Three economic trends for 2011 (fueled by startup goodness)

2011 is going to be a great year for entrepreneurs – even better than 2010. The past year saw startups on the rise, an increase in venture capital funding (both in real dollars and numbers of companies funded), a resurgence of IPOs, and the rise of David against Goliath, as best represented by Groupon’s spurning of a $6 billion offer from Google.

Three trends which started in 2010 should continue into 2011 and should accelerate as the year goes on: VC funding will continue to accelerate fueled by the global growth in entrepreneurship; job creation will see gains, fueled by startups and small business; initial public offerings will see a comeback.

Investors will be bullish on startups. Last month the National Venture Capital Association released a survey which reflected investor’s optimism on high-risk startups, and gave every indication that VCs would continue to invest, particularly in IT, mobile, and cloud-based technologies. In addition, R&D budgets continued to increase throughout the recession and show no signs of letting up. Social media will continue to attract investment, as well as clean energy, nano technologies, and bio-pharma. But this investment will happen globally and the US may see a decline in VC-funded startups in 2011. The survey indicated that the VCs surveyed felt the best prospects were for entrepreneurs in emerging markets like China, Brazil, and India.

VCs also indicated their optimism about the overall quality of the deal flow with high percentages from all countries surveyed indicating that quality would “remain the same” or improve in their countries in 2011.

Startups will sustain domestic employment.It has become a cliche that startups are the engines of job growth in the US, and this is for a very good reason: they are. The Labor department reported that in 2010 the total number of businesses in the US actually declined, while new businesses are opening at a frantic pace. Although, the new businesses opening their doors are adding fewer jobs than were lost, tech continues to be a bright spot and companies in their first five years are expected to account for most of the projected job growth. The problem is not with the startups and their  net contribution to overall employment, but rather with large companies in established industries and their continuing destruction of jobs as they continue downsizing and outsourcing to overseas markets.

The long term success of new companies and their contributions to increased employment will depend on innovation; in other words it is not the “replacement” businesses like new restaurants and gas stations that will impact the economy, but rather the truly innovative technologies and ideas that will have a major impact on the economy. It will not be the Facebooks of the world that will prove a job-creating force, but rather the new technologies that are the equivalent of the mainframe computer, the PC revolution, or the Internet.

International entrepreneurship will see strong growth while the US market may plateau.An analysis by Bloomberg last year indicated that Asian companies raked in two thirds of the financing from all IPOs in 2010, while US companies accounted for only around 10 percent. In part, this is due to the energy exhibited by entrepreneurs in India, China, and other emerging markets that continues to outstrip US innovation and entrepreneurship. At the same time, many US-based startups are being founded by immigrants from Asia; according to the Kauffman Foundation, in the last decade around 25 percent of the most successful US startups were founded by immigrants.

The environment for startups in emerging markets continues to strengthen, as governments in many of these countries are actively changing tax laws and regulations to make investment even more attractive. Simultaneously, local investment in emerging market startups has increased as cross-border investing is expected to continue its decline – international VCs will lead the way in funding these startups as only 39 percent of US venture capital firms surveyed indicated that they planned to increase investment outside of this country. The NVCA survey also revealed that the US startup market continues to lag in many areas, and that fewer than half of US venture capitalists are projecting favorable climates, with concern about factors such as government-supported R&D, effective tax and regulatory policies, and strong ROI.

Photo: Alan Levine