Small businesses are often referred to as the engine or the backbone of the economy. Entrepreneurs, the people who build new businesses and come up with innovative ideas, can help deter economic stagnation.
In this episode of Big World, Professor Krista Tuomi joins us to discuss entrepreneurship and startups, as well as how local governments stake a claim in the promotion of innovation (1:08). She explains how disproportionate regulation can be a barrier to small businesses (2:53) and highlights the actions cities have taken to bolster startups (4:45). Tuomi doesn’t just teach her students about entrepreneurship, she also supports entrepreneurs through her pro bono work (10:26). During her free time, Tuomi serves as a consultant to organizations like the Angel Capital Association; we ask her to define angel investors and explain how they support startups (12:01).
A class on entrepreneurship sounds like a business school course, but Tuomi discusses how the study of startups is relevant to international affairs (14:22). And what kind of personality is best suited for an entrepreneur? Tuomi’s answer may surprise you (17:20).
We ask Tuomi what five policies she would institute that would have a positive impact on the world of startups during our “Take Five” segment (7:06).
0:07 Kay Summers: From the School of International Service at American University in Washington, this is Big World, where we talk about something in the world that truly matters.
0:15 KS: Whenever the conversation turns to the economy, political discourse inevitably turns to the often repeated idea that small businesses are the engine or the backbone of the economy. Entrepreneurs, those who put ideas and business plans together, are the people who build new businesses, and without them and their consistent innovation, the economy would stagnate.
0:34 KS: Today, we're talking about entrepreneurship and startups. I'm Kay Summers, and I'm joined by Krista Tuomi. Krista is a professor in the School of International Service. She teaches economic policy, crowdfunding, entrepreneurship, investment, and financial policy. She's worked for many years as a policy analyst in the areas of innovation and investment. Recently, her focus has been on best practices in the startup investment climate. She also conducts workshops on financing for small businesses and nonprofits.
1:04 KS: Krista, thanks for joining Big World.
1:06 Krista Tuomi: Thank you. Thank you for having me.
1:08 KS: Krista, your focus has been on a variety of topics related to investment and entrepreneurship including what the optimal ecosystem for startups looks like, and in an article that you wrote for the Washington Business Journal titled "Eight Ways Cities Can Boost Their startup Ecosystems," you said that every local and regional government must stake a claim in the promotion of innovation and entrepreneurship. So tell us, why do you think it's important for local governments to do this, to stake a claim in the promotion of innovation?
1:40 KT: I think mostly because innovation always starts small. That's not to say that innovation is not carried out by the large country-wide firms, but they're not the ones that necessarily need government support at all, or a little bit of a boost. In fact, they're not the ones who necessarily create the most meaningful tax revenue, or employment opportunities. If you've seen some of the big tech startups manage to shrink the job force and take their tax revenue abroad.
2:05 KT: I think for many cases, local government and smaller business create the biggest social returns, and revenue returns, and since all policy has winners and losers, I'd rather keep policy interventions for where they are most necessary, and in this case, in most perhaps have the best leverage, and this, I think, would be at the local level. You can get more concrete, measurable results with less bureaucracy. For example, small tweaks such as local zoning easing on small business and home businesses can have a huge effect where the same thing wouldn't be done at the federal level.
2:42 KS: Okay. So on the flip side of an optimal ecosystem, what would you say are some of the barriers that are in place for entrepreneurs?
2:53 KT: Wow. A lot of the regulation is not proportionate, so the larger you are, there are sort of economies of scale and regulation. So complying with tax information, complying with regulations in general, labor regulations, reporting, licensing—the bigger you are, the smaller percentage of your total cost this becomes. And a lot of local regulations are superfluous. I mean, a lot of regulations are superfluous for small businesses at local level.
3:20 KT: So one of the barriers I think I would like to address is just sort of analyze things, and tease out the ones that are no longer necessary, or can be tweaked for firms of different sizes.
3:32 KS: And regulation sometimes seems to be a word that's kind of weaponized politically, where it's designed, depending on the ideology of the person saying it, to say "This is all a great thing. All regulation is good," or to say "This is a terrible thing. All regulation is bad." What I hear you saying is there is some regulation that is actively getting in the way of entrepreneurs doing what they need to do with a small business size.
