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S. HRG. 112–617 

PERSPECTIVES FROM THE ENTREPRENEURIAL 

ECOSYSTEM: CREATING JOBS AND GROWING 

BUSINESSES THROUGH ENTREPRENEURSHIP 

ROUNDTABLE 

BEFORE THE

COMMITTEE ON SMALL BUSINESS AND 

ENTREPRENEURSHIP 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

APRIL 18, 2012 

Printed for the Committee on Small Business and Entrepreneurship 

( 

Available via the World Wide Web: http://www.fdsys.gov 
(II) 

COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP 

ONE HUNDRED TWELFTH CONGRESS 

MARY L. LANDRIEU, Louisiana, Chair 

OLYMPIA J. SNOWE, Maine, Ranking Member 

CARL LEVIN, Michigan 

TOM HARKIN, Iowa 

JOHN F. KERRY, Massachusetts 

JOSEPH I. LIEBERMAN, Connecticut 

MARIA CANTWELL, Washington 

MARK L. PRYOR, Arkansas 

BENJAMIN L. CARDIN, Maryland 

JEANNE SHAHEEN, New Hampshire 

KAY R. HAGAN, North Carolina 

DAVID VITTER, Louisiana 

JAMES E. RISCH, Idaho 

MARCO RUBIO, Florida 

RAND PAUL, Kentucky 

KELLY AYOTTE, New Hampshire 

MICHAEL B. ENZI, Wyoming 

SCOTT P. BROWN, Massachusetts 

JERRY MORAN, Kansas 

DONALD R. CRAVINS, JR., Democratic Staff Director and Chief Counsel 

WALLACE K. HSUEH, Republican Staff Director 

BRIAN VAN HOOK, Democratic Policy Director 

MEREDITH WEST, Republican Senior Professional Staff 
(III) 

C O N T E N T S 

OPENING STATEMENTS

Page 

Landrieu, Hon. Mary L., Chair, and a U.S. Senator from Louisiana .................. 1 

Brown, Hon. Scott P., a U.S. Senator from Massachusetts .................................. 4 

Moran, Hon. Jerry, a U.S. Senator from Kansas .................................................. 20 

Risch, Hon. James E., a U.S. Senator from Idaho ................................................ 20 

WITNESSES

Gorman, Juliet, Communications Director, Etsy .................................................. 5 

Gerber, Scott, Founder and President, Young Entrepreneur Council ................. 5 

Williamson, Tim, Chief Executive Officer and Co-Founder, The Idea Village ... 6 

Daugherty, Scott, Executive Director, North Carolina Small Business and 

Technology Development Center ........................................................................ 6 

Mitchell, Ph.D., Matt, Senior Research Fellow, Mercatus Center at George 

Mason University ................................................................................................. 7 

Lowe, Hon. Craig, Mayor, City of Gainesville, Florida ......................................... 7 

Nigro, Joe, Business Evangelist, Vsnap.com ......................................................... 7 

Wadhwa, Vivek, Fellow, Stanford University ....................................................... 8 

Friederichs, Christina, Managing Director, Helzberg Entrepreneurial Mentoring Program ..................................................................................................... 8 

Laskey, Alex, President and Founder, Opower ..................................................... 9 

Hyman, Jennifer, Chief Executive Officer and Co-Founder, Rent the Runway . 10 

Burfield, Evan, Chairman, StartupDC .................................................................. 10 

Greene, Ph.D., Patricia G., Paul T. Babson Chair in Entrepreneurial Studies, 

Babson College ..................................................................................................... 11 

Acharya, Nishith, Director, Office of Innovation and Entrrepreneurship, Economic Development Administration, U.S. Department of Commerce ............. 11 

ALPHABETICAL LISTING AND APPENDIX MATERIAL SUBMITTED

Acharya, Nishith 

Testimony .......................................................................................................... 11 

U.S. Department of Commerce Economic Development Administration 

2011 i6 Green Challenge Winners ............................................................... 47 

Brown, Hon. Scott P. 

Testimony .......................................................................................................... 4 

Burfield, Evan 

Tesimony ........................................................................................................... 10 

Daugherty, Scott 

Testimony .......................................................................................................... 6 

Prepared statement .......................................................................................... 54 

Biz Boost Report ............................................................................................... 57 

Friederichs, Christina 

Testimony .......................................................................................................... 8 

Gerber, Scott 

Testimony .......................................................................................................... 5 

Prepared statement .......................................................................................... 65 

Gorman, Juliet 

Testimony .......................................................................................................... 5 

Greene, Ph.D., Patricia G. 

Testimony .......................................................................................................... 11 

Hyman, Jennifer 

Testimony .......................................................................................................... 10 
Page

IV 

Landrieu, Hon. Mary L. 

Opening statement ........................................................................................... 1 

Chart titled ‘‘Private Sector Job Growth’’ ....................................................... 40 

Chart titled ‘‘2009 Graduate Students in STEM Fields’’ .............................. 41 

Chart titled ‘‘Top 10 U.S. Engineering Graduate Degree Programs’’ .......... 42 

Laskey, Alex 

Testimony .......................................................................................................... 9 

Prepared statement .......................................................................................... 113 

Lowe, Hon. Craig 

Testimony .......................................................................................................... 7 

Mitchell, Ph.D., Matt 

Testimony .......................................................................................................... 7 

Prepared statement .......................................................................................... 71 

‘‘Working Paper on Freedom and Entrepreneurship: New Evidence from 

the 50 States’’ ................................................................................................ 74 

‘‘Testing Baumol: Institutional Quality and the Productivity of Entrepreneurship’’ ....................................................................................................... 98 

Moran, Hon. Jerry 

Testimony .......................................................................................................... 20 

Nigro, Joe 

Testimony .......................................................................................................... 7 

Risch, Hon. James E. 

Testimony .......................................................................................................... 20 

Snowe, Hon. Olympia J. 

Prepared statement .......................................................................................... 43 

Wadhwa, Vivek 

Testimony .......................................................................................................... 8 

Williamson, Tim 

Testimony .......................................................................................................... 6 
(1) 

PERSPECTIVES FROM THE 

ENTREPRENEURIAL ECOSYSTEM: CREATING 

JOBS AND GROWING BUSINESSES THROUGH 

ENTREPRENEURSHIP 

WEDNESDAY, APRIL 18, 2012 

UNITED STATES SENATE, 

COMMITTEE ON SMALL BUSINESS

AND ENTREPRENEURSHIP, 

Washington, DC. 

The Committee met in a roundtable discussion, pursuant to notice, at 10:05 a.m., in Room 428–A, Russell Senate Office Building, 

Hon. Mary L. Landrieu, Chair of the Committee, presiding. 

Present: Senators Landrieu, Risch, Brown, and Moran. 

OPENING STATEMENT OF HON. MARY L. LANDRIEU, CHAIR, 

AND A U.S. SENATOR FROM LOUISIANA 

Chair LANDRIEU. Good morning, everyone. Let me call this third 

roundtable on the entrepreneurship ecosystem to order. I really appreciate the special effort that many of you made to be here and 

to be a part of this exciting, and I hope, productive series of 

roundtables that the Small Business Committee has been conducting over the course of the last few months to explore some 

ideas relative to strengthening the entrepreneurship ecosystem in 

our country. I really appreciate your participation. You have all 

come highly recommended. 

The goal of these roundtables is to take the ideas that come from 

them and the discussions, and this is going to be very informal, 

hopefully very interactive, much different than a sort of staid, stiff, 

formal hearing. So, I hope that you will be enthusiastic about sharing some of your best ideas. 

You are all a very impressive group of experts and leaders in 

your own right, and I am going to introduce you briefly in just a 

minute. 

As we look at the definition of an ecosystem, it is defined as, ‘‘a 

system formed by the interaction of a community of organisms 

within their environment.’’ 

When I read this definition this morning in preparation, a couple 

of the words jumped out to me. It is a system. It is not a hodgepodge of unrelated pieces. 

The word ‘‘interaction’’ is important. It indicates it is not action 

going one way but back and forth. It is not one organism but a 

community of organisms that have to work together for the whole 
2 

to be successful, and of course, we all understand what the environment is. 

Let me welcome Senator Brown, who has joined us. Thank you 

for joining us. 

It is a very interesting definition, I think, to apply to the work 

that our Committee is trying to do without jurisdiction over and 

admitting that we do not have jurisdiction over all aspects of business. 

Obviously, the Commerce Committee has their jurisdiction. The 

Finance Committee has jurisdiction over the tax code. Every other 

Committee has jurisdiction over different rules and regulations and 

policies related to health care, education, et cetera, et cetera. 

Our Committee is really a Committee that is focusing on trying 

to pull as many of these ideas together and promote them as a 

package to the Congress to strengthen this ecosystem. Some of 

those bills will have to be actually marked up in this Committee. 

Others will have to share jurisdiction with other Committees. 

So, do not be just restricted in your comments even if you think, 

well, this really belongs in Banking. The Banking Committee will 

eventually get it sooner or later. 

So, with that definition while exploring what makes certain individuals into entrepreneurs is an interesting and useful endeavor, 

it is also ground well covered. 

These discussions are taking a look at relationships between 

those entrepreneurs and their current environment for entrepreneurship and how we can make them more robust. 

Babson College, which is represented here today, has done some 

exciting work. We are looking forward to hearing from them. In 

fact, in their many research papers and documents, Babson has 

identified the six domains of any entrepreneurial ecosystem. 

First, they start with a conducive culture that rewards innovation, creativity, and experimentation. The question is, does our culture here in Washington do that? Do our states do that? Do our 

local governments do that? Does the private sector do that? Rewarding innovation, creativity, and experimentation. Are we riskaverse or taking too much risk? 

Second is enabling policies and leadership that provide regulatory and capital support. What is the regulatory environment? 

Are we providing enough capital? Third, availability of appropriate 

finance including microloans, private equity, and public capital. 

Four, quality human capital that includes both skilled and unskilled workers from home and abroad. 

Five, venture friendly markets for products by creating distribution channels and entrepreneurship networks. 

And six, a range of institutional infrastructure supports including incubation centers, legal and accounting advisers. 

These are the six domains identified for Babson. Many of you 

have done work in this area. You may have your own domains. 

Please share them with us today. 

Now that we have at least one idea of what makes up an entrepreneurial system, hopefully we can develop ideas that come from 

these discussions into policies that will strengthen this ecosystem 

in the United States. 
3 

My goal is for the United States to have the strongest, most vibrant, most dynamic, most finely tuned ecosystem in the world; 

and I think that if we do that, the country will stay number one 

with our economy. If we do not, we will fall behind. 

Our first roundtable was focused on developing and strengthening and understanding, I would really say, the high-growth entrepreneurs and what makes or separates high-growth. 

We know jobs are created from these startups. We have been told 

a lot up here that it is not just the new companies that are creating 

the jobs, obviously, but it is those companies, the new companies, 

that are the gazelles and the high-growth companies. There is not 

a complete consensus about that, but that information is coming to 

us loud and clear. 

The second roundtable was held on March 22nd about a specific 

government program called SBICs, Small Business Investment 

Companies, which was not a new idea. It was developed in 1958. 

It is a 60-year-old program that authorizes $3 billion to basically 

create non-bank lenders, small business investment companies that 

have the great strength of being a public-private partnership where 

licensed or registered groups can go out and raise private capital 

and then the government matches a two-to-one match to create a 

pool of funding that is lent out, an idea that evidently in 1958 Senators like Lyndon Johnson (who was the other Senator involved? 

President Eisenhower signed it) did not think the banks were making capital readily available to main streets all over America. I 

think that is a challenge that we still face today. 

Both Congress and the President have proposed expanding this 

program. It has been proven to be effective over many years and 

I am supporting, strongly supporting, that expansion and hoping 

we can get it done. 

Today’s discussion will focus on mentorship and technical assistance, what works and what does not, what kind of mentorship is 

important, what kind of technical assistance. 

Entrepreneurship education, again, can you teach someone how 

to be an entrepreneur or is it innate? If it is or not, how do we 

make more of them that are successful? 

What is the role of local government? We have one of our mayors 

here. Do local governments have a role and how do the local governments in cities or counties working with states, what is working 

and what is not working. 

Private sector accelerators. Some of you run those. How are those 

effective? High risk skilled talent pools, where are they, how do we 

get more of them? 

Then of course, promoting small business exports. It has been 

very disappointing so far that we have not been able to reauthorize 

the Export Bank. Hopefully, we can get that done sometime soon. 

That is because one percent of U.S. small businesses currently export their products or services to the world even though 95% of the 

world’s customers are outside the borders of the U.S. If we could 

double or triple that, I think it would mean a tremendous number 

of jobs and wealth creation for the United States. So getting the 

Export Bank authorized is important. 

I am going to ask each of you to introduce yourself. When we do 

this, either some people take too long and go on and on or some 
4 

people do not say anything. We are going to try to find that happy 

medium. Okay? 

I want you to really realize that you have an opportunity to tell 

in a minute or less about yourself and the one or two things that 

either you are most proud of or why you think you have been asked 

to be at this roundtable. 

Then as you know, we will start off with questions from here. 

When you want to speak or have something to say, just stand your 

nameplate up like that and we will go back and forth. We will try 

to give everybody an opportunity, and really again, the idea is to 

have a free flow of discussion. 

I am going to recognize Senator Brown, who is busily not listening to me or maybe listening and signing his letters, signing his 

letters for an opening statement and then he may have to leave. 

Senator BROWN. I am listening. 

Chair LANDRIEU. Go right ahead. 

OPENING STATEMENT OF HON. SCOTT P. BROWN, A U.S. 

SENATOR FROM MASSACHUSETTS 

Senator BROWN. First of all, thank you, Madam Chair, I wanted 

to attend as I have attended the other small business roundtables 

that you have held. I greatly appreciate them and I have learned 

a lot, and most importantly you have had folks here from Massachusetts. 

We obviously have Patricia. It is good to see you. And Joe Nigro, 

MassChallenge. I want to thank you for holding these. 

In Massachusetts, we had a field hearing on access for capital for 

small businesses in Boston. It was really laser focused on how to 

create new capital and that is why I was very happy that my 

amendment on Crowdfunding was able to pass. 

Joe, I know you were instrumental in it. Thank you. The folks 

in MassChallenge actually started a site called wefunder.com and 

have about $6 million worth of capital ready to go out the door for 

new startup businesses. 

In Massachusetts, we are an innovative state. We have, I think, 

more opportunities than some states. Not all states. But as a result 

of working with you on this Committee and providing SBIR reauthorization, the new Crowdfunding opportunities, looking at a lot 

of the SBA opportunities that we have been able to get reauthorized, it is a good thing. 

It is funny. The biggest challenge I see as I travel around the 

country, I am sorry, around the state, is that lack of regulatory and 

tax certainty. You do not know what is next. That is one of the biggest challenges. You do not know if the tax policy is going to 

change. 

FDA, EPA, NLRB, whatever the entity is, SEC, you do not know 

what is next. That is really scaring a lot of investment dollars 

away. There is upwards of $2 trillion on the sidelines. What I have 

tried to do is to work on those things that are going to move our 

country forward on Crowdfunding, for example. We are working on 

the Hire a Hero Veterans bill to get that tax break there so folks 

will actually want to hire and expand. I am concerned about a lot 

of the business deductions that are expiring at the end of the year 

as well as the individual rates for a multitude of businesses that 
5 

file as S corporations. Business owners do not know, as I said, 

what is coming down the pike. 

I spent the entire of last week in Massachusetts touring small 

businesses from a meatball company that is the number two meatball company in the entire country, and I know each and every one 

of you had. 

All they want to do is make meatballs. But they are saddled with 

that lack of certainty as to what is the tax policy because they are 

a sub-S corporation. What is going to happen with the EPA and the 

DEP and a lot of the municipal, state, and then Federal regulations 

that are just saying, you know what, we may best move. 

So, this is a good opportunity to work on the things that matter. 

I appreciate your holding them. I am looking forward to participating. I have other hearings I am attending, but I wanted to show 

my support for your efforts. 

So, thank you. 

Chair LANDRIEU. Thank you, Senator Brown, and he has been 

one of our more active members of our Committee. I am really 

grateful and very appreciative for his attendance and his interest 

both here and at home. I thank him very much. 

Let us begin, Juliet, Ms. Gorman, with you, and again please, 

one minute. Do not be shy but do not be too long. 

Ms. GORMAN. Sure. 

Chair LANDRIEU. You have to speak right into these mics. It is 

a little bit awkward but press your red button and then lean into 

your mic. 

Ms. GORMAN. Okay. Hi, guys. I am Juliet Gorman. I am the communications director at Etsy. Etsy, if you do not know us, is an online marketplace for hand-made in vintage goods and supplies. We 

have over 800,000 sellers on our platform, handmade and vintage 

goods and supplies. 

I am actually wearing a few things today made by Etsy sellers 

from New York and California. But we have 800,000 sellers on the 

platform, three quarters of them, more than three quarters of them 

are women entrepreneurs, many of them with home-based businesses. 

They sell everything from food to furniture. Like I said, I have 

got some accessories today. We have around 40 million unique visitors come to our market place every month. 

Last year our sellers had over $525 million in gross merchandise 

sales. That may not sound like a big figure in the big picture of 

the economy, but $4000 in supplemental income at the holidays or 

when you have a car payment or when your kid needs braces, when 

you want to go out for an extra dinner with your husband or even 

possibly quit your day job, makes a big difference. 

Chair LANDRIEU. Juliet, that is perfect. Perfect. Perfect. 

Scott. 

Mr. GERBER. Thank you, Madam Chair. I much appreciate you 

allowing the YEC to be represented today. Again, my name is Scott 

Gerber. I am the founder of an organization called the Young Entrepreneur Council. We represent nearly 400 of the most successful 

young entrepreneurs in the country who have created close to 

20,000 jobs and hundreds of millions of dollars in revenue. 
6 

In addition to that, we have spearheaded a national movement 

called Fix Young America, which is a campaign where we have 

taken some members (actually some that are represented here 

today) and aggregated their best ideas surrounding policy, privatesector solutions, and philanthropic solutions to the youth unemployment crisis through entrepreneurial means. 

Right now we actually have this book coming out of policy solutions which I would love to give to the Committee on May 9. But 

most importantly our mission is to provide Americans under the 

age of 35 and recently graduated the opportunity to become entrepreneurs in an economy in which frankly we see the traditional job 

losing its value. 

Chair LANDRIEU. Fabulous. Terrific. And please share that book 

with us and hopefully you will share some of those ideas in the 

book today. 

Mr. GERBER. Yes, ma’am. 

Chair LANDRIEU. Tim. Mr. Williamson. 

Mr. WILLIAMSON. Thank you, Senator. My name is Tim 

Williamson. I am one of the cofounders of The Idea Village, but 

first and foremost, I am an entrepreneur from New Orleans who 

moved away and came back home in the late 1990s to find a declining city. 

So, The Idea Village was founded very specifically because we believe that entrepreneurship creates change. I love to hear the word 

‘‘ecosystem,’’ but back when we started, we called it an ‘‘idea village.’’ 

The answer was to build a network of university, government, 

and professionals that singularly would identify, support, and retain entrepreneurial talent. 

The good news is we have worked with over 1800 entrepreneurs 

in the last 12 years. We have engaged over 2000 people to write 

56,000 consulting hours and $3 million in capital. 

New Orleans is becoming a laboratory for innovation and entrepreneurship, rated the number one brain magnet in the country 

and number two best city for jobs. But fundamentally we are seeing a model where ecosystems are coming together to support entrepreneurs and more importantly keep them in the city to make 

a better city. 

Thank you. 

Chair LANDRIEU. Thank you, Tim. And I may have to be a little 

partial here because, of course, that is my hometown, and my 

brother is the mayor of New Orleans. So, he works very closely 

with Tim but they really are developing quite a wonderful model 

that other cities could emulate. So, it is exciting, and thank you for 

coming again. 

Mr. Daugherty, Scott. 

Mr. DAUGHERTY. Good morning. I am Scott Daugherty. I am the 

State Director of the North Carolina Small Business and Technology Development Center, which is operated through the University of North Carolina system. I also serve as the Commissioner for 

Small Business for the State of North Carolina. 

I am here today principally because our SBTDC has had for a 

number of years a very strong commitment to serving existing 

businesses with 10 to 150 or so employees. 
7 

Chair LANDRIEU. Fabulous. 

Mr. DAUGHERTY. We think this is a significant market place. It 

is grossly underserved but has enormous potential for growth including growth in export markets. 

Chair LANDRIEU. Thank you. We are really looking forward to 

your expertise in that area and we have been hearing nothing but 

very positive things about North Carolina. 

Mr. Mitchell. 

Dr. MITCHELL. Good morning. Thank you so much for having me. 

My name is Matthew Mitchell. I am a senior research fellow at the 

Mercatus Center at George Mason University. 

As you may know, George Mason was sort of put on the map in 

1986 when James Buchanan won the Nobel prize in economics and 

he won it for studying public choice. Since then, Vernon Smith also 

won the Nobel Prize in economics there, also for pioneering in the 

field of public choice. 

Public choice focuses on the ways in which government policies 

are actually determined and carried out. I think his weighs on entrepreneurship in particular. I too appreciate the ecological metaphor. I think it is a really appropriate metaphor. 

Recently, I had been looking at the public choice ways in which 

the ecology of entrepreneurship can sometimes be interfered with. 

Just like a natural ecology, entrepreneurial ecology needs to be a 

bottom-up process and quite often can be subject to interference 

from governments or otherwise. 

Chair LANDRIEU. That is an excellent point, and I hope that we 

will have a little bit more thought provoking comment about that. 

Just like governments can ruin physical infrastructure, I mean 

physical, natural environments, governments can also, with the 

wrong policies, disrupt, the I do not know if you would call it natural but the strength, dormant strength or natural strength of a 

people to grow jobs and produce wealth. 

Mr. Lowe. 

Mr. LOWE. Hello. I am Craig Lowe, Mayor of Gainesville, Florida, 

home of the University of Florida and I am also on the U.S. Conference of Mayors Technology and Innovation Task Force. 

It is really an exciting time to be Gainesville because our entrepreneurial ecosystem is really starting to take off. The latest development is a startup incubator at the University of Florida that is 

called the Florida Innovation Hub. 

It is designed to bring together scientists and innovators and entrepreneurs. It is 48,000 square feet. It is also home to the U.S. Office of Technology Licensing. It opened in October but already there 

are 15 startups as well as the offices of venture capitalists, law 

firms that deal with entrepreneurs, design firms, and other entities 

that offer services to startups. 

It is the first building in what we call our Innovation Square but 

already it is having broader economic impact. For example, we had 

a company that is relocating, well, is actually locating, that is 

based in India that will be bringing over 400 jobs to our city. 

Thank you. 

Chair LANDRIEU. Thank you, Mr. Mayor. That was perfect. 

Mr. is it Nigro? 

Mr. NIGRO. Correct. 
8 

Chair LANDRIEU. Joe. 

Mr. NIGRO. So, thank you very much for having me today. I am 

really excited to be here. So my name is Joe Nigro. I am a founding 

team member of a startup company in Boston, Massachusetts 

called Vsnap. Vsnap is a 60-second video messaging company for 

your smart phones, tablets, and computers, just a more personal alternative to e-mail. 

That is kind of my pitch. I should have put my 60-second pitch 

on Vsnap and sent it to everybody. 

[Laughter.] 

Maybe I will do my follow up on that. But I am part of the 

world’s largest accelerator competition based in Massachusetts 

called MassChallenge. You know, you brought up earlier today, I 

have it here, interaction of a community. Interaction of a community is a crucial part of the ecosystem and that is exactly what 

MassChallenge is, hundreds of entrepreneurs running around like 

crazy trying to figure it out, as I like to say, and doing a great job 

at that. 

So, I am really looking forward to this discussion. 

Thank you. 

Chair LANDRIEU. Well, good. When you all figure it out, please 

tell us. 

Mr. NIGRO. Will do. 

Chair LANDRIEU. Mr. Wadhwa. 

Mr. WADHWA. I am Vivek Wadhwa, an entrepreneur who founded two technology companies, turned academic, and in my spare 

time I write for the Washington Post and for BusinessWeek. 

I have been researching global policy entrepreneurship, immigration, and so on. I have been shocked at all the myths that persist 

in policy circles. I have researched why companies are going overseas and doing outsourcing; the education systems of our competitors; and what makes the U.S. tick and gives it a strategic advantage—this includes enterpreneurship and immigration policy. 

I have been surprised that I am able to shatter so many myths 

that are out there and come up with more sensible policy. For example, Chile is doing an experiment called Start-Up Chile, that I 

helped develop. Entrepreneurship is booming there and this experiment costs very little. 

Chair LANDRIEU. Wonderful. Thank you very, very much. 

Ms. Friederichs. 

Ms. FRIEDERICHS. Good morning. Thank you for including me 

today. I am Christina Friederichs, the Managing Director of 

HEMP, which stands for the Helzberg Entrepreneurial Mentoring 

Program. We are focused in the Kansas City area where we 

strengthen entrepreneurial leaders through excellence in mentoring 

by matching proven business veterans or mentors with growing 

business owners for a three-year program. 

We focus on entrepreneurs or businesses that have a minimum 

of five employees or over $1 million in revenue because we have 

identified there is a gap of resources available between startup and 

mature companies. 

In the 17 years that HEMP has been facilitating organized mentoring, we have witnessed over 200 entrepreneurs significantly contributing to the economy through job creation and revenue growth. 
9 

I thank you for the opportunity. We are excited to participate 

today. 

Chair LANDRIEU. Thank you so very much. 

Mr. Laskey. 

Mr. LASKEY. Thank you very much for having me, Madam Chairwoman. And, Senator Brown, thank you again. 

I am the President and Founder of a company called Opower. We 

are an energy information company. We work with 70 utilities 

across the globe on three continents. There are 250 of us now at 

the company and the most exciting number is that this year alone 

we will generate one terawatt hour of energy savings which is 

nearly two-thirds the size of the entire solar industry’s output in 

2011. 

So, we are helping people save energy equivalent to nearly twothirds of the size of the solar output in 2011. 

We work with almost every utility in Massachusetts. I think 

Massachusetts has been the state in which we have gotten the biggest energy savings. We are not yet working with Entergy but 

working on that. And we are working with a utility in Gainesville. 

There are 250 of us today but five years ago there were two of 

us squatting at a desk. We have had, I guess in retrospect, gazelletype growth although it seems incremental as it has gone along. 

There are two policy areas that I hope that this group addresses, 

domain specific on energy efficiency. There are policies that make 

sense that have been signed into law by Democratic and Republican governors at the state level that ought to happen at the Federal level that will untap a $40 billion market opportunity for small 

and big companies alike and put money back in the pockets of people across the country. 

The second policy area I hope this group addresses is, as you 

mentioned it Chairwoman in your opening remarks, labor and the 

talent pool, particularly immigration. 

Chair LANDRIEU. Thank you very much. 

Go ahead, Senator Brown. 

Senator BROWN. So, are you working like with EnerNOC and 

those types of companies in Massachusetts? 

Mr. LASKEY. No. We work directly with National Grid and 

NSTAR. We deliver reports that show people how their consumption compares to neighbors in similar size homes. 

Senator BROWN. Yes. I get those. So, you are working with National Grid. 

Mr. LASKEY. How are you doing? 

Senator BROWN. I am fine because I am never there. It is funny. 

You know, I am never there. I am surprised that my consumption 

is not down because I have unplugged everything, like nothing is 

on and supposedly my neighbors are still better than me. So, I am 

glad you are here. I might want to talk to you later. I am not quite 

sure how that works. 

Chair LANDRIEU. He is complaining about his personal report but 

this is good. This is how we find out. 

Mr. LASKEY. On average, people spend six minutes a year thinking about their energy use. The Senator, who is as busy as anyone, 

is spending some time thinking about energy use. That is a good 

thing. 
10 

Chair LANDRIEU. It is good for us to focus. 

Ms. Hyman. 

Ms. HYMAN. My name is Jennifer Hyman. I am the CEO and Cofounder of Rent the Runway, which is a site that rents designer 

dresses and accessories to women for 10 percent of the price but 

more importantly it empowers women to have aspirational experiences before all of the special events in their lives. 

So, the concept of Rent the Runway and the gall is to democratize luxury in the United States and then later globally. I started 

the business while I was at Harvard Business School in Boston. I 

am funded by two Boston VCs, Bain Capital and Highland Capital 

as well as Kleiner Perkins. 

We have grown to a company in just two years of 125 people located in New York City. We have a huge warehouse that we run 

as well. We have around 3 million members now. So, it has been 

very fast growth and I think that I have been helped along by a 

lot of mentorship as well as education that I think would be beneficial to other entrepreneurs. 

Chair LANDRIEU. Well, may I say the men on our staff had not 

been familiar with your company but all the women did know 

about it. So, we are excited. 

Senator BROWN. I am. Okay. My daughters I am sure they use 

you guys. 

Ms. HYMAN. That is really wonderful to hear. 

Chair LANDRIEU. This is a great help to parents as well. Good 

idea. 

Senator BROWN. It is wonderful for me as well. 

Chair LANDRIEU. Mr. Burfield. 

Mr. BURFIELD. Yes. Again thank you, Madam Chairwoman. 

Chair LANDRIEU. You have to push the button and pull it a little 

closer to you. 

Mr. BURFIELD. Thank you, Madam Chairwoman and Senator 

Brown, for this opportunity to talk about these issues. 

My name is Evan Burfield. I am the Chairman of StartupDC, 

which is a regional effort here in the Greater Washington area associated with Startup American network to help grow exactly the 

ecosystem you are talking about from a private sector standpoint 

here in Washington. 

My background. I started my first venture-backed startup when 

I was 19 just after graduating from high school and have been 

building companies since then. 

Most recently, I am the Founder and Chairman of Synteractive. 

We are a consulting firm that builds out social applications in the 

cloud, including building out applications like recovery.gov here for 

the U.S. Government. 

When we look across the Greater Washington region, there is a 

number of challenges that we can identify that we are trying to 

tackle. 

How do we get large corporations and small startups working together in better ways? How do we unlock latent angel capital? How 

do we create more flexible space options? 

But the one that I want to talk the most about today is how do 

we unlock more talent and create more talent available to the 

startups because the lack of enough talent to help these startups 
11 

grow is the number one issue facing startups here in the region but 

it is also one that we hear when we talk to all these other regions 

around the country through Startup America. 

