Earlier this month it was announced that the unemployment rate had dropped to 6.3 percent, the lowest since 2008. While that looks like very good news at first blush, another figure that was also released paints a very different picture: April marked a three-decade low in workforce participation among working-age adults holding or seeking jobs.
That statistic, known as Labor Force Participation, sank to 62.8 percent, a number we haven't seen since 1978. Not so good. That of course doesn't speak to people retiring, so let's look at labor force participation rate for people ages 25-29. That number hit a low in April of 79.8 percent, a number not seen since 1982. The kicker is that 1982 was the year the Bureau of Labor Statistics (BLS) started collecting the data.
Now, I'm not an economist, but I did work on Wall Street for nine years, starting in 1993 at age 16, getting my Series 7 stockbroker's license at age 17, unknowingly setting a Guinness World Record. Over the course of my career, and the years that have followed, I've watched this stuff very closely, since job growth is so key to the health of our economy.
The contrast between the unemployment numbers and the workforce participation stats seem to lead us in two different directions. One of the common complaints about the standard unemployment number is that it doesn't take into account discouraged job seekers who are no longer seeking employment, the self-employed and individuals who are looking to become self-employed, some part-time workers, the incarcerated, and other groups; so critics commonly consider it to be a very low estimate and an inaccurate statistic.
At last month's annual Conservative Political Action Conference, Donald Trump said he believed the March unemployment number of 6.7 percent was probably more like 21-22 percent. Of course, that's Donald Trump being Donald Trump, but you get my drift. Even the U-6, a different stat used by some economists, which is more real-world in my opinion, left us with a 12.3 percent unemployment number for last month.
Regardless of all of these numbers, it's clear that we need more jobs, especially if The Donald is in the right ballpark. More jobs equals more savings, more spending and more investment. More jobs can make America great again, and we all want that, don't we?
According to the U.S. Small Business Administration, about 52 percent of American workers are employed by small enterprises. Between 1990 and 1995, small business produced 75 percent of the economy's new jobs. That's remarkable. So we need existing small businesses to grow, which requires access to capital. To remain competitive in the world marketplace, and continue to innovate, we need new businesses to start and thrive, which also requires access to capital. One of the biggest problems that emerged from the financial crisis is that most small business saw their access to capital dry up almost overnight. They have barely seen a trickle since.
Credit lines were cut, loans were no longer available, venture capitalists pulled back, IPOs all but evaporated, even good old-fashioned angel investors went looking for bomb shelters, and many still haven't resurfaced. At the same time, in a low-interest-rate environment, the "search for yield" has pushed our markets to new highs, despite well-justified, deep underlying concerns about the economy. After all, it's often said that a bull market climbs a wall of worry. It's also true that nothing goes up in a straight line forever.
We went out to raise capital for my companies at the perfect time, right at the depths of the 2008 crisis, and although we've had success, the path has not been without its potholes and pitfalls. I have the scrapes and bruises to prove it. The irony is that I raised money for other early-stage companies professionally for nearly a decade, and did it very successfully. It was a different era, for sure, and many things have changed, so much so that I can't imagine what it must be like to go out into the marketplace as an entrepreneur, without the experience of knowing how to navigate those choppy, shark-infested waters. It was challenging for us, and we know what we're doing!
My observation is that venture capital is no longer done at the venture level, with the exception of some tech and biotech deals. Venture is now effectively early-stage private equity, looking to invest higher and higher on the growth curve than traditional venture investors of yesteryear. Many of them are looking for millions in revenue and/or cash flow. In my opinion, a true venture capitalist invests in ideas written on the back of a napkin. But the venture funds are too big now. It's hard for them to move the needle with small deals, not to mention the difficulties in managing a large portfolio of little companies, and the wasted time doing due diligence on embryonic prospective investment opportunities.