3:53 KT: I think it's compliance with the regulation. The bureaucracy behind the compliance. The licensing requirement. It's not actually are they following the laws, but the reporting, and the financing, and the number that are unnecessary for different sorts of firms and small ones, but they just form a larger percentage of the cost. And so some way to make their reporting requirements over a longer period of time, less onerous and sometimes it is necessary for firms of that size.
4:20 KS: If you had a large business, you would have-
4:23 KT: Entire departments.
4:24 KS: Yeah, entire departments that are focused on that, and at a small business, that makes up a much larger part of their overhead.
4:30 KT: And their time. Time they don't have.
4:31 KS: Right, right. That makes sense. Krista, in that same article in Washington Business Journal, you emphasized several key actions that cities have taken to bolster startups. Tell us briefly, what are some of these actions?
4:45 KT: Well, apart from the making regulation a little more proportionate, and I'm not against regulation at all, as I said. It's just proportionate levels for different sizes of firms. Some have openly taken steps to welcome them in whole new measures. Berlin's business welcome package, for example, tries to encourage entrepreneurs to set up shop there, and they give them both funding, and advice on marketing, taxation, finance, and office space if they want to use Berlin as a testing pilot for any of their new apps or ideas, which is great. It's making it a hub of innovation.
5:20 KT: Also, a couple of cities have been very good about acting as customers for small business products, and providing easy revenue portholes through which small businesses can compete to sell to local and city governments, and a lot of them have also opened up their databases and transparency in terms of transport, data, energy data, and offering these in hackathons and prized to see what startups can do in order to try and fix the problems and compete to win either a contract or a prize. The one I'm thinking of in particular is Moscow's Active Citizen App, which was a result of one of this, which is now a great way that the Moscow city government interacts with the citizens, and they poll them on various things, and they win participation points where they can comp for theater tickets, or free parking, or bikes. Just a great way for the cities to interact.
6:17 KT: And then, last two, which are key and quite obvious, are good access to a transport system that's functional, and easy digital connectivity, because that really helps, obviously.
6:30 KS: The one that you mentioned about access to government contracts, to being able to do that, that seems huge, and it almost plays along with that regulation compliance piece because some of what goes into getting a government contract of any kind on any level is the paperwork that's involved in bidding on it, and then reporting on it in ways that other private industry wouldn't require. So that seems like more of them putting their money where their mouth is, to actually make those contracts available.
6:58 KT: Absolutely, and making it simpler and easier to do. I mean, as I said, it is a nightmare of bureaucracy to weave your way around.
7:06 KS: Right, right.
7:14 KS: Krista Tuomi, it's time to take five. This is when you, our guest, get to reorder the world as you'd like it to be by single handedly instituting five policies or practices that would change the world for the better in your opinion. Specifically, what five policies would you institute that would have a positive impact on the world of startups?
7:35 KT: So, caveat here. As noted, the private sector can often play this role far better than the public sector, who is using taxpayer money with perhaps less expertise. So given that in its mind, what I would suggest is I would like to see far more local governments provide entrepreneurs with access, as mentioned before, to data on transportation, demographics, energy consumption, so that they can try and provide solutions. Be far more transparent about them. Citizens and businesses equipped with actionable data can provide far better input often than government bureaucrat.
8:10 KT: Two, I would like to be a bit more proactive about recognizing the danger and the tendency of innovation winners to start to amass market power and concentration without regard for the consequences. I'd like to create a task force on the dangers as well as the benefits of tech, and ways to sort of counteract the concentration and privacy concerns that come when some of these winners get so big.
8:37 KT: Three, I would like to see more governments make a commitment to be a consumer of small businesses/firms services and products, and mechanisms to ensure that the commitments actually adhered to. A lot of them have laws on the books, but don't actually follow through to see how big and how small these companies are.