Chair LANDRIEU. Wonderful. 

Dr. Greene. 

Dr. GREENE. Good morning and thank you for having us here 

today. My name is Patti Greene. I am a professor at Babson College, like Vivek, a later stage academic and probably because of 

that I am really interested in the intersection of research, teaching, 

practice, and policy, how do we pull it all together in order to really 

have an impact in our small business economy. 

I think I am probably here today also, though, because I like to 

connect dots which means that I spend a lot of time with different 

kinds of technical assistance programs around the country and 

through some other programs around the world. 

So, I am on the SBA’s advisory board for the SBDC; a Cofounder 

of the Diana Project, which looks at women and venture capital inside the country, but also women and all kinds of resources outside 

of the country; worked a lot with frankly many of you around the 

table. 

But it is about technical assistance and what does it really take 

to recognize an ecosystem that is not just about startups but all 

kinds of businesses. 

So, that is really where we play out. And as of last month, I am 

one of the owners of Artworks in Gettysburg, Pennsylvania. 

Chair LANDRIEU. Wonderful. 

Nishith Acharya. 

Mr. ACHARYA. Thank you, Senator. I am Nishith Acharya. I am 

Director of the Office of Innovation and Entrepreneurship and Senior Advisor to the Secretary of Commerce. 

I just joined the Administration a few months ago. I had been 

CEO of the Deshpande Foundation in Massachusetts where I got 

to meet many of you and moved down here primarily because I was 

excited about what the Administration and its partners in Congress were doing around the issues of innovation and entrepreneurship. 

Just to mention a few, the Economic Development Administration where I sit we have ran the i6 Challenge for the last two years 

where we have given $12 million directly from EDA, an additional 

match from several agencies including the Department of Energy, 

EPA, USDA, and then private sector match from a lot of the winners including Louisiana Tech to support centers that help universities and research centers identify innovation, create processes to 

commercialize that innovation and actually get it out the door in 

the form of startups that will benefit their regions. 

That has been a very exciting program to watch grow, and we 

will be running it again this year as well. 

EDA has also run the jobs and rural innovation accelerator 

which has been helping later stage companies with training and 

other areas where they can really develop their local economy 

through tax credits, training money through the Department of 

Labor as well as the USDA and others. 

Then of course, the President signed the interagency memorandum last fall requiring all agencies to develop plans for com-
12 

mercialization, and I look forward to working Administration-wide 

on seeing that have a major impact on how the U.S. Government 

funds for R and D really lead to more innovation and more entrepreneurship across the country. 

Chair LANDRIEU. Thank you, Mr. Acharya. I really appreciate 

your leadership in this Administration and your efforts in this regard. 

Let me start with a very broad question and then I will have a 

series of individual questions to just get the discussion going. 

Do any of you sitting around the table think that what we, I 

think, want to accomplish strengthening our entrepreneurship assets in America and creating jobs can be done by the private sector 

alone? And what specific role do you believe that the Federal Government either should or should not be involved in? 

Go ahead, Mr. Gerber. 

Mr. GERBER. Madam Chairwoman, I think that everybody would 

agree that government regulation in some ways is always a barrier 

to business. Whether people agree or disagree on the specifics is always a matter of politics. 

Chair LANDRIEU. Is it always a barrier? 

Mr. GERBER. I think that in many cases when it comes to the 

specifics regarding how someone can grow a business or on a cityor state-level, how businesses are dealing with Federal and city 

and state regulations, these tax implications and other things, as 

Senator Brown mentioned, will impede many businesses’ progress. 

With that being said, I think that the main aspects for younger 

entrepreneurs where I would like to speak is specifically about creating a paradigm shift toward treating entrepreneurship in as high 

a regard as a traditional employment opportunity. 

I believe that begins in the education system. I also believe 

where the government comes to play is in promoting through ecosystem development, through various different mentorship programs, expanding technology awareness and other means to really 

connect with the younger generations about this topic, is something 

that I frankly do not see enough of today. 

Chair LANDRIEU. Now, be a little clearer though. What would 

government have to do with mentorship? 

Mr. GERBER. Uh-huh. So, for example right now there are thousands of government organizations like SBDCs across the country. 

You also have a variety of things like SCORE, the SBA, a variety 

of programs that are starting to make strides in connecting with 

young entrepreneurs. 

But ultimately an issue that is problematic is that many of them 

are run by government agents who ultimately have never had any 

business experience, who frankly have not made any real effort to 

connect with the community as a whole to bring in the business 

community in the collegiate years or in the high school years when 

these individuals are in their most formative years of deciding 

what their employment opportunity will be. 

So, those are some of the things I think on a mentorship level 

are important. 

Chair LANDRIEU. Excellent points. Of course, SCORE is private 

sector and so is SBA. They are government-funded but not government run. 
13 

Let us go to you, Mr. Daugherty. 

Mr. DAUGHERTY. I think the question had to do with private sector alone. 

Chair LANDRIEU. Yes. That was the question. 

Mr. DAUGHERTY. And the answer is clearly not. There are a 

bunch of private sector initiatives represented here today and they 

are all great and good and wonderful. But unless there is an opportunity for profit, you are not going to get broad scale replication of 

things like an SBDC network or other kind of platforms for reaching large numbers of entrepreneurs across the nation. 

The private sector needs to be participatory partners. Clearly, 

they need to be looked to for good ideas on new ways to do things. 

But if we are going to wait for the private sector to do it all, you 

have to do is look at the banking system right now. 

They are not lending. They are awash in money but they are not 

lending. So, it has taken some activity out of the Congress to stimulate movement in that area. I think you would have to continue 

to do that. 

Chair LANDRIEU. I think the government has a role and the private sector has a role. We are trying to flush some of that out. 

Mr. Burfield, did you have a comment on that? 

Mr. BURFIELD. I would like to respectfully disagree with Mr. 

Daugherty. I think the private sector is absolutely capable and is 

creating vibrant startup ecosystems across the country. 

I mean all of the efforts that we are doing here in the DC region, 

you know, if anything, we are keeping our local government and 

our State government informed in what we are doing but we are 

driving it because we are passionate people that care about this 

and we see, you know, a vested interest for a region that we care 

about and actually growing the ecosystem. 

But certainly, legislation like a JOBS Act which is very thoughtful, very targeted in removing some of the barriers to private sector 

activity has been very beneficial. I think there are other very, very 

targeted areas where perhaps the private sector by itself cannot 

tackle the full problem. 

I want to come back again to the fact that, you know, we have 

a significant jobs crisis in this country. We have high unemployment, high underemployment but at the same time when you talk 

to many of our most successful startups, when you talk across our 

overall region, we cannot find talent fast enough. There is very 

clearly a labor market inefficiency across—— 

Chair LANDRIEU. Does the private sector provide the talent or 

does the government have to change the rules to provide the talents? 

Mr. BURFIELD. I mean, I think the issue the issue at the end of 

the day is the talent that a lot of our startups need is not necessarily the talent that is being produced. It is not necessarily the 

talent that is available. So, you end up in a dynamic where 

startups are competing with other startups. They are trying to 

steal talent from large companies. 

Chair LANDRIEU. Not to press you on this, is it the private sector 

that can produce that talent or is it the government that has to 

work with the private sector to produce it? 

Mr. BURFIELD. The private sector absolutely can. 
14 

Chair LANDRIEU. Cannot or can? 

Mr. BURFIELD. Can. Can. I mean, you look at programs like Hungry Academy here in D.C. where LivingSocial, one of our big success stories here in the D.C. region, has actually set up a program 

to train people who have never been software developers before and 

actually teach them how to code, teach them how to operate at 

startup speed, teach them the cultural values that they need. 

But I think government has a role to play in helping to create 

those incentives because that is essentially an apprenticeship and 

training program. 

Chair LANDRIEU. Is that a charter school? 

Mr. BURFIELD. No. No. It is for grown-ups. I mean, it is for 

adults. 

Chair LANDRIEU. It is for adults. 

Mr. BURFIELD. It is for taking people who are in one career and 

teaching them how to transition their skills set into skills that are 

more relevant to what the startup economy is creating. 

Chair LANDRIEU. Mr. Williamson. 

Mr. WILLIAMSON. One point. If it’s the private sector solely, the 

answer is no. I think there is a partnership. 

I do think it needs to be started by the private sector. I think 

the most effective ecosystems are led by primarily entrepreneurs 

who decide that they want to do it within their community and 

there has to be a private sector leading this network but the government is a critical part of the network. 

Secondarily, at the beginnings of an ecosystem, there needs to be 

an honest broker. So, if it were purely profit-led, you might not be 

able to build a vibrant ecosystem because some would benefit and 

some would not. So, the role of the government is important to be 

in that network to help balance out the university private sector 

mix. 

Lastly, I do think in terms of innovations there are opportunities 

where the government can be a participant. We modeled the program this year as the government/entrepreneur-in-residence because most entrepreneurs do not know what they do not know. So, 

in dealing with government who helps them guide it? 

Could there be mentorship from the government in local communities to help local entrepreneurs figure out ‘‘how do I maneuver 

this bureaucracy?’’ or ‘‘how do I do this?’’ 

I think government is a partner. 

Chair LANDRIEU. And Dr. Greene. 

Dr. GREENE. I would go back to where you started really with the 

idea of the system of interactions and, of course, it has to be everybody involved. One of the things I think we might think about in 

building that ecosystem is that government means a lot of different 

things. 

So of course, today we are sitting here, we are talking about the 

Federal Government. When we are looking at an ecosystem, we 

also have to think about how many different governments do we 

have to deal with and how do we really align the opportunities, resources, and challenges in order to make that ecosystem a healthy 

one for everybody. 

I work mostly right now with the Goldman Sachs 10,000 Small 

Business Program. We are in six cities and in every city you have 
15 

a very strong relationship with the mayor’s office. In some cities we 

have the state involved. But it is really a matter of trying to figure 

out what is the best way for the ecosystem to work as a system 

that is aligned to meet the needs. 

Chair LANDRIEU. And to challenge you all to think, and I am 

going to get to all of you, the difference between the skills and experience necessary to build one or a series of successful businesses, 

entrepreneur businesses, and the skills and experience necessary to 

strengthen the entrepreneurship ecosystem and how many ecosystems—what is the optimal size of an ecosystem? 

That is an interesting question. Is it a national ecosystem or is 

it a national ecosystem with hubs, subsets? Is it a locally developed 

ecosystem? That is what we are trying to pull some ideas out of 

you but stay on the original question. 

Does government have a role? Help us define it. Or can the private sector do this alone? 

Mayor. 

Mr. LOWE. Yes. Actually, I think government definitely has a role 

and sometimes government does have to come first. For example, 

with the innovation hub that I was just speaking about, that was 

enabled by an EDA grant that helped develop this economic incubator that develops commercial applications from academic research, academic research that was done at a public university 

which, in turn, gets funding from the state and Federal level. 

Also, the ecosystem is also fostered by other means such as community redevelopment agencies. Our community redevelopment 

agency took very much so a leading role in our downtown community, and the business community is actually thriving there as a result of it. 

In addition to that, of course, we have local and state incentives 

which help spur entrepreneurialism as well. 

Thank you. 

Chair LANDRIEU. Excellent point. Dr. Mitchell. 

Dr. MITCHELL. Thank you so much. So, what I would argue is 

that governments do play a role but it goes back to that ecosystem 

metaphor. Economist from Milton Friedman on left have long recognized that governments play an incredibly important role in setting the environment in which business can grow. 

They need to protect property rights. They need to ensure that 

contracts are enforced, and they need to police fraud and things 

like that. 

But otherwise, there is a large, large literature that suggests 

that when governments get involved in particular types, trying to 

promote particular types of businesses there are a lot of problems 

associated with that. 

So, setting an environment is good but then targeting the particular firms or types of firms for special privileges can set up and 

enormous number of problems. 

So, by ‘‘privileges’’ I mean things like subsidies or loan guarantees. Regulations is an interesting one. A minute ago I think you 

appropriately ask, are all regulations harmful, and the answer interestingly enough is no. 

Many regulations are bad for the economy but they are very, 

very helpful for particular firms and that is part of the problems 
16 

with regulations is that they—take, for example, the regulation, 

sort of ripped from the headlines some famous regulations that required financial firms to use the three major credit rating agencies 

as they had a mandate to use their services. 

So, this is the kind of regulation that is of great benefit to the 

three major credit rating agencies. It is a de facto monopoly. But 

it is very, very harmful in the sense that it creates a number of 

other problems along the way. 

Chair LANDRIEU. Excellent point. 

Ms. Hyman. 

Ms. HYMAN. I just want to speak my personal experience. I am 

a Bloomberg fellow in New York City, and Mayor Bloomberg has 

set up a group of entrepreneurs every year who are all young. We 

are all under the age of 35 years old, and he connects us with other 

leaders, CEOs of other companies in New York City who become 

our mentors over the course of years and help us develop quickly 

all of the leadership skills and all the skills that we need to continue being the CEOs of our company. 

I am only 31 years old now. I am managing a 125-person team. 

I have certainly never done that before but I am being coached by 

the CEO of NBC Universal and the former chairman of 

Bloomingdale’s who are able to give me real management advice. 

Bloomberg set up a system whereby young people can accelerate 

their growth as leaders by nature of connecting them to other mentors. 

The other thing that I think is really interesting in New York 

City is Bloomberg is just opening up a campus for entrepreneurship through Cornell University in New York. 

One of the biggest hurdles to growth in New York is the nonpresence of engineers. There is basically trench warfare amongst 

the startups in New York for engineering talent. The starting salary of an engineer in New York City is about $110,000. That is how 

much in demand young engineers are. 

I would claim that one of the reasons why the bay area has been 

such a hot bed for entrepreneurial growth is really because of Stanford University and how amazing it has been as a technology center. 

By nature of the government going in and helping to funnel talent into an area both to train the leaders of those companies as 

well as to funnel younger talent in in areas that are going to be 

fundamentally important like technology to companies like ours I 

think that there is no other city that I would rather be in right now 

to be an entrepreneur because of what the government is doing to 

help startups like ours. 

Chair LANDRIEU. So interesting, and of course, Mayor Bloomberg 

is an extraordinarily excessive entrepreneur himself, creating one 

of the most famous and most profitable businesses in the recent 

history and then went on to be Mayor. 

So, he has a unique, really not singularly unique, but special talent that some mayors have, some do not and it brings to mind that 

we are going to give him a ring and get him to come and make a 

presentation. 

How many fellows are there? 

Ms. HYMAN. Every year there are around 30 to 40 fellows. 
17 

Chair LANDRIEU. And this has been going on for 10 years or so? 

Ms. HYMAN. It has been going on for the majority of his time. 

Chair LANDRIEU. Of his term. Okay. 

Let us see Mr. Nishith. 

Mr. ACHARYA. Nish. 

Chair LANDRIEU. We will just call you Nish. 

Mr. ACHARYA. That is fine. 

I will make a couple of comments. I think the evidence is that 

the Federal Government and State governments have played a 

great role in supporting both innovation and entrepreneurship. 

Most of the incubators around the country have gotten some government funding at some level, whether they were starting out, 

whether the buildings they are in received support to renovate, 

whatever it might mean. 

I would look at three buckets. One of the opportunities I have is 

to manage the National Advisory Council on Innovation and Entrepreneurship for the President and for the Secretary. 

There are really three buckets of interest areas that they focus 

on where the Federal Government has a very important role. The 

first is around the risk of supporting innovation. 

There are a lot of technologies, particularly expensive technologies in clean tech and in life sciences that are not yet ready 

for the private sector to fund entirely. 

The business models are not clear. The technology itself is very 

nascent, and at EDA our i6 Challenge is meant primarily to support some of that really cutting edge technology and helping it 

move just a little bit closer to market readiness. 

The second part of that, and I think the SBIC program at SBA, 

and then EDA’s funding as well around innovation is to support 

funding in regions that do not have a plethora of capital. 

So, there are some parts of the country that do not have ventured capital, that do not have a lot of large banks, and they certainly do not have a shortage of good ideas as well. So, government 

plays a great role in matching those ideas and getting them out the 

door if you will. 

The second part is on a business process if you will. I think the 

Patent and Trade Office does an amazing job of helping support 

our competitive edge as a Nation which is in our most innovative 

ideas and giving them the protection that they need. 

I mentioned SBA and the SBIC program which is, again, helping 

alleviate risk in those areas that do not have it, creating funding 

vehicles. 

And then thirdly, the Federal Government obviously works heavily on the issues of immigration and then STEM education which 

at every entrepreneurship meeting I have ever attended those two 

things come up over and over, and I think we play a huge role in 

that. So, I think the role is enormous. 

Chair LANDRIEU. Getting back to educating engineers. I wanted 

to take a minute, this is a little political and I do not have a Republican here but I will try to be an honest broker as I can on this. 

The Solyndra issue is an interesting example. Highly politicized. 

The loan went bad, taken a lot of hits, the Administration has 

taken a lot of hits on that. 
18 

But I do not know if there exists a venture capital firm or venture capital enterprise that does not have one or two of their deals 

go bad. Right? Do you all know of anyone, a venture capital company that has all winners? Does anybody know that? 

So, the nature of venture capital which is that the government 

is trying, now whether it is a good idea or not for the government 

to do this, that is a question. But when the government tries to set 

up a venture capital fund, the nature of it is that you are going 

to have some spectacular failures, correct? And you are going to 

lose money, but the idea is that the two or three that make it pay 

you back 10 fold. 

While this has been highly politicized, it is, in essence, the government’s effort, whether that was a good idea or not, to try to set 

up a venture capital fund that would invest in certain industries 

that did not really exist in the United States and this Administration thought they should. 

It has not really been described that way but I think everybody 

at the table understands it. As I said, whether it was good or not 

I do not know. 

Mr. Laskey. 

Mr. LASKEY. Thank you. Certainly, we have had investments 

from Accel Partners and Kleiner Perkins and NEA, three of the 

most successful venture capital funds. They invest far more in companies that do not work out than in companies that do. 

Chair LANDRIEU. Say that again. They invest in far more companies that what? 

Mr. LASKEY. They invest in far more companies that do not succeed than in companies that do. They hope that companies like 

ours will make them whole and their investors more than whole in 

the end. 

But I wanted to respectfully disagree with Mr. Burfield and Mr. 

Gerber about the role of regulation and of government in promoting 

and ensuring the success of entrepreneurship. 

I think others have already talked to the importance of STEM 

education. But there is no question that no matter how good any 

kind of secondary training can be, unless we have, to use the ecosystem analogy for a moment, the sort of core nutrients for an ecosystem, that ecosystem will not succeed. In an entrepreneurial ecosystem those nutrients are the people doing the work. I am a product of public schools and a private university that receives a lot of 

public funding and I suspect that is true of everybody around this 

table. Our public education needs continued investment and innovation. 

In addition, twelve and a half percent of the people in this country are immigrants, but 40 percent of the founders of Silicon Valley 

startups are people who either came to this country directly for better educational opportunities, or whose parents came so that their 

children could have better educational opportunities. So, I think we 

would be remiss if we did not think about the importance of both 

good immigration policy and good STEM education in creating a 

strong entrepreneurial ecosystem. 

Specifically on regulation, if you think of three of the big industries that require the most innovation around this table, I think we 

would agree that education is one of them. Healthcare is another 
19 

and energy is the third, with which I am most intimately familiar. 

All of them are heavily regulated industries and businesses. 

Our business would not exist without smart regulation, regulation that is now in place in 26 states that aligns the utilities’ interests with the public interest, by driving toward energy efficiency 

which everybody agrees is a good thing and putting money back 

into the pockets of people in small towns and big cities across the 

U.S. 

Chair LANDRIEU. Alex, you have given us two words that will 

stay with this Committee. Core nutrients, excellent thought and 

concept; and smart regulation. It is not no regulation, it is not a 

lot of regulation, it is just smart regulation that is aligned with 

specific goals. 

I think we do have a challenge, I have to say, with the regulatory 

environment that we have right now at both the Federal, state, and 

local level. 

This is very interesting. Do you all want to go on on this subject 

for a little bit longer or do you want to switch? Do you all have 

something really to say? That is fine. Dr. Greene or Juliet, I will 

get you. Juliet, go ahead. 

Ms. GORMAN. I just wanted to echo what Jennifer mentioned 

about the trench warfare over software engineering talent in New 

York and in terms of private-sector kind of nontraditional educational solutions for that we are doing a similar thing specifically 

around women in software engineering. 

We are working with a group called Hacker School, hacker not 

in the sense of like infiltrating security but the traditional tinkerer. 

Chair LANDRIEU. Not the CIA. 

Ms. GORMAN. No, no, no. The traditional definition of hacker as 

a tinkerer, solution builder, to fund grants specifically to women 

who want to move into software engineering. It is a three-month, 

fully-paid school and we are hosting it at our offices. So, I think 

that is one example. 

But to your point about what it is kind of the culture and the 

network that encourages mentoring, I think sometimes we as entrepreneurs can provide tools to other entrepreneurs to do that 

peer-to-peer mentoring. 

We do this on Etsy. We have a teams program. 200,000, more 

than 200,000 of our members are members of a team. They organize either by geographical area or by subject area. So, you know, 

jewelry makers or the Atlanta Street Team. 

They will pool resources. They will put on events. They will do 

cooperative advertising. They will advise each other and we have 

given them very simple tools to do this. 

So, that desire, that community of creativity is there and you 

allow the face-to-face connection. I think it does not take much. 

Chair LANDRIEU. That is a wonderful segue into mentorship or 

technical assistance because I have decided that one of the pieces 

of the bill that we are putting together is going to be focused on 

this issue because it comes up at every single roundtable. 

Every roundtable that we have had mentions the importance, at 

some point, on mentorship opportunity for that entrepreneur. We 

are searching for is the right way to strengthen, I am searching for 

the right way to strengthen either the Federal Government’s role 
20 

in that or state or local government or some non-government entity 

that could be an honest broker. 

So, let us talk about that. What the Federal Government has 

done sort of so far is through a network of small business centers 

that are at our public universities. 

We give out ‘‘X’’ amount of money. My staff is going to give me 

that number before the end of this hearing. We also have Women’s 

Business Development Centers. We have Minority Business Development Centers. 

One of the pieces of that that I have been particularly high on 

is the SCORE chapters which are not government chapters. They 

are private-sector individuals that have come together. It has been 

a long-standing major organization. There are others. They receive $7 million from the Federal Government but they take that $7 million. That is it, and leverage it 10 times to reach 

thousands of entrepreneurs because it is really a volunteer 

mentorship network. 

What would be your best suggestions if the Federal Government 

could come up with a new sort of approach to mentorship? I have 

become aware of the Vistage organization. I do not know if you all 

know Vistage out of California, the Milken organization? 

This is a for-profit mentorship network. They make money mentoring which is fine, I mean they have made a business model out 

of mentoring. 

But there are some nonprofit entities. You just talked about in 

your own company, Juliet, you all are doing this mentorship. So, 

(a) what could we give out, highly competitive grants from the Federal Government through, you know, an agency that is well-positioned to really identify those great mentorship opportunities out 

there and scale them up, should it be coming from our universities, 

should it be coming from certain businesses that are good at it? 

Mayor Bloomberg obviously has a wonderful program, but it is 

small. As you said, it is 30, 40 a year. We have a country of 350 

million people. 

So, let us hear some ideas about mentorship and I am so happy 

to be joined by two Senators. Senator Moran and Senator Risch, 

and of course, this is very informal. You are welcome to jump in 

right now and give any comments that you like, Senators. 

So, why do we not ask our Senators to say a word. Everybody 

from all over the country is giving us excellent ideas about 

strengthening the entrepreneurialship ecosystem in the United 

States and at every level in every region down to every Main Street 

and community in our country. 

Senator. 

Senator MORAN. Madam Chairman, I will defer. I do want to say 

a couple of things but I will defer to Senator Risch. 

Senator RISCH. Go ahead. I am going to pass anyway. 

Chair LANDRIEU. Okay. 

Senator RISCH. First of all, thank you for holding this hearing. 

Currently, entrepreneurship is so important. We all know that. It 

is where jobs are created. Thank you, Madam Chairman, and I 

yield to Senator Moran. 

Senator MORAN. Senator Landrieu, this is the third roundtable 

that I have at least attended in part. 
21 

Chair LANDRIEU. Thank you. 

Senator MORAN. I think these are very valuable. As I indicated 

the last time we were together, I think that the conversations that 

occur here may be more useful than the hearing setting that we 

often have in the United States Senate, and so, I appreciate the individuals coming to Washington, D.C., and sharing with us their 

thoughts. 

I have, over the course of my Senate career which is now only 

slightly more than a year, tried to become somebody who is an advocate for entrepreneurship and innovation. 

And in large part because I saw the failure of the President and 

the Congress to deal with the deficit issues that our country faces, 

if we have the unwillingness or inability to deal with those things 

in regard to spending and revenues, maybe we can address this 

issue on the growth side. 

You look at what the potential is it seems to me it is in entrepreneurship, startup businesses, and innovation. So, I have been very 

interested in all the comments that I have heard now in three of 

these roundtable discussions. 

As I started down this path of trying to find what the necessary 

ingredients are to create an environment in which startups have a 

better shot at success and in the process of pursuing success put 

people to work, I mean there is a regulatory component and I had 

heard that talked about. There is a tax component. Capital formation. We have passed the JOBS Act. 

A wide array of things. A lot of research that goes on using Federal dollars, how can we make sure it is available and can be commercialized. 

But the one I want to highlight today is this global search for 

talent, the battle for it, and I understand before I got here at least 

three of you have talked about this topic. 

I am trying to figure out how I can play a greater role in moving 

Congress in the direction of visas for highly skilled, trained, educated workforce. 

I spent some time in Silicon Valley a day or two last week during 

the recess, met with a number of startups as well as some who 

were startups a few years ago and now are significant corporations. 

The global battle for talent is, it seems to me, to be perhaps the 

most important issue we face in being able to grow our economy. 

I wanted to relay to the Chairman and now to Senator Risch the 

story that I heard in which one of those companies had dozens, I 

think it was 68 employees, ready to be hired. The visas did not 

work and now they are expanding in Canada, not in the United 

States, as a result of the workforce there. 

We heard a bit about repatriation, the money that companies 

have abroad that they are trying to figure out, tax code-wise, how 

do we get it back. It occurs to me that if your money is abroad and 

the workforce is abroad, what do we do to encourage you not to 

grow your company abroad, and this workforce issue, I think, is the 

significant one. 

So, I want to highlight the importance of that, lots of areas in 

which we need to work on and to create an entrepreneurial environment in the United States, but it seems to me that the vast majority of members of the Senate, of Congress perhaps, could agree 
22 

upon the desirability of a policy that would allow foreign-born but 

U.S. educated, highly trained individuals to remain in the United 

States and use their skill set and intellect for our economy’s benefit 

and yet we get caught in his immigration, broad and all-encompassing kind of conversation and the politics never seem to allow 

us to do what at least I think the vast majority of policy makers 

in Washington, D.C., know that we should do, or if told the facts 

would easily reach the conclusion that we need to do this. 

So, if you can help me find the way to get the political environment that we need in order to advance the economic environment 

that we need, I am interested in that conversation. 

Chair LANDRIEU. Absolutely, and I look forward to working with 

the Senator on that. I think there is a common ground that can be 

found by giving opportunities to U.S.-educated foreign students. 

There is also an issue of people being born in the United States, 

educated in the United States, and giving them an equal opportunity to compete against those born elsewhere. That is part of the 

debate that we have to find a balance on but I think that we can. 

But let us talk about mentorship because I literally am so impressed that every entrepreneur I have talked to reminds me of all 

the evangelists that I know. They are so anxious to share how they 

did it and how it worked and it is like they do not try to keep it 

a secret. It is an amazing thing to me. 

You would think they would be thinking I built my business and 

I have made a lot of money and I do not want anybody else to 

know. It is the opposite. They have the most interesting desire, almost a need, to share how they did it and are happy to tell you 

everything about it. It is just quite wonderful. I think that we 

should try, if we can, to capture that and scale it. 

Mr. Gerber. 

Mr. GERBER. So, a few things regarding my personal role with 

the Young Entrepreneurship Council, which is a 501(c)(3) nonprofit 

corporation. 

We educate roughly 10,000 young people through ongoing 

mentorship utilizing technology, live chats with successful entrepreneurs, content we create for every major media outlet in the 

United States and so on. 

The first point regarding the grants you discussed earlier is you 

would think that I would have a better sense just from being so 

entrenched in the entrepreneurial ecosystem that I live and 

breathe, that I would know even what is available to a nonprofit 

like ours if we’re to continue to facilitate not only the education of 

10,000 individuals but hundreds of thousands if not millions. Simply from a research perspective that information is very difficult to 

find. So, putting that out in the forefront would be very helpful. 

I want to address a statistic that we found in a national survey 

that we did where 90 percent of young people that were recent college grads found that entrepreneurship education was vital but literally nearly half of them never even had a single entrepreneurship education experience in college, and those that did found them 

highly ineffective. 

And there are now a few reasons I think for that. The first is 

going back to the SBDCs, most college campuses have no concept 

of what SCORE is, no concept of what the SBDCs are; and these 
23 

are great facilitators of community organizers that can actually 

bring in these ecosystems. 

So, I think along with the monies given to these entities that 

they should be mandated to throw competitions, bring a certain 

level of public relations to college campuses, and educate through 

their various opportunities not just business and MBA students but 

more importantly those who do not have a business degree or are 

going for that level of education. 

Lastly, just looking into technology to scale things that actually 

makes sense. You know, obviously again, SCORE is a perfect example. I have worked with Ken and that group a few years now. Ultimately it is very much a person-to-person experience. 

Your cost for education is very high whereas utilizing technology 

you can still have a one-on-one experience in many ways but on a 

mass scale. 

So, I think that those are the kinds of government grants and 

other programs that should be looked at. 

Chair LANDRIEU. Thank you. That is exactly what SCORE is 

hoping to do. Of course, their allocation is $7 million, that is going 

to require some additional investment but I think it would be well 

spent. 

Tim. 

Mr. WILLIAMSON. Well, thank you. I think you hit on the core 

issue or opportunity, and Ms. Hyman’s idea of a fellowship and a 

mentorship is incredible. That really is how you build those networks in cities like New Orleans or other or other ‘‘B’’, ‘‘C’’, ‘‘D’’ cities that do not have that network of lawyers and CEOs, and I 

think what we have been looking at is how do you import that. 

