge concern right now is that we are in this welfare mode, and we’re not putting policy in place that is going to focus on building sustainable, private enterprise – which is the only way to build back a thriving economy,” she says.
What is the rosiest outlook if something like Mitra’s entrepreneur stimulus plan were implemented on a large scale? Quite simply, the ability to quickly move from a stabilization policy to a growth policy. She sees a growth policy moving the tax discussion away from taxing wealthy individuals more and worrying about any tax increases for the lower or middle classes, to collecting far more in tax revenues over the long term from healthy companies fueled by a much heightened focus on aiding entrepreneurs. This, of course, has implications on funding much-needed federal infrastructure projects and helping states balance their budgets without the use of individual taxpayer dollars.
And Mitra argues that her stimulus plan is not just smart policy for American enterprises. India, which she also studies from an entrepreneurial point of view, could benefit greatly from these measures.
“The Indian economic engine is stuck in a similar stage of the process. Early-stage investment – what we call seed capital – has also choked up there,” she says. “I submit that everything that I’ve proposed for the U.S., if we applied those same policies to India, would have the exact same effect there.”
An in-demand strategy consultant for early-stage startups and other small firms, Mitra is doing her part to enact her plan. She’s recently taken the concept of a live entrepreneurial roundtable event – which she did several years ago in Silicon Valley – and turned it into an online forum. Since October 2008, about once a month three or four entrepreneurs or VCs pitch their business plan, she advises them on what they could do to best spur growth and market penetration, and the hundreds of other attendees on the call learn in the process.
With rising unemployment that is sparking an increase in the number of people trying their hand at starting a business, according toThe Wall Street Journal, as well as with those already in the game trying to survive or thrive, the ideas and efforts of experts in entrepreneurialism such as Mitra can go a long way toward spurring sustainable growth on Main Street.
Sramana Mitra’s next free online strategy roundtable for entrepreneurs will be held on March 25 at 10 am PT. Click here to register to pitch her, or just to attend and learn from her feedback on other pitches.