8:54 KT: Four, this is an interesting one, I'd like to create more policy hackathons to suggest ways to break the current system, which is biased against women and minority entrepreneurs and startups. We have lots of data on how VCs, banks, you name it are unintentionally perhaps biased against the type of ideas and mechanisms that come through them, and if we drop the ball on this, it's going to be continue drop the ball, so trying to find ways to tap the crowd on what the best policy solutions would be to keep this issue front and center at all times. I don't have the most specific answers here, but I'd rather use an innovative way to try and find them.
9:39 KT: And five, I think I would create more incentives in terms of R&D and tax breaks for green innovations, but I would like this with a lot more accountability. Maybe with claw backs if the green promised gains do not get realized to prevent firms green washing, if possible.
10:01 KS: Green washing, yeah.
10:01 KT: I think those would be my five that I'd like to start with, off the cuff.
10:05 KS: Wonderful. Thank you so much.
10:07 KT: All right.
10:13 KS: Krista, as a professor, you teach students about entrepreneurship, but alongside that, you also support entrepreneurship through your own pro bono work. So can you tell me a little bit more about what you do in your free time?
10:26 KT: What's free time? Yeah, I conduct workshops, quite a few workshops, all over. I do workshops for financial literacy, all forms of small business finance, pricing, grants for nonprofits for SCORE, which is the volunteer branch of the Small Business Association, and for the Hispanic Business Council, and a couple of local bodies. I also do work on the Boots to Business program, which goes to bases and helps with transitioning service members, teaching them all forms of entrepreneurship skills before they transition off base.
11:00 KT: On that same line, I do work with BWise as well, which is the organization responsible for similar type of entrepreneurship boosting for army, army wives, women soldiers, and women vets. And then I tend to mentor quite a few of these once they've progressed through these programs over the years, and occasionally get to judge on the Shark Tank competitions, which is always fun. In fact, I just actually did a new...it's great being a Shark Tank judge. You get to play it all out. I just did one for LearnServe on high schoolers and social innovation, which is also fantastic fun.
11:32 KT: And I'm a consultant on various types of seed financing startups, policy environments, to organizations like the Angel Capital Association, occasionally state and local government, and...yeah.
11:47 KS: It's great that you mention the Angel Capital Association. That was my next question for you. One of the organizations you advise is the Angel Capital Association. Tell me, who are angel investors, and what role can they play in supporting startups?
11:59 KS: It's a great name.
12:00 KT: It is!
12:01 KS: I want to be an angel.
12:01 KT: Exactly. Don't we all? Sadly, I do not have the money that the angels have, but angel investors are those fairly wealthy—and there is a range, there is a range—investors who invest their own cash in exchange for equity. They offer guidance, contracts, mentorship to the companies involved, and as opposed to venture capital, which tends to invest other people's money. It's a great, it's a wide, it's an exciting field, I think, because there's all these different specialties now. You've got impact investing and green investing and particularly women and minority investors, and getting these investors in and part of this game to put their funds to help other startups is quite exciting.
12:44 KT: So, why they are so important? As you asked, because they provide the riskiest firms with funding they wouldn't have got otherwise. These type of firms are unlikely to be the ones getting bank loans, and they're certainly not at the level of VC and private equity, so angels provide that very important role in taking that risk on themselves. And, of course, that expertise and mentorship that they provide.
13:10 KS: And these are people who are wealthy enough to really go with their gut and their heart, so if something appeals to them, even if they're not sure it's going to pay off, unlike a venture capitalist, they can put the money there-
13:19 KT: Well, it depends. When Angels first started out, it tended to be a bit more slapdash. They're getting a little bit more professional, and it's starting to look a little bit more assimilated VCs in terms of due diligence. But certainly they expect about a third of those to fail completely. They expect about a third to just get the money back, and then they expect that last little bit to just do so well that it pays for all the rest.
13:49 KS: Interesting.
13:49 KT: So there is that element of going to the gut, but more the idea of don't put all your eggs in one basket, and diversify a little bit within your portfolio so that you can pay for the duds with your successes.
14:01 KS: Yeah.
14:03 KS: Krista, people might hear about your work with entrepreneurs and think that this sounds like something for a business school. I've been interested to hear you talk about some of the other locations, Moscow, Berlin, that are doing interesting things with small business. Why is this study of entrepreneurship or startups relevant as part of study of international affairs?
