The American economy is struggling, impenetrable financial institutions have failed or converted to bank holding companies, and consumer confidence is dropping. I spoke with European private equity executives last week who told me that many Europeans feel that American capitalism is being “propped up,” that free markets no longer exist.
In a sense, this is true. In a few days over the last week, the US government constructed a $700 billion bailout plan for the financial crisis. In a free market system, the financial institutions that were saved by government intervention would be allowed to fail, and the resulting bloodshed would allow for a more efficient economy.
Now the fate of the US financial system may lie in the hands of what the WSJ called “The Players Remaking Financial World” on September 20, 2008:
History has thrown a handful of men together this week with a task that they themselves might have brushed off as unthinkable just days ago: Give the U.S. financial system its biggest makeover since the 1930s. And do it quickly.
Will this group save America from collapse? And even if they do, how will America get back on a path of growth again?
The last year has seen a nearly 3,000-point drop in the Dow Jones Industrial Average, representative of typical losses in individual savings accounts. This has had the following effects:
- Americans near or at retirement age have seen great losses in their retirement portfolio, with little means to gain it back through employment or investing, instilling concern and conservation.
- Recent grads have seen severe decays in the job markets, and will likely see more cuts in bonuses and salaries. Since most are also burdened with student debt, we can expect their risk tolerance to be dramatically lowering.
- 30- to 50-year-olds who are in middle management positions are potentially struggling from an upside-down mortgage after a recent home purchase. Worried about how to preserve enough money for their families, they will probably focus most of their energies on not getting laid off.
Therefore, it seems that the majority of the American workforce is scared about their financial future and we cannot expect the level of innovation necessary to push American businesses forward.
This is where entrepreneurs differ from the majority.
Entrepreneurs share a unique characteristic of financial optimism. They love to create something from nothing, using capital resources as efficiently as possible, and in success are rewarded with a great cash windfall for themselves and their teams.
Innovation Across Many Sectors
Of the 310 MBA students in my MIT Sloan class of 2008, I can easily count 20 who decided to start their own company after business school, despite the economy. Amazingly, these startup ideas range from solar energy to wireless power to consumer Internet (sorry that’s me) to mobile to biotech to business analytics.
In my circles of friends and professional contacts, the fear that is gripping America at large is not holding back entrepreneurs from following their dreams and creating innovative products.
Sources of Capital Still Alive
Since the late 90s, venture capitalists have continued to raise large funds, peaking at $1 billion for some firms, and creating the challenge of capital overhang. At the same time, angel funding has become a sophisticated source of capital for early stage companies, especially in Silicon Valley.
While large companies will be tightening their belts, the spicket is not necessarily shutting off for startup funding. Investors who believe in technology startups still have capital to put to work.
Role of Entrepreneurship in America
Entrepreneurship is key to growth and job creation in America. Small companies earn 50% of the GDP and provide 50% of all jobs [source: MIT Sloan 15.431 Entrepreneurial Finance]. As workforces are cut from Lehman, Merrill, AIG, HP, and other large firms, there will be a new crop of talent available to small businesses.
Josh Kopelman (serial entrepreneur and managing director at First Round Capital) recently blogged about this opportunity and referenced a website he started, LeaveWallStreetJoinAStartup.com, where he posts exciting startup jobs in the NYC area:
These days, startups are more stable than Wall Street (seriously). And while a startup probably won’t offer the creature comforts of a job in the financial services industry, startups offer different benefits. You get to participate in the creation of something new. Your work makes a direct (and clear) impact on the success or failure of the company. No more politics, endless meetings, or multi-layered organization structures. Plus, you’ll likely get stock options to share the upside.
I couldn’t agree more with his sentiment.
Entrepreneurs Will Save America
America has always persevered through difficult times by innovating. It is the entrepreneurial nature of this country that cannot be quieted. There are many people, mostly in their 20s to 30s, whose passion and determination will not be undone by this financial crisis. I think these are the men and women who will save America.