So, in a city where the lawyers and the accountants and the 

CEOs do not have experience or entrepreneurship is relatively new, 

you need to bring CEOs and investors and universities into the 

community to build those mentorship networks; and so really I 

guess a post-Katrina phenomenon where universities like Stanford, 

Harvard, MIT, Babson, and others who brought in teams of MBAs 

to directly provide consulting and mentorship to local entrepreneurs is an opportunity, I think, to scale where these individuals can actually come into communities. 

They can provide direct consulting to an entrepreneur which is 

valuable, but as Scott was saying, to get that experience of being 

an entrepreneur is incredible. 

So, I look at that answer as how do the second-tier cities that 

do not have the built-in networks bring those networks in. 

The last part of your question, ‘‘What is the size of the ecosystem?’’ There is one real ecosystem, but how do you create local 

ecosystems that engage those networks? I would love to have the 

network that Ms. Hyman has in New Orleans. How do we 

incentivize corporations and universities to go directly into the second-tier cities or third-tier cities, to provide that mentorship? 

Chair LANDRIEU. Well, you know, Goldman Sachs has really 

stepped out with their entrepreneurship 10000. I think that is exactly what they are trying to do. 

I am not sure if I know. I know New Orleans was one of your 

cities, but I do not know all of your other cities. 
24 

If I could ask Goldman, was that your idea to kind of reach out 

to cities that might not be in the top tier of this entrepreneurship 

or did you just not care, did you just go wherever? Kind of explain 

how Goldman shows what ingredients you were looking for when 

you reached out to create this kind of really it is like an entrepreneurship training and mentorship program. 

Dr. GREENE. Thank you, Senator. We really did look for areas 

that were underserved in entrepreneurship education. Now, New 

Orleans, of course, has a great deal of things going along in entrepreneurship but we are looking for the educational piece of it. So, 

we are in New York which was the first one. New York, New Orleans, Houston, Chicago, and LA and Long Beach at the moment 

with two more coming quite soon. 

Chair LANDRIEU. See, I would think that all of these cities except 

for New Orleans were already sort of, had a lot of the components 

of it. 

Dr. GREENE. And that is the issue right there. They have the 

components. They do not have the system. New Orleans is working 

hard in the system. There is another ecosystem meeting coming 

back up shortly sponsored by the mayor’s office. 

But how do you actually turn it into a system of interaction 

where the educational pieces are connected with the finance pieces 

are connected with the business assistance pieces. 

So, we actually talk about our program as an intervention where 

we come in. We provide the education. They are given their business advisors. At the end we basically say, okay, you are being released back into the wild of the ecosystem and part of the training 

is how do you identify and how do you use all the other resources 

that are out there. 

Chair LANDRIEU. Joe. 

Mr. NIGRO. So, thank you. In Massachusetts and the city of Boston more specifically in MassChallenge the mentorship, I believe, 

falls in the laps of the entrepreneurs themselves. 

We are incredibly enthusiastic. We have a lot to say. I see how 

the public and private sector in Massachusetts works together to 

create this incredible district called the Innovation District, which 

I was living in California for a couple of years a few years ago and 

when I came back to Boston, that area in the Seaport District in 

Boston was just completely transformed into literally an innovation 

district within two years. 

Mayor Menino in the city of Boston, you know, put 

MassChallenge right there to build out this infrastructure where, 

you know, students from all the surrounding area of colleges 

around Massachusetts can go. 

It is almost like, if you build it they will come, and entrepreneurs 

want a place to go. They want a place to exist. It is now in the 

hands of the entrepreneurs to kind of foster that mentorship. 

Chair LANDRIEU. Do you know how many Federal research dollars land at those universities every year? 

Mr. NIGRO. Oh, man. Probably a lot; I am not sure. A lot. 

Chair LANDRIEU. That might be one of the reasons why entrepreneurs flock there because it is not the private capital that is invested there first, you could argue that, but it is the Federal dollars that go to those universities. 
25 

What I am going to ask my staff to do, we do not have it done 

for today, but we are going to put up a map that is going to show 

where the Federal research dollars go. I bet there is a direct correlation, I could be wrong, a direct correlation between the entrepreneurship strength around Federal research dollars. 

Now, you want to think about NIH. You want to think about National Science Foundation. You want to think about the research 

that goes on for the Department of Defense. 

We are not spending, to my mind, and I am an appropriator, we 

are not spending the percentage of our total overall spending on research and development that your companies would. 

Your companies, if you want to grow, I think have to invest between what? Five and 10 percent in research and development? 

The Federal Government overall is somewhere between two and 

three. That should be frightening to everyone. 

Now, it will go a little higher, I think, for defense. But overall 

we are spending less than three percent in long-term research and 

development. When you look at the research and development, 

though, and where it is, I think there will be a direct correlation 

to this, you can tell, Silicon Valley with Stanford and some of the 

research that is done there. Massachusetts, New York. 

I represent the South, and not to get on a high horse about this, 

but our delegations way before I even got here were very concerned 

about the lack of investments in some of the southern universities 

because, and maybe it is like this in the Midwest, I do not know, 

but we do not get those same dollars. 

When we try to create that same kind of dynamic technology sector, it is not that our people are not smarter, that our people do 

not work hard, we just do not seem to have the same, I do not 

know, opportunity or maybe because the universities in other parts 

of the country got a head start on us, and we are recovering from 

lots of things. The Civil War being one, but other things. 

It is very interesting to me and I am going to really push the 

data on this to find out if there is a correlation. 

Senator MORAN. Chairman Landrieu, it would be interesting to 

know which came first. 

Chair LANDRIEU. That is true. 

Senator MORAN. The map will be interesting. I am anxious to see 

it. But the environment, which environment existed first, the Federal dollars and the research occurring—— 

Chair LANDRIEU. Or the reverse. 

Senator MORAN. Right. 

Chair LANDRIEU. That would be interesting to see. Go ahead. 

Dr. Mitchell. 

Dr. MITCHELL. Thank you. I just wanted to address that last 

point because that is a really interesting question, just address it 

from sort of it on my research design hat. 

With all due respect, I am not sure if we would learn that much 

from that kind of a study and the reason is if you look at the way 

people do, say, macroeconomics. You tend not to do studies that it 

would be very, very surprising if we could tax everyone at this 

table and redistribute the money to me and I could not, then studied and found out later that—and then we would investigate that 

I would do well after that. 
26 

It would be very, very surprising if I did not do very well after 

that. So, that is why we do not do studies of, say, stimulus that 

way. We do not do studies of research investment that way because 

it would be very, very surprising if taxpayer dollars that were 

raised throughout the country and redistributed to certain research 

centers did not somehow produce greater growth. 

I would suggest a different type of research design, and the nice 

thing is that there has actually been a number of studies that have 

done this which is to look across countries. 

The nice thing about that is that the tax dollars come from within the country and are spent within the country. So, it does not 

have that research design problem. 

A number of studies have examined this and found that there is 

a very, very strong correlation between entrepreneurship and what 

economists refer to as economic freedom. So, economic freedom is 

largely designed as well protected property rights, low and stable 

tax regimes, nondiscriminatory tax regimes. 

That is just as important as having low taxes is you do not have 

a complicated tax code that rewards some and punishes others. 

Few limited regulations that are reasonable, that are thoughtful 

regulations as you suggest. 

Again, to me, it gets back to creating an environment that is nurturing for growth and nurturing for entrepreneurship but it is not 

one and where you are trying to push your buttons and sort of from 

the top down and say I am going to redistribute here and we are 

going to get growth. 

Chair LANDRIEU. Mr. Mayor, please go ahead and then we will 

get you Ms. Friederichs. 

Mr. LOWE. Yes. With respect to mentoring, the innovation hub 

that I have been talking about is set up to promote mentoring and 

to allow those in startups to be able to first mentor each other because there are actually those who have been entrepreneurs before 

they are sort of serial entrepreneur you might say. 

And also there are plans for a new program at the University of 

Florida specifically for entrepreneurs. It will actually operate on a 

slightly different calendar year, actually January through August. 

But another interesting thing about the program is that it will 

include a residence hall designated essentially for entrepreneurs 

and it is located right across from the innovation hub so that there 

will be a high degree of interaction with respect to that. 

Thank you, Madam Chair. 

Chair LANDRIEU. Thank you. I will get one more comment on this 

and then we are going to switch subjects to make sure we cover 

everything before 12:00. 

Ms. Friederichs. 

Ms. FRIEDERICHS. Thank you. You mentioned before that entrepreneurs are eager to share, that they are not private about it. I 

think a large portion of that is if you are a business owner and you 

are struggling to make payroll that month and you cannot pay your 

house payment, only another business owner is going to understand that. 

It is very lonely for business owners and it is a community that 

they work together and they understand one another and everyone 
27 

is seeking out a mentor, whether it be formal or informal, as a 

business owner. 

If you have an organized, facilitated mentoring program such as 

the one that I run HEMP, Helzberg Entrepreneurial Mentoring 

Program, and you measure the results, it can make a huge impact 

on the economy. 

In an eight-year period where we measured the one-on-one mentoring of entrepreneurs with another seasoned entrepreneur, 43 

percent of revenue growth and 30 percent employee increase count 

as well as contributing over $750 million to the economy in that 

eight-year period. 

So, the impacts of mentorship are very impactful and we work 

also with the SBDC in Kansas City and helped them start a mentoring program as well called CEO Coaching and More, and they 

rose to the top five in the country the year after they starting the 

mentoring program again because of the effect. 

Chair LANDRIEU. Are you all a nonprofit or for-profit? 

Ms. FRIEDERICHS. We are a nonprofit, 501(c)(3). We were started 

by Barnett Helzberg, who had a company called Helzberg Diamonds. He had a mentor of Ewing Kauffman who ran Marion Laboratories, and he mentored him. 

Once Barnett sold his company, he wanted to give back to the 

Kansas City area. So, he started this nonprofit of mentoring other 

entrepreneurs. He said it has been the greatest investment he has 

made. 

Again, the entrepreneurs are willing to invest the dollars. They 

are seeking for the help to have someone who has been in these 

shoes. A lot of times it will save several years and several dollars 

because you are preventing mistakes because you are talking to 

someone who has been there and done that. 

Chair LANDRIEU. Well, let me ask you all. This record will be 

open for two weeks and you could be very, very helpful to our Committee if you have identified any successful mentoring organizations in your area, whether they are not-for-profit, for-profit, or 

government-sponsored like SCORE, please let this Committee 

know because we are trying to collect the universe of what is out 

there so we can have a discussion about whether we should help 

strengthen it or whether it is sort of okay on its own and what the 

Federal Government might do. 

And when I mean government, it is the Federal Government but 

we are also in a position, of course, to encourage local government, 

state, and municipal level governments to follow suit or at least encourage them to do so. 

We want to hit three more areas very quickly. We sort of touch 

this but if anybody has anything they want to say or add to 

entrepreneurialship education, any ideas about what the Federal 

Government can do or not do to prepare people more. Are entrepreneurs born, are they trained, et cetera? 

And then private sector accelerators. We want to talk a minute 

about that. And then the small business export efforts that the 

Federal Government is doing. Do you think this is helping or not. 

But let us start. A few comments on entrepreneurial education, 

what works, what does not work, what have we seen out there. Go 

ahead. We will start with one of the experts here. 
28 

Dr. GREENE. Who will remember to pull the microphone toward 

her this time. 

Of course, you can teach entrepreneurship. I mean, there is a 

skills set that is about starting and about growing businesses. So, 

breaking down that skill set and adding on training about a 

mindset, you can actually teach entrepreneurial behaviors and you 

can watch entrepreneurial outcomes. 

I would suggest that one of the most important things about entrepreneurship education is that it should not be just for the business owners. One of the challenges entrepreneurs run into all the 

time is working with professional service providers and policymakers and educators who do not understand who they are and 

what their businesses need to grow. 

So, an expansion for the attorneys, for the accountants, for again 

all of the professional service providers to actually understand that 

this is a not large corporate business, it is a different entity, could 

make a huge difference. So that was, you know, just one part of 

thinking about it differently. 

Chair LANDRIEU. Okay. 

Ms. HYMAN. So, I actually think there were three key things that 

I needed in order to start Rent the Runway in addition to, you 

know, learning about merchandising, learning about operations, 

learning about technology. 

But the three applicable things were, first of all, I needed legal 

guidance and advice from the very beginning. I was lucky enough 

to have procured free legal advice from Latham and Watkins, who 

took me on as a client for six months without me paying anything 

because they believed that we would get funded and I would be 

able to pay them at some point in time. 

But had they not given me that legal advice from the beginning, 

my company would not actually be, I would not hold the same ownership and equity in my business. I would not have the right sort 

of contract with my cofounder. I would not have set up the organization in the way that we needed to in order to get venture capital 

funding. 

So, that was number one. Number two is actually understanding 

how do you hire people. So, I learned a lot at Harvard Business 

School about how are you strategic or how do you, you know, build 

a service operation. 

But no one told me how do you actually hire someone, what is 

insurance, how do you execute payroll, how do you care for people’s 

health care. 

And these were huge problems that sunk up a lot of time in the 

beginning of starting the company that were like the tactics of how 

you actually formulate that team that were really important to us. 

And the third thing was not just access to capital because I think 

that access to capital is always going to be limited by things like 

where you are from and what your educational background is and, 

you know, my access to capital was solely because I was at Harvard Business School and I had that brand name behind me that 

I was given credibility with the venture capital community in Boston because I had no previous entrepreneurial experience. 

But more important than access to capital was teaching the 

skills of how do you actually procure capital, how do you pitch 
29 

yourself, what are investors whether they are venture capitalists or 

they are angel investors or they are private investors, what do they 

want to hear in those first few minutes because 95 percent of all 

companies are nixed in the first 5 to 10 minutes when they talk 

to and investors. 

So, if you are not given the training on what are you coming in 

with, I think that a lot of great ideas are probably nixed at the beginning. So, I think that these are just more needs building blocks 

that people need in addition to just being smart individuals who 

are educated about the areas of, you know, expertise. 

Chair LANDRIEU. Jennifer, thank you for being so honest because 

I am sitting here thinking about exactly what you said and from 

a perspective from a United States Senator it is, I do not know 

what the word is, it is difficult for me to really, I accept everything 

that you said, I agree with everything that you said, but I just 

want to repeat what you said so that you all can think of this from 

what I hear. 

Because she was from Harvard, she got in the door. Because she 

had been trained to make her pitch in two minutes, she got the 

money. Now, I am thinking about the 4.5 million people I represent. I am thinking about all the smart wonderful kids in Mississippi and Alabama and Texas and Florida, a few of them do go 

to Harvard. Lots of good kids at LSU. 

They do not get in the door because you go to Harvard, you go 

to Stanford, you go to ‘‘X’’ and ‘‘X’’, the door opens. If you do not, 

it does not. My job is to open the door for the kids that cannot get 

in, and I am having a hard time figuring out how to do this. 

Ms. HYMAN. Well, it is even harder if you are a woman. 

Chair LANDRIEU. Yes, and if you are an African-American 

woman, you can just go down the line. I am sorry that my colleagues are not here, but when I hear some of my colleagues say, 

‘‘Oh, anybody can get access to capital,’’ I know the truth and that 

is not the truth. 

Capital does not flow to the smartest most able, it flows to those 

that are most connected. Period. That is the truth. Now every now 

and then an unconnected, very smart person will get the capital 

they need but it is the exception not the rule. 

My job to figure out how to switch that, how to get the smartest 

people regardless of where they went, the most able people, the 

ones with the best ideas and the strength to carry them out whether they are connected or not, connected. 

That is the only way this country is going to move forward. The 

country that figures that out the fastest will get there the soonest. 

This is a very difficult question. So, that is what I need you all to 

think about. 

Evan. 

Mr. BURFIELD. Entrepreneurship education is personally for me 

a very important subject. Again, I literally graduated from high 

school and set out to try to build a company; and it was a really, 

really painful the first two or three years because I did not know 

anything. 

Chair LANDRIEU. But your parents gave you or somebody had to 

tell you or somebody gave you some idea, huh? 

Mr. BURFIELD. Absolutely. Uh-huh. 
30 

Chair LANDRIEU. It was your parents? 

Mr. BURFIELD. My parents and, you know, ultimately I went 

down and found some business school professor down at Darden at 

the University of Virginia and convinced them to help me and built 

my mentor network and did all that stuff. 

I actually went back to my own high school this last year which 

to your point, you know, Thomas Jefferson High School for Science 

and Technology here in Virginia, it is the number one-ranked high 

school in the country by U.S. News and World Report but there 

was no curriculum around entrepreneurship. 

There was not any structure, any program related to it. I agree 

with the idea that there is content that you need to teach related 

to entrepreneurship but I think learning to be entrepreneurial is 

something that fundamentally has to be done by doing. 

The biggest thing that struck me in trying to set up, we actually 

set up a venture accelerator inside the high school so students were 

encouraged sophomore year, junior year to actually start companies, build those companies. 

We brought in a tremendous network of mentors from the top 

venture capitalists in the region, all of this. But the biggest thing 

that struck me is the nature of the way that we educate our children goes in some significant way fundamentally counter to the 

values set that is important to entrepreneurship. 

So, we have an education system that teaches kids do not challenge the status quo, to teach to the test, to regurgitate what they 

are told, to not fail whereas the essence of being an entrepreneur, 

not the actual nuts and bolts contents you need but the essence of 

challenge the status quo, be creative, persevere no matter what—— 

Chair LANDRIEU. Be willing to fail. 

Mr. BURFIELD. You are going to fail, fail, fail, fail, fail; and to 

Alex’s point, I am sure when Alex thinks about what it feels like 

to go from zero to 250 employees in a few years it feels like week 

after week after week of failure and some level of surprise when 

you get to the end and you go, wow, we have gotten there. 

But that challenge of, you know—when we talk about the role of 

government, one of the things I was struck with was Jefferson is 

a pretty innovative. For a public high school, it is about as innovative as you can get. But even then it was a challenge to work almost against the regulations, against the rules, against wait a second you want to set up a venture pitch competition and actually 

give high school kids money to invest in their companies. How is 

the school going to control the money? Well, it is not. 

Chair LANDRIEU. Yes. 

Mr. BURFIELD. These are a lot of the challenges you face when 

you really try to talk about instilling a culture of entrepreneurship 

in the way we educate our children. 

Chair LANDRIEU. Which is why we are pushing some charter 

schools that are more accepting to new ideas. New Orleans is full 

of them. So, we will get back to that. 

Alex. 

Mr. LASKEY. I just wanted to connect what you had said earlier 

about the feeling when you talk to entrepreneurs that they sound 

like evangelicals. 
31 

I think we have one big thing in common, in spite of a great deal 

of evidence that says we are wrong or that the answer is no. We 

keep pursuing yes in a semi-psychotic way. 

And yes, there is a lot of failure along the way, but it actually 

feels like success if one in 10 things go right. 

You know, I too am concerned. In full disclosure, I also went to 

Harvard, and I am concerned about access to capital for people 

elsewhere across the country. 

There are great stories of people. I think one of the things that 

government can do really well, in addition to investing in education 

so that there are more talented people better trained across the 

country, is to highlight success stories. 

So, highlight success stories of businesses that have started in 

unusual places or by unlikely people. We should highlight those 

success stories because venture capitalists are not stupid. They will 

follow the money. If we can begin to highlight great successes in 

places like New Orleans or Birmingham, Alabama, businesses that 

are doing well, then money will follow. 

Chair LANDRIEU. Excellent idea. 

Scott and then Juliet and then we will have to start wrapping 

it in about 10 minutes. 

Mr. GERBER. Thank you. I will be very quick with comments. I 

have four specific things that we have uncovered that would help 

train young entrepreneurs especially starting at the high school 

level. 

The first is there currently is something known as the wellrounded funds Title V. It is under the current No Child Left Behind Act. Currently, there is no check box that would allow high 

schools to purchase any form of entrepreneurship education materials. This is not abstract. This is literally that you cannot check 

a box to buy entrepreneurship-related materials. 

When you look at programs like, case in point, where we share 

a lot of interest, Madam Chairwoman, is around especially minority entrepreneurs. I worked with a group called the Network for 

Teaching Entrepreneurship which has educated nearly 400,000 

young people from mainly African-American communities across 

the United States with incredible success rates compared to other 

case studies. 

They have to actually raise money in order to sell into school districts their various educational platforms and curriculum, unlike a 

physical education curriculum which you can easily just buy based 

on allocated funds. 

The second is looking at other kinds of school concepts—— 

Chair LANDRIEU. Hang on. Do you run that as a nonprofit or forprofit? 

Mr. GERBER. Which one? 

Chair LANDRIEU. The one you just said. 

Mr. GERBER. The Network for Teaching Entrepreneurship is a 

nonprofit. 

Chair LANDRIEU. Nonprofit. 

Mr. GERBER. That is correct. 

Another is gearing specific schools toward the realities of the new 

economy and the workforce. There is currently a program in New 

York called the Academy for Software Engineering that we have 
32 

uncovered. It is done by Fred Wilson, members of the state government and local government in New York. The concept basically 

being to create a charter school around software specific training. 

I think that these are the kinds of concepts that the government 

from an educational funding level should be looking at so that they 

are also keeping in mind what the workforce readiness needs to be. 

The last thing just to bring up is, you know, personally going to 

schools and speaking to thousands of students a year, the first 

thing I really get teared up about in many ways is the fact that 

I will have students come up to me, say I am about to graduate 

with $25,000 in debt, I have a liberal arts degree or I am an auto 

body shop mechanic. They have no concept of how to take that relevant training they have into the world of business. 

So, I think that when we look at ways that you are funding federally these institutions in any capacity, there should be some parameters set around the fact that if you leave school as an auto 

body mechanic and you do not know how to run an auto body shop, 

that is a big problem. 

I would encourage, especially around the mentorship discussions 

that we are having today, that we not just talk about mentorship 

in the abstract. Of course, I do not think anybody would say that 

mentorship is not incredibly important. It is a lot of the reason why 

I am even here today. 

But the fact that you cannot, as a young person, use mentorship 

to, let us say, go after a microloans as the SBA because there are 

intermediaries that ultimately will block you from funding because 

a kid who does not have any credit is a problem. So we are talking 

from not just the intangible experience, but making it a tangible 

experience using that. 

Thank you very much. 

Chair LANDRIEU. Thank you very much. 

Juliet. 

Ms. GORMAN. Quickly, I hear the challenge you are facing around 

access to capital and folks that do not usually get it and I just 

wanted to just add one optimistic note from the standpoint of kind 

of the do-it-yourself manufacturing movement. 

The barriers to entry are dropping. For basically like the price 

of a gym membership, you can join an organization called Tech 

Shop, which has locations nationwide, and have access to millions 

of dollar of machining tools. 

I think platforms like Etsy what they are basically doing is lowering the barrier to entry to have a product idea, get it manufactured, and reach a global market quickly, and also they are lowering the barrier to entry for consumers to support those kind of 

independent creative businesses. 

So, I do think, I mean Etsy has had 39 million in venture capital 

funding but entrepreneurs on Etsy have not and they are still 

supplementing their income and in many cases quitting their day 

jobs, and it is not about, you know, that classic entrepreneurship 

story of Instagram getting sold to Facebook and making, you know, 

however many hundreds of millions of dollars. 

It is, again, about making your car payment. It is about quality 

of life. It is about time with your family. You know, a lot of small 
33 

businesses are formed for non-pecuniary benefit reasons like control over your time, creative satisfaction, being your own boss. 

So, I do think there is a bit of an optimistic story about how the 

manufacturing ecosystem is changing in terms of access to folks 

who do not have the traditional education or the means to raise a 

lot of money. 

Chair LANDRIEU. Okay. That is an excellent segue into two 

things. One, this bill that we just passed that was somewhat controversial but the President supported it, many people supported it. 

I did not vote for final passage but I did vote for the 

Crowdfunding piece that Scott Brown and others put forward, and 

I was actually a cosponsor. We cosponsored that piece of 

Crowdfunding because it had more safeguards than the bill that 

came from the House. 

Very interesting to me to those of you that have raised money 

by venture capital and what you had to do to get their money. Now 

that you can go basically to the Internet and take your business 

up to $1 billion. 

Have you all followed this bill or are you thinking about it? 

Could you comment about what advantage or disadvantage you 

think this will have to you or to the world that you are in? 

I know that is a broad question but I am very interested particularly, Juliet, to hear from you and Jennifer. But go ahead. 

Ms. GORMAN. I think the issue is education. A lot of the folks we 

are working with do not necessarily see themselves as business 

people when they get started and so they are not thinking about 

financing from day one. 

We see a lot of folks again in the creative community using platforms like Kickstarter, which is not so much about raising money 

in exchange for equity in your business but more frankly just about 

community charity essentially. 

But the power, I guess, there is the network effect. That is the 

thing that platforms like Etsy are banking on. It is not that traditional hierarchical incumbent model. 

So, I think the issue is just how do we as Etsy get this information about Crowdfunding and what is enabled and the government 

resources in front of folks who are just thinking about a lot more 

of the tactical stuff that Jennifer alluded to. 

Chair LANDRIEU. Jennifer. 

Ms. HYMAN. I am skeptical of things like just crowd sourcing for 

funding or Kickstarter mostly because I think money has to be tied 

to accountability as well. 

So, one of the reasons why I wanted to raise from institutional 

investors is because I wanted board meetings every single month 

where I was accountable for the metrics of how the business was 

doing. 

I wanted people who had been there, done that on my board with 

the ability to actually, you know, fire various people in the company if we were not doing a good job. 

If you are just going to give young people money when they do 

not necessarily have someone guiding them, watching over them, 

and some idea that they are accountable for that, I do not know 

how successful that is going to be especially because most entrepreneurs are young and without the necessary experience. 
34 

So, even angel investors, some of them are going to be quite involved and give you that mentorship and give you that advice. So, 

I think there has to be a combination of capital with accountability 

for how you use that capital. 

Chair LANDRIEU. And there was very little of that in this bill and 

I think we have to be very careful about what we did but it is done. 

Evan. 

Mr. BURFIELD. I think a lot of the Crowdfunding provisions are 

going to have a democratizing effect on the ability to raise capital. 

I think you have already been seeing those changes occurring in 

the venture capital industry before the JOBS Act. I mean, the reality is, you know, we probably spent $16 million 

in venture capital in my first business back in the late 1990s before 

we ever really understood what our product was or our market. 

You know, nowadays companies can find that out for a couple of 

hundred thousand dollars in capital. I mean, the cost of innovation, 

the cost of experimentation and discovery has just dropped like 

crazy. 

That has been having a significant impact. You are having accelerators now, you know 500 startups, the goal is to find 500 

startups at a couple of hundred thousand dollars each and, you 

know, see which ones really succeed or fail. You know, a lot of 

those accelerator problems I think do take a much broader swath 

of entrepreneurs than you might have seen even five years ago 

from traditional venture capital. 

I think, you know, any platform, any of those Crowdfunding platforms to be successful I think they are going to tend to be tied to 

some sort of accountability model. 

I think you are going to see Crowdfunding paired with accelerators being probably the most successful model because somebody 

needs to put that imprimatur of credibility on it. 

But anything, to your point, that starts moving it to the value 

of the idea versus the value of who you know immediately is beneficial, and I think that has been the history of a lot of what the 

Internet has done to various other markets to date and I think it 

is going to do the same thing to venture capital, and that is a good 

thing. 

Chair LANDRIEU. Okay. We are going to get Scott and Christina 

and then I am going to ask Nishith, as a representative of the Administration, to have the opportunity to close. 

We did get the numbers on the research. California is the leading state to receive Federal research money. They received $47 billion. 

Michigan is second at $18 billion dollars New York is third at $14 

billion. Texas is fifth, I am sorry, fourth at $12. Massachusetts is 

fourth at $12 billion. 

The lowest is Idaho, Delaware. Let us see. I am sorry that is not 

true. But those are the figures and I am sorry I do not have the 

lowest states. But anyway, we are going to get that out to you all 

and go head, Christina. 

Ms. FRIEDERICHS. I think it goes back to what you were saying 

earlier too about the connections and trying to open the doors for 

those that cannot get in, whether it be venture capital or any other 

needs that you might have, and it goes back to building support 

systems for entrepreneurs, whether it be mentoring or common 
35 

groups, education, things of that nature so that they can build 

those connections. 

And then once you get those referrals, they can move you on to 

those and you have a better success rate of getting venture capital 

or the support that you need. 

It also goes along with, have you read the book, The E–Myth? It 

is about how entrepreneurs usually have a skill or an idea and 

they take that and that is how they start their business, but beyond that, they do not know how to actually operate a business. It 

is a great book and it really supports everything we are talking 

about here. 

Chair LANDRIEU. Wonderful. Let us get it and put it on our shelf. 

We are collecting your books and papers. 

Alex, final word. And then we will have Nishith Acharya. 

Mr. LASKEY. I just wanted to touch on the topic that you said you 

wanted us to talk about that we did not have time to which is the 

Export Bank and small-business exports. 

Chair LANDRIEU. Yes. 

Mr. LASKEY. The last year I have spent the majority of my time 

outside the U.S. In fact, my passport is today getting extra pages 

added to it because I have run out of space. And I have benefitted 

some from the Commerce Department, State Department, Department of Energy. 

But I think there are many opportunities to expand the ability 

for small businesses like ours to export our products and services 

overseas. One particular problem that I see with the Export Bank 

is that it seems that the ability to export capital goods is supported 

under the Ex-Im bank but that—— 

Chair LANDRIEU. But not services. 

Mr. LASKEY. Not services and software. And particularly as we 

move to a software-based economy, the entrepreneurs in this room, 

I think, would benefit from the expansion of those support services 

being linked to software and IP, not just capital. 

So, I look forward to continuing to travel around. We have now 

just opened an office in London and that is—— 

Chair LANDRIEU. Because if you think about it, I mean, it makes 

just common sense without even having to be an expert that America who has been the most successful country in the world for this 

entrepreneurial, democratic, open society, we would have a lot of 

ideas and services that help to create this country that the world 

is desperately in need of and we could make a lot of money selling 

it or sharing it or whatever your model is. 

So, we have got to get about that because there is nobody better 

than America that can go over and tell everybody, until you get 

your private property rights done over here, you are not going to 

be able to do anything. Until you set up a mortgage system where 

you can mortgage your home, have a mortgage system, you are not 

going to be able to build a middle class. 

