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Venture capital in the U.S. is said to be society‘s essential technology gatekeeper, one that has helped to create waves of technological innovation that have transformed both industries and society at large. Prominent companies that VCs have supported include Google, E-bay, Amazon, Intel, Sun Microsystems, Microsoft, Medtronic, Home Depot, Starbucks, Federal Express, and Whole Foods. In particular it is argued that the high tech companies in which venture capitalists have invested such as semiconductors, personal computers, biotechnology, software, nanotechnology and artificial intelligence have created spillovers that have established new industries, revitalized economies, and benefited society as a whole (Florida and Kenney, 1988). Gompers and Lerner (1999, 2001a, 2001b) have argued that up to a third of the total market value of all public companies in the U.S. has been created by VCs. Their data show that a very high percentage of startups that have the aspiration to become major businesses do not attract VC funding and fail within three years.

VCs fund highly innovative ideas that may threaten established products and services. The ideas that they fund are outside the mold of the ideas that banks typically finance. If entrepreneurial firms fail banks do not have sufficient hard assets to hold as collateral and repossess. A lack of funding is generally viewed as a major barrier to the progress that entrepreneurial firms otherwise could make (Amit, Brander, & Zott, 1998; Bygrave, 2004). VCs are supposed to remove this barrier. Without their funding the entrepreneurial firms could fail. They would begin small and remain so or take far longer to become big, even if their businesses were based on innovations with high growth potential. Without VC funding, entrepreneurial firms would not have the wherewithal to grow their businesses and diffuse their technologies on a wide-scale enough basis to provide the full benefits of which they are capable of providing to themselves and society. They would lack the resources, for instance, to hire the staff they need and to do the product development that is necessary for them to achieve market growth. If their technologies and business models show enough promise, they cannot rely just on the capital of their founders and the founders‘ early backers and profits earned from early activities to expand rapidly and boost the scale of their operations.

(Alexiandre, “Over 5 Million New US Startups Show Covid-Era Boom Has Legs,” pg online @ https://www.bloomberg.com/news/articles/2023-01-17/over-5-million-new-us-startups-show-covid-era-boom-has-legs //um-ef)

More than 5 million businesses were created in the US last year, a sign that the entrepreneurship boom spawned by the pandemic may be long-lasting. New business applications rose by 44% from 2019 to 2022, with the sharpest increases in Southern states, according to US Census Bureau figures released Tuesday. Bound at home at the outset of the Covid-19 pandemic, millions of Americans started a business either out of necessity after losing their jobs or because remote work opened up opportunities. Following the initial spike in 2020, business creation has been plateauing at a much higher level than pre-pandemic, the Census numbers show. About 5.1 million applications were filed last year, down from the record 5.4 million in 2021, but up from 3.5 million in 2019. On average, it means that almost 14,000 businesses were created every day in 2022, according to the data, which tracks Federal Tax Identification Numbers, or unique nine-digit number assigned for tax purposes. Business applications in the South — where many Americans migrated in recent years — are up by 53% from 2019. Other regions such as New England are below the national growth average. The White House touted the business-applications numbers, saying that they build on other strong government figures released recently. “When you look at these numbers — from business applications to job growth to unemployment — you are seeing resilience and solid labor market performance,” White House adviser Gene Sperling told reporters Tuesday.

In terms of their impact on the economy, small businesses aren’t actually that small.

Small businesses are generally defined by the U.S. Small Business Association (SBA) as independent businesses having fewer than 500 employees. Based on SBA's definition, there are 33.2 million small businesses in America, which account for 99.9% of all U.S. firms.

The pandemic may have forever supercharged America's entrepreneurial spirit.

Americans filed 5.1 million new business applications in 2022, according to US Census Bureau data, equating to roughly 14,000 new business applications filed every day last year. It marked the second-highest year on record — down slightly from 5.4 million in 2021 — and remained well above the 3.5 million filed in 2019.

More than 5 million businesses were created in the US last year, a sign that the entrepreneurship boom spawned by the pandemic may be long-lasting.

New business applications rose by 44% from 2019 to 2022, with the sharpest increases in Southern states, according to US Census Bureau figures released Tuesday.

