Startups are thriving in Illinois and entrepreneurs in Chicago’s tech community now have a dazzling ecosystem envied by most other places in the country.  Doesn’t that prove things aren’t so bad here?  Shouldn’t Illinois be bragging about that proof?

No,  entrepreneurship thrives in a down local economy and an otherwise hostile business environment for many reasons.

Those reasons go beyond the obvious reality that many talented and experienced people cannot find good jobs.  Yes, those people often start new ventures and they comprise a nice labor pool that startups can tap on the cheap. But there are many other reasons.

First, high tax rates don’t mean much to startups.  To reach profitability is the promised land and the prospect of paying corporate income taxes is seen as a nice problem they would like to have — something to worry about in the future.  At the individual level, too, startup salaries are generally low and compensation is weighted towards equity or options which are tax-advantaged.  As long as those tax advantages are large enough, high tax rates may even favor entrepreneurship.

Second, office space, service providers and other costs are low.  Landlords cut deals, lawyers and accountants chase new ventures with discounted pricing, used office furniture easy to find and so on.  Cheap apartments and homes also suit founders and early employees.

Third, over-regulation is not an issue for most startups, especially in tech.  For example, most HR regulations don’t kick in until a company grows, environmental regs are not relevant and, let’s be honest, startups can cut legal corners far more aggressively than large enterprises. The big guys need to protect their brands and their balance sheets; the size penalty for the large enterprise is worse in over-regulation.

Finally, in this economy angel investors have soured on the public stock market and can get virtually no return in the bond market.  Longer term bets on startups are comparatively more attractive because they essentially represent plays on the economy five to ten years out.

Take Austin, Texas, as an example of some of this, where a tech startup community was born in the 1980s, and where I had my formative experience.  The Texas economy at the time had completely tanked through the confluence of the S&L crisis, collapsing oil prices and a depressed real estate market.

For startups, nothing could have been better.  Loop 360, which circles Austin, was dotted with sparkling new, empty office buildings.  The common deal offered by their landlords was  rent equal to just the pro rata part of property taxes.  Silicon Valley homes were expensive and Austin’s were ridiculously cheap.  Talent and investors flooded in.  Today, Loop 360 is renowned as the home of dozens of leading tech companies, and Austin’s houses are filled largely with California emigrants who wanted a more affordable community.

The bottom line:  Tough times for the state are good for our startup community, and don’t let anybody tell you that thriving entrepreneurship proves that Illinois’ problems are not so bad.

 

Mark Glennon