I mean, there are things we know even though we beat ourselves 

up and say how terrible we are, the fact is we are pretty great and 

we still are. 

So anyway, thank you very much. All right. 

Mr. ACHARYA. Thank you, Senator. 
36 

I think one of the things you are hearing that is the great struggle here is that entrepreneurship is inherently a very personal 

journey and it is a very local experience even though we live in a 

globalized world and we are talking about Federal policy which affects a very large country, a very complex dynamic economy and 

how do we reconcile the two issues there. 

I think the exciting thing is that you are seeing nationally a common agenda around innovation and entrepreneurship. In my last 

position and now with the Commerce Department, what I am seeing is that everybody at the higher education level and then regionally is thinking about innovation and entrepreneurship. 

I would imagine that all our major research universities, our 

community colleges, they are all focusing on innovation and entrepreneurship. 

Some, like MIT, are very focused on lab to market and how to 

commercialize more high-growth entrepreneurship. Others, like 

Tulane in your home State, are the leaders around student entrepreneurship and civic engagement. 

Then community colleges, we have actually 170 community colleges in this country that have signed a letter promoting entrepreneurship programs in community colleges. 

So, this is a national effort. The reality is that everybody is in 

a different place in the work that they are doing and I think the 

flexibility that we need in our Federal policy should reflect that, 

that what MIT is working on will require a set of focus, a different 

set of circumstances, a different amount of money than maybe 

what the community colleges are doing as they get started. 

Also, I was at the University of Wyoming which has over 50 

startups in Laramie, Wyoming. Clearly, their needs are going to be 

very different than what some of the other universities are doing. 

But nonetheless we should support the development of that ecosystem where they may be at level ‘‘A’’ and MIT might be at level 

‘‘D’’ that is okay. They still need the same support around the 

issues we have talked about, mentorship, access to capital, access 

to business models that can support them and then the right economic development conditions in their region. 

On the entrepreneurship side, similarly I think every regional 

economic development agency is now looking at entrepreneurship. 

At EDA most of the applications we get for business accelerators, 

and we have funded over 700 over the years at University centers 

and regionally economic agencies, really focus on entrepreneurship 

and where are we in the continuum of developing entrepreneurship. 

Some, like Idea Village and MassChallenge, are really, really far 

ahead nationally, you know, over 1200 applications for each program and robust mentorship and entrepreneurship programs for 

each of the applicants. 

So, what they need is at one level of funding and support, probably more money, more technical support, more agencies that can 

work with them at the Federal level, Labor, Energy, Commerce, 

SBA, they can all do something for these programs because they 

are so big and have such a vast array of startups under them. 
37 

Then again, I bring up Wyoming and other places where they are 

just getting started, or Lowell, Massachusetts. Their needs are 

similar but at a different level. 

They are looking at money to refurbish old mill warehouses and 

buildings to create incubators. They are looking at retraining local 

workforces that used to be good at manufacturing or agriculture or 

telecommunications and transitioning those skills. 

Or they are looking at middle aged workers whose expertise is 

in financial services but are not going to go weatherize homes now 

because they have been laid off. They are going to maybe figure out 

another way to work and maybe entrepreneurship is the path they 

need and what is their development strategy to help those workers. 

So, I think we are seeing a vast array of programming around 

the country that is very different. I think Crowdfunding will actually help that significantly as we are seeing. 

Most organizations are trying to develop ideas and culture 

around the entrepreneurship and that little bit of money to help 

the culture is going to be critical. 

So, I hope we can continue the discussion around a broad national policy that reflects the diversity of where organizations and 

regions are. 

Chair LANDRIEU. Well, thank you very much. It is almost the bewitching hour of 12 noon and I know that you all have a lunch to 

get to and planes to catch so we are going to end but thank you 

again. 

This has been very, very stimulating. I hope you feel like you 

have been challenged with your own ideas and the thoughts that 

have been very invigorating to the discussion. I can promise you 

the ideas that you put out today and emphasized will be included 

in the reports, of course, from the Committee this morning itself 

but hopefully some of your ideas will actually get into legislation 

that we hope to put together literally in the next few weeks to introduce. 

So, thank you all very much. 

The meeting is adjourned. The record will stay open for two 

weeks. 

[Whereupon, at 11:56 a.m., the Committee was adjourned.] 

(39) 

APPENDIX MATERIAL SUBMITTED 
40 
41 
42 
43 

SENATE COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP 

Perspectives from the Entrepreneurial Ecosystem: 

Creating Jobs and Growing Businesses through Entrepreneurship 

Ranking Member Olympia J. Snowe 

April 18, 2012 (DRAFT #1, 04-16-12, 5:00 PM) 

Thank you, Chair Landrieu, for holding this timely and informative 

roundtable, and to our participants for your willingness to discuss the essential 

roles of entrepreneurship, business growth, innovation, and mentorship. We 

value your input on the economic climate facing our nation's small businesses; 

and particularly those high-growth firms whose development is integral to 

creating jobs and reviving our stagnant economy. 

Members from both sides of the aisle recognize the necessity of crafting 

policy that results in an economic game-changer. As America continues to suffer 

from unprecedented levels of unemployment, it is imperative that we look 

towards our nation's job creators, small businesses, to bridge the gap. There is 

no question that America's entrepreneurs have the tenacity and innovation 

pivotal to our country's success, and Congress must ensure that the Federal 

government helps, rather than hinders, their growth. 

At a time when 14 million Americans are still unemployed, and have been 

so for the longest period since record keeping began in 1948, our government 

should be taking every possible step to ease the burden on job creators. We must 

help create an environment that is conducive to small businesses' job creation 

and results in more success stories about high-growth firms hiring American 

workers, and growing here at home. 

I recently met with David Friend, Chairman and CEO of Carbonite, a 

technology company ranked #9 in Inc. Magazine's list ofthe top 500 fastest 

Page 1 of4 
44 

growing private companies. On November 4, 2011 Carbonite opened a facility in 

Lewiston, Maine that provides technical service to customers attempting to 

retrieve damaged or deleted data. The company currently employs 

approximately 150 people in Maine and plans to expand to 250 by the end of 

2012. These technical support jobs were being performed overseas but 

Carbonite has now repatriated all the jobs to the facility in Lewiston. 

Today's roundtable is about companies like Carbonite, and other startup 

businesses that have found success, even in the worst of economic times. I'm 

eager to hear from all of the stakeholders here today to determine ways we can 

replicate this success on an even larger scale. What practices work? What 

hasn't worked? What lessons have you learned? An entrepreneurial ecosystem 

to bolster business growth and development will playa prominent, if not the lead 

role, in driving the economy out of the current economic morass. 

As a tremendous first step in helping entrepreneurial firms at their various 

stages of growth and development, I applaud the recent passage of the bipartisan 

Jumpstart Our Business Startup, or JOBS, Act which the President signed into 

law earlier this month. Two Republican members of our Committee, Senators 

Brown and Moran, were instrumental in the passage of this legislation, which 

will make it easier for start-ups to raise money and go public by lifting U.S. 

Securities and Exchange Commission (SEC) restrictions on soliciting new 

investors and permit "crowdfunding" so that entrepreneurs can raise equity 

capital from larger pools of small investors. This is a paramount move in 

transforming the ability of small businesses to raise capital and help companies 

generate sustainable economic growth and jobs. 

At the same time, Congress must do more. This means providing tax 

certainty to our small businesses and curtailing onerous regulations which act as 

Page 2 of4 
45 

barriers to startups - prohibiting companies from becoming high-growth job 

creators. While the myriad of variables affect individual businesses and 

industries differently, everywhere I go in Maine and nationally, I hear about the 

onerous impact of regulations on hardworking small business owners. 

That is why I, along with Senator Tom Coburn (OK), introduced S. 1030, 

the Freedom from Restrictive, Excessive, Executive Demands and Onerous 

Mandates (FREEDOM) Act on May 19,2011. The FREEDOM Act is a targeted 

regulatory reform bill that would provide small businesses with much needed 

relief from burdensome, one-size-fits-all federal regulation. This legislation will 

modernize the Regulatory Flexibility Act (RFA), to require that federal agencies 

conduct more comprehensive analyses of the potential impacts that regulations 

have on small businesses. 

Additionally, while I continue to advocate for comprehensive tax reform, 

there are certain measures that, although not a silver bullet, should be passed 

right away to help improve the economic environment for small businesses. The 

Small Business Tax Extenders Act of 2011 is a critical example! This legislation, 

which I have recently reintroduced with Chair Landrieu and Senator Brown, 

contains provisions we have championed for years to provide small businesses 

greater cash flow, incentivize their investments, and increase tax fairness. 

While brilliant, innovative ideas have the potential to spur business growth 

and employment; these ideas will fail to flourish if our tax code and regulatory 

system remain broken. I welcome your input on how these crucial issues 

challenge entrepreneurs, and on potential solutions going forward. 

I look forward to hearing from all our witnesses, who know first-hand the 

value and role entrepreneurship plays in boosting our struggling economy. Your 

Page 3 of4 
46 

contributions are truly invaluable as this committee makes developing an 

entrepreneurial ecosystem a top priority in the year to come. 

Thank you, Madam Chair. 

Page 4 of4 
47 

Economic Development Administration 

2011 i6 Green Challenge Winners 

Igniting Innovation, Florida f Cleantech Acceleration Network, University of Central Florida, 

Technological Research and Development Authority, and the University of Florid;b establishes a 

Proof-of-Concept model that links Florida based universities, incubation networks, investors, and 

industry resources to create a network of proof-of-concept centers to accelerate the creation and 

commercialization of innovative clean technology research. Atlanta Region 

Proof of Concept Center, Louisiana Tech University, serving the 1-20 corridor in north 

Louisiana, south Arkansas, west central Mississippi, and northeast Texas to increase the speed 

with which new green technology innovations enter the market by fostering an ecosystem that 

includes proof of concept process, the development of business plans, leveraging private 

investment, promoting interdisciplinary collabi}l1!tion between university and private sector 

partners, and creating entrepreneurial oPPOltunities. Austin Region 

Michigan State University Centers to Commercialize Research supports a proof of concept 

center for green scale-up chemistry working with entrepreneurs and client finns to 

commercialize research discoveries. Chicagu Region 

Iowa Innovation Network, State onowa Department of Economic Development, and Iowa State 

University development of innovative proof 0f concept and proof of commercialization supports 

the relevance centers that will accelerate the !allilch of new firms spur job creation, and 

conh'ibute to economic growth in Iowa. Denver Region 

New England i6 Green Partnership Proof of Concept Center, New England Clean Energy 

Foundation serves communities across a six state region, the project creates a commercialization 

network infrastrncture that enables collaborators to increase job creation and private sector 

inveshnent. Philadelphia Region 

Washington Clean Energy Partnership Project, Puget Sound Regional Council, South Seattle 

Community College, Cleantech Open, SIRTI supports collaboration between industry and 

institutions of higher education for the expansion of the clean energy sector throughout 

Washington State. The project will develop resources for testing energy efficiency solutions, 

establishing public private partnerships focused on clean energy, and facilitating the testing of 

clean energy products and services. Seattle Region 
48 

Region: 

Grant Program: 

Project Name: 

Grantee Name: 

Award Amounts: 

Identified Region: 

Identified Cluster: 

Project Description 

and Objectives: 

Brief Description of 

Activities: 

All Project Partners: 

Atlanta 

i6Challenge 

Igniting Innovation (12) Cleantech Acceleration Network 

University of Central Florida / Technological Research and Development Authority / 

University of Florida 

$1,000,000 (E.DA) + $613,155 (Applicant) + $149,487 (DOE.) = $1,762,642 Total 

E.ast Central Florida: Connties inclnde Brevard, Volusia, Orange and Seminole. The 

eligibility is based on Brevard County, FL. 

A pat1icnlar emphasis will be given to research areas in whichFL excels - solar energy, 

biofuels, green huilding technologies, and smart grid. 

The Igniting Innovation Cleantech Acceleration Network (I2 CAN) is a nniqne distnlmted 

proof-of-concept model that consists of a network of Florida-based universities, 

incubation networks, investors and industly resources that are coming together to 

accelerate the commercialization of innovative clean teehnology researeh into new 

technology companies or to license into existing firms. The I2 CAN will provide 

commercialization resources to entrepreueurs, scientists and established companies that 

are interested in commercializing clean technology research conducted withio Florida's 

research institutions. A particular emphasis will be given to research areas in which 

Florida excels - solar energy, biofuels, green building technologies, and smart grid 

(energy storage aud software/sensors). 

This investment "ill support the Florida I2 Cleantech Acceleration Network's (12 CAN) 

Proof-of.Concept model. It will implement a unique model that links Florida-based 

universities, incubation networks, investors and industly resources together to create a 

network ofPOC centers to accelerate the creation and commercialization ofinnovative 

clean technology research. 

This investment will support Tbe University of Central Florida (UCF), the Technological 

Research and Development Authority (TRDA), and the University of Florida's Florida 

E.nergy Systems to inlplement a unique model that Iiuks Florida-based universities, 

incubation networks, iovestors and industly resources together to create a network of 

POC centers to accelerate the creation and commercialization of innovative clean technology research. 

The University of Central Florida (UCF), the Technological Research and Development 

Authority (TRDA), and the University of Florida's Florida E.nergy Systems 
49 

Region: 

Grant Program: 

Project Name: 

Grantee Name: 

Award Amounts: 

Identified 

Region: 

Identified 

Cluster: 

Project 

Description and 

Objectives: 

Brief 

Description of 

Activities; 

Austiu 

i6Challeuge 

Louisiana Tech Proof of Concept Center 

Louisiana Tech University 

$1,000,000 (EDA) + $679,622 (Applicant) + $649,500 (other) + $100,000 (EPA) 

= $2,429,122 Total 

Serviug the 1-20 corridor region in uorthLouisiana, sonth Arkausas, west ceutral 

Mississippi, and northeast Texas 

Green Technology innovation 

Establishing a proof of concept center, called LA_i6, based at and operated by Lonisiana 

Tech, serving the 1-20 corridor region in north Lonisiana, south Arkansas, west central 

Mississippi, and northeast Texas. LA_i6 will focus on increasing the speed with which new 

green technology innovations enter the market and amplifYing their subseqnent social, 

environmental, and economic impacts. 

The broad goals of LA_i6 include: 

1. Linking proposed ~i6 activities "'ith other related, ongoing effOlts to conduct 

technology market evaluations, design aud build proto·types, aud develop business plans; 

2. Leveraging public investment to attract private seed funding to support 

commercialization; 

3. Promoting interdiscipliuary collaboration between the university and private sector 

partners in the development and deployment of new green technologies aud applications; 

4. Providing experiential education opportunities for students that engage them in 

innovative entrepreneurial challenges and with new technology; 

5. Enhancing the regional network of innovators, entrepreneurs, and investors throngh 

specific interaction on green techuology development pr~jects. 

LA_i6 will support technology product development, eutrepreneurs, and startup or growing 

compauies focused on each of the major areas listed as priorities for the i6 Green Challenge. 
50 

Region: 

Grant Program: 

Project Name: 

Grantee Name: 

Award Amounts: 

Identified 

Region: 

Identified 

Cluster: 

Project 

Description and 

Objectives: 

Brief Description 

of Activities: 

Chicago 

i6Challenge 

Proof of Concept Center for Green Chemistry Scale-up 

Michigan State Universityf Lakeshore Advantage fNew North Center IPfima Civitas 

Foundation " 

$500,000 (EDA) + $500,000 (Applicanf)+ $80,000 (EPA) $1,080,000 Total 

West Michigan: The project site is located in the City of Holland, a municipality that 

straddles Allegan and Ottawa Counties in Michigan. SUlTouudiug West Michigan 

counties include Muskegon and Kent. 

Chemical and bioeconomy industries. 

The project involves operating the Michigan State University Proof-of-Concept-Center 

for Green Scale-Up Chemistry (PCCGSC), training and advising PCCGSC clients on 

green technology innovation and recruiting capital investment in PCCGSC clients. In 

addition, supplemeutal EPA assistance will help fund research and development at the 

PCCGSC in drinking water filtration and safety. 

The project scope of work includes the following: 

1) Operating the physical site of the MSU Bioeconomy Institute and the Michigan State 

University Proof-of-Concept-Center for Green Scale-Up Chemistry (PCCGSC) 

including all safety, regulatory compliance, maintenauce, and other site operational 

tasks, and the installation of videoconferencing capacity; 

2) Planning and executing all chemical scale-up services to entrepreneurs and client 

firms provided by the Proof of Concept Center; 

3) Assisting qualified and interested PCCGSC client firms in obtaining USDA 

BioPreferred designations; 

4) Augmenting existing Bioeconomy-reJated research and development efforts centering 

on arsenic removal from drinking water, through an EPA supplemental i6 Green 

award; 

5) Training and advising entrepreneurs and PCCGSC client firms on "Green 

techuology"-related inuovation, product design aesthetics, and human factors 

accommodations; 

6) Operating the BioBusiness Accelerator at the MSU Bioeconomy Institute; 

7) Recruiting "Green technology" incubator tenants; 

8) Providing entrepreneurs and PCCGSC client firms with advice on business planning, 

marketing, and sales; 

9) Providing entrepreneurs with assistance in pursning MEDC, SBIR and STIR grants 

and NineSigma solicitations; 

10) Organizing "showcase events" for the PCCGSC client companies and their 

technologies; 

11) Facilitating collaborations with Grand Valley State University, local community 

colleges, and the regional SBTDC structure; 

12) Coordinating PCCGSC publicity with MSU and other partnering organizations; 

13) Identifying and recruiting potential PCCGSC client companies, especially beyond 

West Michigan. 
51 

Region: 

Grant Program: 

Project Name: 

Grantee Name: 

Award 

Amounts: 

Identified 

Region: 

Identified 

Cluster: 

Project 

Description and 

Objectives: 

Brief 

Description of 

Activities: 

Denver 

i6Challenge 

Iowa Innovation Conncil i6 Green Project 

Iowa Economic Development Authority/ Iowa State University 

$1,000,000 (EDA) + $1,000,000 (Applicant) = $2,000,000 Total 

State of Iowa 

Technology 

EDA funds will be used to expand the proof of concept development model by adding 

the next stage, Proof of Commercial Relevance Center (POCRC). 

POCRC takes early stage processing further by providing market validation of new 

technology. The focus will be on prodnct, production or manufacturing process, 

customer acceptance, and overall economics. 

POCRC would increase the commercialization activity from these centers by: 

Prospect development; 

Proactively work with Center/Institnte leadership and faculty to bnild a cnlture 

within these initiatives that encourages and supports commercial application of 

research; 

Utilize seminars, personal coutact, educational programs to build knowledge of 

commercialization opportunities among students and faculty; 

The pacc will be the vehicle for delivery of commercialization programming 

and services; 

Deliver analysis aud services to advance research to commercialization; 

Provide feedback to researchers on the commercial potential of their research 

program through evaluation of technical risks and intellectual property 

potential, includiug examination of opportunities to build a portfolio ofIP; 

market assessment in relation to risk assessment and competition 

demonstrating the potential for growth and job creation; paring with advisors 

form industry or the entrepreneurial sector; development of a plan to advance 

the research to commercial application; analysis of and assistance with 

regulatory requirements; staged funding to advance the research through proof 

of concept and towards prototype/testing stage. 
52 

Region: 

Grant Program: 

Project Name: 

Grantee Name: 

Award Amounts: 

Identified Region: 

Identified Cluster: 

Project Description 

and Objectives: 

Brief Description of 

Activities: 

All Project 

Partners: 

Philadelphia 

i6Challenge 

Cleantech Innovations New England 

New England Clean Energy Foundation 

$1,000,000 (EDA) + $1,650,000 (Applicant)+ $75,000 (DOE) + $100,000 (EPA) 

$ 2,825,000 Total 

All of New England 

Green Technology Sector 

The Cleantech Innovations New England will create a Proof of Concept Network that 

will focus its efforts on renewable energy, energy efficiency, and water technologies. 

The Partnership is a multi-state network that will collaborate to provide promising 

cleantech lab and pre-venture projects with funding, business assistance, technical 

resources, and testing infrastructure. 

The scope of work cousists of two principle initiatives: 

1. First, the Proof of Concept Center (PoCC) will develop the New England 

Innovation Connector System to facilitate and foster the exchange of ideas 

among New Eugland's cleanteclt stakeholders. 

2. Second, the PoCC will provide selvices and funding to assist in the 

commercialization of promising cleantech innovations. These initiatives are 

composites of the following elements: (I) market pull through the 

identification of business challenges; (li) research labs to accelerate initial 

technology research, testing and development; (iii) funding for precommercial research and development;(iv) mentorship, team building, 

business model development; and (v) connection with corporate partners and 

investors for follow-on funding. 

Cleantech Innovations New England leverages the Deshpande Center and other 

successful programs to create a multi-state proof of concept center model that serves 

the entire New England region, connecting innovations to valuable, multi-state assets. 

The New England Clean Energy Foundation, the Connecticut Clean Energy Finauce 

and Investment Authority, the Maine Tecltnology Institute, the Massachusetts Clean 

Energy Center, the New Hampshire Office of Energy and Planning, the Rhode Island 

Renewable Energy Fuud, and the Vermont Agency of Commerce and Commuuity 

Development, and 40+ other supporters. 
53 

Region: 

Grant Program: 

Project Name: 

Grantee Name: 

Award Amonnts: 

Identified Region: 

Identified 

Cluster: 

Project 

Description and 

Objectives: 

Brief Description 

of Activities: 

Seattle 

i6ChalIeuge 

Washington Clean Energy Partnership Project 

Puget Sound Regional Council! Sonth Seattle Commuuity College / Cleautech Open 

$1,000,000 (EDA) + $1,569,434 (Applicant) + $150,000 (DOE) = $2,719,434 Total 

State of Washington 

Clean Energy Sector 

The applicant seeks to develop a partnership that will foster collaboration between industry and 

institutions of higher educatiou for the expausion of the clean energy sector. 

Project activities will include the development of resources for the testing of energy efficiency 

solutions, establishment of a pnblic·private partnership focnsed npon the clean energy indnstry, 

and the facilitation of the testing of cleall energy products alld services to enable their 

commercialization. 
54 

April 17, 2012 

Senator Mary Landrieu, Chair 

Committee on Small Business and Entrepreneurship 

U.S. Senate 

Washington, DC 20510-6350 

Attn: Darla Ripchensky, 

Chief Clerk for the Committee 

Dear Senator Landrieu: 

I am pleased to have the opportunity to participate in the Committee's roundtable entitled 

"Perspectives from the Entrepreneurial Ecosystem: Creating Jobs and Growing Businesses 

Through Entrepreneurship", on Wednesday April 18, 2012. As I understand it, the purpose of 

this roundtable is to discuss proposals on high growth entrepreneurship and job creation 

including the federal government's role in strengthening entrepreneurial ecosystems. 

Started in 1984, the SBTDC is a statewide program of the University of North Carolina System 

with offices based at each of the 16 campuses of the system. It is well recognized for its 

innovation, high quality services and exceptional connectivity to the state's economic 

development infrastructure. 

We were the first SBDC to adopt a client market segment based service delivery system. These 

segments include start-ups, existing small businesses with less thanl0 employees and existing 

businesses with 10 or more employees (up to roughly 150 or so). Services provided are 

specifically focused on meeting the different needs of each segment. 

We adopted this approach because of our recognition that a portfolio approach to service 

delivery provided a basis for broader service and greater long-term economic impact. This also 

included a growing understanding that businesses with 10 or more employees had great 

potential for further growth in both sales and employees. We also quickly learned that these 

firms were largely un-served by the existing service delivery system. 

We have followed a client market segmentation model for service delivery for a decade. 

However, it has only been the last few years that we've had the capacity to be able to be much 

more aggressive in our outreach and service to companies with more than 10 employees. This 

"" City Wilmington 
55 

focus, frankly, resulted from the recession and the painful need to stem job losses and help 

rebuild our economy. 

With the support and engagement of our Governor, our University, our Department of 

Commerce and the SBA we have significantly increased our outreach and services to small to 

medium sized firms. We've used supplemental funding for SBDCs provided through SBA under 

the Small Business Jobs Act and other support from our State Commerce Department to add 

staff, develop and deploy new tools and resources and closely monitor business satisfaction 

and performance outcomes. We've significantly increased our outreach to targeted companies 

under a program brand - BIZ BOOST - which has achieved a significant level of recognition in 

the business community across our state. 

The focus of services under the BIZ BOOST initiative includes an in-depth analysis of the past 

performance (sales / financial), capacities and current positioning of the businesses in their 

marketplace. This is followed by the engagement of owners and managers in a review of their 

strategies and an assessment of their strengths and weaknesses. The firms are then helped in 

the development of their near to mid-term action plan for growth which is essentially 

customized for their business. It will include market expansion targets, operational 

improvement requirements, adequacy of capital to support growth and staff training and 

development. Regular on-going counseling support and leveraging of other resources is 

provided, as well, when the firms are implementing their action plans. 

We've learned some key lessons thru the BIZ BOOST initiative. Among these are the following: 

• These firms are not using the existing business assistance resource network in our state 

• They do not view themselves as "small" and do not believe there are any relevant 

services available to help them. 

• They reserve judgment on the effectiveness of services provided - at 6 months they are 

most likely to indicate they are "not sure" whether the assistance provided has been 

beneficial. 

At the 12 month mark, however, these firms are providing the highest satisfaction 

ratings of all client segments; and 

• They are achieving remarkable business success in terms traditionally measured such as 

jobs, sales growth and other factors. 

The North Carolina SSTDC is not the only SBDC program with a client segment approach to 

services. Many have adopted this model; but there are, as yet, only a few SBDC (such as 

Michigan and Florida) that have made an in-depth commitment to "second stage" companies. 
56 

Attached is a brief synopsis of the outcomes and impact of the BIZ BOOST initiative over the 

period 2010 - 2011. This includes a state-wide summary and a summary for firms in each of the 

state's seven economic development regions to show state-wide distribution. Performance and 

outcome includes only what the firms themselves have directly reported. 

More consistent focus on these types of companies is clearly warranted. They are literally 

everywhere, they are important economically and they have significant capacity for growth, if 

they have access to the right resources and services. Finally, a service commitment to this 

segment can be very cost effective - as has certainly been the case in North Carolina. 

We would urge a stronger federal level focus on "second phase" companies; principally through 

its SBA's Small Business Development Center Program. The focus and results of a number of 

SBDCs can serve as a model for broader replication. 

Sincerely yours, 

Scott R. Daugherty 

Ass!. Vice Chancellor and Executive Director 

SRO:jp 

J:/SD!S6TDC!Communicatlons/Comrnunkations_Senatorlandrleu_.4-17-12 
57 

We're proud to announce the results of our Biz Boost initiative over the 

past two years.. Working with the SBTDe program has shown significant 

impact in our region on jobs and the success of existing businesses. 

• CHent Businesses Served: 260 

• Jobs Created: 457 

• Jobs Retained: 536 

• Tota! Jobs Created 

or Retained: 993 

• # loans obtained: 14 

• Tota! Capital Formation: 

$12,381,800 

• # Government Contracts 

Awarded: 416 

• $ Government Contracts 

Awarded: $21,328,649 

• Cost Per Job Created Across the 

Statewide Biz Boost lnitiative: 

$813 

f'~rt;(ifl<lling wfI\pany data I, ba~~d on all 260 c!iants rffiwll\{I same S€!VI(e'> ~w.-ee~ January 2010 

and Decem\lel 2011 

... 

~bSNOW sb1dc 
58 

We're proud to announce the results of our Biz Boost initiative over the 

past two years. Working with the SBTDC program has shown significant 

impact in our region on jobs and the success of existing businesses. 

• Client Businesses Served: 204 

• Jobs Created; 478 

• Jobs Retained: 364 

• Total Jobs Created 

or Retained: 842 

• # loans obtained; 14 

• Total Capita! Formation: 

$4,899,500 

• # Government Contracts. 

Awarded: 376 

• $ Government Contracts 

Awarded: $47,637,999 

• Cost Per Job Created Across the 

Statewide Biz Boost Initiative: 

$813 

Outcome:> and imp~(t ar~ based w \~e n\!mtler 01 (I",m bUI<neS5es rulrently !eDor\ing data (2!%) 

Part'opotirtg o:>mpanywta pi ba>ed O~ al! 204 dle~ts rete1ving SB,O( Senn(e,l>et\'.'ee~ J3nualy 2010 

MdOetembel201~ 

... 

~bSNOW sbtdc 
59 

We're proud to announce the results of our Biz Boost initiative over the 

past two years. Working with the SBrDe program has shown significant 

impact in our region on jobs and the success of existing businesses, 

• ClientBuslnessesServed:356 

• Jobs Created: 1,971 

• Jobs Retalned: 1,929 

• Total Jobs Created 

or Retained: 3,900 

• fl:loansobtained:47 

• Tota! capita! Formation: 

$32,689,269 

• #: Government Contracts 

Awarded: 351 

• $ Government Contracts 

Awarded: $219,295,796 

• (ost per Job Created Across theStatewide Biz Boost Initiative: 

$813 

Partidp;.!lmg CO'llp;.!ny daw lS based O~ ali 3'16 client> reo:.,V1ng SBroc "'('!I;ces bel\~~ Ji!1UUI)' 2{)1() 

~M~cember2011 

... 

~bSNOW sbtdc NORTH 

~~ 
60 

We're proud to announce the results of our Biz Boost initiative over the 

past two years. Working with the SBTDC program has shown significant 

impact in our region on jobs and the success of existing bUSinesses. 

• Client Businesses Served: 344 

• lobs Created: 116 

• Jobs Retained: 224 

• Tota! Jobs Created 

or Retained: 340 

• # loans obtained: 6 

• Total Capita! Fonnation: 

$3,551,000 

• # Government Contracts 

Awarded: 15 

• $ Government Contracts Awarded: $7,975,390 

• Cost per Job Created Across the 

Statewide Biz Boostlnitlatlve: 

$813 

O~t(ome; and i'l1PiKt ar~ based on the number of di~nt bU5:n~ses OJrr~ntly r~porting data (9 S%) 

ParVClpa(:~g wmpanv data i5 based on a:i 344 dients re(eNing sInce W""(~ :,etween JJr.~ary 1010 

and Decembe' 2011 

~bSNOW sbtdc 
61 

We're proud to announce the results of our Biz Boost initiative over the 

past two years. Working with the SBIDe program has shown significant 

impact in our region on jobs and the success of existing businesses. 

