Sizzle/Fizzle: AI Soars, Toys R Us Sinks And Start-Ups Struggle

 Sizzle

Authentication Technologies: Bound to get a bump, and a big one, sustainable for quite a while. With Equifax in the headlines, naturally, and a rush to cover one’s, ahem, assets in a hurry, is it any wonder that a credit freeze may not be enough? Look for a surge in signups for identity monitoring services, and also the technologies that – at the point of transaction – help prove you are who you say you are … and that it’s you doing the saying. Just sayin’.

B2B: The trillion dollar industry that gets overshadowed in innovation by consumer gee-wizardry tech, B2B is gaining more attention by the day. Across the pond, estimates Innovate Finance and Pitchbook, the B2B FinTech market has gotten nearly half of all FinTech funding in the European Union through the past year. That’s nearly a billion dollars in funding, comparing favorably with the 45 percent logged in 2016. The European Union is also gearing up to promote new, continent-wide mandates that would promote FinTech growth and investments, especially post-Brexit.

AI: In business, putting one’s money where the mouth is can be seen as a strong vote of confidence. To that end, artificial intelligence got a boost this week when Salesforce announced that it is launching a $50 million venture fund to invest in AI-focused startups. The pace of overall investments in AI is projected to be just under $11 billion in 2017, double the previous year’s level. Call it smart money chasing smart tech?

Fizzle

Apple 3 Watch: This will not connect well with would-be buyers. Even before shipping the new Apple watch, the tech giant admitted that issues a-plenty are in the hopper. The Series 3 Watch is having problems connecting to LTE networks, which means that at times the gadgets can’t use cellular services. What is a smartwatch without the connectivity promised (and thus relying a bit more than users might hope on their iPhones)? Why, it’s a watch.

Equifax: Might Equifax be the Wells Fargo of credit agencies? Headline after headline sinking customer morale? Beyond the 143 million individuals affected by the earthquake of the breach disclosed recently, the company has been sending users desperate for guidance and some preventative measures to a fake phishing site – hardly the solution anyone would hope for.

Toys R Us: Toys Were Us? Bankruptcy claims a marquee name in tyke-focused retailing, as the Amazon effect continues. There was, of course, added pressure from carrying debt to the tune of $5 billion. The stores will still stay open, but amid same store sales declines of more than four percent year over year, price matching with Amazon and revamping its online ops will likely be a tough row to hoe (recall that the company ended an exclusive arrangement to be Amazon’s toy vendor of choice back in 2004).

Fizzle Of The Week: Startups

Admittedly, it was tough to decide what deserved the Fizzle of the week top spot. Amazon sent out baby registry announcements for babies that did not exist, and Equifax directed its recently breached customers to a fake site set up by a good guy to further emphasize how lax the folks at Equifax are when it comes to all things data-related.

But we think the winner of the fizzle of the week top spot has some serious consequences for all of us.

Startup formation is fizzling, according to New York Times reports – and dragging down the rest of the economic landscape with them.

The proof, according to economists, is in the numbers. Unemployment is down and the stock market is up – and yet, economic expansion in the years of the so-called recovery has been sort of lackluster, and wages, until very recently, have been frozen in stasis.

So, what gives?

Startups aren’t forming at anywhere near the rate they once did. In 2015, 414,000 new businesses were formed in the latest year surveyed, according to the Census.

The good news? That is slightly more than the previous year.

The bad news? It is well below that of 2006, when that same figure hit 558,000 – and still trailing the 500K-600K that was the average in the U.S for new business creation from the mid-1970s until the early 2000s.

However, it is worth noting that even during that relatively stronger time period for startup businesses, the numbers were already indicating a slowdown.

But the new shape of the slowdown has caught economists somewhat off guard and raised concerns. The slowdown in new businesses being founded in the 1980s and 90s was largely quarantined to certain segments – especially retail, where corner stores and regional brands were falling to larger national chains.

That realignment did not particularly concern economists, as it was not seen as a big drag on economic productivity.

