What Can the U.S. Do to Rekindle Entrepreneurship?

Entreprenurial startups are the sole source of net new job growth in the U.S., maintains serial high-tech entrepreneur Henry Nothhaft. But he fears that they are becoming an endangered species.

When it comes to startups, Nothhaft knows what he's talking about — he's seen firsthand the powerful role that small startup businesses play in job creation and growth in the U.S. In his 35 years in business, he has helped create more than 6,000 jobs and returned $8 billion to investors.

The former CEO of technology-miniaturization company Tessera, Nothhaft helped grow the first Internet company (Telenet) in the '70s, helped develop the first voicemail and data-network in the '80s, and in the '90s led Concentric Networks, one of America's largest Internet service providers, to an initial public offering and $2.5 billion sale to XO Communications. Before joining Tessera, he headed up Danger, the creator of the wildly popular T-Mobile Sidekick, which was sold to Microsoft for $500 million.

Today he sees a nation spinning its wheels. But he thinks he has some solutions that are worth taking a look at. In his new book, "Great Again: Revitalizing America's Entrepreneurial Leadership" (Harvard Business Review Press, 2011), Nothhaft outlines a five-point plan to revitalize America's innovation leadership and kick-start its sputtering economy. Will his ideas work?

"They're powerful because they're implementable," Nothhaft told BusinessNewsDaily. "The ideas wouldn't take money out the government's policy initiatives."

Ultimately, Nothhaft said, everything depends on startups — job creation, our standard of living, our prosperity as a nation and the American dream itself.

But there are five forces holding us back, Nothhaft said: tax and regulatory shackles, a broken patent office, lack of meaningful incentives to bring high-tech manufacturing back to the U.S., overly restrictive immigration rules and inadequate government support of basic science and research.

Rationalize rules and regulations

Washington simply doesn't understand the needs of the entrepreneur, Nothhaft said. And that is reflected in the maze of confusing and often conflicting rules and regulations, albeit well-intentioned ones, that startups must contend with.

For starters, he said, we need to get rid of the prevailing one-size-fits-all approach.

"Companies with up to 500 employees should not have the same rules and regulations as large companies," Nothhaft said.

The most critical task, he said, is to breathe new life into the IPO market so that innovative startups can get the capital they need to create jobs and launch new industries. In part, that involves overhauling the current rules and regulations to restart the engine of entrepreneurialism.

And in part, Nothhaft said, it involves reinvigorating the venture capital spirit. Great innovative companies aren't launched with a top-of-mind emphasis on creating something and flipping it quickly.

"In the American dream, the goal in creating a company was to build it and grow it to create something greater than yourself," he said. "We never went out and shopped the company. A little bit of that spirit has gone out of venture capital financing."

Fix the patent office

Patents are the stewards and rewards of innovation. They guard intellectual property and rein in piracy of ideas in the marketplace.  Startups need to get patents to obtain funding.

The U.S. Patent and Trademark Office (USTPO) is backed up, overburdened and hamstrung by a chronic lack of funding. There is a backlog of more than 1.2 million patents, Northhaft said. Just clearing up that backlog and issuing patents that are so critical to startup funding would create as many as 2.25 million jobs by 2014, he said. It would also help stem the flow of high-tech research and development offshore.

The remedy, Nothhaft said, is for Congress to provide the capital the USTPO needs, stop diverting patent fees for other purposes such as the 2010 census and establish regional offices to be closer to the sources of innovation and stimulate invention and entrepreneurship.

Revive high-tech manufacturing

The decline in manufacturing in the U.S. isn't just a rust belt issue affecting factories cranking out durable goods. It's happening in high-tech manufacturing, even affecting Silicon Valley, the epicenter of American innovations for the past 30 years.

In 1980, Nothhaft said, the U.S. produced 42 percent of the world's semiconductors. That figure fell to 25 percent by 2005. Today, we only produce 14 percent of the world's supply of devices that were invented here about 50 years ago.

The decline in manufacturing has taken much of the wind out America's economic sails.

Manufacturing of all stripes has moved offshore, in search of low wages and comparative advantage. This causes problems greater than the immediate loss of jobs and creation of industrial ghost towns such as Detroit and Youngstown, Ohio. We're in danger of seeing innovation move offshore as well, Nothhaft said.

"Where there's manufacturing, there's innovation," he said.

And by leapfrogging the tyranny of geography, the Internet has made innovation highly portable.

"The Internet changed everything," said Nothhaft. "Multinational corporations have choices. In the last ten years, they've voted with their feet. Small businesses don't have those offshore opportunities."

A nation that no longer makes things will eventually forget how to invent them, he said. And manufacturing accounts for 70 percent of U.S. research and development .

The answer is to repatriate high-tech manufacturing. The U.S. needs to do what every other nation has done, Nothhaft said: offer meaningful tax and other incentives to bring manufacturing—and innovation—home.

Ease immigration rules

Innovation isn't the only thing that's highly mobile. So is talent, Northhaft said. Innovation in the U.S. has benefitted from an inflow of talent from the rest of the world. More than half of all high-tech startups in Silicon Valley were launched by a foreign-born entrepreneur, including Intel, Google, Yahoo and eBay, he said.

But the allure of the U.S. for the best and brightest scientists, engineers and entrepreneurs is beginning to fade under the weight of restrictive immigration policies. America is almost alone among nations in restricting legal immigration by technology professionals, Nothhaft said.

We are on the brink of a brain drain that may cripple American innovation. How can the U.S. turn that into a brain gain?

"We have to transform our immigration policy from a club that drives good people away into a carrot that attracts the best minds of tomorrow," Nothhaft said. "We need to remove shackles."

Support basic science and research

Basic science and research are the fuel of innovation. It's time for the U.S. government to step up to the plate and fully support the kinds of research programs that have proven to generate outsize returns for society, Nothhaft said.

Overall, the government percentage of total U.S. research and development expenditures has been in decline for decades. Nothhaft would like to see a return of political will to support basic research , akin to the Space Race of the '50s and '60s when the success of the Society space program made excellence in science and engineering a national priority.

"What we need is pure, blue-sky regulation," he said. "We need to get off the bench and get in the game."

• Why Your Business Should Embrace Failure
• City Tries to Ignite Innovation with Startup Contest
• Does Business Inspiration Strike Like Lightning?

Reach BusinessNewsDaily senior writer Ned Smith at nsmith@techmedianetwork.com. Follow him on Twitter @nedbsmith.