February 8, 2023 – As of January 2023, 76.6% of aspiring business owners are planning to launch their businesses within the next 12 months. And now, 58.4% of aspiring business owners either agree or strongly agree that “now is a good time to start a business”, consistent with the prior month, but down from the high of 73.5% as recently as February 2022.

FranchiseInsights.com compiles monthly the Small Business Startup Sentiment Index™ (SSI) of individuals who have recently inquired about businesses for sale.

(Ashley, “SVB collapse is double-whammy for tech startups already navigating brutal market,” pg online @ https://www.cnbc.com/2023/03/19/svb-fail-is-double-whammy-for-startups-dealing-with-plunge-in-venture-.html //um-ef)

Founders should anticipate “significant and heavy diligence” from venture capitalists this year instead of “quick decisions and fast movement,” Hawkinson said. The enthusiasm and hard work remains, she said. Hawkinson hosted a demo event with 40 founders for artificial intelligence companies in New York earlier this month. She said she was “shocked” by their polished presentations and positive energy amid the industrywide darkness.

(Chris, “How Startups Can Attract Investors And Inspire Confidence When VC Funding Is Slowing,” pg online @ https://www.forbes.com/sites/forbesbusinesscouncil/2023/01/03/how-startups-can-attract-investors-and-inspire-confidence-when-vc-funding-is-slowing/?sh=119bbc5c2be6 //um-ef)

Ask any tech startup executive about today’s investment climate, and you’re likely to be met with a grimace. It’s not what it used to be. A year ago, headlines hyping inflated valuations seemed to imply that fundraising is easy. Companies often weren’t challenged to be capital-efficient or disciplined with their go-to-market strategies, and cash seemed readily available. Fast forward to today, and the landscape has clearly changed. Anecdotally, there’s been a decline in company valuations and a sizeable drop in available funding — many investors, especially in the Series B world and beyond, appear to be sitting tight on their money until valuations come down. The numbers back this up: A recent CB Insights report indicates that in Q3, deal volume dropped across most stages by more than 20% quarter-over-quarter. In addition, median deal size across deal stages dropped by almost 30%, with late-stage deals shrinking by a notable 50%. Still, deals continue to happen. This begs the question: How can startups attract investors and inspire confidence in a period when VC funding is slowing?

(Ashley, “SVB collapse is double-whammy for tech startups already navigating brutal market,” pg online @ https://www.cnbc.com/2023/03/19/svb-fail-is-double-whammy-for-startups-dealing-with-plunge-in-venture-.html //um-ef)

But in many areas of the startup economy, company leaders are feeling the pressure. Matt Blumberg, CEO of Bolster, said founders are optimistic by nature. He created Bolster at the height of the pandemic in 2020 to help startups hire executives, board members and advisers, and now works with thousands of companies while also doing venture investing. Even before the SVB failure, he’d seen how difficult the market had become for startups after consecutive record-shattering years for financing and an extended stretch of VC-subsidized growth. “I coach and mentor a lot of founders, and that’s the group that’s like, they can’t fall asleep at night,” Blumberg said in an interview. “They’re putting weight on, they’re not going to the gym because they’re stressed out or working all the time.” VCs are telling their portfolio companies to get used to it. Bill Gurley, the longtime Benchmark partner who backed Uber , Zillow and Stitch Fix , told Bloomberg’s Emily Chang last week that the frothy pre-2022 market isn’t coming back. “In this environment, my advice is pretty simple, which is — that thing we lived through the last three or four years, that was fantasy,” Gurley said. “Assume this is normal.”

(Yuliya, Reporter, The Wall Street Journal, “More Startups Throw in the Towel, Unable to Raise Money for Their Ideas,” pg online @ https://www.wsj.com/articles/more-startups-throw-in-the-towel-unable-to-raise-money-for-their-ideas-eff8305b //um-ef)

The pace of startup shutdowns, fire sales and sharp business-strategy changes is picking up. Fresh capital from venture investors and bank loans is scarce and expensive. Going public is nearly impossible. Some business models that worked when cash was cheap are unsustainable now. That means venture-backed startups are running out of money and facing hard choices.