• Client Businesses Served: 264 

• lobs Created: 1,S37 

• Jobs Retained: 241 

• Total Jobs Created 

or Retained: 1,778 

• # loans obtained: 13 

• Tota! Capital Formation: 

$11,264,373 

• # Government Contracts 

Awarded: 178 

• $GovernmentContracts 

Awarded: S88,148,839 

• Cost per Job Created Across the 

Statewide Biz Boostlnitiative: 

$813 

PilrtKtpat,ngrnmpanydatai~ba:;edonaI1264(:;elltsle(e!Vmg SBTDC sel'ilt~sMtweer.lanui'lry lO1() 

and DeC€rrber 2011 

sb1dc 
62 

We're proud to announce the results of our Biz Boost initiative over the 

past two years. Working with the SBTDe program has shown significant 

impact in our region on jobs and the success of existing businesses, 

• Client Businesses Served: 276 

• Jobs Created: 816 

• Jobs Retained: 275 

• Total Jobs Created 

Of Retained: 1,091 

• # Loans obtained: 22 

• Tota! Capita! formation: 

13,078,207 

• # Government Contracts 

Awarded: 141 

• $ Government Contracts Awarded: $41,478,257 

• Cost ~r lob Created Across the 

Statewide Bil Boost !nitiative: 

$813 

Outcomes and <mpact ¥~ based l.m the number of clfent busine>se~ currently '€porting doW (26%) 

Paftl(ipating {ompany d~ta is based or ~iI 276 client!; mCl!Ivmg ,BIDe services Dftwee:n january 2010 

~~d December 20!1 

~ . ~bSNOW sbldc 
63 

We're proud to announce the results of our Biz Boost initiative over the 

past two years.. Working with the SBTDC program has shown significant 

impact in our region on jobs and the success of existing businesses. 

• ClientSusinessesServed:278 

• Jobs Created: 635 

• lobs Retained: 56 

• Total Jobs Created 

or Retained: 691 

• # loans obtained: 40 

• Tota! Capital Formation: 

$28,623,632 

• # Government Contracts 

Awarded: 267 

• $ Government Contracts 

Awarded: $53,308,443 

• Cost per Job Created Across the 

Statewide B!z Boost Initiative: 

$813 

Pa<tidpatmg coffip.lny data is ba>e1i on all nll d'<lNS [!?(ewing SSTOe ser;ices bNween January l.OlO 

arn!~cember2011 

". 

~bSNOW sbtdc 
64 

We're proud to announce the results of our Biz Boost initiative over the 

past two years. Working with the SBTDC program has shown significant 

impact in our region on jobs and the success of existing businesses, 

• Client Business:esServed: 1,710 

• Jobs Created: 5,742 

• Jobs Retained: 3,522 

• Tota! lobs Created 

or Retained: 9,264 

• # loans obtained: 124 

• Tota! Capital Formation: 

198,224,827 

• # Government Contracts 

Awaroed: 1,677 

• $ Government Contracts 

Awarded: $466,823,793 

• Cost pet Job Created Across the 

Statewide Biz Boost !nitiative: 

$813 

Outcorres a~d impact are based on the numbw of ,Iie~t blls'n~sse, currently reporting data (2n.s%) 

Biz Boost c!rents served between January 2010 and December 2011 

132,411 fuiJ-time jobs (average 77 jobs per business), 7,601 

over$10billioninsaies, 

Health Care & Social Assistance (5.0%); Accommodation & Food Servin! (3.8%); 

rartkip.l:ing('Jmpanydmaisbas~op,aill,71()difnt<;lf{€"jmgS!lTD(se""a.~belWl'EnJanlli/ly2()10 

ano Oetember 2011 

". 

