Striking It Rich

Monday, Feb. 15, 1982 By ALEXANDER L. TAYLOR III

Article Tools

Reprints

(2 of 9)

New companies have become a vital source of American economic growth. According to Stanley Pratt, editor of the Venture Capital Journal, small businesses created 3 million jobs in the past ten years. The largest 1,000 American firms, on the other hand, recorded virtually no net gain in employment during the same period. Says Benjamin Rosen, an electronics industry analyst and a financial backer of new enterprises: "These companies represent the true vitality of the American economy. We are wasting too many of our resources trying to keep alive dying industries like steel and automobiles rather than paying attention to and helping these new firms." he odds against success, of course, are high. In 1981 the number of U.S. business failures was 45% higher than 1980, reaching a 20-year high of 17,040. Indeed, only one in ten investments in a new company may ever return a profit. Investors are already wondering whether the early promise of some gene-splicing firms will pay off.

Nonetheless, its entrepreneurial spirit is perhaps the greatest advantage the U.S. has in the highly competitive world marketplace. Neither Europe nor Japan has a strong tradition of adventurous small businessmen starting up their own firms, and neither has matched the American record for developing revolutionary new products. Financial backing for such ventures in Europe is more difficult to get. Says Alan J. Patricof, who is forming a British venture-capital fund: "The attitude in Europe has been much more paternalistic. Stories about big killings by 26-year-olds just aren't known."

Japan is skilled in the mass production of high-quality goods and has become a formidable competitor in established industries like memory chips and home electronics. But Japan encourages corporate development at the expense of individual initiative. Says Kenji Tamiya, president of Sony Corp. of America: "Japanese society is more highly organized, and big organizations tend to avoid risk. Particularly in new fields like personal computers or video games, you must take risks and make decisions quickly. This gives the U.S. an advantage."

Only a few years ago, American risk taking almost dried up. In 1969 Congress increased from 25% to 49% :he maximum tax on long-term capital gains—the profit made by an investor on the sale of stocks, real estate and other property.

The effect was devastating. The amount of money that Americans were willing to gamble on a long-shot business dropped sharply. In 1969, $171 million was amassed in venture capital. By 1975 the amount had fallen to just $10 million.

In 1978, however, Congress rolled back the capital gains tax rate to 28%. With the potential payoff increased, investors were again willing to take a risk. Last year $1.3 billion in venture funds was accumulated, more than 100 times the amount of only six years earlier.

Throughout American history, the nation's entrepreneurs have been the catalysts that sparked the formation of new industries. Three of those pioneers: