Why the ‘Fiscal Cliff’ Is Kryptonite to Entrepreneurs

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Originally published by CNBC

By Shawn D. Terry

Both U.S. political parties have created an obscuring fog of uncertainty that is holding back the creativity and risk-taking of entrepreneurs.

In addition, angel and institutional investors who provide these entrepreneurs with the equity capital they need are largely on the sidelines too, starving start-ups and growing companies of the growth capital they need.

The “fiscal cliff” and the related inter-party gridlock regarding the nature and future direction of taxation, regulation, and business cost structure looms as the largest reason both parties are spooked and sitting on their hands.

To spark a real economic recovery, it’s time for both sides of the political spectrum to figure out what can be agreed on for a national go-forward economic and budgetary framework. The sooner a deal that gets us off the fiscal cliff is put in place, the sooner we’ll see meaningful economic recovery.

Entrepreneurs—the kind of visionary, aggressive, see-around-the-curve types that have powered the American experiment for the past 236 years—have high risk tolerance. So why would a little thing like a lack of clear federal fiscal policy be such a roadblock? The answer to that probably lies in how entrepreneurs view risk.

Entrepreneurs are indeed willing to take greater risks than the average salaried worker in pursuit of problem-solving, personal satisfaction, and economic reward. They’re able to overcome the fear of failure because they tend to have faith in their ideas and their ability to compete in the marketplace. But entrepreneurs make bets on risks they understand—what it takes to make a technological breakthrough or get a consumer to sign up for a new service—or risks they can control (like hiring decisions, marketing expenditures, new capital investment, etc.).

The fiscal cliff, however, represents a very different kind of risk. It has created “rules of the game” uncertainty—the kind that entrepreneurs can’t control and find it particularly vexing to deal with.

How do you gauge consumer sentiment when economists say this political fight could cause a four percent economic contraction? No one knows. How do investors go about valuing a company or selling a company when capital gains taxes could soar suddenly and unpredictably? What will labor costs look like with a partisan shooting war over entitlements, taxation and healthcare implementation going on?

Not even the most informed insiders know, and this political uncertainty is magnified because relatively few entrepreneurs have the bandwidth to be deeply ensconced in policy debate and political handicapping.

America has everything it needs to maintain the most dominant entrepreneurial culture on the face of the earth. Positive risk-taking seems to be part of the American national DNA, and our entrepreneurs tend to like to help and support other entrepreneurs and spread the go-for-it gospel whenever they can.

We remain the world’s overwhelming global technological powerhouse. We’re blessed with an Internet-driven business culture that is remaking the way the world works, even as huge U.S. industries like health care and education are being reinvigorated by tech-enabled service models that promise enormous efficiency and availability improvements.

But our entrepreneurs must be given a copy of the new rule book. Cut a deal and explain for all to see what these new rules and frameworks are.

It doesn’t have to be perfect and it doesn’t have to last for a century. But this talk of cliffs and gridlock and eternal struggle is entrepreneurial kryptonite: The drive to innovate and the will to overcome gets weaker and weaker as governmental uncertainty pulses stronger and stronger. Just as problematic, the capital spigot is largely turned off as investors wait to find out what tax policy will impact their investments.

The doers in our economy can adjust to different tax levels, adapt to new ways of thinking about jobs and labor, and forge new collaborative ecosystems to raise growth capital. There is a winner’s confidence about most entrepreneurs, but the game must be defined and agreed upon first.

So please Mr. President, Mr. Speaker, and Mr. Majority Leader: Put America first—ahead of political parties, agendas and re-election campaigns. Work collaboratively to reach an agreement.

Defining the new rules of the game will let investors start investing and entrepreneurs start innovating and hiring. Blow that fog away and let’s all go help get this innovation economy rumbling powerfully forward again.

Shawn D. Terry is Co-Founder and Managing Director of Dallas investment bank MHT Partners, LP.