(Yuliya, Reporter, The Wall Street Journal, “More Startups Throw in the Towel, Unable to Raise Money for Their Ideas,” pg online @ https://www.wsj.com/articles/more-startups-throw-in-the-towel-unable-to-raise-money-for-their-ideas-eff8305b //um-ef)

Yin said that she isn’t concerned that the wave of closures will have a serious negative effect on her fund’s returns. That is because the companies that recently folded were never marked to a high value in the portfolio, she said. Larger shutdowns could put further pressure on venture returns that have been falling overall. The yearly internal rate of return for venture firms was negative 7% in the third quarter of 2022, the lowest value since 2009, according to PitchBook Data. In recent months, several companies that raised significant venture funding have folded, including biotechnology company Goldfinch Bio, wine business Underground Cellar and fintech company Plastiq. California startup Zume, which was developing a robotic pizza maker and was once valued at $2.25 billion, recently entered a wind-down process handled by Sherwood Partners, a restructuring firm, according to Sherwood’s co-founder and co-president Martin Pichinson. Zume representatives couldn’t be reached. Zume, which was developing a robotic pizza maker, recently began winding down. Sherwood’s business increased by 50% through April 30 this year compared with the same period last year, Pichinson said. “And the storm hasn’t even started,” he added. The venture-capital boom in 2021, as well as pandemic-era government funding to small businesses, likely kept businesses alive for longer than they would have otherwise, some observers believe. Now that those funding sources have dried up, the failures are coming in. “Most of the companies we are handling now frankly deserved to have gone out of business a year or two ago,” said Barry Kallander, president of KallanderGroup, which provides corporate restructuring and dissolution services. Venture-backed businesses in the U.S. raised $346 billion in venture capital in 2021, according to the PitchBook-NVCA Venture Monitor report. Many are still surviving on that for now, investors and founders say. Some hope that they will be able to get through to a time when the market rebounds and they can consider tapping public markets. Technology stocks have started strengthening with the Nasdaq Composite Index up more than 26% for the year as of Thursday afternoon. The venture market, meanwhile, has been declining. Startups in the U.S. raised $37 billion in the first quarter of this year, down 55% from the first three months of last year. The longer the venture market stays depressed, the closer many startups get to the moment of truth.

(Sarah McBride, Abhinav Ramnarayan, Jill R Shah and Aggi Cantrill, Bloomberg, “Tech Startups Find One of Their Last Funding Sources Is Drying Up,” pg online @ https://www.bloomberg.com/news/articles/2023-05-11/startups-find-one-of-their-last-funding-sources-is-drying-up //um-ef)

For some privately held startups, the downturn and banking shakeup could make it more difficult to get loans from regular lenders, particularly those without a background dealing with Silicon Valley players. Many lenders are inclined to be increasingly choosy about which companies they finance. “When you’re in a bull market, it looks like an easy business,” Structural Capital’s Tse said. To price the risk properly, “you have to know the companies, you have to spend time with them, you have to have skills that regular commercial bankers don’t.” It’s not clear how bad any slowdown in tech lending will be. There are still banks and other firms providing financing. But many lenders take cues from equity fundraising, where valuations are typically unchanged or lower, said Ted Wilson, a former Silicon Valley Bank vice president who joined Stifel Bank in March. That’s making it harder for companies to borrow, he said. “There are often insider rounds, follow-on rounds, flat rounds,” Wilson said, referring to deals that don’t increase the valuation of a startup or don’t include new investors. “Those are not quite as attractive from a lending perspective.”

(Sarah McBride, Abhinav Ramnarayan, Jill R Shah and Aggi Cantrill, Bloomberg, “Tech Startups Find One of Their Last Funding Sources Is Drying Up,” pg online @ https://www.bloomberg.com/news/articles/2023-05-11/startups-find-one-of-their-last-funding-sources-is-drying-up //um-ef)

