The importance of JOBS

The JOBS bill being signed by President Obama today is critical to the emergence and growth of the next generation of industries as ecosystems.

Those ecosystems are made up of three layers: Platforms (Google, Amazon, Salesforce, Facebook, Kickstarter, Federal Express, Foxconn), which make it possible for entrepreneurial ventures to be built at lower cost with less capital and reduced risk at greater speed. To provide the critical mass that large corporations used to provide — to, for example, sell advertising at scale or acquire distribution or acquire goods or services at volume — sometimes these ventures need to band together in networks (Glam, YouTube, Etsy, eBay). This is how I simplistically draw it in a whiteboard:

Our economy — equity markets, regulation, taxation — has been built to support The Firm: large companies that controlled the entire chain from design to manufacturing to marketing to distribution, gaining efficiency and control as they gained size. The new ecosystem still benefits large companies if they are platforms, as today much — perhaps most — of the value created via the net falls to new corporate behemoths: Google, Amazon, Facebook….

But it’s at the entrepreneurial layer that the real work is being done, the real efficiency is being found, and the real value is being built. But they need capital — not much, but they need it. And they need to be able to recognize the value they create. That’s what I hope Steve Case and others worked toward with the JOBS bill. Andrew Ross Sorkin is worries that the new law’s loosened regulation for some companies will mean that more will lose money. But Henry Blodget counters that it’s not the SEC’s job to save you if you’re stupid enough to invest in Groupon (told ya!). The lighter regulation certainly bears watching.

But the part of the bill that encourages me is the ability of small companies to raise small amounts from small investors. I see this as economically democratizing on both sides of the transaction: more small companies disrupting large firms and more real investors able to get in on the opportunities (and risks) of a platform-enabled entrepreneurial economy.

Such small-scale investment has already been possible in the U.K. — not just possible but encouraged through 30% tax break on investments. Recently I got email from a company set to benefit, Escape the City (soon to be renamed, which helps would-be refugees from London’s financial district build new and one hopes better lives outside it. Cofounder Mikey Howe kindly wrote to me because he’d read What Would Google Do? and said it helped him think in new ways. (Thank you, Mikey.)

Howe wrote on the occasion of the company sending a letter to its 57,000 members inviting them to pledge to invest in the venture. Within one hour, $6.6 million was pledged. I checked back with him three weeks later and 2,200 members had pledged $15 million (more than they will end up raising). What’s exciting is not just that a small company can more easily raise investment funds but that this small company knows its potential investors. They are members of the service already: a community of customers and investors. Imagine what that relationship could do to help a startup, when your users, your customers have a stake in your success. (I also enjoy the notion that their venture attempts to disrupt the financial district they left.)

Start Something You Love: Escape the City…1 year on from Escape the City on Vimeo.

Until the JOBS bill, about the closest thing we had in America was Kickstarter. My entrepreneurial journalism students are eager to try to use it to raise funds — perhaps a bit too eager, I caution them, for funding a single product or project does not a sustainable strategy make (any more than begging for grants from foundations). But properly used, Kickstarter reduces risk by performing the best possible market research (pre-orders) and allowing an entrepreneur to use her customers’ capital to start her venture while also turning customers into marketers. Kickstarter could not sell equity. Should it? I think that’s an entirely different proposition. In any case, now we can see Kickstarters of a new sort help more new companies. See also the U.K.’s Funding Circle, which loans capital to startups (and which just got an investment from New York’s Union Square Ventures).

The irony of the JOBS bill’s title (it stands for Jumpstart Our Business Startups) is that it may end up killing more jobs than it creates as it funds highly disruptive and highly efficient new ventures that will try to replace large and now inefficient companies in old vertical industries. (See my post, the jobless future.)

But if the disruption is inevitable — and I believe it is, across many industries from media to retail, banking to travel and even manufacturing — then the only sane response is to find the opportunity in the change. The JOBS act helps more people, entrepreneurs and investors, find more opportunity. That, more than bailouts, is the wise role for government to play in the shift from an industrial to a digital economy.

