How Licenses and Patent Trolls Are Choking Entrepreneurship in America

July 13, 2016, 7:41 PM UTC
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It’s easy to get carried away by the excitement about new companies that seemingly reshape the way the economy works, almost on a daily basis. Particularly in the tech world, so called disruptors are everywhere, including the ride-sharing company Uber, whose $62 billion price tag makes it the most highly valued startup of all time, and Airbnb, which has essentially turned the world into a gigantic hotel.

But such companies are increasingly in the minority, according to a new policy brief, out Wednesday, from the Kauffman Foundation. In fact, innovation and entrepreneurship has been on a steady decline for the last 40 years, and the U.S. has ultimately become less competitive as large companies take a greater share of profits in their respective industries, and roughly as many small companies go out of business as start up annually. One particularly telling statistic: Nearly 60% of U.S. employees now work for firms founded before 1980, Kauffman says.

“There are fewer younger companies in the economy today,” says Jason Wiens, a policy and research director for Kauffman.

Kauffman proposes some fixes, however. Among them, are restricting occupational licensing, which has been on the rise for years. Licensing, which varies according to state, often requires business owners to take classes, pass tests, or pay fees before they can open a business. And while licensing does help protect consumers when applied correctly, increasingly it’s being used by established businesses to keep out new competitors from entering the market, Wiens says.


Existing state regulations could work as a stand-in for licensing for industries that are of concern, Wiens says.

New businesses would also benefit from limiting the scope of patents that have become too broad. In recent years, non-practicing entities, sometimes referred to as patent trolls, have run amok, wreaking havoc on young tech and software companies. Patent trolls are typically shell companies that buy up expired or soon-to-be expired patents, and then claim infringement by new companies. Such lawsuits have cost startups half-a-trillion dollars since 1990, Kauffman says.

Overly burdensome non-compete agreements, particularly for highly-skilled employees, should also be reined in, Kauffman’s research suggests. About 90% of such workers are subject to non-competes, which prevents them from engaging in similar work or opening related businesses. That, in turn, reduces new business formation when these workers seek alternative opportunities, as they may fear looming lawsuits or other punitive actions.

Finally, Kauffman suggests revamping states systems for rewarding tax credits and other business incentives, which research it cites from the non-profit Good Jobs First suggests, overwhelmingly favor large businesses.

Related: How Goldman Grooms Its 10,000 Small Businesses for Growth

While these policy changes won’t alter the competitive landscape on their own, taken together, they could offer valuable economic props.

“Our goal is to ensure policy-makers are better-informed about entrepreneurship, so they know how to support it better over time,” Wiens says. “That will lead to a better environment across the country for people to start and grow companies.”