When I first started on Wall Street there was an almost countless number of small investment banks that specialized in providing capital to startups and small businesses, albeit at a steep price. But it was available, and deals got done. In my estimation, we created millions of jobs. Many of the firms employed unscrupulous sales and trading practices, and as such, most of them got in trouble and are rightfully gone. These firms are now only known because of movies like The Wolf of Wall Street and Boiler Room. My feelings about those films is fodder for a future piece, so we'll leave that there.
Many of the other firms that didn't color outside the lines, but were still an important component of America's growth engine, were squeezed out of business due to changes in regulations about trading, how a trading desk takes risk, how commissions are paid. Eventually trading moved from fractions into decimals, further tightening margins for market makers. Ever-growing regulation after September 11th to prevent money laundering slowed down these small firms even further. When the dot-com bubble burst, the IPO market dried up. Eventually even the best of the little guys took their balls and went home. Only the large underwriters survived or persevered, along with a handful of smaller houses, which brings us to where we are today.
Lots of people point to the cost of regulatory compliance as a primary reason for the dearth of small IPOs, and while that may be true to some degree, there is some data showing that more and more companies are staying private with the aim of getting acquired. Also, most of the onerous issues with Sarbanes-Oxley specifically related to audit requirements were waived for smaller issuers, as they should be, considering that the companies that triggered the legislation were all gigantic: Enron, WorldCom, Tyco, etc.
Without a doubt, the regulatory environment is ridiculous and has a stranglehold on our economy in many ways, but it hasn't stopped the IPOs completely. It just snuffed out an entire spectrum of small investment houses that served the smaller companies, which historically provided the largest percentage of new job creation, as I mentioned earlier. In fact, 2013 was the best year for domestic IPOs since 2000, which is amazing, but look at the numbers. The median deal size was $126.3 million and the largest one raised $2.8 billion. These are not early stage companies, regardless of how old they are. Our capital markets are dominated by large cap names, especially in the technology space. While these guys are definitely hiring, don't forget, small business has created 65 percent of new job growth since 1995.
So what do we do? I don't have all the answers. It's a very complicated situation. Certainly we need some regulatory rollback and some structural changes in the marketplace to allow the train to get back on the tracks. Also, I think it's an important point that regulation doesn't prevent people from breaking the rules. There will always be that contingent. What we really needed was more and better enforcement of existing rules, not more rules. We still do. In fact, more rules just makes it harder to enforce them.
One of the most important sources of capital for early stage companies is individual investors, or angels. Aside from your uncle or neighbor, who invests in your business because he likes you, angel investments used to be essentially facilitated by the small firms I mentioned. If deals don't come knocking on their door, now they have to go out on their own to find them, which is incredibly time-consuming, so they often band together to form angel investment groups. This ends up creating the unintended consequence of angel groups acting more like venture capitalists with their committees, onerous terms, heavy focus on technology, and slothful ways. In that scenario, risk capital becomes risk averse. Group think kicks in. Nothing good comes from that.
It's my opinion that we need to get back to investing in businesses that we know and understand, as locally as possible, and in sectors other than technology. At my company, we've been lucky. Most of the capital we've raised has actually been through our customers and people we know. I guess that speaks to the customer experience we create, and the confidence we engender, but it also points out how challenging it is to raise capital through what used to be more traditional channels. If we'd had to rely on venture capitalists or investment banks for growth capital, we wouldn't exist.
Hopefully the JOBS Act, despite all its imperfections, can help fill part of the canyon in the marketplace that was left by the precipitous decline in the small-cap market in the last decade, due to the disappearance of the small-cap investment banks, and the shift up the growth curve in the venture capital market.
Unfortunately, with the JOBS Act, I predict we will inevitably see a new crop of bad actors popping up, taking advantage of the relaxed legislation to the detriment of the individual investor. We may be jumping out of the frying pan into the fire. At least when small IPOs and private placements were underwritten by a registered broker-dealer, there was (supposedly, at least) a filter and some degree of due diligence, and some accountability. We are heading into a new frontier, and it feels like it might be the wild, wild west, all over again, and maybe even worse.
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