The Entrepreneur’s Dilemma

Last week Steve Case wrote an Op-Ed in the Washington Post called Give entrepreneurs room and they will grow the economy.  For those not familiar with him, Case was the original founding CEO of AOL and he has been an active healthcare investor, among other things, for the past 7 years.  My firm, Psilos Group, is a co-investor with Case’s Revolution Health Fund in a health services company called Extend Health.

Anyway, it was a very good editorial and one of the statistics within it particularly stood out to me in light of my venture capital role:  firms less than five years old have produced 40 million American jobs over the past three decades–accounting for all of the net new jobs created in that period.  That is a pretty stunning fact and also one that really makes a person scratch their head about current U.S. policy towards start-ups.    It is worth watching this Kauffman Foundation 3 minute video which is very instructive about start-ups and job creation.

Nowhere is this issue more relevant than in the healthcare industry, which conveniently happens to be the only thing I know anything about.  In a world where there is no way out of the healthcare crisis except through the innovation of new ideas to solve our healthcare problems, young companies are the golden ticket to new employment.

In his State of the Union speech, President Obama specifically stated that he wanted Congress to work with him to institute policies that advance research in medical devices, a field in which the U.S. has long been the leader.  However, due to a combination of factors which include several government policies, we are now in peril of losing this supremacy to other nations like China and India.  Research is nice, but tax and other policies that support the genesis of new companies and growth of existing ones are better right now in a world where medical device start-ups can’t catch a break. As AdvaMed President Stephen Ubl points out, the Patient Protection and Affordable Care Act (PPACA) imposes a $20 billion annual tax on the medical device industry to help cover the cost of health reform and this new tax is already causing layoffs at large and small companies. FYI, the companies that sell branded drugs will also be hit with a $2.5 billion excise tax. Add these taxes to the challenges and costs presented by today’s FDA and it’s a toxic cocktail.

The small start-up companies that have answers to our healthcare challenges should be growing not shrinking, but they are gasping for air in the current environment. I was in a Board meeting at a medical device company just yesterday where we had a frank discussion about the R&D projects we would have to forego in order to cover this medical device tax, which is being imposed equally on large profitable and young unprofitable companies starting in 2014.

If healthcare startups are not allowed to thrive, I can assure you that the jobs in healthcare are not going to come from the majority of larger healthcare entities.  The American Hospital Association has stated that anticipated reductions in Medicaid and Medicare funding and reimbursement will cost hospitals 278,000 jobs as revenue declines in these programs. The pharmaceutical industry has already laid off over 124,000 people in the last three years; expected further consolidation in this field isn’t going to help.  The large medical device companies have also been shedding their staffs.  It is the young upstarts that make the jobs appear.

As Steve Case clearly says in his Op-Ed, “America’s best chance to achieve robust, sustainable growth and prosperity is by ensuring that the United States increases its entrepreneurial competitiveness relative to the rest of the world.”  There has been some activity in the form of a variety of bills supporting crowdsourcing of young companies (although that is a mixed bag, if you ask me), relaxed Sarbanes Oxley rules to encourage smaller companies to go public, the StartUp Act, and others.  But so far these are bills, not laws, and start-ups are having a hard time raising financing, particularly in a world where the IPO market is so compromised.  It is worth noting, for instance, that in the last 4 years there were a total of 9 medical device IPOs but in the 4 preceding years there were an average of 13 per year.  In the pharma/biotech sector, a similar phenomenon:  26 IPOs in the last 4 years in total and an average of 21 per year in the prior 3 years.  This is important because, traditionally, IPOs have given these young firms the capital to grow exponentially, creating many jobs in their wake.

Case refers to a great Thomas Edison quote in his Op-Ed that applies perfectly to the entrepreneur:  “Vision without execution is hallucination.” Nothing could be more true, as I have seen hundreds of entrepreneurs over the years I have been a healthcare investor and it is only those who have the gene for excellent execution that reach nirvana.  I can’t say if the others are merely hallucinating, but I have my suspicions.

Edison’s quote applies equally well to our lawmakers, however, who are all running around saying “Jobs! Jobs! Jobs!” when they are not busy pointing out which Republican candidate is having more sex than they are.  Job creation can be the byproduct of these lawmakers’ endeavors but they are going to have to turn those bills into law to make it happen.  Execution, people!  Tax breaks, access to capital, hiring initiatives for those who may not be citizens…all of these are necessary to get our economy back on track.

Parenthetically, isn’t it weird to see the Republican candidates pointing fingers at each other for not paying enough taxes?  Let’s hope they get back to their tax-hating basics when the election is over, as tax breaks are instrumental to entrepreneurial stimulus. Hey Republicans, you’re supposed to be the guys that like low taxes. Please get back on message.

You need only look at the results of the ARRA stimulus law and the related HITECH Act to see that legislative stimulus efforts can work to create jobs. By unleashing $20 billion or so in government dollars as payments to those providers who purchase electronic medical records (EMRs), the US government unleashed the collective hiring power of a horde of healthcare nerds clamoring to build systems to meet the new demand. A couple of years ago these companies were few and far between. Now there are more EHR vendors than Starbucks outlets. This may or may not be a good thing in the end, but it did create jobs outside of Starbucks. The problem was in the specific execution of this law. It appears that the lion’s share of the dollars will end up in the hands of large companies, not start-ups. As Lily Tomlin once said, “I always knew I wanted to be somebody; I now realize I should have been more specific.”

To be fair, the purpose of the HITECH Act was to facilitate the rapid proliferation of EMRs, not to launch a million little companies and their jobs.  But it would have been nice to see these objectives overlap.  I hope these mutually reinforcing types of goals will be taken into consideration as other stimulus-type initiatives are considered.

The good news is that much political discourse has begun to focus on the vision of supporting entrepreneurial endeavors and getting the American Dream back on track. Let’s hope the legislators remember that whole execution thing when the big spending, big lobbying, big companies come in to chat.

Lisa Suennen is co-founder and Managing Member of Psilos Group, a healthcare-focused venture capital firm with over $577 million under management. You can follow her at her blog on health care investing, Venture Valkyrie.

7 replies »

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  2. I agree. Whatever new things they introduce to us nowadays have to be on the side of the customer’s needs, including the need to save.

  3. Peter and Dou, I agree cost and savings have to take center stage in every new idea brought to healthcare; the system is not willing or able to absorb anymore “innovation” in the name of doing things the same way at higher cost.

    And Southern Doc: education is part of the motor for our entrepreneurial superiority, to be sure. Any overall policy to encourage innovation must support both education by funding it properly and making it possible for people to go to college while also establishing a welcome tax and regulatory environment. These all go hand in hand and are all in various stages of disarray today in my view.

  4. “as tax breaks are instrumental to entrepreneurial stimulus”

    Strange, I thought it was the US’s once world leading educational system that was the motor for our entrepreneurial superiority. I guess the “tax hating” Republicans, as they work to destroy that system, know better.

  5. It has to ad real value in the markets. My belief for a business is that it has to make a customer money, save them money or time, fulfill a basic need or improve their quality of life.

  6. We don’t need entrepreneurs to invent new stuff, we need them to figure out how we’re going to pay for it, or more importantly, how to convince people that if they want it they’ll have to pay for it in some form.