  • Well put sir. This is what our efforts in Jamaica, Weirton, WV and Kansas City is all about!

    Digital Economy Ecosystems.

    Its actually possible to help create, promulgate, support and maintain these kind of on-line environments. That’s the business we’re in.

    But it takes partnering with local government, industry and businesses – to “connect-the-dots” (as Steve used to say.) Community engagement is the secret weapon.

    On-going programs, one-off projects and free services is what we’re doing. Creating jobs at ~$20k per job. [NOTE: In Ohio they currently spend ~$56K a job.]

    Anyway – great to see you focused on this important issue.

  • Nero Wolfe told me many times that ‘loan’ is not a verb. But that’s the only quibble I have with this excellent post. It gives me a small reason for hope in a world that seems to offer so few. Thanks.

    • Oops, yes. Give up loaned for lent….

      • “give up loaned for lent”

        Good one.

  • Richard Reich

    Sounds like another invitation to economic disaster.

  • Rich post, Jeff. Much to think about. As I tweeted, this makes me think about the Bruce Sterling SXSW talk about vertically integrated stacks, which he saw a s fragile and ultimately expendable. Those that are platforms in a symbiotic relationship with smaller engineers will draw on the vitality of the ecosystem and thrive, it seems to me. The dominate companies/platforms can be balanced by the energies released by the JOBS Act.

    But clearly this bill is just one piece of a big puzzle.

  • Jeff, I’m really surprised. Your post must not have been as well-researched and it’s certainly less insightful as the rest of your writings, which I have come to love. In fact, I consider you one of my intellectual heros. Fortunately, even this misleading post does not threaten your position in my “ideas hall of fame” since this is only peripherally related to the subject on which I consider you to be visionary.

    • Oh, my, Fred, can’t we just disagree. I do say in the post that there are legitimate concerns about the rollback of regulation on some companies. What I’m concentrating on here is the crowdfunding of entrepreneurial ventures. And I will say that those small companies cannot afford the regulation large companies undergo when they sell stock and so we need to find ways to enable them to get funded and get liquidity.

      • Can’t we just disagree?! That sounds like the logic which underlies lazy, “objective” reporting: present both claims but don’t seriously evaluate who’s telling the truth.

        Whatever benefits these entrepreneurial ventures stand to gain from this bill will be greatly outweighed by its negative consequences.

        1. There is little to no basis to the claim that small companies cannot afford the regulatory documentation required as the law presently stands. Also, there is no shortage of investor capital for the tech sector, one of the “problems” this bill is designed to solve.

        2. Investor protections, which this bill undermines, strengthens capital formation! Investors are less likely to invest, and if they do not at as high of a share price, in a weaker regulatory environment.

        3. As a corollary to #2, this bill primarily benefits frauds.

        4. As we saw in the S&L crisis, the dot com crisis, and now the Great Recession, weakening regulation creates a criminogenic environment which results in economic disaster for those committing fraud. However, especially recently, the political-economic elite then bail out the fraudsters with taxpayer money, transferring the economic disaster to the PUBLIC.

        5. Large corporate interests typically benefit enormously, at least in the short-term, from these passed-on economic disasters. With high unemployment and increasing poverty, they can drive down wages and buy up assets at fire sale prices, cashing in when the economy rebounds. Small entrepreneurs, on the other hand, who don’t have the infrastructure, capital or customer base to ride it out, suffer.

        6. With reduced wages and greater poverty, there is less domestic demand. Again, the big players can ride this out, especially if there industry is practically monopolized, whereas entrepreneurs see their potential market, which they need to get off the ground, evaporate.

        If you want to repeat the same mistakes made with the credit markets (which resulted in international economic collapse) with the equity markets, then support the JOBS act.

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  • Thanks from the post. I like to read your blog.

    Special thanks from Romania (Europe)!

  • Thanks again. Keep going …. beautifull blog.

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