~bSNOW shtdc NORTH 

~~~ 
65 

Scott D. Gerber Statement for the Record 

April 18,2012 

Roundtable: "Perspectives from the Entrepreneurial Ecosystem: Creating 

Jobs and Growing Businesses through Entrepreneurship" 

Chairman Landrieu and Members of the Senate Committee on Small Business and 

Entrepreneurship, on behalf of the Young Entrepreneur Council, an organization 

comprising many of our nation's most successful young entrepreneurs, and the 

#Fix Y oungAmerica movement, a solutions-based effort that aims to highlight proven 

solutions to youth unemployment, I'd like to thank you for inviting me to speak today 

about how to help our nation's young people create much-needed jobs for Americans 

through entrepreneurship. 

In the past year and a half, the Young Entrepreneur Council has been working diligently 

to mentor, train and develop young American entrepreneurs-because we strongly 

believe entrepreneurship is a viable, practical solution to youth un- and 

underemployment. I address you today on behalf of those young entrepreneurs, because 

they need your help in order to lead this country forward. 

Our urgency is real: Youth employment is at a sixty-year low. 1 Student loan debt has 

surpassed $1 trillion. And default rates are rising quickly? 

As a result, one in four young Americans moved back in with their parents after living on 

their own. Thirty-one percent postponed marriage or starting a family.3 And many wouldbe entrepreneurs are sidelined indefinitely due to student loan repayments and lack of 

cash flow. 

Despite these harsh realities, youth entrepreneurship is ever-present, as demonstrated by 

the recent college graduate segment of the 20 11 Young Entrepreneur Council/Buzz 

Marketing Group annual youth entrepreneurship survey-which found that 29 percent of 

recent grads are self-employed, up from 20 percent in 2010. Thirty percent started a 

business in college, up from 19 percent in 2010. Fourteen percent started a business as a 

result of being unemployed and 35 percent have started a side business to earn extra • 4 Income. 

We believe that the bipartisanship displayed during the recent passage of the JOBS Act in 

Congress sends a strong message to all Americans, but especially to our youth, that their 

elected officials believe in US citizens' ability to empower themselves to improve their 

I Paul Taylor, et a!., Young, Underemployed and Optimistic: Coming of Age, Slowly, in a Tough Economy, 

Pew Research Center, (Pew Social & Demographic Trends, February 9, 2012), 

http://www.pewsocialtrends.org/files/2012/02/SDT-Y outh-and-Economy .pdf. 

2 "Default Rates Rise for Federal Student Loans," U.S. Department of Education, September 12,2011, 

http://www.ed.gov/news/press-releases/default-rates-rise-federal-student-loans. 

J Paul Taylor, et al., Young, Underemployed and Optimistic. 

4 Data is from YEC and Buzz Marketing Group's annual youth entrepreneurship survey of over 1600 

American males and females ages 16-39. 
66 

economic situation. These are exactly the kind of proactive reforms YEC has been 

fighting for. 

But I believe our elected representatives must be even bolder- in fact, I believe we owe it 

to our youngest entrepreneurs to be so bold. Millenriialsmust be empowered to funnel 

their entrepreneurial energy into solving joblessness and economic malaise, or risk 

becoming a lost generation. 

Members of the Committee, this is not an abstract endeavor. The YEC, along with 

partners like Junior Achievement, Babson College,Codecademy, Network for Teaching 

Entrepreneurship, National Association for Community College Entrepreneurship and 

Venture for America, have identified a handful of tried-and-true approaches that are 

already successfully fostering entrepreneurship education initiatives and youth business 

creation all over America. 

Today, I want to address three specific areas that the YEC and our partners wish to call 

attention to: young veterans, young entrepreneurs in general, and the Startup Visa. 

First, let's talk about our veterans. While overall unemployment is a little over 8 

percent; 29.1 percent of male veterans and 36.1 percent of female veterans ages eighteen 

to twenty-four were unemployed in 2011--compared to 17.6 and 14.5 percent, 

respectively, of nonveteran young men and women of the same age. 5 

Veterans are hard-working, passionate risk takers who put the mission before the manqualities that also describe successful entrepreneurs. Overall, they own about 2.4 million, 

or 9 percent, of all American businesses. When you count businesses in which they're at 

least half-owners, those numbers rise-to 3.7 million businesses and 8.2 million 

employees.

6 Given this, we must ask ourselves: Instead of only helping returning young 

vets seek jobs, why aren't we doing even more to help them create jobs? 

To do exactly that, we ask the Committee to consider including provisions from two 

important bills in your efforts to support entrepreneurship through new legislation. The 

first is the Veterans Entrepreneurial Transition (VE1}Act of 2011, a game-changing 

bill (that's gotten zero fanfare in the media) that would allow qualifying veterans to use 

GI Bill entitlements to start or purchase a business or franchise. 7 

Then there's the Help Veterans Own Franchises Act, fust introduced in 2009 and then 

again in 2011 as part of the American Growth, Recovery, Empowerment and 

Entrepreneurship (AGREE)Act. 8 It establishes a tax credit for qualified returning 

veterans to offset startup costs equal to 25 percent offranchise fees, up to $100,000. 

5 Bureau of Labor Statistics, U.S. Department of Labor, "Employment Situation of Veterans Summary," 

March 20, 2012, http://www.bls.gov/news.release/vet.nrO.htm. 

6 U.S. Census Bureau, Survey of Business Owners - Veteran-Owned Firms: 2007, (2007), 

http://www.censlls.gov/econ/sbo/get07sof.html? 17. 

7 Veterans Entrepreneurial Transition Act of2011, H.R. 3167, 112th Congress (2011). . 

• American Growth, Recovery, Empowerment and Entrepreneurship Act, S. 1866, 1 12th Congress, (2011). 

2 
67 

Direct economic output in the franchise sector is projected to grow 5 percent in 2012, and 

employment, 2.1 percent-and young Americans are clamoring to get on board.9 

Next, to address the needs of young entrepreneurs in general, my organization has coauthored the Youth Entrepreneurship Act (YEAio with Young Invincibles. YEA is a 

set of policy initiatives designed to support and foster young entrepreneurs, some of 

which were introduced by Rep. Cedric Riclunond as part of the Microenterprise and 

Youth Entrepreneurship Act of2011. 11 

I'd like to highlight five of YEA's common-sense provisions-provisions that we believe 

will accelerate the growing youth entrepreneurship movement: 

One, we'd like to see greater flexibility in the use of Title V "Well-Rounded" 

funds under the Elementary and Secondary Education Act (ESEA) so that 

local and state educators can better support entrepreneurship education programs. 

Within No Child Left Behind, Title V identifies certain federal programs (such as 

those for foreign languages, physical education and arts in education) as 

innovative assistance programs that educators can direct funding toward-but as 

of yet, there is no checkbox that allows state and local education agencies to buy 

entrepreneurship-related materials. 12 Reauthorizing ESEA is a low-to-no-cost way 

for the government to quickly expand young peoples' access to entrepreneurship 

education and resources. 

• Two, the centerpiece of YEA is a common-sense federal student loan 

deferment, reduction and forgiveness program for young people who start 

growing businesses after college. This proposal leverages the existing IncomeBased Repayment system (put into place by President George W. Bush and 

reformed recently by President Obama)13 and is modeled after the current Public 

Service Loan Forgiveness Program (PSLF), which forgives the federal student 

loans of borrowers who obtain government jobs or jobs in nonprofits. We're not 

reinventing the wheel-we're just taking good, bipartisan programs one logical 

step further and applying them to job creators too. Requiring young entrepreneurs 

to meet certain qualifying benclunarks (and ongoing goals and metrics, including 

revenue and job creation) is a smart, cost-effective way to extend PSLF benefits 

to the people who need it most: America's young business leaders who are 

actively creating new jobs. Based on current rates of new business creation, we 

9 20 I 2 Franchise Business Economic Outlook, prepared by lHS Global Insight for the International 

Franchise Association, January 2012, I, http://emarket.franchise.orgiEconOutlookFactSheetfinal.pdf. 

10 Young Invincibles, Growing Our Economy Through Young Entrepreneurs: Proposals to Remove 

Barriers to Young People Starting Businesses, 2011, http://theyec.orglwp-contentJup!oadslYouthEntrepreneurship-Act-Policy-Brief.pdf. 

11 Microenterprise and Youth Entrepreneurship Act of201 t, H.R. 2809, 11th Congress (2011). 

12 See 20 U.S.C. § 6454(4), 20 U.S.C. § 7267b, 20 U.S.C. § 7175(a)(4). 

13 "Income-Based Repayment Plan," Federal Student Aid, U.S. Department of Education, last modified 

December 7, 2011, http://studentaid.ed.gov/PORTALSWebApp/students/english/IBRPlan.jsp. 

3 
68 

predict that the program could create between 25,000 and 125,000 new jobs in the 

first five years alone. 14 

Three, increasing access to capital is key to ensuring young people don't just 

start businesses, but grow and hire. The JOBS Act is a great start, but ramping up 

the SBA Microloan Program (rather than slowing it down) and targeting a 

significant percentage of those loans to young people is simply good thinking, 

given that the vast majority of their businesses will be technology-driven and . 

service-based-thereby costing only a few thousand dollars to start. While the 

federal government spent $33.686 million on its microlending program in 2010,15 

fiscal year 2011 funding received was only $19.266 million, and the Small 

Business Administration only requested $16.378 million for 2012. 16 Beyond 

expanding its size, we also need the SBA to ensure that young entrepreneurs 

whose business models are worthy of investment-but who have limited credit 

history and collateral-can still access microfinance through intermediaries, 

perhaps using metrics like co-signing, the assessment of a qualified local mentor, 

or by asking them to contribute a percentage ofincome to self-funding. 

• Next, there are several existing government activities we can harness to support 

the growth of youth-owned businesses. The first area is procurement. Currently, 

the President establishes goals for procurement contracts awarded to small 

businesses; certain percentages of prime contracts and subcontracts must go to 

socially and economically disadvantaged businesses, including women-owned 

businesses, HubZone (historically underutilized) businesses, and service-disabled 

veteran-owned businesses. We seek to have young entrepreneurs added as a 

mandatory category. 

• The second activity is the practice of running low-cost competitions for students 

to solve various public-private challenges. For example, the Department of Health 

and Human Services (HHS) ran a successful competition in which college 

students were called on to create the best mobile app to improve public health. 

Not only does this spur innovation and interest in the sciences-an area where US 

students typically fall short-but many of these students go on to turn their 

products into businesses. The prizes cost the government almost nothing; they're 

often under $1,000. We would like to see these competitions happen governmentwide; we also would like to see increased government grants or funds reallocated 

from other underperforming programs used to support business competitions on 

the high school and collegiate levels with guidance from the SBA (or another 

government agency) to foster real-world entrepreneurship among students. 

Finally, more resources for entrepreneurship education are needed in general-in the 

2011 YEC/Buzz Marketing Group survey, 88 percent of respondents said 

14 Small businesses typically create about four jobs, and about 80% of those jobs typically remain after 5 

years. Moreover, while half of small businesses will fail after five years, some percentage will grow 

substantially. Therefore, these numbers could even be conservative. 

15 In 2009, ARRA provided $6 million in loan subsidies and $24 million in technical assistance grants for 

the micro loan program, in addition to the 2009 appropriation of $22.5 million. 

16 U.S. Small Business Administration, FY 2012 Congressional Budget Justification and FY 2010 Annual 

Performance Report, 

http://www.sba.gov/sites/defuultifilesIFINAL%20FY%202012%20CBJ%20FY%202010%20APR_O.pdf. 

4 
69 

entrepreneurship education is vitally important given the new economy, but 74 percent of 

them had no access to entrepreneurship resources during their college years. When 

resources were available, most respondents felt they were inadequate. 17 This is 

unacceptable; today, adaptability, creativity and financial literacy are core work skills in 

the new economy-and we face a shortfall of science, technology, engineering, and 

mathematics (STEM) graduates. IS 

This growing shortfall, combined with current immigration policy, has led to more and 

more foreign-born entrepreneurs taking their revenue-positive companies off of US soil. 

The StartUp Visa Act of 2011 provides a solution that both creates jobs and helps 

increase US competitiveness. Notably, the StartUp Visa doesn't just hand out visas-it's 

conditional and employment-based. After two years, it requires visa-holders to have 

raised additional capital investment, demonstrate they are not a burden to taxpayers, and 

create new Americanjobs.19 

In doing so, the StartUp Visa accomplishes several things: it allows entrepreneurs to 

make key hires in instances where in-demand talent is otherwise lacking (enabling them 

to grow and hire faster), and it incentivizes immigrants who are educated and trained in 

the US to stay, build businesses and create new jobs. One of our YEC members is an 

immigrant from Colombia who has built multiple businesses in the US, generating 

millions of dollars in revenue and creating several dozen American jobs. But ifhe had not 

married an American citizen, his contribution to our economy would have been 

impossible under current immigration law. 

If we agree that small businesses truly are the engine of job creation in America-as 

President Obama himself has said-then it's imperative for us to spur youth 

entrepreneurship and to ensure the young employees of tomorrow are ready to compete 

in a global economy. The solutions we propose here represent the beginning ofa much 

larger conversation about reform, but these areas represent some of the most challenging 

issues young entrepreneurs face right now. 

Importantly, this is not about making life easier for Millennials, but rather about helping 

transition the young American workforce into a more entrepreneurial one capable of 

thriving in the new economy. We believe reforms like this are the key to initiating a 

paradigm shift away from the antiquated policies and mindset of yesteryear, so that when 

today's young people become the 30-, 40- and 50-something leaders of tomorrow, they 

will have the capacity and ability to lead America forward. 

Today, the Young Entrepreneur Council, our partners, and the tens of thousands of young 

entrepreneurs we mentor are asking you to help us as we set out to do what's right: Fix 

17 YEC and Buzz Marketing Group survey. 

IS Richard Dobbs, James Manyika and Charles Roxburgh, "What business can do to restart growth," 

McKinsey & Company, September 2011, 

http://www.mckinsey.com/Features/GrowthlWhat_ business_can _do_to Jestart _growth. 

19 StartUp Visa Act of2011, S.565, 112th Congress (2011). 

5 
70 

Young America. And on their behalf, I thank you for giving me the opportunity to 

discuss these vital issues and offer you achievable, practical solutions to resolve them. 

6 
71 

Entrepreneurship and Economic Freedom: 

A number of studies have examined the relationship between entrepreneurship and economic freedom. 

Overwhelmingly, they have found that those times and places with greater economic freedom tend to 

have greater levels of measured entrepreneurial activity: 

Joshua Hall, John Pulito, and Benjamin VanMetre, "Freedom and Entrepreneurship: New Evidence From 

the 50 States," Mercatus Center at George Mason University Working Paper no. 12-13 (April 2012). 

In this paper, we extend the growing literature on economic freedom as a determinant of 

entrepreneurship. We employ a new general measure of freedom that encompasses both 

economic and personal freedoms to test whether general freedom is related to entrepreneurial 

activity. While we find a positive and statistically significant relationship between overall 

freedom and entrepreneurship, disaggregating overall freedom into personal and economic 

freedom shows that economic freedom is driving the relationship. We find that a one standarddeviation increase in a state's economic freedom is associated with over 100 new businesses 

started per 100,000 residents every month. 

Russell Sobel, "Testing Baumol: Institutional Quality and the Productivity of Entrepreneurship," Journal 

of Business Venturing 23 (2008): 641-655. 

When institutions provide for secure property rights, a fair and balanced judicial system, contract 

enforcement, and effective constitutional limits on government's ability to transfer wealth through 

taxation and regulation, it reduces the profitability of unproductive political and legal 

entrepreneurship. Under this incentive structure, creative individuals are more likely to engage in 

the creation of new wealth through productive market entrepreneurship. (p. 641) 

I find that better institutional structnres produce higher venture capital investments per capita, a 

higher rate of patents per capita, a faster rate of sole proprietorship growth, and a higher 

establishment birth rate. (p. 642) 

Note: institutional quality is measured by the Economic Freedom of North America index. Its three 

principal components are size of government, takings and discriminatory taxation, and labor market 

freedom. 

Joshua Hall and Russell Sobel, "Institutions, Entrepreneurship, and Regional Differences in Economic 

Growth," Southern Journal of Entrepreneurship I, No. I (March 2008): 69-96. 

The measure of institutions we employ in this paper is the Economic Freedom of North America 

(EFNA) index released annually by the Fraser Institute. (p. 80) 

The evidence presented here suggests that differences in institutional quality help to explain 

differences in entrepreneurship across states. (p. 89) 

Kristina Nystrom, "The Institutions of Economic Freedom and Entrepreneurship: Evidence from Panel 

Data," Public Choice 136 No. 3-4 (2008): 269-282. 

This paper provides new evidence on the determinants of entrepreneurship across countries. The 

paper investigates the relationship between the institutional setting, in tenus of economic 

freedom, and entrepreneurship, measured by self-employment, in a panel data setting covering 23 
72 

OECD countries for the period 1972-2002. The measure of economic freedom includes five 

aspects: size of government, legal structure and security of property rights, access to sound 

money, freedom to trade internationally, and the regulation of credit, labour and business. The 

empirical findings show that a smaller government sector, better legal structure and security of 

property rights, as well as less regulation of credit, labour and business tend to increase 

entrepreneurship. (p. 270) 

Determinants of Government-Granted Privilege: 

Despite what may be the best of intentions, government-granted privileges such as tax credits, subsidies, 

loan guarantees, etc., are often dispensed on the basis of political-connections and not on the basis of 

merit. In recent years, a number of academic studies have examined this question: 

Mara Faccio, Ronald W. Masulis, and John J. McConnell, "Political Connections and Corporate 

Bailouts," The Journal oj Finance 61, no. 6 (December 2006): 2597-2635. 

We analyze the likelihood of government bailouts of 450 politically connected firms from 35 

countries during 1997-2002. Politically connected firms are significantly more likely to be bailed 

ont than similar nonconnected firms .... Further, among bailed-out firms, those that are politically 

connected exhibit significantly worse financial performance than their nonconnected peers at the 

time of and following the bailout. This evidence suggests that, at least in some countries, political 

connections influence the allocation of capital through the mechanism of financiaJ assistance 

when connected companies confront economic distress. (p. 2597). 

Jordi Blanes i Vidal, Mirko Draca, and Christian Fons-Rosen, "Revolving Door Lobbyists," (Centre for 

Economic Performance [CEP] Discussion Paper no. 993, London School of Economics and Political 

Science, London, UK, 2010), conditionally accepted by the American Economic Review: 

Washington's 'revolving door'-the movement from government service into the lobbying 

industry-is regarded as a major concern for policy-making. We study how ex-government 

staffers benefit from the personal connections acquired dnring their pnblic service. Lobbyists with 

experience in the office of a US Senator suffer a 24% drop in generated revenue when that 

Senator leaves office. The effect is immediate, discontinuous around the exit period and longlasting. Consistent with the notion that lobbyists sell access to powerful politicians, the drop in 

revenue is increasing in the seniority of and committee assignments power held by the exiting 

politician. (1) 

Daron Acemoglu, Simon Johnson, Amir Kermani, James Kwak, and Todd Mitton, "the Value of Political 

Connections in the United States, Working Paper, December 2010. 

The announcement of Timothy Geithner as President Obama's nominee for Treasury Secretary in 

November 2008 produced a cumulative abnormal return for Geithner connected financial firms of 

around 15 percent from day 0 (when the announcement was first leaked) to day 10. The 

quantitative effect is comparable to standard findings in emerging markets with weak institutions, 

and much higher than previons studies have found for the United States or other relatively rich 

democracies. The results hold when we control for how much firms were affected by the financial 

crisis, as well as in a wide range of other robustness checks. There were subsequently abnormal 

negative returns for connected firms when the news broke that Geithner's confirmation might be 

derailed by tax issues. Since the Geithner nomination announcement, policy has been supportive 

of the financial services sector and Geithner-connected frrms have continued to show positive 

cumulative abnormal returns, but there is no compelling evidence that Treasury implemented the 
73 

exact form of favoritism implied by the stock market reaction. Our results pick up market 

expectations and the perceived value of connections at a moment of intense financial crisis, rather 

than how policy was subsequently designed or implemented. (p. 1) 

Benjamin Blau, Tyler Brough, and Diana Thomas, "Corporate Lobbying, Political Connections, and the 

2008 Troubled Asset Relief Program," Working Paper, October 2011. 

Political involvement has long been shown to be a profitable investment for firms that seek 

favorable regulatory conditions or support in times of economic distress. But how important are 

different types of political involvement for the timing and magnitude of political support? To 

answer this question, we take a comprehensive look at the lobbying expenditures and political 

connections of banks that were recipients of government support under the 2008 Troubled Asset 

Relief Program (T ARP). We find that firms that lobbied or had other types of political 

connections were not only more likely to receive TARP funds, they also received a greater 

amount of support earlier than firms that were not politically involved through lohbying or direct 

political connections. For every dollar spent on lobbying during the five years prior to the TARP 

bailout, firms received between $485.77 and $585.65 in TARP support. (p. 1) 
74 

No. 12-13 

April 2012 

WORKING 

PAPER 

FREEDOM AND ENTREPRENEURSHIP: New Evidence from the 

50 States 

By Joshua C. Hall, John Pulito, and Benjamin VanMetre 

MERCATUS CENTER 

George Mason University 

The ideas presented in this research are the authors' and do not represent official positions 

of the Mercatus Center at George Mason University. 
75 

Freedom and Entrepreneurship: 

New Evidence from the 50 States 

Joshua C. Hall 

Assistant Professor 

Department of Economics 

Beloit College 

John Pulito 

Mercatus Center Fellow 

George Mason University 

Benjamin VanMetre 

Mercatus Center Fellow 

George Mason University 

Abstract 

In this paper, we extend the growing literature on economic freedom as a 

determinant of entrepreneurship. We employ a new general measure of freedom that 

encompasses both economic and personal freedoms to test whether general freedom 

is related to entrepreneurial activity. While we find a positive and statistically 

significant relationship between overall freedom and entrepreneurship, 

disaggregating overall freedom into personal and economic freedom shows that 

economic freedom is driving the relationship. We find that a one standard-deviation 

increase in a state's economic freedom is associated with over 100 new businesses 

started per 100,000 residents every month. 

JEL Codes: 0020, L260, RIIO 

Keywords: Institutions, Economic Freedom, Entrepreneur, Entrepreneurship 
76 

Freedom and Entrepreneurship: 

New Evidence from the 50 States 

Introduction 

Entrepreneurship is the act of exploiting an opportunity for profit. I It is the exploitation of profit 

opportunities in the private sector that drives economic progress forward, which is why so many 

policy makers at the local, state, and national levels seem to be focused on spurring 

entrepreneurial activity. While many actions fit into the above definition of entrepreneurship, 

most policy makers typically think of entrepreneurship as the creation of new businesses. Thus, 

many empirical studies of entrepreneurship have focused on different measures of new 

businesses, such as the growth rate of sole proprietorships or the number of new business starts. 

However, when looking at the determinants of good entrepreneurial growth, it is important to 

remember that behind each potential organization is an individual who is weighing the costs and 

benefits of starting the new business. If a potential entrepreneur fears that the returns from 

starting a new business will not be high enough because of the economy, or that the future is 

uncertain, or that public policy will raise the cost of operating the business, then the person may 

go on to do something else, which might not contribute to economic growth and development in 

the same way that starting a business would. In some cases, such as lobbying, these contributions 

may actually lead to lower growth. 

The link between economic institutions and entrepreneurship was made famous by 

William Baumo1.2 Before Baumol, there was a tendency among scholars to think of 

entrepreneurship only in positive-sum terms. Thomas Edison and Garrett Morgan were not just 

I Randall Holcombe. Entrepreneurship and Economic Progress (New York: Routledge, 2007), 29. 

2 William Baumol, "Entrepreneurship: Productive, Unproductive, and Destructive," Journal of Political Economy 

98, no. 5 (1990): 893-921. 
77 

famous inventors, nor were they businessmen who made their living merely by buying low and 

selling high. These men were true entrepreneurs, and for Baumol, this focus on the heroic 

inventor was problematic since it cannot not explain a decline in positive-sum entrepreneurship 

(i.e., entrepreneurship in which society as well as the entrepreneur is better off), except by 

suggesting that entrepreneurial energies or innovations are exhausted. Given the very basic 

human desire to improve one's condition, Baumol argued, one should instead assume that the 

stock of entrepreneurial energy in society is fixed. 3 Under this assumption, if the amount of 

positive-sum entrepreneurship changes over time, it must be because entrepreneurs are having 

their time and attention diverted away from positive-sum entrepreneurship and toward bad 

(negative-sum) entrepreneurship. According to Baumol, the rules ofthe game (i.e., economic 

institutions) have an important effect on positive-sum entrepreneurship-as illustrated by a series 

of case studies focusing on ancient Rome, early China, and the Middle Ages.4 The rules of the 

game that determine the rewards for different types of entrepreneurship have ehanged over time, 

and entrepreneurial behavior has changed in response to these changes in the rules of the game. 

Societies that keep taxes low, do not demonize business, and minimize the amount of resources 

distributed through the government steer their citizens' entrepreneurial energies toward good 

entrepreneurship, such as starting a new business, and away from bad entrepreneurship, such as 

finding a better way to lobby politicians for favors. Over time, the countries that have higher 

rates of entrepreneurial growth (positive-StUll) tend to experience more innovation and higher 

rates of economic progress. 

Many scholars have explored the relationship between economic institutions and various 

measures of entrepreneurship. However, in order to study the rules of the game, scholars must 

'Ibid. 

'Ibid. 

2 
78 

first measure them. A popular measure of institutions in economics literature is econom ic 

freedom, which is measured by indices at both the national and state levels. 5 Broadly speaking, 

economic freedom is present when individuals have the freedom to make private choices, 

including the freedom to interact with other free individuals, provided that they do not harm 

others or their property.6 The indices are designed to measure the quality ofa country's or state's 

formal and informal institutions. Countries and states that protect private property rights while 

keeping taxes low and refraining from creating barriers to trade and entry into markets have 

more economic freedom than those that do a poor job of protecting private property or that 

engage in high levels of taxation or regulation. 

At the national level, several studies have found a positive link between economic 

freedom and different measures of entrepreneurial activity. Some studies have looked at the 

relationship between economic freedom and the total entrepreneurial activity in a country, as 

measured by the Global Entrepreneurship Monitor. 7 Total entrepreneurial activity is measured 

as the number of individuals out of every 100 in a country who are in the start-up phase of a new 

business or are managing a business that has been in existence for fewer than 42 months. There 

is a positive and statistically significant relationship between the level of economic freedom in a 

country and that country's total entrepreneurial activity. 8 By disaggregating economic freedom, 

5 At the national level see James Gwartney, Robert Lawson, and Joshua Hall, Economic Freedom ojlhe World 

Report: 2011 Report (Vancouver: Fraser Institute, 2011). At the sub-national level there are two indices. The oldest 

measures economic freedom at the level orus states and Canadian provinL'es and is published by the Fraser Institute 

in Canada. The most recent edition is Nathan Ashby, Avila Bueno, and Fred McMahon, Economic Freedom oj 

North America: 2011 (Vancouver: Fraser Institute, 201l). A recent competitor that measures both personal and 

economic freedom at the U.S. state level is William Ruger and Jason Sorens, Freedom in the 50 States: An lndex oj 

Personal and Economic Freedom, 2nd ed. (Arlington, V A: Mercatus Center at George Mason University, 20 II). 

6 For more on the definition of economic freedom, see Gwartney, Lawson, and Hall, Economic Freedom of the 

World,1. 

7 Paul D. Reynolds, William Bygrave, Erkko Autio, and Michael Hay, Global Entrepreneurship Monitar: 2002 

Executive Report (Kansas City, MO: Ewing Marion Kauffman Foundation, 2002). 

, See, for example, Russell Sobel, J. R. Clark, and Dwight Lee, "Freedom, Barriers to Entry, Entrepreneurship, and 

Economic Progress," Review (if Austrian Economics 20, no. 4 (2007): 221-36. 

3 
79 

it is found that access to sound money is positively related to total entrepreneurial activity.9 A 

sound and stable currency is important in order for voluntary exchange to occur. Thus, it is 

useful to measure the extent to which governments provide access to sound money by keeping 

inflation low and stable and allowing their citizens access to alternative currencies. to Other 

studies have also disaggregated economic freedom, but measured entrepreneurship using selfemployment rates. These studies have found that countries with smaller governments, stronger 

legal systems and rules of law, secure property rights protection, and fewer regulations have 

higher self-employment. 11 

Similar work has looked at the relationship between economic freedom and various 

measures of entrepreneurship at the state level. Steven Kreft and Russell Sobel measured 

entrepreneurship using the growth rate of sole proprietorships from 1996 to 2000 and the index 

of economic freedom provided in earlier editions of the annual report Economic Freedom of 

North America (EFNA). 12 Controlling for other factors that may influence the growth rate of sole 

proprietorships, Kreft and Sobel found a positive relationship between economic freedom and 

their measure of entrepreneurship. 13 Following their research, a large number of papers have 

examined the relationship between the EFNA and different measures of entrepreneurship. The 

EFNA measures economic freedom using 10 variables in three areas: size of government, takings 

and discriminatory taxation, and labor market freedom; and it includes key measures such as 

9 Christian Bj0mskov and Nicolai Foss, "Economic Freedom and Entrepreneurial Activity: Some Cross Country 

Evidence," Public Choice 134, no. 3 (2008): 307-28. 

10 Gwartney, Lawson, and Hall, Economic Freedom oJthe World. 

II Kristina Nystrilm, "The Institutions of Economic Freedom and Entrepreneurship: Evidence from Panel Data," 

Public Choice 136, no. 3 (2008): 269-82. 

12 Steven Kreft and Russell Sobel, "Public Policy, Entrepreneurship, and Economic Freedom." CatoJournal25, no. 

3 (2005): 595-616. 

"Ibid. 

4 
80 

total tax revenue as a percentage of gross domestic product, top marginal income tax rates and 

the threshold at which they apply, and union density.'4 

Noel Campbell and Tammy Rogers used the index to study the determinants of net 

business formation, and in addition to finding a positive relationship between economic freedom 

and entrepreneurship, they also noted that increasing economic freedom on net business 

formation has "more than twice the marginal effect ofa similar increase in commercial lending 

and nearly three times the marginal effect of a similar increase in minority percentage." 15 Similar 

results on the effect of economic freedom on entrepreneurship have been found in studies 

looking at firm births and deaths 16 and the Kaufmann Index of Entrepreneurial Activity (KIEA), 

a state-based measure of the number of businesses started by non-business-owning adults during 

the past year. 17 

In this paper, we extend the existing literature by exploring the effect of economic 

freedom more generally on state-level entrepreneurship in the United States. Recently, political 

scientists William Ruger and Jason Sorens developed a state-based measure of overall freedom 

for the Mercatus Center called the Freedom in the 50 States index, which includes measures of 

both personal and economic freedoms. '8 We used their measures of overall freedom, personal 

freedom, and economic freedom to deepen our understanding of the relationship between 

government intervention and entrepreneurial activity. In addition, their measure of economic 

freedom uses a more expansive set of variables than the EFNA index does; thus our results also 

14 For more details on how these variables are measured, see Ashby, Bueno. and McMahon, Economic Freedom of 

North America. 

15 Noel Campbell and Tammy Rodgers, "Economic Freedom and Net Business Formation," CatoJournal27, no. 1 

(2007): 33. 

16 Noel Campbell, Tammy Rodgers, and Kirk Heriot, "The Economic Freedom Index as a Determinant of Firm 

Births and Firm Deaths," Southwest Business and Economics Journal 16 (2007-S): 37--50. 

17 Joshua Hall and Russell Sobel, "Institutions, Entrepreneurship, and Regional Differences in Economic Growth," 

Southern Journal of Entrepreneurship I, no. 1 (2008): 69-96. 

18 Ruger and Sorens, Freedam in the 50 States. 

5 
81 

act as a robustness check on the previous literature. The most important difference between the 

Freedom in the 50 States index and the ENFA index is the sheer number of factors included in 

the former's measure of economic freedom. Ruger and Sorens broke down each factor into fiscal 

policy and regulatory policy. In the area of fiscal policy alone they had 10 variables, while 

regulatory policy contained 38 variables. While, based on their study, we find that overall 

freedom is positively related to entrepreneurship, we also conclude that the relationship is 

primarily driven by the influence of economic freedom, rather than by a strong positive 

relationship between personal freedom and entrepreneurship. However, our results suggest that 

the findings presented in the previous literature on economic freedom and entrepreneurship, most 

notably those of Joshua Hall and Sobel,19 were not strongly influenced by the particular measure 

of economic freedom that was used. 

We proceed as follows: Section 2 describes our data, empirical approach, and some 

additional relevant literature. Section 3 presents a first look at the measures of overall freedom, 

personal freedom, and economic freedom, and how they relate to entrepreneurship. In Section 4 

we present our empirical results, and in Section 5 we conclude. 

2 Data and Empirical Approach 

One ofthe greatest difficulties in empirical research on entrepreneurship is how best to measure 

it. While there are numerous reasons to employ measures such sole-proprietorship growth rates 

and new business starts, in this paper we follow the work of Hall and Sobel and employ the 

KIEA, designed and calculated by economist Robert Fairlie and published annually by the Ewing 

19 Hall and Sobel, "Institutions, Entrepreneurship, and Regional Differences in Economic Growth." 

6 
82 

Marion Kauffman Foundation. 2o The KIEA is an important indicator of new entrepreneurial 

activity at the state level, as it measures new businesses started by current nonbusiness owners. 

That is, it measures the flow of new individuals into entrepreneurship. In addition, it is derived 

from current population surveys, not payroll data. This is important, since many new businesses 

operate without adding employees for some time, and thus their activity is not picked up using 

payroll data.21 

For each state, the KIEA measures the monthly percentage of non-business-owning 

adu Its who have started a business with more than 15 hours worked per week in the following 

month. In 2009, Oklahoma's KIEA score was 0.47, the highest in the US for that year. This seore 

translates to 470 out of every 100,000 adults in Oklahoma starting a new business every month. 

In contrast, Mississippi's score of 0.17 was the lowest in 2009. Montana, Arizona, Texas, and 

Idaho were also among the five states with the highest KIEA scores in 2009, while Nebraska, 

Pennsylvania, Alabama, and Minnesota were among the five states with the lowest scores. While 

the KIEA data goes back as far as 1996, the limited data available on overall freedom confines us 

to explaining the determinants of entrepreneurship in 2007 and 2009. 

In our empirical analysis, we employ three different categories of independent variables 

that may explain state-level entrepreneurship. The first and most important category is associated 

with economic freedom. The variables of interest in this category come from the first and second 

editions of the Freedom in the 50 States index.22 Similar to other measures of economic freedom, 

this index measures freedom from an individual rights perspective. According to the authors, 

"Individuals should be allowed to dispose of their lives, liberties, and properties as they see fit, 

20 Robert Fairlie, Kauffman Index of Entrepreneurial Activity: 1996-2010 (Kansas City, MO: Ewing Marion 

Kauffman Foundation, 2011). 

21 Hall and Sobel, "Institutions, Entrepreneurship, and Regional DifIerences in Economic Grm,th." 

22 Ruger and Sorens, Freedom in the 50 Slates. 

7 
83 

as long as they do not infringe on the rights of others.',23 Recognizing that individual freedom 

extends beyond the economic sphere, the authors constructed an overall measure of freedom that 

is the summation of both personal and economic freedom. They gathered data on dozens of 

variables and calculated a score for each policy variable by measuring how many standard 

deviations above or below the mean each state was for that variable. Thus, when aggregated into 

a summary index, scores have a mean of zero and are generally between plus or minus 0.50. In 

2009, according to this measure, the freest states in terms of overall freedom were New 

Hampshire, South Dakota, Indiana, Idaho, and Missouri. The states with the lowest levels of 

overall freedom were Massachusetts, Hawaii, California, New Jersey, and New York. 

Ruger and Sorens calculated personal freedom using data on topics such as education, 

gun contrnl, marriage and civil union laws, gambling, alcohol regulations, drug laws, etc. The 

exact weighting given to each of these areas varied depending on the number of people affected 

by the infringement, as well as on a subjective determination of its overall salience. While a 

relationship exists between personal freedom and overall freedom-given that personal freedom 

comprises half the weighting of overall freedom-according to their results, the freest states in 

terms of personal freedom were not necessarily the freest overall. For example, Oregon had the 

highest level of personal freedom in 2009, but in terms of overall freedom the state was only 

eighth, as its ranking of twenty-fifth in economic freedom lowered its overall score. 24 

In constructing their economic freedom index and ranking each state, Ruger and Sorens 

first created scores and rankings in two separate areas: fiscal policy and regulatory policy. Fiscal 

policy included data on spending and taxation, while regulatory policy included data on labor 

13 Ruger and Sorcns, Freedom in the 50 States, 5. 

24 Ruger and Sorens, Freedom in the 50 Slates. Readers interested in better understanding tbe data and weighting 

process are encouraged to read Ruger and Sorens's extremely detailed description of how their index is constructed, 

which begins on page 60 of their 2011 report. 

8 
84 

regulation, health insurance regulation, occupational licensing, land use, etc. Both areas were 

weighted equally for calculating the overall econom ic freedom score. According to the results, 

South Dakota was the most economically free state in 2009, with New Hampshire, North 

Dakota, Idaho, and Virginia rounding out the top five. By way of comparison, the EFNA listed 

the most economically free states at the subnationallevel as South Dakota, Delaware, Tennessee, 

and Virginia 25 Remember that part of the reason for employing the Freedom in the 50 States 