But the 2000s saw a change, as the slowdown started to impact areas like technology that, until quite recently, have been associated with high-growth entrepreneurship. And as that decline has gone hand-in-hand with a plunge in productivity and stagnation in wages, economists are becoming increasingly concerned that the great entrepreneurship stall-out is one of the big root causes of why the American economy has been so laconic.

“We’ve got lots of pieces now that, say dynamism, has gone down a lot since 2000,” said John Haltiwanger, a University of Maryland economist who has done much of the pioneering work in the field. “Startup formation has gone down a lot since 2000, especially in the high-tech sectors, and there are increasingly strong links to productivity.”

And that loss, the Times reports, has been increasingly felt across all segments of the economy. Small businesses in general and startups in particular are often cited as key drivers of job creation and innovation. Historically, they tend to be the places where epoch-making disruptions come from, and have been a ladder into the middle class for less educated workers and immigrants.

And, on the whole, they push productivity, both by creating new products and methods and also by forcing the rest of the existing industry to follow their lead.

And – judging by the numbers – startup business isn’t working.

“We’re still in a startup funk,” said Robert Litan, an economist and antitrust lawyer who has studied the issue. “Obviously, the recession had a lot to do with it, but then you’re left with the conundrum: Why hasn’t there been any recovery?”

That is the trillion dollar question: Why have things gotten so funky out there for startups of all shapes?

And there are no easy answers.

Blame it on the big guys, is the popular school of thought among economists.

In the era of Amazon, Google and Facebook, they argue, small firms are at great risk of simply being blown out of the water by bigger firms, or bought out of the competition if their innovations look a little too threatening to a major player’s bottom line.

“You’ve got rising market power,” said Marshall Steinbaum, an economist at the Roosevelt Institute, a liberal think tank. “In general, that makes it hard for new businesses to compete with incumbents. Market power is the story that explains everything.”

But not everyone is so sure. Another school of thought is that baby boomers are aging out of the economy as active workers, as the generations following them are smaller and logically have fewer members to even start small businesses – and don’t really want to.

Another philosophy points to the collapse of small banks and credit unions in the post-crisis years, and the collapse of the market for home equity loans, which could have made it harder for would-be entrepreneurs to get access to capital.

That is related to, but slightly different from, the regulatory hurdles that new businesses face. Banks, for example, haven’t stripped their SMB lending down to its most basic level because they don’t like entrepreneurs – but because regulations over the last decade or so have worked hard to steer banks away from risky lending, and new businesses are risky by definition.

And that’s just the lender regulatory issues: The businesses themselves face regulatory hurdles in droves. Want to start a financial services startup? Better have a very full and robust compliance department and a perfect working knowledge of AML/YC regulations. Want to accept credit cards? Get to know PCI DSS (or hire a vendor who does). Hoping to sell some food out of a truck? There are a host of federal, state and local regulations you need to know – and it’s probably best to get up to speed on the zoning laws in your area as well.

Oh, and we’re not done yet: There are also overtime laws, the ACA, wage-in-hour laws, insurance requirements and permitting rules. After all, you can’t just start giving people haircuts without a license; you first need to prove you are a licensed beautician.

If you think of the most successful startup of the last 10 years – Uber – it is notable that among the things it is most famous for is deciding to ask for forgiveness of local regulators instead of asking for permissions. If they had, there might not be an Uber today.

While the big corporation explanation hits the possibility that big companies are intentionally squeezing out smaller startup competitors, it overlooks the fact that even if large companies were making no such concerted effort, they would still be the only players in the game with the size, scale and capital to meet all the myriad regulatory requirements.

Whatever the case – or whatever combination of them – the outcome is clear. Startup formations are fizzling, and that is reason for everyone to worry.

“Everybody loves entrepreneurship, but they’re not aware it’s in trouble,” notes John Dearie, founder of the center for entrepreneurship. “If new businesses are the engine of net new job creation, and if new businesses are the engine of innovation, and new business creation is at 30-year lows, that’s a national emergency.”

We couldn’t agree more.