14:22 KT: Wow. Because it's—and forgive me for maybe—how does one best put it? I think it is the most crucial form of development, and so much of what this school is focusing on is improving living standards and not just for Americans but for the rest of the world. And what are the big problems the world has to solve and how best to solve them. And, sadly, some of the big problems are no longer able to be addressed by the traditional forms of theoretical development, policies, and procedures we tend to teach for so long. Whereas some of the startups, and the innovation in the smaller business have come up with groundbreaking mechanisms to both improve people's living standards in order to bypass a lot of the big problems with governments and dealing with things in the traditional mechanisms of intervention.
15:23 KT: And I think so many of our students, as well, are excited about the possibility. I mean, in each of my classes, excited about the whole range of ways they can make a difference. This is what's so special about SIS is our students really are passionate about making a difference and giving them more ways than the traditional working for an NGO, working for a think tank, going and doing USAID and saying, yeah, you can help thousands and millions of people in a way that you perhaps never even thought of. And there are, as I said, innovative startups in the green area and so many different areas worldwide. And that's one of them.
16:05 KT: The other is, as you know, I teach for nonprofit management and financing as well, is that innovation and financing is important in all fields, and I do a crowdfunding course here, and it's not just businesses who come to the crowdfunding course. Maybe there's one business out of the entire lot. It's scientists who have had their grant funding cut off. It's nonprofits. It's artists. It's a whole range saying, "The traditional mechanisms that we use to fund ourselves are no longer functioning." What are the innovative ways in financing that we can now look at, learning from both the private sector and what's happened to, again, make that change, make that difference, and make it sustainable?
16:47 KS: That's great. That's wonderful. That makes a lot of sense.
16:49 KS: So as someone who's not much of a risk taker—I'm pointing at myself. I don't even like surprise parties. I don't like risk.
16:56 KT: No. God, I hate them! I absolutely hate them! Yeah.
17:00 KS: I've always been fascinated by the type of person who starts a business, especially a startup of a new idea or product or service. It just seems so brave. What can you tell me about the personality of an entrepreneur?
17:20 KT: I'm pleased you brought that up, because that is perhaps a little bit of the myth that surrounds an entrepreneur. Yes, they need perhaps a little bit more bravery sometimes than the average person working at a full time job, but risk is not one of them because the successful entrepreneurs are not risk takers, they're risk managers. The successful ones. There are a few who all think they're going to be the next Uber in two days, and you need to bring them down to reality, but successful entrepreneurs are ones that recognize, who are very good at looking at risk, recognizing risk, and managing risk.
18:01 KT: The big risk takers are really the angels, throwing their money behind a whole range of untried and untested ones, but a successful entrepreneur is one who is able to recognize risk in all its forms, and take steps to mitigate that, if at all possible. Particularly in, say, BWise, the army wives, women vets, and women soldiers, and my small business workshops where I'm dealing a lot with, say, the average age is about 40, 45 to 50. We're dealing with people who have families, people who have kids, maybe people who are single parents. These are not what you imagine, 22 year old living in his parents' basement-
18:48 KS: On a futon, right.
18:50 KT: [crosstalk 00:18:50] It doesn't matter if he goes bust six times over. So most of what they're asking me and what we're helping doing is how do you take the jump but in mechanisms that still protect? How can you slowly ease yourself in, do market research, ease yourself into an industry by testing the waters so that you don't have to sacrifice your entire life savings for a dream that may or may not happen?
19:16 KS: It sounds like some of these people don't like surprise parties either.
19:19 KT: No, no, no.
19:20 KS: Okay.
19:20 KT: Yes.
19:21 KS: Thank you. That's good. That sort of disabused me of some notions there.
19:24 KS: Krista Tuomi, thank you so much for joining Big World and talking about entrepreneurship and startups. It's been a real pleasure to speak with you.
19:30 KT: Thank you.
19:31 KS: Big World is a production of the School of International Service at American University. Our theme music is It Was Just Cold by Andrew Codeman. Until next time.