index of economic freedom is as a robustness check on the previous literature that exclusively 

employed the EFNA index. 

One drawback to the Freedom in the 50 States index is that it has only been calculated for 

2007 and 2009. This limits our analysis to a pooled data set with two observations for each state. 

We first use the overall freedom index measure in our baseline regressions as our dependent 

variable. We then disaggregate overall freedom into its personal and economic freedom 

components to see whether personal or economic freedom is driving the results. Finally, we take 

an individual look at both fiscal policy and regulatory policy to see which is more important to 

explaining state-level entrepreneurship as measured by the KlEA. 

The two remaining categories of explanatory variables in our analysis are relatively 

straightforward. The first group centers on the overall conditions within a state that may 

influence entrepreneurship. These variables include the unemployment rate, population density, 

percentage of service employment, and data on property and violent crime rates per 100,000 

persons. Our choice of these economic variables is informed by economic theory and previous 

literature. For example, some studies have found that entrepreneurship in certain sectors, such as 

retail and wholesale, is positively related to higher violent crime rates, controlling for other 

25 Ashby, Bueno, and McMahon, Economic Freedom afNorth America. 

9 
85 

factors. 26 There is also a positive relationship between service employment and the growth rate 

of sole proprietorships.27 Other studies have showed that a 10 percent increase in population 

density increased the percentage of people who wanted to become entrepreneurs by I percent. 28 

In densely populated areas, idea and knowledge creation as well as the flow of goods and 

services occurs at a higher rate. The dynamism of more densely populated areas leads to more 

entrepreneurial opportunities being taken by individuals. Finally, a negative relationship between 

self-employment and the unemployment rate has been found across a sample of Organisation for 

Economic Co-operation and Development countries.29 However, there does not appear to be a 

relationship between unemployment rates and the number of new businesses at the state level. 30 

The final category of control variables in our analysis focuses on the characteristics of 

entrepreneurs. These variables include the percentage of the labor force that is male and white, 

the percentage of individuals over the age of25 with a four-year college degree, and the median 

age of a person in the state. These are typical explanatory variables in previous literature.31 For 

example, according to some studies, men are more likely than women to be entrepreneurs. 32 It 

has also been found that a positive relationship exists between self-employment and an 

individual's level ofeducation.33 While in some cases education may enable people to become 

entrepreneurs, as in high-tech start-up firms, in most cases education is negatively related to an 

26 Stuart Rosenthal and Amanda Ross, "Violent Crime, Entrepreneurship, and Cities," Journal of Urban Aconomics 

67, no. I (2011): 135-49. 

27 Kreft and Sobel. "Public Policy. Entrepreneurship, and Economic Freedom." 

28 Yasuhiro Sato. Takatoshi Tabuchi, and Kazuhiro Yamamoto, "Market Size and Entrepreneurship," Journal qf 

Economic Geography (forthcoming). 

29 David Blanchflower, "Self-Employment in 0ECD Countries," Labour Economics 7, no. 5 (2000): 471--505. 

30 Martin Carree, "Does Unemployment Affect the Number of Establishments? A Regional Analysis for U.S. 

States," Regional Studies 36, no. 4 (2002): 389-98. 

" For example, see Kreft and Sobel, "Public Policy, Entrepreneurship, and Economic Freedom," and Hall and 

Sobel, "Institutions, Entrepreneurship, and Regional Differences in Economic Growth." 

n Nan Langowitz and Maria Minniti, "The Entrepreneurial Propensity of Women," Entrepreneurship Theory and 

Practice 31, no. 3 (2007): 341-64. 

33 Stephan Gohmann. "Institutions, Latent Entrepreneurship, and Self.Employment: An International Comparison," 

Entrepreneurship Theory and Practice 36, no. 2 (2012): 295-321. 

10 
86 

individual's willingness to start a new business. While this may seem counterintuitive, formal 

education opens numerous opportunities in pre-existing organizations, thus reducing the 

incentive to invest in a risky start-up business. Table I presents summary statistics for all the 

variables used in our analysis?4 

Table I: Summary Statistics 

Variable Mean StDev Min Max 

Dependent Variable 

Kauffman Index 307.75 85.41 81.66 471.72 

Measures of Freedom 

Overall Freedom 0.00 0.26 -0.75 0.44 

Fiscal Freedom 0.00 0.15 -0.48 0.35 

Regulatory Freedom 0.00 0.10 -0.24 0.16 

Personal Freedom 0.00 0.10 -0.27 0.25 

Economic Freedom 0.00 0.22 -0.57 0.47 

Other Independent Variables 

Percentage Male 0.53 0.01 0.50 0.57 

Median Age 37.75 2.39 28.46 43.40 

Percentage White 0.83 0.13 0.20 0.97 

Population Density 162.11 201.40 l.03 998.45 

Unemployment Rate 6.37 2.59 2.70 13.60 

Percentage Service Employment 0.75 0.05 0.67 0.88 

Percentage with Bachelor's Degree 0.17 0.03 0.10 0.23 

Property Crime Rate 3,052.02 693.22 1,652.30 4,414.00 

Violent Crime Rate 394.75 171.14 118.00 788.30 

l4 Precise definitions of our data, as well as sources, are provided in Appendix table I. 

11 
87 

3 Freedom and Entrepreneurship: A First Look 

Figure I provides some initial evidence in favor of a positive relationship between overall 

freedom, as measured by the Freedom in the 50 States index, and entrepreneurship. The vertical 

axis shows our entrepreneurship variable--a state's KIEA score measured per 100,000 

residents-while the horizontal axis shows the state's overall freedom score. The data in figure I 

includes observations for both 2007 and 2009. While the raw scatter plot does not clearly exhibit 

a positive relationship, a linear trend line reveals a positive relationship between overall freedom 

and the KlEA measure of entrepreneurship. Figures 2 and 3 show a similar relationship for 

personal freedom and economic freedom, respectively. A first look at the data suggests that a 

positive relationship exists between personal freedom and entrepreneurship. However, a more indepth examination is warranted, and is covered in Section 4. 

Figure 1: A First Look at Overall Freedom and Entrepreneurship 

-0.60 -0,20 0.00 0.20 040 0.80 

12 
88 

Figure 2: A First Look at Personal Freedom and Entrepreneurship 

+ •• 

. " 

-030 -020 

+ • ..: ... ' • + 

.: . 

-0.10 000 

Personal Freedom 

010 020 030 

Fignre 3: A First Look at Eeonomic Freedom and Entrepreneurship 

. . 

· • $ 

· . . • \+ . . . .+ 

. 

. • + +. 

. .: 

:: . . · . 

+. . . . .. ~ .. . ... ,+, .. 

I- + 

-080 -060 _040 .020 000 0.20 0,40 0,60 

Economic Freedom 

13 
89 

4 Empirical Results 

We begin our empirical analysis of the effects of overall freedom on entrepreneurial activity by 

estimating the following equation: 

9 , 

KIEA" = IX + 2: PjX /r + yFreedom" + hi + sit j=l 

(1) 

where KIEAIt is an index of entrepreneurial aetivity, Xi, is a veetor of regressors, Freedomil is the 

overall freedom as measured by the Freedom in the 50 States index, hi is the fixed-effect 

estimator, and Sit is the disturbance; the subscripts i = 1, '" , 50 and t = 2007 and 2009 represent 

the states and years, respectively. The regressors Xi, include the other explanatory variables 

previously discussed in Section 2. Thc results of this pooled cross-section are presented in table 

2. 

The first column of table 2 includes only a constant term and overall freedom in order to 

get a sense of the baseline relationship between overall freedom and KIEA. As expected based 

on the scatter plots presented in Section 3, the relationship is positive and it is statistically 

significant. The second column in table 2 introduces the control regressors related to the 

characteristics of potential entrepreneurs: gender, age, race, and education. In this specification, 

the sign on overall freedom is still positive, but is not statistically significant at the 10 percent 

level. Among the personal characteristics of male, median age, percentage white, and bachelor's 

degree, all had the expected signs, but only age is statistically significant at conventional levels. 

Finally, in the third column of table 2 we present our complete specification as discussed 

in equation 1. Here, we introduce the control regressors representing external state-level 

influences on entrepreneurship, including population density, unemployment rate, the size ofthe 

service sector, and violent and property crime rates. The first important thing to note is that 

overall freedom is both positive and statistically significant at the 10 percent level. The 

14 
90 

coefficient of 275 .56 on overall freedom suggests that if a state increases its overall freedom 

score by one standard deviation (0.26) it should experience an increase of approximately 72 

(275.56 x 0.26) new businesses started for every 100,000 non-business owners. That is nearly 85 

percent of one standard deviation in the KIEA index.35 

Table 2: Detenninants of Entrepreneurial Activity (Overall Freedom) 

Dependent Variable: Katiffinan Index of Entrepreneurial Activity 

Variables Modell Model 2 Model 3 

Constant 307.75 *** -596.34 -2,153.63 

(56.55) (0.36) (1.01) 

Overall Freedom 282.72 * 241.73 275.56 * 

(1.77) (1.46) (1.82) 

Percentage Male 1,180.26 2,887.94 

(0.6\) (1.54) 

Median Age 18.83 ** 1.l0 

(2.32) (0.05) 

Percentage White -756.43 -1,294.13 

(0.62) (1.04) 

Percentage with Bachelor's Degree 1,145.74 665.59 

(0.51) (0.31) 

Population Density 9.09 ** 

(2.1l) 

Unemployment Rate 10.72 

(1.11) 

Percentage Service Employment -411.05 

(0.49) 

Violent Crime Rate 0.93 *** 

(2.70) 

Property Crime Rate 0.08 

(1.39) 

J?? Adjusted 6.01% 19.24% 43.19% 

Note: * indicates significance at the 10% level, ** at the 5% level, and *** at the 1% 

level. Absolute t-statistics in parentheses. 

J5 For example, if the state with the lowest entrepreneurship rate in 2009, Montana, increased its economic freedom 

score by one standard deviation, it would increase the number of new businesses started per month by approximately 

70. 

15 
91 

All the other explanatory variables had the expected signs, except for the service sector 

variable, which was expected to be positive based on the previous literature?6 The signs for both 

crime variables are positive, which is also consistent with the literature, and the violent crime 

variable is statistically significant at the 1 percent level. 37 At first glance, this relationship may 

seem puzzling. However, in the face of high violent crime rates that deter potential customers, 

we should expect to see less entry from risk-averse large corporations and more entry from 

mom-and-pop enterprises. With the exception of population density, no other explanatory 

variables are statistically significant. Overall, the model explains 43 percent of the variation in 

KIEA scores across the states. 

In tables 3 and 4, we run the same specifications as in the third column of table 2, with 

one exception. Recall that overall freedom consists of two separate measures: personal freedom 

and economic freedom. While the full specification in table 2 suggests a positive and significant 

relationship between overall freedom and entrepreneurship, that relationship could be largely 

driven by economic freedom. This would not be surprising given the large body of research 

finding such a relationship between economic freedom and entrepreneurship. Therefore, we 

replace overall freedom with personal freedom in table 3, and with economic freedom in Table 4. 

The regressions in these two tables show that the relationship between overall freedom and 

entrepreneurship observed in table 2 is likely driven by economic freedom. While the coefficient 

on personal freedom is positive, it is not statistically significant, and the economic magnitude is 

relatively small. However, the coefficient on economic freedom from the third column of table 4 

is positive and statistically significant at the 5 percent level. Following from this coefficient of 

482.99, a state that increases its economic freedom score by one standard deviation (0.22) could 

36 See, for example, Kreft and Sobel, "Public Policy. Entrepreneurship, and Economic Freedom." 

37 Rosenthal and Ross, "Violent Crime, Entrepreneurship, and Cities." 

16 
92 

expect an increase of 106 per month in the number of new businesses started per 100,000 

persons (482.99 x 0.22). That is more than a one standard deviation increase in KIEA scores 

across our sample. 

Table 3: Determinants of Entrepreneurial Aetivity (Personal Freedom) 

Dependent Variable: KGlifftnan Index of Entrepreneurial Activity 

Variables Modell Model 2 Model 3 

Constant 307.75 *** -743.23 -2,634.10 

(55.46) (0.45) (1.20) 

Personal Freedom 297.48 338.34 95.83 

(1.07) (1.21) (0.34) 

Percentage Male 1,412.70 3,534.92 * 

(0.74) (1.78) 

Median Age 22.00 *** 9.68 

(2.77) (0.42) 

Percentage White -685.33 -1,137.59 

(0.56) (0.88) 

Percentage with Bachelor's 240.95 -89.48 Degree 

(0.45) (0.04) 

Population Density 7.81 * 

(1.76) 

Unemployment Rate 9.20 

(0.91) 

Percentage Service 

Employment -332.98 

(0.38) 

Violent Crime Rate 0.94 

(2.55) ** 

Property Crime Rate 0.07 

(1.16) 

Ii' Adjusted 2.28% 18.07% 38.68% 

Note: * indicates significance at the 10% level, ** at the 5% level, and *** at the 

1 % level. Absolute t-statistics in parentheses. 

While not exhaustive, these results suggest that more personal freedom is not related to 

entrepreneurship as measured by the KIEA. This should not be taken to suggest that the 

17 
93 

individual rights embodied in this measure of personal freedom are not important. Rather, it is 

just a confirmation that personal freedom is not directly related to entrepreneurship. 

Table 4: Determinants of Entrepreneurial Activity (Economic Freedom) 

Dependent Variable: Ka:uffinan Index <:1 Entrepreneurial Activity 

Variables Modell Model 2 Model 3 

Constant 307.75 *** -986.89 -2,029.28 

(55.93) (0.61) (0.98) 

Economic Freedom 286.56 199.01 482.99 *. 

(1.41) (0.93) (2.32) 

Percentage Male 1,706.72 3,297.56 * 

(0.90) (1.85) 

Median Age 19.01 ** -12.52 

(2.25) (0.55) 

Percentage White -634.84 -1,417.70 

(0.51) (1.16) 

Percentage with Bachelor's 1,163.76 1,311.31 Degree 

(0.49) (0.61) 

Population Density -986.89 10.62 ** 

(0.61) (2.46) 

Unemployment Rate 14.46 

(1.51) 

Percentage Service 

Employment --688.64 

(0.83) 

Violent Crime Rate 1.06 **' 

(3.15) 

Property Crime Rate 0.10 

(1.67) 

If Adjusted 3.90% 17.00% 45.80% 

Note: • indicates significance at the 10% level, *. at the 5% level, and *.* at the 

1 % level. Absolute t-statistics in parentheses. 

The finding that personal freedom is not directly related to entrepreneurship is somewhat 

surprising given that at least some research has shown that educational choice-a type of 

18 
94 

personal freedom-is positively related to youth entrepreneurship.38 However, at the same time 

these results are in agreement with the previous literature on the positive relationship between 

economic freedom and entrepreneurial activity. This is important to note, as our findings are the 

first to employ the Freedom in the 50 States measure of economic freedom. 

Finally, in table 5 we again ran the full specifications from the third column of table 2. 

However, this time we split economic freedom into its two component parts: fiscal policy and 

regulatory policy. 

Table 5: Detenninants of Entrepreneurial Activity (Fiscal and Regulatory) 

Dependent Variable: Kauffman Index of Entreprenewial Aetivity 

Variables Fiscal 

Constant -2,397.38 -2,361.02 

(1.16) (1.08) 

Measure of Freedom 583.12 *. 379.29 

(2.19) (0.98) 

Percentage Male 3,994.51 ** 3,230.53 

(2.23) (1.67) 

Median Age -11.55 4.61 

(0.50) (0.20) 

Percentage White -1,063.06 -1,407.19 

(0.87) (1.08) 

Percentage with Bachelor's Degree 1,714.90 -147.51 

(0.77) (0.07) 

Population Density 8.80 ** 9.49 ** 

(2.09) (2.04) 

Unemployment Rate 13.33 11.16 

(1.39) ( 1.12) 

Percentage Service Employment -741.03 -391.01 

(0.88) (0.45) 

Violent Crime Rate 0.90 .* 1.09 ••• 

(2.67) (2.94) 

Property Crime Rate 0.10 0.08 

(1.66) (1.25) 

Ii:' Adjusted 45.08% 39.95% 

Note: * indicates significance at the 10% level, ** at the 5% level, and •• * at the 1% 

level. Absolute t-statistics in parentheses. 

38 Russell Sobel and Kerry King, "Does School Choice Increase the Rate of Youth Entrepreneurship?" EConomics of 

Education Review 27, no. 4 (2008): 429-38. 

19 
95 

One advantage of the Freedom in the 50 States measure of economic freedom is that 

because it focuses solely on the United States, its formulators are able to incorporate measures of 

regulation into their definition of economic freedom. Regulatory policy comprises 50 percent of 

their economic freedom measure. This should allow researchers to better study the impact of 

regulatory policy on entrepreneurship, building off work done at the intemationaileveL39 

The regressions in table 5 point to fiscal policy being most important to entrepreneurship, 

with the coefficient on fiscal policy both positive and statistically significant at the 5 percent 

level. While regulatory policy (more regulatory freedom) is positively related to KfEA scores, it 

is not statistically significant. Given the large number of regulatory policies included in the 

regulatory policy index, it is possible that regulations in some areas are more relevant to 

entrepreneurship than others, which would be a great exercise for future scholars. 

5 Conclusion 

Entrepreneurship is important for at least two reasons. At the individual level, the opportunity to 

pursue one's dreams has value, regardless of how others in the marketplace might value what is 

produced. In the aggregate, entrepreneurship is valuable because it leads to economic growth and 

progress. 40 Over the past decade, a large body of empirical research has confirmed this 

relationship.41 Previous findings have given researchers a better understanding ofthe 

determinants of entrepreneurship. Many have identified !""Conomic freedom as an important factor 

39 For example. see Leora Klapper, Luc Laeven, and Raghuram Rajan, "Entry Regulation as a Barrier to 

Entrepreneurship," Journal of Financial Economics 82, no. 3 (2006): 591-629. 

40 See Holcombe. Entrepreneurship and Economic Progress, and David Audretsch, Max Keilbach, and Erik 

Lehmann, Entrepreneurship and Economic Growth (New York: Oxford University Press, 2006). 

41 See Donald Bruce, John Deskins, Brian Hill, and Jonathan Rork, "Small Business Activity and State Economic 

Growth: Does Size Matter?" Regional Studies 43, no. 2 (2009): 229-45; and Daniel Berkowitz and David Dejong, 

"Entrepreneurship and Post-Socialist Growth," Oxford Bulletin of Economics and Statistics 67. no. I (2005): 25-46. 

20 
96 

in creating the conditions under which positive-sum entrepreneurship can occur.42 In this paper 

we extended the findings of previous literature to look at freedom more broadly, using a new 

index of freedom at the US state level. 43 While we find that the overall measure of freedom is 

positively related to entrepreneurship as measured by the KIEA, disaggregation of overall 

freedom into both personal and economic freedom shows that economic freedom is driving the 

relationship. Controlling for other relevant tlu.;tors, we found that an increase of one standard 

deviation in economic freedom is associated with an increase of ovcr one standard deviation in 

entrepreneurship. To put it simply, if the average state increased its economic freedom score by 

0.22 points this would translate to 106 additional new businesses started per month. For a state 

such as Ohio, with an economic freedom score of -0.11 in 2009, an increase in its economic 

freedom score to 0.11 would likely increase the number of new businesses started per month 

from 270 to over 370! This finding confirms and supports the previous literature showing a 

positive relationship between economic freedom and entrepreneurship. 

However, perhaps even more important is that fact that our findings are the first to show 

that the Freedom in the 50 States measure of economic freedom leads to results consistent with 

those of previous economic freedom literature, which used the EFNA index. Given the 

differences in methodology and coverage, this finding is important because it creates the 

opportunity for more research in the area of regulatory policy. In addition, interested researchers 

will benefit from having access to a different measure of economic freedom for robustness 

checks and to ensure proper coverage. 

42 Hall and Sobel, "Institutions, Entrepreneurship, and Regional Differences in Economic Growth." 

43 Ruger and Sorens, Freedom in the 50 Stales. 

21 
97 

Variable 

Kauffman Index 

Overall Freedom 

Fiscal Freedom 

Regulatory Freedom 

Personal Freedom 

Economic Freedom 

Percentage Male 

Median Age 

Percentage White 

Population Density 

Unemployment Rate 

Percentage Service 

Employment 

Percentage with Bachelor's 

Degree 

Property Crime Rate 

Violent Crime Rate 

Appendix Table 1: Data Descriptions 

Definition 

Number of entrepreneurs per 

100,000 people 

Overall Freedom Index Score 

Fiscal Freedom Index Score 

Regulatory Freedom Index 

Score 

Personal Freedom Index Score 

Economic Freedom Index 

Score 

Percentage of the labor force 

that is male 

Median age of the total 

population 

Percentage ofthe labor force 

that is white 

Persons per square mile of land 

area 

Percentage of the labor force 

that is unemployed 

Percentage of the labor force 

that is employed in the service 

sector 

Percentage of the population 

over 25 that has at least a 

bachelor's degree 

Number of property crimes per 

100,000 people 

Number of violent crimes per 

100,000 people 

Source 

Kauffinan Index of Entrepreneurial 

Activity 

Freedom in the 50 States: Index of 

Personal and Economic Freedom 

Freedom in the 50 States: Index of 

Personal and Economic Freedom 

Freedom in the 50 States: Index of 

Personal and Economic Freedom 

Freedom in the 50 States: Index of 

Personal and Economic Freedom 

Freedom in the 50 States: Index of 

Personal and Economic Freedom 

Bureau of Labor Statistics, 

www.data.bls.gov 

US Census Bureau, www.census.gov 

Bureau of Labor Statistics, 

www.b/s.govlgpsl 

US Census Bureau, www.census.gov 

Bureau of Labor Statistics, 

www.data.bls.gov 

Bureau of Labor Statistics, 

www.bls.govlgpsl 

US Census Bureau, 

www.census.govlcompendialstatabl 

Federal Bureau of Investigation, 

Uniform Crime Reports, 

www.jbi.govlabout-uslcjislucrlucr 

Federal Bureau ofInvestigation, 

Uniform Crime Reports, 

www.{bi.govlabout-uslcjislucrlucr 

Note: All data at the state level is for the years 2007 and 2009, except for percentage with bachelor's 

degree, which is for the years 2007 and 2008. 

22 
98 

ELSEVIER 

Abstract 

Available online at www.sciencedirectcom 

--" ".;" Science Direct 

Journal of Business Venturing 23 (2008) 641 ~655 

Testing Baumol: Institutional quality and the 

productivity of entrepreneurship * 

Russell S, Sobel * 

James Clark Co.Dman DisJinguished Chair in Entrepreneurial Studies, 

Department of Economics and Entrepreneurship Center. 

West Virginia University, P'Q. Box 6015, Morgantown, WV 26506-6025, United States 

Baumol's [Baumol, W,J., 1990, Entrepreneurship: productive, unproductive and destructive, Journal of Political Economy 98 (5), 

893-921] theory of productive and unproductive entrepreneurship is a significant recent contribution to the economics of 

entrepreneurship literature. He hypothesizes that entrepreneurial individuals channel their effort in different directions depending on 

the quality of prevailing economic, political. and legal institutions. This institutional structure determines the relative reward to 

investing entrepreneurial energies into productive market activities versus unproductive political and legal activities (e.g .• lobbying 

and lawsuits). Good institutions channel effort into productive entrepreneurship. sustaining higher rates of economic growth. I test and 

confirm Baumol's theory. and discuss its significance to the literature, economic prosperity. and policy reform. 

© 2008 Elsevier inc. All rights reserved. 

Keywords: Entrepreneurship; Institutional quality; Economic freedom; Economic growth 

1, Executive summary 

One of the major recent contributions to the eeonomics of entrepreneurship literature is William Baumol's theory of 

productive and unproductive entrepreneurship, Baumol theorizes that entrepreneurial individuals have a choice to 

devote their labor effort toward either private-sector wealth creation, or toward securing wealth redistribution through 

the political and legal processes (e,g" lohhying and lawsuits), This decision is influenced by the corresponding rates of 

return-or profit rates-to the activities, which in tum is shaped by the quality of existing political and legal institutions, 

When institutions provide for secure property rights, a fair and balanced judicial system, contract enforcement, and 

effective constitutional limits on government's ability to transfer wealth through taxation and regulation, it reduces the 

profitability of unproductive political and legal entrepreneurship_ Under this incentive structure, creative individuals 

are more likely to engage in the creation of new wealth through productive market entrepreneurship, Thus, differences 

n f am grateful to three anonymous referees, special issue editor Maria Minniti, and Peter Leeson for helpful comments and suggestions. r would 

like to thank Joshua Hall and Andrea Dean for their excellent research assistance. 

* Tel.: +1 304 2937864. 

E~mail address: Russe1!.Sobei@maiLwvu.edu. 

0883~9026/$ ~ see front matter © 2008 Elsevier Inc. All rights reserved. 

doi: 1 O.! 016/jjbusvent.2008.0 I.OO4 
99 

642 R.S, Sobel I Journal of Business Venturiltg 23 (2008) 64/-655 

in measured rates of p,ivate sector entrepreneurship are partially due to the different directions entrepreneurial energies 

are channeled by prevailing economic and political institutions, throngh the rewards and incentive strnctures they 

create for entrepreneurial individuals. 

This paper examines the relationship between measures of the quality of state political and legal institutions and 

measures of both productive and unproductive entrepreneurship. I find that better institutional strnctures produce 

higher venture capital investments per capita. a higher rate of patents per capita, a faster rate of sole proprietorship 

growth, and a higher establishment birth rate. The results also show that those states with the worst institutions have the 

worst records on total lobbying activity and legal quality/lawsuit abuse--the unproductive types of entrepreneurship. 

This paper constrnets a state index and ranking of 'net entrepreneurial productivity' in which productive entrepreneurship is measured relative to unproductive polltical and legal entrepreneurship. The relationship between having 

good institutions and the index of net entrepreneurial productivity across states is highly significant. The index nf net 

entrepreneurial productivity also helps to explain differences in the levels of economic prosperity across states. 

This paper not only provides the first empirical evidence in support of Baumors theoretical contribution, but also 

examines the effects of unproductive entrepreneurship on state economic prosperity. The paper concludes with a set of 

recommended policy reforms that would help to improve the quality of institutions and create higher levels of productive 

private sector entrepreneurship. 

2. Introduction 

For almost three hundred years, economists have been making contributions to the academic literature on 

entrepreneurship. Among thc mnst significant historical contributions were those of Cantillon, Say, Mill, Knight, 

Schumpeter, and Kirzner, who advanced our understanding of the entrepreneur's role in the economy. One recent 

contribution that might someday make this list comes from economist William Baumol, who first publiShed his thcory 

of 'productive and unproductive entrepreneurship' in 1990. His contribution is significant hecause it fundamentally 

shifts the fOCllS of academic inquiry toward the role of institutions in affecting entrepreneurship. 1 

Baumol's theory is founded on the idea that entrepreneurs exploit profit opportunities not only within private markets 

but also within the political and legal arenas. Thus, differences in measurod mtes of private sector entrepreneurship are 

partially due to the different directions entrepreneurial energies are ehanneled by prevailing economic and political 

institutions, through the rewards and incentive strnctures they create for entrepreneurial individuals. 

In areas with institutions providing secure property rights, a fair and balanced judicial system, contract enforcement, 

and effective limits on government's ahility to transfer wealth throogh taxation and regulation, creative individuals are 

more likely to engage in productive market entrepreneurship---activities that create wealth (e.g., product innovation). In 

areas without strong institutions, these same individuals are instead more likely to engage in attempts to manipulate the 

political or legal process to capture transfers of existing wealth through unproductive political and legal entrepreneurship---

activities that destroy wealth (e.g., lobbying and lawsuits). This reallocation of effort oeeurs because the institutional 

strncture largely determines the relative personal and financial rewards to investing entrepreneurial energies into 

productive market activities versus investing those same energies instead into unproductive political and legal activities.2 

In this paper I attempt to provide the first complete empirical test of Baumol's theory, examining the impact of 

institutional quality on both the levels of productive and unproductive entrepreneurship. My results confirm Baumol's 

conjecture that areas with better institutions have both more productive entrepreneurship, and also less unproductive 

entrepreneurship. A trndeoff clearly exists between the levels of these two activities in an economy. The policy 

implications of Baumol's theory are clear; rather than focusing on expanding goveroment programs like subsidized 

loans, workforee education, or programs ilimed at increasing 'entrepreneurial inputs' as a way to foster produetive 

entrepreneurship, the better path is through institutional reform that constrains or minimizes government's role, 

lowering thc feturn to unproductive types of entrepreneurship. Government programs too often encourage entrepreneurial individuals to devote effort toward figuring ant how to obtain the transfers or subsidies, rather than devoting 

those efforts toward satisfYing consumers and creating wealth. 

1 The idea that free-market institutions, such as secure private property rights, are vital to economic growth was also stressed in the works of Peter 

Bauer, sec Dom (2002) for a good discussion of Bauer's contributions in this area, 

2 For example. a steel entrepreneur might react to competition by trying either to find a better way of producing steel (productive 

entrepreneurship), or by lobbying for subsidies, tariff protection., or filing legal anti-trust actiqns (unproductive entrepreneurship). 
100 

R.S. Sobel! Journal of Business Venturing 23 (2008) 641,-655 643 

This paper continues by first reviewing ecouomists' contributions to our understanding of entrepreneurship, from 

CantiUon through Baumo!. A framework is then presented to highlight the difference between academic inquiries into 

the role of entrepreneurial iuputs versus the role of institutions. Measures of unproductive and productive entrepreneurship, as well as of institutional quality, are discussed and analyzed to see if the predictions ofBaumo!'s theory 

hold. 

3. Economists' contributions to entrepreneurship 

In 1730, economist Richard Cantillon identified the willingness to bear the personal financial risk of a business 

venture as the defining characteristic of an entrepreneur.) In the early 1800s, economists Jean Baptiste Say and John 

Stuart Mill further popularized the academic usage oflhe word 'entreprenenr.' Say stressed the role nfthe entrepreneur 

in creating value by moving resources out ofless productive areas and into more productive ones. Mill used the term 

'entrepreneur' in his popular 1848 book, Principles of Political Economy, to refer to a person who assumes both the 

risk and management of a business. In this manner, Mill provided a clearer distinction than Cantillon between an 

entrepreneur and other business owners (such as shareholders ofa corporation) who assume financial risk, but do not 

actively participate in the day-to-day operations of the firm. 

Building on Cantillon and Mill, economist Frank Knight emphasized that entrepreneurs deal witb uncertainty about 

the future, not with risk. Probabilities can be estimated for risky activities and thus are insurable. Entrepreneurs, 

however, are dealing with uncertainty about the profitability of their new combinations of resources. Since entrepreneurs cannot insure against the probability that new goods and services will fail, entrepreneurs bear the burden of the 

uncertainly associated with the market process. 

Two other economists, Joseph Schumpeter and Israel Kirzner, also greatly advanced our understanding of the role of 

the entrepreneur. Schumpeter ([1911] 1934, 1942) stressed the role of the entrepreneur as an innovator. To Schumpeter, 

an entrepreneur is someone who finds new combinations of resources and creates products that did not previously exist. 

From a Schurapeterian view, the entrepreneur is a disruptive force ia an economy because the introduction of these new 

combinations leads to the obsolescence of others. The introduction of the compact disc, and the corresponding 

disappearance of the vinyl record, is just one of many examples of this process Schurapetertermed 'creative destruction. ' 

Cars, electricity, aircraft, and personal computers are others. Schumpeter viewed this disruptive force as the source of 

true economic progress. In addition to stressing the disruptive role of entrepreneurs, Schumpeter differentiated between 

innovators and creditors. Innovators serve the creative function while creditors serve the financing function. True 

entrepreneurship is the creative, or innovative aspect of business formation-not the financing component. 

Kirzner's (1973, 1997) view of entrepreneurship smads in some contrast to Schumpeter's. Instead offocusing on the 

disequilibrating role of the entrepreneur, Kirzner views entrepreneurship as an equilibrating force in which entrepreneurs discover previously unnoticed profit opportanities and act on them, bringing market, toward their zero 

economic profit, long-run equilibria Thus Kirzner's 'arbitraging' entrepreneur initiates a change that moves a market 

toward equilibrium, rather than disrupting an existing equilibrium as does Schumpeter's entrepreneur. Holcombe 

(1998) attempts to bring together the Schumpeterian and Kirzuerian views by explaining that a Schumpeterian 

innovation (such as, say, the introduction of the automobile) creates multitudes of new profit opportanities (in area' like 

auto accessories and fuel delivery) that are there to be exploited by Kirznerian entrepreneurs. 

Perhaps the most significant theoretical contribution to our understanding of entrepreneurship since the time of 

Kirzner is Baumol's theory of productive and unproductive entrepreneurship. First published in his 1990 article, this 

theory has been further elaborated in Baumol (1990, 1993,2002), Boettke (2001), Boettke and Coyne (2003), Coyne 

and Leeson '(2004), Kreft and Sobel (2005), and Ovaska and Sobel (2005). Baumol conjectures that entrepreneurship is 

an omnipresent reamre of human nature, and what differs across areas is not the degree of underlying entrepreneurial 

spirit, but instead how that spirit is channeled. In the political and legal arenas, just like in the market sector, there are 

both Schumpeterian 'innovation' and Kirznerian 'arbitrage' opportunities that can and do generate profit for entrepreneurial individuals. 

These entrepreneurial individuals have a choice to devote their labor efforta toward either private sector wealth 

creation, or toward securing wealth redistribution through the political and legal processes. This decision is influenced 

by the corresponding rates of return to the two activities. Institutions providing secure property rights, a fair and 

J For additional discussion and references on this historical material see Sobel (2008). 
101 

644 R.S. Sobel/Journal a/Business Venturing 23 (2008) 641-655 

{

Examples: 

E • I :Jt Venture Capital Availability conomfC npu S Skilled labor Force 

Technology & Infrastructure 

Resource Availability 

{

Examples: 

Tax Policy 

Business Regulations 

Fair and Balanced legal/Judicial System 

Economie Freedom I Secure Property Rights 

Ent~:::~~ial Patents Jssued 

Ne~::::: formation 

'-_______ .-/ New Goods and SelV;ees 

Fig. 1. The entrepreneurial process. 

balanced judicial system, contract enforcement, and effective limits on government's ability to transfer wealth through 

taxation and regulation, have a lower return to unproductive political entrepreneurship. Under this incentive structure, 

creative individuals are more likely to engagc in thc creation nf new wealth through productive market entrepreneurship. In areas without good institutions, the rate of return to unproductive entrepreneurship is higher and creative 

individnals engage in attempts to capture transfers of existing wealth through unproductive political entrepreneurship--

such as lobbying and lawsuits. 

Baumol's theory may be viewed as a one period model of an individual entreprenenr's utility maximization over a 

private consumption good c, with a normalized price of $1. Income, 1'; is entirely spent on consumption, so c= Y. The 

individual maximizes utility subject to a normalized labor allocation constraint in which the sbare of entrepreneurial 

effort devoted to productive entrepreneurship, cp, pIns the share devoted to unproductive entrepreneurship, e", equals 

one,. or ep+eu= 1. Finally, the budget constraint~ in tenus of the returns to productive entrepreneurial activity, rp, and 

unproductive entrepreneurial activity~ ru. is Y=eprp +euru' 

Optimization produces the familiar result that the individual will allocate his or her effort so as to equate the 

marginal return per hour worked across the two activities. In a world ofheterogenenus agents, comparative advantages 

will dictate that some individuals will arrive at comer solutions in which they are either full time political entrepreneurs 

(i.e., lobbyists) or full time private entrepreneurs. 

The economy's "net entrepreneurial productivity' (NEP) is given by: NEP=ep-eu . The economy's net entrepreneurial productivity (NEP) is a function of returos to the two activities, so NEP=!(rp, ru)' Net entrepreneurial 

productivity rises as either the reward to productive entrepreneurship rises [i.e., 8NEPlorp>O), or as the return to 

unproductive entrepreneurship falls [i.e., 8NEP I oru <OJ. We will return to this theoretical model later to derive the 

empirical measures employed in this study. 

Baumol's theory is important because it fundamentally redirects the academic focus of policy-relevant questions 

about how best to foster entrepreneurship and economic growth. This can more clearly be understood by considering 

Fig. 1. 

Fig. I illustrates the process by which entrepreneurial outcomes are generated. Economic inputs, such as venture 

capital and resouree availability, are converted into entrepreneurial outcomes like new businesses created or patents 

issued. However, the quantity of entrepreneurial outcomes generated from a given amount of economic inputs depends 
102 

R.s. Sobel! Journal q{ Business Venturing 23 (2008) 641-655 645 

primarily on the institutions, or 'nlles of the game,' under which entrepreneurs operate. Prior to Baumol, most 

economists and policy makers focused only on the relationship betwe\Jn entrepreneurial inputs and entrepreneurial 

outcomes, essentially assuming away the rules of the game from the analysis. Baumol's theory also considers the 

institutional context, and rules of the game, under which entrepreneurs operate. 

His theory also helps to explain why so many government programs aimed at subsidizing entrepreneurial inputs, 

such as government loan and education programs, have shown little success in actually promoting entrepreneurship. 

Increasing inputs has little impact on outcomes when the rules of the game are poor. Baumol's theory suggests that the 

policy focus should, instead, be on how to improve the quality of institutions to get the largest productive entrepreneurial output out of an economy's entrepreneurial inputs. 

4. Entreprenenrship, instilntions, and economic growth 

Productive entrepreneurship is important to an economy because it is the fundamental source of economic growth 

and wealth creation. Reynolds et al. (1999), for example, show that one-third of the differences in national economic 

growth rates can be attributed to differences in entrepreneurial activity. Zacharakis et a1. (2000) study sixteen developed 

economies and find that entrepreneurial activity explains approximately one-half of the differences in GDP growth 

between countries. More recently, Henderson (2002) shows that entrepreneurs significantly impact economic activity 

at a more locallevcl through fostering localized job creation, increasing wealth and local incomes, and connecting local 

economies to the larger, global economy. The research seems to conclude that productive entrepreneurial activity is the 

primary source of economic growth. 

Yet there exists an entirely different and unrelated strand of economic literatnre attempting to explain economic 

growth differentials by differences in the quality of institutions. This literatnre has arisen in large part due to the 

pUblication of the Economic Freedom of the World index by economists James Gwartney and Robert Lawson (2005, 

first published in 1996). This index is updated annually, and has now been used in hundreds of studies published in 

academic journals and hooks. Because state and local policies also impact the degree of 'economic freedom', authors 

Amela Karabegovic and Fred McMahon released their Economic Freedom of North America ranking individual U. S. 

states and Canadian provinces with respect to each other in terms of their institutional quality. 

Generally these indices attempt to condense into a single number the degree of' economic freedom' indi viduals have 

in a geographic area. Thc index measures institutional quality specifically with respect to the extent of capitalism and 

limited government on a scale from zero to ten. Zero means that a state is completely economically unfree. Ten means it 

is completely free, or has the best institutions. Three subcomponents compose this index: (I) the size of government, 

which considers measures of government spending and ownership as a percent of the state economy, (2) takings and 

discriminatory taxation, which measures how well government protects private property rights and the presence oflow 

tax rates that allow owners to keep residual income, (3) labor market freedom, which covers government regulation and 

control of lahor markets including measures of state minimum wages and govemment employment.4 In sum, these 

measures provide a broad index of the extent to which states adopt policies consistent with the ones that best discourage 

unproductive political entrepreneurship. Studies using these indices such as Farr et a1. (1998), Gwartney et a1. (1999), 