A key form of financing that startups rely on is shrinking, hurting new companies that are already starved for capital. The volume of venture debt, a type of loan that younger companies line up to help pay the bills, plunged to $3.5 billion in the US in the first quarter, according to PitchBook, the lowest level since 2017. Climbing interest rates have made the funding more expensive for companies, and one of the biggest venture lenders, Silicon Valley Bank, faced a run on the bank that forced government regulators to seize it and sell it. First Citizens BancShares Inc., Silicon Valley Bank’s buyer, says its appetite for venture financing hasn’t changed. On a conference call on Wednesday, the company’s president said First Citizens is better positioned to serve venture-backed companies now. But many of the biggest lenders across the economy are less willing to take risk as economic growth slows. Companies drove venture lending to record levels last year as revenue was under pressure and other forms of financing were drying up. VCs pulled back dramatically on equity investments in the second half of 2022, squeezed by rising interest rates and falling market values across the tech industry. By the first quarter of 2023, venture firms invested $79 billion in startups, less than half the $178 billion a year earlier, according to PitchBook. Raising equity in public markets is harder too: There were just $2.5 billion of initial public offerings in the US in the first quarter, the lowest for the first three months of the year since 2016, according to data compiled by Bloomberg. Less debt and equity capital for young companies will probably translate to more companies collapsing, said John Haltiwanger, an economist at the University of Maryland. Startups often aren’t profitable and instead focus on growth, and they need a constant drip of money to keep operating. “These companies are heavily dependent on financing,” Haltiwanger said. “If that financing dries up, they’re in trouble.” Startups’ reduced access to funding has broader implications for the economy. New businesses account for most job creation in the US, Haltiwanger said. Five million such businesses were created last year in the US, according to the Census Bureau.

(Committee for a Responsible Federal Budget, Mitch Daniels Leon Panetta Tim Penny President Maya Macguineas Directors Barry Anderson Erskine Bowles Charles Bowsher Kent Conrad Dan Crippen Willis Gradison Jane Harman William Hoagland Jim Jones Lou Kerr Jim Kolbe Marjorie Margolies Dave Mccurdy James Mcintyre, Jr. David Minge Michael Nutter June O’neill Marne Obernauer, Jr. Rudolph Penner Robert Reischauer Charles Robb Isabel Sawhill Alan K. Simpson John Spratt Charlie Stenholm Gene Steuerle David Stockman John Tanner Tom Tauke Carol Cox Wait, “Risks and Threats from Deficits and Debt ,” pg online @ https://www.crfb.org/sites/default/files/media/documents/Risks_and_Threats_From_Deficits_and_Debt_July_2022.pdf //um-ef)

Higher interest rates on federal debt and bank reserves increase interest rates throughout the economy on everything from mortgages to student loans to credit cards. They also contribute to a phenomenon called “crowd out,” where investors purchase government bonds instead of investing in the private sector, thus slowing economic growth. CBO estimates that for every $1 of new U.S. government borrowing, total investment falls by 33 cents and an additional 24 cents of the return to investments goes abroad, resulting in slowing income growth over time.11

(Jack, MA in Political Economy from King’s College London in 2015 and is currently pursuing an MPP at George Mason University, “Six Arguments for More Federal Spending—And Why Each One Is Wrong,” pg online @ https://www.discoursemagazine.com/economics/2021/04/07/six-arguments-for-more-federal-spending-and-why-each-one-is-wrong/ //um-ef)

More importantly, there is the underlying assumption that large and oftentimes wasteful government spending is the only way to close the output gap. We know from the fiscal multiplier literature that government spending does not stimulate private spending and investment but actually crowds them out. Why, then, do so many economists jump in excitement at the idea of government stimulus closing the output gap? Past experience demonstrates that government spending doesn’t close the output gap. The U.S. had a large output gap in the early 1990s. By 1996 the output gap had been closed. Similarly, in the early 2000s, real output lagged behind potential output, but the gap was closed by 2005. It wasn’t government stimulus spending that closed the output gaps—actually, government spending as a share of GDP fell during these periods. Growth driven by the private sector is what closes output gaps, not government spending. False argument #5: We can reduce the deficit with tax increases, so more spending won’t add to the debt. In the real world that never happens. Before the election, President Biden’s plan was to spend an additional $11 trillion over the decade and hike taxes on corporations and high-income earners, which was estimated to reap between $2.1 trillion and $2.8 trillion in new revenue over the decade. In other words, for every $5 or $6 of additional spending, the administration would finance just $1 with new revenue; the remainder would go on the national credit card. But raising taxes even higher to cover the whole tab for new spending would be worse. A majority of studies find that tax increases reduce GDP by two or three times the increase in revenue. This explains why our own analysis reveals that cutting the debt-to-GDP ratio by cutting spending is much more successful than reducing debt by raising taxes, which often causes deep and long-lasting recessions. False argument #6: A high debt ratio means nothing—just look at Japan; it’s doing fine. Proponents of this argument are not making an apples-to-apples comparison—debt dynamics in Japan are very different from those in the U.S. Japan’s debt is 240% of its GDP, well over twice the U.S. ratio. But it’s traditionally had a very high savings rate, constituting about a third of its GDP, while the U.S. savings rate is about half of that—typically around 17% of GDP. In Japan, 90% of the nation’s debt is held domestically, reducing risks from international volatility, while U.S. debt held domestically has averaged less than 60% of total public debt since the Great Recession. Japan remains the world’s biggest creditor nation, while the U.S. is the biggest debtor. Additionally, Japan’s fiscal trajectory is hardly a model that others should be following. We know that debt crowds out investment and growth. While the U.S. has averaged real growth of 2.1% since 2000, Japan has averaged just 0.9% over the same period. Due to this lack of growth, wages have stagnated in Japan for the past two decades, while in the U.S. wages have continued to grow.

