Last week Steve Case wrote an op-ed in the Washington Post called “Give Entrepreneurs Room and They Will Grow the Economy.” For those not familiar with him, Case was the founding CEO of AOL and has been an active healthcare investor, among other things, for the past seven years. My firm, Psilos Group, has co-invested in a health company with with Case’s Revolution Health Fund.
Anyway, it was a very good editorial and one of the statistics within it particularly stood out to me in light of my venture capital role: firms less than five years old have produced 40 million American jobs over the past three decades—accounting for basically all of the net new jobs created in that period. That is a pretty stunning fact and also one that really makes a person scratch their head about current U.S. policy towards startups. It is worth watching this Kauffman Foundation 3 minute video that is very instructive about start-ups and job creation.
Nowhere is this issue more relevant than in the healthcare industry, which conveniently happens to be the only thing I know anything about. In a world where there is no way out of the healthcare crisis except through the generation of new ideas to solve our healthcare problems, young companies are the golden ticket to new employment.
In his State of the Union speech last week, President Obama specifically stated that he wanted Congress to work with him to institute policies that advance research in medical devices, a field in which the U.S. has long been the leader. However, due to a combination of factors, including several government policies, we are now in peril of losing this supremacy to other nations like China and India. Research is nice, but tax and other policies that support the genesis of new companies and growth of existing ones are better right now in a world where medical device start-ups can’t catch a break. As AdvaMed President Stephen Ubl points out, the Patient Protection and Affordable Care Act (PPACA) imposes a $20 billion annual tax on the medical device industry to help cover the cost of health reform, and this new tax is already causing layoffs at large and small companies. FYI, the companies that sell branded drugs will also be hit with a $2.5 billion excise tax. Add these taxes to the challenges and costs presented by today’s FDA and it’s a toxic cocktail.
The small start-up companies that have answers to our healthcare challenges should be growing, not shrinking, but they are gasping for air in the current environment. I was in a board meeting at a medical device company just last week where we had a frank discussion about the R&D projects we would have to forego in order to cover this medical device tax, which is being imposed equally on large profitable and young unprofitable companies starting in 2014.
If healthcare startups are not allowed to thrive, I can assure you that the jobs in healthcare are not going to come from larger healthcare entities, either. The American Hospital Association has stated that anticipated reductions in Medicaid and Medicare funding and reimbursement will cost hospitals 278,000 jobs as revenue declines in these programs. The pharmaceutical industry has already laid off over 124,000 people in the last three years; expected further consolidation in this field isn’t going to help. The large medical device companies have also been shedding their staffs. It is the young upstarts that make the jobs appear.
As Steve Case clearly says in his op-ed, “America’s best chance to achieve robust, sustainable growth and prosperity is by ensuring that the United States increases its entrepreneurial competitiveness relative to the rest of the world.” There has been some activity in the form of a variety of bills supporting crowdsourcing of young companies (although that is a mixed bag, if you ask me), relaxed Sarbanes-Oxley rules to encourage smaller companies to go public, the StartUp Act, and others. But so far these are bills, not laws, and startups are having a hard time raising financing, particularly in a world where the IPO market is so compromised. It is worth noting, for instance, that in the last four years there were a total of nine medical device IPOs but in the four preceding years there were an average of 13 per year. In the pharma/biotech sector, a similar phenomenon: 26 IPOs in the last four years in total and an average of 21 per year in the prior three years. This is important because IPOs have traditionally given these young firms the capital to grow exponentially, creating many jobs in their wake.
Case refers to a great Thomas Edison quote in his Op-Ed that applies perfectly to the entrepreneur: “Vision without execution is hallucination.” Nothing could be more true, as I have seen hundreds of entrepreneurs over the years I have been a healthcare investor, and it is only those who have the gene for excellent execution that reach nirvana. I can’t say if the others are merely hallucinating, but I have my suspicions.
Edison’s quote applies equally well to our lawmakers, however, who are all running around saying “Jobs! Jobs! Jobs!” when they are not busy pointing out which Republican candidate is the true pillar of family values. Job creation can be the byproduct of these lawmakers’ endeavors but