Cole (2003), and Powell (2003) have consistently shown that countries with higher economic freedom scores not only 

have larger per capita incomes, but also tend to have higher rates of economic growth. 

Baumol's theory provides a way to make sense of, or synthesize, these two seemingly separate 'fundamental' 

explanations for economic growth. The index of economic freedom measures precisely those institutional structures 

that should lowcr the return to unproductive entrepreneurship, promoting productive entrepreneurship over unproductive entrepreneurship. Thus, underlying economic freedoms generate economic growth because they more heavily 

promote productive entrepreneurial activity, which is the source of economic growth. Both sets ofliteratnre are indeed 

correct, economic freedom and entrepreneurship are hoth highly correlated with economic growth. It is the institutional 

structnre as measured by economic freedom, however, thai promotes productive, wealth-generating entrepreneurial 

activity which is the source of economic growth. 

It is worthwhile to make a distinction between the total supply of entrepreneurs and the allocation of entrepreneurs 

between productive and unproductive activities. Within a specific geographic area, from year to year, changes in total 

4 A list of the specific subcomponents of each of these areas can be found in Karabegovic and McMahon (2005), which is available online at: 

http://www,freetheworld.comJ. 
103 

646 R.S Sobel! Journal of Business Venturing 23 (2008) 641·.(j55 

productive entrepreneurship, Baumol argues, are largely caused hy changes in institutional structures, rather than 

changes in the population's underlying propensity to be entrepreneurial. When comparing different geographic areas, 

however, there are other factors that may inflnence the total supply of entrepreneurs. This is why in the suhsequent 

empirical work other control variables are included, and is also why the main test is performed using a newly created 

index that measures these two activities as relative proportions. 

To appreciate Baumol's contribution to economic growth theory requires understanding the difference between 

positive-sum, zero-sum, and negative-sum economic activities. Activities are positive-sum when net gains are created. 

Private market activities are positive-sum because both parties gain in voluntalY transactions. Government actions that 

transfer wealth, regulate, subsidize, or protect industty from competition are instead zero-sum. One party's gain (e.g., 

the subsidy) is offset ex:actly by another party's loss (e.g., the taxes). However, the fact that it requires an investment of 

resources into lobbying to secure the zero-sum transfer means that tbe overall impact on the economy is negative-sum. 

Magnil'ying this is the fuct that others will devote resources to political lobbying on the other, defensive, side as well. 

The resources devoted toward securing (and fighting against) zero-sum political transfers have an opportunity cost-in 

essence we have more lobbying firms and fewer DVD manufacturers.5 Unproductive entrepreneurship is unproductive 

precisely because it uses up resources in the process of capturing zero-sum tnmsfers, and these resources had 

alternative, productive uses. 

The remainder of this paper is devoted toward using different measures of both productive and unproductive 

entrepreneurship and seeing whether they indeed relate, as Baumo]'s theory would predict, to the level of institutional 

quality as measured by the index of economic freedom. 

5. Institutional quality and the levels of productive and unproductive eutrepreneurship 

One of the issues to overcome in testing Baumo]'s theory is that all three of the required variables are truly 

unobserved. This necessitates the use of proxies or indices, and my hope is to present enough alternatives to show that 

the results are not sensitive to any single measure. I ex:amine cross-sectional data from the continental 48 U.S. States. 

Measures, particularly those of the unproductive entrepreneurship, simply are not consistently available internationally 

to examine this part of the hypothesis using international data. 

As measures of productive entrepreneurship I use venture capital investments per capita, patents per capita, the 

growth rate of self-employment activity, the establishment birth rate (all new firms), and the large-establishment birth 

rate (new firms with 500 or more employees). All variables, their precise definitions, years, sourees, and descriptive 

statistics are provided in Appendix A. In each case a multi-year average (generally centered around the year 2000) is 

used to lessen the potential that a particularly goed or bad single year is used. These measures artempt to span the 

spectrum of what could be considered productive entrepreneurship, from small lifestyle entrepreneurs to gazelle firms, 

and within-firm innovation. 

For measures ofunproduetive entrepreneurship, I use three measures developed in Sobel and Garrett (2002) of the 

munber of political and lobbying organizations in each state's capital. In addition, a measure of unproductive 

entrepreneurship through legal ehannelsllawsuits is examined. This measure is derived from the well-regarded 'Harris 

Poll' index: of legal and liability system quality and fairness. 6 States scoring poorly on this index generally have 

significant legal fraud and abuse, particularly in the areas of class-action, medieal malpractice, and workers 

compensation lawsuits.? Because this index measures judicial quality, I invert the index score to arrive at the measure 

of unpreductive legal entrepreneurship· 

5 This notion is the seminal insight of political economist Gordon Tullock in his theoty of rent seeking published in lQ67 (Tullock, 1967). For 

additional infurmation and background on the economic IitCr'dture on rent seeking see Tollison (1982) and McChesney (1987). 

6 This index, a cooperative effort of the Institute for Legal Refonn, the Harris Poll, and the U.S. Chamber of Commerce ranks the 50 states based 

on how fair their court systems are perceived to be. particularly with regard to liability system abuse. The study is based on a survey of over 1400 

practicing attorneys and general counsels who answered a comprehensive battery of questions. 

7 Many of these poorly-scoring states are that way because of their unusual method of electing state supreme court judges by partisan elections 

(see Sobel and Hall, 2007). Candidates for the court in these few states often run on clearly biased political platforms, for example Democrat<; 

promising voters they will use their position to side with workers over large corporate businesses in rulings. 

8 The scale of the index is Oto 100, so it is inverted by subtracting it from 100 to arrive at the new score (e.g., so a 25 becomes a 75, a 99 becomes 

a 1, etc.). 
104 

R.S. Sobel / .Journal ~r Business Venturing 23 (2008) 64/-655 647 

Table 1 

Institutional quality and productive entrepreneursbip: regression results 

Dependent variable 

Independent Venture capital investment Patent/{ per capita ship Total establishment Large finn estabUshment 

variable birth rate birth ratc 

Constant - 836.182 (1.124) -64.462 (0382) 86.924 (1.327) 64.003*" (2.782) 46.180*** (3.076) 

Institutional 32.127** (2.041) 8.178** (2.348) 4.206" (2.999) 0.838* (1.823) 0.873**' (2.717) 

quality 

Median age -1.251 (0.298) -0.398 (0.425) -0.266 (0.712) -0.320 (2.653) -0.146' (1.713) 

Population -0.0125 (0.308) 0.0201" (2.268) -0.0003 (0.089) 0.0012 (0.998) 0.0030*** (3.68S) 

density 

Percent college 11.908'" (6.024) 1.246'" (2.896) -0.252 (1.443) 0.009 (0.145) 0.042 (1.048) 

degree 

Percent male 8.836 (0.621) 0.222 (0.069) -1.741 (1.376) -0.928" (2.079) -0.736 (2.538) 

Observations 48 48 48 48 48 

R-squared 0.875 0.659 0.347 0.504 0.571 

Notes: Absolute [.Statistics in parentheses; asterisks indicate significance as follows: *** = 1 %, ** "" 50/0, * "" I 0%. All regressions were checked to 

ensure outliers were not driving the results, and that there were no problems with multicolHnearity. In the regressions in 'Which there were statistically 

Slb'llificant outliers, robust regression techniques were t.'lDpioyed to obtain unbiased coefficient estimates. I follow Bamett and Lewis (1995) outlier 

identitication techniques using both the Tn and Dixon's Q test statistics. Statistical significance was found in three of the regressions in Tabfe 1 and 

none of the regressi04ns in Table 2. Rather than excluding these observatioft.<;, they arc 'dummied ouf in the list of independent variables for that 

equation only. They were all fuirly obvious cases: CA (Silicon Valley) and MA (Boston), the two major 'home' VC markets, in the venture capital 

equation; CA (Silicon Valley) and ID (Boise, home of DRAM patent giant Micron Technology) in the patent equation; and the two least populated 

ruml states, MT and WV. in the total establishment birth rate equation (likely a relic introduced through including the population density variable). 

The corresponding coefficients Oil these d\uumy variables (and absolute Matios) were respectively: 382.9 (7.935), 426.8 (8.347), 18.07 (1.694), 

55.08 (5.115), 2.lQ (1.875), and 1.62 (l. 126). tn each of these three cases, effectively, the remaining 46 states are used to fit the equation, similar to the 

results that would be produced by a least median squares estimation technique, 

First [ examine the relationship between the level of productive entrepreneurship in each state and the state's 

institutional quality score from Karabcgovic and McMahon (2005). Ordinary least squares regressions are performed 

for each measure of productive entrepreneurship. In addition to including institutional quality, I also include several 

control variables. It is important not to include any variables that could potentially be endogenous, or are simply 

altemative measures of the same phenomenon (e.g., state income wonld be one that is rejected for both reasons). Thus, I 

use only a selection of geographic and demographic eontrols such as median age, population density, percent of the 

population that is male, and the percent of the population with a college degree. However, additional variables and 

measures will be explored later for robustness checking. 

Table I presents the results of the regressions. Institutional quality is found to be oftlle correct sign, and statistically 

significant at a 5% level in two of the specifications, and at 1% in the other two. The estimated coefficients for 

institutional quality are also economically significant. The coefficient may be interpreted as tbe difference in 

entrepreneurial activity associated with a one nnit difference in tbe state's institutional quality score. Given the withinsample range of this index, a one unit difference would bc ronghly eqnivalent to comparing the 35th ranked state's level 

of entrepreneurial activity with the 15th ranked state. 

The state with a one unit higher institutional quality score is predicted to have $32 larger per capita venture capital 

investments, which relative to the cross-state average of $82, converts ronghly into a 39% higber level of venture 

capital investments.9 A one unit higher institutional quality score is associated with 8.2 additional patents for evety 

100,000 residents, or 36.6% higherJevel of patent activity. A state with a one nnit higher score also has roughly a 4.2 

percentage point higher rate of growth in self-employment activity (note this is a cumulative 5 year growth rate), a 

difference that would reflect typical growth rates of 15% compared to 11%. Establishment birth rates (both total and 

large) are higher by about 0.8 percentage points, a difference of about 7 to 8%. 

Percentage changes are calculated based On the within sample mean for the variable of interest. 
105 

648 RS. Sobel! Journal 0/ Business Venturing 23 (2008) 64/-655 

Table 2 

Institutional quality and unproductive entrepreneurship: regression results 

Dependent variable 

Independent Unproductive political Unproductive political Unproductive political Unproductive legal 

variable entrepreneurship (lobbying entrepreneurship (lobbying entrepreneurship (lobbying entrepreneurship (100 minus 

orgs. per capita measure 1) orgs. per capita measure 2) orgs, per capita measure 3) Harris judicial index) 

Constant 72.493** (2.127) 229.125* (1.797) 553.552' (1.786) -44.020 (0.388) 

Institutional -1.718" (2.460) '-6.362'* (2.435) -13.898'* (2.189) - 6.177'* (2.544) 

quality 

Mcdianage 0.700 (0.359) -0.309 (0.423) -1.226 (0.691) -1.236' (1.913) 

Population 0.136 (0.721) 0.559 (0.792) 0.277 (1.611) 0.0031 (0.505) 

Density 

Percent -0.876 (0.957) -0.139 (0.406) -0.291 (0.350) -0.912'" (3.010) 

college 

degree 

Percent male -1.165' (1.750) -3.207 (1.288) -7.698 (1.272) 3.795' (1.732) 

Observations 48 48 48 48 

R-squared 0.183 0.152 0.168 0.424 

Notes: Absolute t-statistics in parentheses; asterisks indicate significance as follows: ***=1%, **--"5%, *-" 10%. AU regressions were checked to 

ensure outliers were not driving the results. and that there were no problems with multicollinearity, None of the regressions in this table required 

robust regression techniques, as Barnett and Lewis (1995) Tn and Dixon's Q outlier identification tests did not show any statistically significant 

results for any of these regreR<;ion equations. 

The evidence presented in Table I uniformly supports the first part ofBaumo!'s hypothesis-that better institutional 

quality results in a higher level of productive entrepreneurial activity. The second part of Baumol's theory would 

suggest that due to the nature-imposed constraint nf scarcity, these additional resources flowing toward productive 

entrepreneurship should also be reflected in a negative relationship between institutional quality and measures of 

unproductive entrepreneurship. Table 2 presents similar regressinns as in Table I, bnt here the dependent variables are 

the measures of unproductive entrepreneurship. 

Again the measure of institutional quality is unifonnly significant, both statistically and economically, and with the 

expected sign. A state with a one unit higher score on iustitutional quality would have fewer measured political interest 

group organizations (by 1.7, 6.4, and 13.9 per 1,000,000 residents depending on the measure). While these numbers 

may differ, they convert to roughly equal predictions of the pereentage reduction in unproductive entrepreneurial 

activity of 67, 60, and 56% respectively. Examining the measure of unproductive legal entrepreneurship, the coefficient 

would suggest that unproductive entrepreneurship is lower by 6.2 nnits on the legal index, or around 11%, in a state 

with a one unit higher institutional quality score. 

5.1. Robustness checks 

Several techniques were employed to check for the robustness of these estimates. Specifications were run including 

additional variables, such as the percent voting republiean among the popUlation, and using lagged values for 

institutional quality to check for potential problems ofendogeneity. In all specifications, the results remained robust to 

these changes, and the full estimates from these models are included as Appendix B. The only notewnrthy result is that 

the percent voting republican was sometimes negatively associated with productive entrepreneurship and positively 

associated ,with unproductive entrepreneurship. 

As an additional check of robustoess, Speannan's rank correlation tests were nm among all variables in Tables I 

and 2 with the institutional quality score. This is worthwhile because of the non-continuous nature of the institutional 

quality score. The results of the rank tests universaJly supported the findings in Tables I and 2. When converted to 

rankings, however, the measures of unproductive entrepreneurship seemed more subject to outlier issues, although 

because this is a simple two-variable correlation, there are no additional control variables to help explain outlier 

observations. The full results from these rank correlation tests are presented in Appendix C. 

Thus, the data support both predictions ofBaumol's theory.lnstitutional quality is found to be highly correlated with 

all of the measures and proxies for both the amounts of productive and unproductive entrepreneurship. However, it is 
106 

RS Sobel/Journal o/Business Venturing 23 (2008) 641-655 649 

Table 3 

State productive and unproductive entrepreneurship scores 

Rank State Net entrepreneurial productivity (ep) Productive entrepreneurship (ell) Unproductive entrepreneurship Institutional 

(NEP) score (ep-eu): (scale -47 score (Borda Count avg. points: score (Borda Count avg. points: scale quality score 

to +47) scale 1··48) 1~48) (scaleHO) 

Delaware +31.95 41.20 9.25 7.8 

Washington +25.70 30.20 4.50 6.2 

New York +22.90 33.40 10.50 6.4 

Nevada +22.70 33.20 10.50 7.3 

Florida +22.25 33.00 10.75 6.7 

California +19.80 37.S0 IS.OO 6.7 

Oregon H4.80 32.80 IS.OO 6.7 

Illinois +14.45 2S.20 13.75 6.9 

Texas +13.90 35.40 21.50 7.2 

10 Virginia H2.90 25.40 12.50 6.S 

11 New Jersey tl2.50 30.00 17.50 6.7 

12 Michigan + 12.30 19.80 750 65 

13 Maryland tlL85 28.60 16.75 6.3 

14 Colomdo +11.25 43.00 31.75 7.6 

15 North t-1O.80 27.80 17.00 7.1 

Carolina 

16 Utah +9.25 40.00 30.75 7.0 

17 Missouri +9.20 22.20 13.00 6.8 

18 Georgia +-1(40 34.40 26.00 7.3 

19 Arizona +6.35 38.60 32.25 7.1 

20 Pennsylvania +4.10 18.60 14.50 6.7 

21 New +3.20 31.20 28.00 7.3 

Hampshire 

22 New Mexico + 1.35 23.60 22.25 6.2 

23 l\1assachusetts cl.30 33.80 32.50 7.1 

24 Minnesota ~0.15 25.60 25.75 6.8 

25 Alabama ~0.20 19.80 20.00 6.8 

26 Ohio ~0.40 16.60 17.00 6.5 

27 Kentucky -1.35 13.40 14.75 65 

28 Kansas -L80 15.20 17.00 6.8 

29 South Dakota -2.00 IO.OO 12.00 73 

30 Idaho -3.25 33.00 36.25 6.6 

31 Connecticut -3.70 27.80 31.50 7.1 

32 Tennessee ~3.90 22.60 2650 7.2 

33 South -7.05 19.20 26.25 6.9 

Carolina 

34 Indiana -8.10 14.40 22.50 7.0 

35 Vermont -9.05 1120 20.25 63 

36 Wisconsin -1030 13.20 23.50 65 

37 Wyoming -11.55 14.20 25.75 6.9 

38 Mississippi ~11.95 17.80 29.75 6.2 

39 Louisiana -12.80 19.20 32.00 7.2 

40 Maine -1455 18.20 32.75 5.9 

41 Nebraska -16.60 11.40 28.00 6.8 

42 Towa -18.40 9.60 28.00 6.5 

43 Arkansas -22.90 13.60 36.50 6.2 

44 Rhode Island -23.10 20.40 43.50 6.1 

45 Montana -24.85 18.40 43.25 5.7 

46 Oklahoma -25.85 14.40 40.25 6.4 

47 West Virginia -29.60 7.40 37.00 5.4 

48 North Dakota ~36.Q5 3.20 39.25 6.2 

important to note that both in Baumol's theory and in the Karabegovic and McMahon institutional quality index, 

institutional quality has a very specific meaning. It reflects the extent to which states have secure private property rights, 

a fair and balanced judicial system, contract enforcement. small government sectors, and effective limits on 
107 

650 R.S. Sobel I Journal (~r Business Venturing 23 (1008) 641--655 

Institutional Quality ScoreFig. 2. Institutional quality and the productivity of entrepreneurship. 

government's ability to trdnsfer wealth through taxation and regUlation. These are precisely the institutional structures 

that lower the relative reward to unproductive entrepreneurship. 

6. Income and the level of productive and unprodnctive entrepreneurship 

While the previous section examined both productive and unproductive entrepreneurship separately, this section 

calculates an index of net entrepreneurial productivity across U.S. states. This index will then he examined to sec how 

closely it correlates with both institutional quality and with measures of state income. 

Because the scales of the five measures of productive entrepreneurship and of the fonr measures of 

unproductive entrepreneurship vary considerably, they cannot simply be averaged or summed. In order to compute 

a single index number we must employ an index classification system, such as the Borda Count, that normalizes 

all variables over the same range, and weights them equally. Table 3 presents these index measures for both the 

level of productive entrepreneurial activity (column 2) and the level of unproductive entrepreneurial activity 

(column 3).10 Column I of the table presents Baumol's overall net entrepreneurial productivity (NEP) score that, 

recall from earlier, is given by: NEP~ep-eu. A positive NEP score (NEP>O) means the state has relatively more 

productive than unproductive entrepreneurship, while a NEP score of zero reflects roughly equal proportions of the 

two. A negative NEP score means the state has relatively more unproductive entrepreneurship than productive 

entrepreneurship. 

Table 3 presents states ranked by their level of net entrepreneurial productivity. The first column shows the 

state's NEP score, and the second and third columns show the underlying ep and eu subcomponent scores. Each 

state's institutional quality score is presented for comparison in the final column. First, it is worthwhile to note that 

the states ranked as having the top five NEP scores are: Delaware, Washington, New York, Nevada, and Florida. 

These five states have the most productive entrepreneurship in comparison with their levels of unproductive 

entrepreneurship. The five states ranking the lowest were North Dakota, West Virginia, Oklahoma, Montana, and 

Rhode Island. These states have the highest levels of unproductive entrepreneurship relative to their levels of 

productive entrepreneurship. Even from the raw data presented in the table, a clear correlation with institutional 

quality is present. Delaware, the state with the best institutional quality score, also tops the list of having the highest 

level of net entrepreneurial productivity. West Virginia, the state with the worst institutional quality score, ranks 

47th out of 48 in net entrepreneurial productivity. Fig. 2 shows the high correlation between the NEP and 

institutional quality scores. 

!O With 48 states in the sample, the range of the computed index for both ep and eu is from one to 48. Because NEP=ep·~eu. its range is from -47 

to +47. The Borda Count sorts each variable from smallest to largest. One point is given to the state with the smaUestvalue, two point'> to the state 

with the second smaUest value, and so forth, until the state with the largest value is given 48 points. An average Borda score is found across the five 

productive entrepreneurship measures to arrive at "p and an average Borda score is found across the four unproductive entrepreneurship measures to 

arrive at eu_ The net entrepreneurial productivity (NEP) is computed as: NEP""'ep -e." 
108 

R.s. Sobel! Journal of Business Venturing 23 (2008) 641-655 651 

$00,----------,-----------, $00 

$55 . . // 

$50 

.... //". . . $45 

.. · .!:~::: /.. . . $40 

.~» .0 • o ., 0 $35 

/.r'/ • 00 0 

• 0 

$30 

"0 5.5 6.0 6.5 7.0 7.5 8.0 

Net Entrepreneurial Productivity (NEP) Score Institutional Quality Score 

$OO.-----------.---------~ $30.---------------------------, 

Net Entrepreneurial Productivity (NEP) Score Institutional Quality Score 

Fig. 3. State income, institutional quality, and net entrepreneurial productivity. 

As is clear in Fig, 2, states with better institutional quality teud to have higher levels of net entrepreneurial 

productivity. This is perhaps the most direct test of Baumol's theory yet, as it simultuueously looks at the relative 

amounts of productive and unproductive entrepreneurship as compared to institutional quality. rather than examining 

the two separately. A simple regression line, illustrated in Fig, 2, confirms the statistical relation is highly significant. 

The slope coefficient has a t,ratio of 4.112, which is significant at the 1% level, and the R'squared is 0.27, A 

Spearman's rank correlation test confirms a 1% significance level of this correlation even when only using the ranks of 

the two variablesH States with better institutional quality clearly have entrepreneurial efforts channeled relatively 

more toward productive entrepreneurship. 

The four panels in Fig. 3 show how both the net entrepreneurial productivity and institutional quality scores 

relate to two different measures of state income, median household income and average per capita personal 

income. In the figures, both appear to be highly correlated with either measure of economic well,being in the 

state, but simple regressions suggest that net entrepreneurial productivity is a much closer correlate than 

institutional quality, The slope coefficients in all four regressions are sigoificant at the 1% level. 12 However, the 

R,squares from the regressions using net entrepreneurial productivity to predict income are 0.34 (median 

household) and 0.30 (per capita personal) relative to 0.16 and 0.12 R,squares when using institutional quality 

to predict income. Thus, even though the net entrepreneurial prodnctivity score I calculate is based on 

methodologically simplifying assumptions and averages, it is more closely related to the level of state income 

11 Appendix B contains the results of the Spearman's rank correlation tests for all of the variables in this paper. 

11 Letting (D) indicate the dependent variable, and (I) the independent variable, the respective slope coefficients, with absolute t-ratios in 

parenthesis, are: (0) Median Household Income and {O Institutional Quality: 5137,888 (2.959), (D) Median Household Income and (I) NEP Score: 

229.899 (4,871), (D) Per Capita Pcrsona11ncome and (I) Institutional Quality: 2060.659 (2.47I), (D) Per Capita Personal Income and (1) NEP 

Score: 101.846 (4.484). 
109 

652 R.S. Sobel/Journal of Business Venlun'ng 23 (2008) 641-655 

Table 4 

Specific policy refonns that increase the reward to productive entrepreneurship- andlor decrease the. reward to unproductive entrepreneurship in a 

.tate 

Reducing or eliminating state personal and corporate income taxes 

Reducing or eliminating state turnover or business and occupation taxes 

Workers compensation reform (privatization, damage caps, rule enforcement) 

Medical malpractice reform (privatization, damage caps, rule enforcement) 

Judicial reform (eliminating partisan elections for state courts, liability limits) 

Eliminating state minimum and maximum price and wage limits and restrictions 

Reducing occupational licensing restrictions (and enacting righHo-work laws) 

Constitutional limits on eminent domain and environmental property takings 

Reducing government ownership of productive resources (e.g., land holdings) 

Broad reductions in government employment, expenditures. and levels of taxation 

Broadly applied, simplified tax codes that reduce the ability of groups to. lobby fur specific exemptions, credits:. and rate reductions 

Reduce the returns to lobbying by eliminating state 'budget digests' and other forms of pork~barrellegislation that use state money to fund local pet 

funds 

than is the measure of institntional quality. The method by which the score is constructed might seem somewhat 

simplifying, but it passes the test of predictive validity in the state income data. The Spearman's rank correlation 

tests provided in Appendix B, also show that the correlation among the rankings of these two measures ofincome 

and the rankings of states on the net entrepreneurial productivity index is greater than it is for the institutional 

quality measure. 

In conjunction with the finding from Fig. 2 that institntional quality is highly correlated with net entrepreneurial 

productivity, these results would seem to confirm my hypothesis that institntional quality creates wealth primarily 

because it promotes productive entrepreneurship, which in tum creates wealth and income. This fmding explains why 

researchers have found separately that both institutional quality and entrepreneurship each largely explain the different 

growth paths of economies. They both do explain it, but the causal link flows from institntions through entrepreneurship to wealth. 

To grow richer, states and nations need more productive entrepreneurship and less unproductive entrepreneurship. 

The specific reforms necessary are those that: (a) increase the relative reward to productive market entrepreneurship, 

andlor (b) decrease the relative reward to unproductive political and legal entrepreneurship. Repealing state income 

taxes would be one way to accomplish (a), and it is interesting to note that 3 of the top 5, and 4 ofthe top 10 states in 

the net entrepreneurial productivity index were oncs who do not have a state income tax. 13 The reward to 

unproductive entrepreneurship can be rednced through reforms that increase the security of private property right<, 

create a fairer and more balanced judicial and liability system, strengthen contract enforcement, lessen government 

pork-barrel spending, and more effectively limit government'S ability to transfer wealth through taxation, regnlation, 

and subsidies. Table 4 lists some specific programmatic refonns that could accomplish these goals. All of the reforms 

listed in the table either lower the reward to political/legal entrepreneurship or increase the reward to productive 

market entrepreneurship. 

As one will notice by looking at the table, the real contribution ofBaumol's theory, returning to the framework 

presented in Fig. I depicting the entire entrepreneurial process, is that it shifts attention toward institntional reform, 

and constrained government, as the way to promote entrepreneurship. This is a rather large change in thinking given 

the conventional wisdom in the 1990s advocated promoting entrepreneurship through enacting additional 

government education programs, or subsidies and interventions in ventnre capital markets. Given the failure of 

these types of government programs in practice, and the ever continuing search for new ways to promote 

entrepreneurship, Baumol's theory and it< policy implications could potentially form the foundation of2ls! centnry 

13 Although, as a counter example. note that Wyoming also has no state income tax and it ranks 37th. so clearly other factors are important as well. 
110 

R.S. Sobel! Journal of Business Venturing 23 (2008) 641-655 653 

economic development policy. After all, good institutional reforms have already allowed Ireland to increase 

significantly its rate of economic growth, and have allowed some of the former Soviet republics, like Estonia, to 

rival the success o[Western economies in less than two decades after abandoning complete central planning. At the 

same time, states like West Virginia, whose economic freedom ranks lower than that of Estonia, have struggled 

economically and will continue to do so without significant institutional reform. 

The policy implications ofBaumol's theory are clear; rather than focnsing on expanding government programs like 

subsidized loans, workforee education, or programs aimed at increasing 'entrepreneurial inputs' as a way to foster 

entrepreneurship, the better path is through institutional reform that constrains or minimizes govemment's role, 

lowering the return to unproductive entrcpreneurship. GQveniment programs too often encourage entrepreneurial 

individuals to devote effort toward figuring out how to obtain the transiers, rather than devoting those efforts toward 

satisfYing consumers and creating wealth. 

Appendix A. Data description and sonrces 

Variable name (source) Description 

Measures of productive entrepreneurship 

Venture capital investment Average annual venture capital investment (from all sources) per capita (l995 -200 I period) 

per capita (I) 

Patents per capita (2) 

Sole proprietorship 

growth rate (1) 

Total establishment 

birth rate (3) 

Large firm establishment 

birth rate (3) 

Average annual numoc'T of utility patents granted (l995~'2001 period) per 100;000 popUlation 

Cumulative percent change in nonfann proprietor employment as percent of labor force (NPE), as 

calculated as: «NPE2000--·NPE 1996)INPE 1996) 'I 00 

Average annual number of new establishment births as % of existing firm" (1999·-2002 period) '*' 100 

Average annual number of new 500 +employee establishment births as % of existing large firms 

(1999-2002 period)*I00 

Measures of unproductive entrepreneurship 

Unproductive political Number of establishments in SIC code 8650 (Political Orgs.) in state capital per 1,000,000 

entrepreneurship (lobbying population (1995) 

meastue 1)(4) 

Unproductive political Nwnber of establishment .. in SIC codes 8650 and 8690 (political Orgs. and Membership Orgs .• n.e.c.) 

entrepreneurship (lobbying in state capita! per 1,000,000 population (1995) 

measure 2) (4) 

Unproductive political Number of establishments in SIC codes 8650, 8690, and 8390 (political Orgs., Membership Orgs., 

entrepreneurship (lobbying and Social Services Orgs., 'n.e.e-.) in state capital per 1,000,000 population (1995) 

measure 3) (4) 

Unproductive legal 100 minus the Harris Poll score measuring the quality ofa state's liability system on a 100 point 

entrepreneurship (5) scale (2002) 

Other van'ables used 

Median household income (6) 

Per capita personal income (6) 

Institutional quality 

score (6) 

Median age (6) 

Population density (6) 

Percent college degree (6) 

Percent male (6) 

Percent voting bush in 2004 (7) 

Sources: 

Median household income (2000) 

Per capita personal income (2000) 

All government economic freedom index score (1995 used tor political orgs. regressions, 2001 for 

aU others) 

Median age of state population (2000) 

Population density in state per unit ofland area (2000) 

Percent of population with a Bachelor's degree or higher (%* 100 for year 2000) 

Percent of population male (%* 1 00 for year 2000) 

Percent of popular vote for Bush in 2004 Presidential Election (%* 100) 

1 < U.S. Department of Commerce, Bureau of Economic Analysis, State and Local Area Data, Washington, D.C. 

2. U.S. Patent and Trademark Office,. Utility Patent Counts by CQuntrylState and Year, Washington, D.C. (2001). 

3. Office of Advocacy, U.S, Small Business Admin., from U.s. Census Bureau, Statistics ofD.S. Business. 

4. Sobel and Garrett (2002) and County Business Pattems. U.S, Census Bureau, Washington, D.C. 

5. Institute for Legal Reform and U.S. Chamber of Commerce, State Liability Systems Ranking. Wash. D.C. 

6. U,s. Department of Commerce, Census Buteau, Census 2000, Washington, D.C. 

7. Federal Election Commission, Federal Elections 2004, Washington, DC. May 2005. 

Mean S.D. 

81.56 120.04 

22.34 16.02 

11.03 4.85 

11.54 1.68 

10.94 1.37 

2.57 2.29 

10.75 8.40 

24.86 20.63 

57.34 8.94 

40,982 6,174 

20,712 2,893 

6.71 0.48 

35.59 1.89 

185.52 254.03 

23.71 4.35 

50.9{) 0.67 

53.14 8.36 
111 

Appendix B. Institutional quality and entnpreneurship: extended regression results 

t: 

g> 

~ 

Con~tant 

~ 

1 

'" Lagged ~ institutiOl'la1(1.764) ~ 

a -3.!73 -1.774~ ~0.734'" -0.3&4*** -0.277*~* 0.241 {L272) 

(0.67fi) (3.171) 

-0.009 O.003H~ 0.003(1.642) 

0.406(0_542) -0_005(0.003) 1.057(1.462) 

0_OJ8 I U O.il!1(1.532) (2.200) -0.00.2(0.288) 

(O.207) (3.4&6) 

12.28<)*** OJlO3 0.069 (O_737) 

college: (5339) (1.856) (2.000) {M%} (O.OR!) d,_ 

Percoolma!e -1.971 -2.587u -O.70!(U4'» 

(0.625) (2.120) 

Pcn::wtvoting -0,716** -(U86*'u 0.124**(2.440) 

0.406(1.099) " 0..743(0.808) 1,086U "'(3.046) 1l 

~ 

-4.600(0.108) -4.154* (1.784} ~ 

0.713(\.551) 0.005(0.024) ~ 

-\.612(0.669) 

O.44JU(1.200} 

busbin (0.470) (2.616) (2.785) (U)05) (),05'» 

2004 

Ob!!ervatiom 48 48 48 48 48 48 48 48 48 
112 

R.S. Sobel! Journal afBusiness Venturing 23 (2008) 641-.fJ55 655 

Appendix C. Spearman's rank correlation tests 

Spearman rank correlation test of each variable against economic freedom ranking (except where noted in Using all 50 

parenthesis) observations 

Without outliers 

R' P~value R' P~value 

Measures of productive Venture capital investment per capita 0.1180 0.0168** 0.1146 0.0214** 

entreprenemship Patents per capita 0.0699 0.0693* 0.0897 0.0432** 

Sole proprietorship growth rate 0.1709 0.0035*** nia nia 

Total establishment birth rate 0.0866 0.0424"'''' 0.0810 0.0552' 

Large finn establishment birth ratc 0.1746 0.0031*** nia nla 

Measures of unproductive Unproductive political entrepreneurship (lobbying orgs. per capita measure I) 0.0103 0.4921 0.0700 0.0865* 

entrepreneurship Unproductive political entrepreneurship {lobbying orgs. per capita measure 2) 0.0107 0.4849 0.0850 0.0578' 

Unproduclive political entrepreneurship (lobbying orgs. per capita measure 3) 0.0095 0.5093 0.0667 0.0945* 

Unproductive legal entrepreneurship (lOO minus Harrisjudiclal index) 0.0982 0.0301** nla n/a 

Other mea<;ures Net entrepreneurial productivity score 0.1452 0.OO7S .. n nla nia 

Median household income (wiEF) 0.1210 0.0154"" nla nia 

Median household income (wINEP) 0.3734 O.OOOO**'" 

income (wIEF) 0.0843 0.0453** nla nia 

0.3953 0.0000*** 

Notes: Asterisks indicate significance as follows: *** = 10/0., ** "" 5%, '" "'" 1 00/,-,. OutliL'fS excluded from regressions were: CA and MA in the venture 

capital equation; CA and ID in the patent equation; MT and WV in the total establishment birth rate equation, and CO. WA, MI, KY. NY in the 

unproductive entrepreneurship fe!:,'Tessions. See note to Table I for more infonnation on outlier detection. 

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113 

REMARKS 

Senate Small Business Committee 

4.18.12 

Opower Overview 

Thank you Chairwoman Landrieu for inviting me to share a few thoughts with you 

this morning about entrepreneurship. It's an honor to be here today. 

My name is Alex Laskey and I am the President and Founder of Opower. 

Opower is an energy information software company that works with utilities to 

engage millions of residential customers on their energy use. 

When my partner and I founded our company in 2007, we were looking for ways 

to start a company that would create sustainable change. We realized that 

although most people want to save energy, very little time is spent thinking about 

actual energy consumption. In fact, Accenture recently reported that the average 

American only spends 6 minutes a year thinking about their home energy use. 

So we created a company to help utilities engage customers on their energy bills 

through insight and information. 

We do this through the delivery of Home Energy Reports and web tools that use 

cutting-edge behavioral science techniques and data-analytics to provide people 

with information and motivation to cut back on their energy. 

Our reports let families understand how their energy use compares to similarly 

sized neighborhood homes and supply personalized tips on how to save energy. 

Since our founding in 2007 we have grown rapidly to almost 250 employees and 

now work with 70 utility clients on three continents. 

On behalf of our utility clients we serve more than 13 million customers and that 

number is growing quickly. 

WhyOpower 

Utilities work with us to drive measurable business results across a range of 

strategiC initiatives. Our programs conslstently generate cost-effective, verified, 

sustainable energy savings, along with increased participation in other utilitymarketed programs. 

We know this because we design our program like a pharmaceutical trial: when 

we deploy with a utility we have a "treatment group," of homes that receive 
114 

information, and a "control group," of randomly selected homes that don't get 

information. We look at the actual difference in performance. 

Our program saves average customers 2-3% on their energy bills and has been 

independently verified by 12 external evaluators. 

Now, 2-3% may sound not sound like a lot, but added up across millions of 

homes it has a big impact: $120 million in savings for families and more than 1 

billion pounds C02 abated. 

Next month we will pass 1 TWh of energy saved, enough energy to power a city 

the size of a quarter of a million people, such as Orlando. To put that into 

context, last year, the entire solar industry generated 2 TWh's of energy. 

This year alone, we will save another TWh. According to the Environmental 

Defense Fund, which analyzed about a dozen of our utility programs, we would 

save American consumers more than $3 Billion per year if we went to scale. 

Based on analysis of our data - and we have 40% of the US energy data under 

management -- we will be publishing a study that demonstrates 20-30% of all 

energy in the home is wasted. That's energy that serves no purpose - leaving 

the air-conditioning on to cool down your couch when you aren't home. That's 

approximately $40B that is wasted every year. That's a huge opportunity for the 

American economy. 

Policy Drivers 

There are two main policy areas that are important for our growth: energy policy 

and immigration policy. 

Energy Policy 

The biggest energy policy driver for our business to date has been Energy 

Efficiency Resource Standards. 

Twenty-six states have taken the lead at passing these standards. Not only have 

policies been passed in places where you would expect them - California, 

Massachusetts, New York they have also been signed into law in other statesTexas, Arkansas, Indiana, Minnesota. Almost 90% of states are meeting or 

achieving their goals - and many are far exceeding them. 

These standards work, because energy efficiency is an attractive policy to both 

utility companies and the general public. Energy effiCiency costs roughly 3 cents 

per kWh - cheaper than any other form of energy generation. 
115 

And in many states, utilities can receive incentives for meeting efficiency targets, 

and are able to pay for the programs through rates. 

Essentially, we need to make energy use more productive. One sector to look to 

is the agriculture sector. Between 1950-2010, every acre became 3x more 

productive (291% increase in output/acre). Today, American families are 

spending half as much on food (from 20% of income to 9%) than they were in 

1950. 

Immigration Policy 

The other policy area that is important to our business is immigration. 

One of our highest objectives as a company is to hire and retain the best talent in 

the world. I believe that smart immigration laws are needed to create access to 

workers and also to attract entrepreneurs who will start businesses here in 

America and create jobs for Americans. 

Foreign-born residents made up just 12.5% of the US population in 2008, but 

nearly 40% of technology company founders and 52% of founders of companies 

in Silicon Valley. 

This doesn't apply to only founders. Our big challenge is hiring talented people. 

The US attracts some of the smartest people in the world to come study here, but 

we don't do a good job of retaining talent 

The H-1 B visa process has been plagued with backlogs because the number of 

H-1N visas for skilled workers is currently capped at 85,000 (arguably up to 

about 120,000 per year including af! the exceptions.) In 2008, companies made 

163,000 applications for the 85,000 H-1B visa slots. 

This makes it extremely difficult for entrepreneurs to obtain an H-i B visa. As a 

result, high-skilled immigrants are looking for opportunities elsewhere. 

H-1 B visas and green card limitations have a detrimental impact on the economy 

- between 2003-2007 these foreign graduates of US universities in science, 

technology, engineering and math fields would have raised GOP by about 

$13.6B and contributed to $2.7 - $3.6B in taxes. 

This has a direct impact on our ability as a country to lead in innovation. In an oped from Senator Udall, he notes that for the first time in 2009, foreign-born 

innovators earned more patents than Americans. Only a decade earlier, 

Americans earned 57% of all patents worldwide. 

One piece of legislation that I'm excited about is The Startup Visa Act, proposed 

by Paul Graham, founder of Y Combinator and mostly recently introduced by 
116 

Æ 

Senators Kerry and Lugar. The Act proposes a two-year visa for any immigrant 

entrepreneur who can raise a $250,000 investment and then creates a pathway 

to legal residency. 

I appreCiate the opportunity to be here today and to discuss Opower and our 

policy priorities. I am excited to work with you to advance both energy and 

immigration policies that create jobs, and I look forward to your questions.