(Ruchith Dissanayake Queensland University of Technology - School of Economics and Finance Yanhui Wu Queensland University of Technology - School of Economics and Finance; Financial Research Network (FIRN) Huizhong Zhang Queensland University of Technology - School of Economics and Finance, “Military Spending Shocks and Private Sector Innovation,” pg online @ https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3082217 //um-ef)

Increases in government spending are either financed through increases in taxes or public debt. Increases in the supply of public debt reduce the demand for competing securities such as corporate bonds, pushing up the relative cost of corporate debt capital. Graham et al. (2015), for example, report that government borrowing “crowds out” corporate debt financing through competition for investor funds. Consequently, it could be the case that, following an increase in government spending, firms cut back on investment in innovation because of a rise in the cost of corporate debt financing rather than decreases in demand. We show that our results remain robust controlling for the effects of debt crowding out channel.

(Christopher, “Why Yellen Doesn’t Lose Sleep Over US Borrowing That Alarms Most Americans,” pg online @ https://www.bloomberg.com/news/articles/2023-05-31/yellen-not-worried-about-us-24-trillion-debt-load-mccarthy-wants-to-limit //um-ef)

Wendy Edelberg, a former chief economist at the Congressional Budget Office, says better budgeting will be needed in the long run, because “you can’t have the federal government taking action over time that perpetually reduces the amount of savings in the economy and perpetually crowds out ever more private investment.”

(Karl W. Smith is a Bloomberg Opinion columnist. Previously, he was vice president for federal policy at the Tax Foundation and assistant professor of economics at the University of North Carolina, “Economists Join Congress in Not Worrying About the Deficit,” pg online @ https://www.bloomberg.com/opinion/articles/2019-11-21/do-deficits-matter-economists-increasingly-say-no#xj4y7vzkg //um-ef)

First, some history: The consensus among economists has long been that, while budget deficits are sometimes necessary (in case of war, for example, or recession), they are ultimately a threat to economic growth. That’s because when the government borrows, it “crowds out” investment in the private sector. At this point, one of three things can happen: Private investors competing over the smaller pool of savings can bid up interest rates until some borrowers are pushed out of the market; foreign savers can step in and add to the pool of savings; or some combination of both. In any case, future Americans will be worse off, either because domestic investment will be lower or foreign debt will be higher.

(Veronique de Rugy, PhD in economics from the Panthéon-Sorbonne University, George Gibbs Chair in Political Economy and Senior Research Fellow at the Mercatus Center at George Mason University and a nationally syndicated columnist, “Debt and Growth: A Decade of Studies,” pg online @ https://www.mercatus.org/research/policy-briefs/debt-and-growth-decade-studies //um-ef)

As America’s federal debt burden continues to grow, the government must increase borrowing in order to fund its expansive spending programs. This increased government borrowing competes for funds in the nation’s capital markets, which in turn raises interest rates and crowds out private investment. With entrepreneurs in the private sector facing higher costs of capital, innovation and productivity are stifled, which reduces the growth potential of the economy. If the government’s debt trajectory spirals upward persistently, investors may start to question the government’s ability to repay debt and may therefore demand even higher interest rates. Over time, this pattern of crowding out private investment coupled with higher rates of interest will drive down business confidence and investment, which drags productivity and growth down even further.

Global Challenges – Twelve risks that threaten human civilisation – The case for a new category of risks 89

3.1 Current risks