FTC Juices Small Business Boom + How Silicon Valley Started

Welcome to The Shift, a weekly newsletter where I provide thought-provoking ideas to help you think differently about your career and money.

Stifling Side Effects

Get ready for a small business boom.

A recent ruling by the FTC (Federal Trade Commission) to ban non-compete agreements could prove to be a major boost for workers with an entrepreneurial itch.

Most non-competes prevent employees from working for a competitor for set period of time (can be up to several years) after leaving an employer. The original goal of these agreements was to prevent the distribution of trade secrets to competitors.

They also negatively impact wages for employees by preventing job switching, according to the FTC.

My take: Another side effect of these policies was that they unfairly limited the amount of competition in an industry by preventing the formation of new businesses.

If all the people that have knowledge about a product or industry are restricted from using that knowledge elsewhere, competition and innovation get stifled.

And people get stuck.

Opening the Floodgates - Timing is Everything

What I find most interesting about this announcement is the timing of it.

It collides with a shift in worker preferences for autonomy and a significantly lowered bar of entry to entrepreneurship.

The FTC says it expect the non-compete ban will boost new business formation by 2.7% a year, which equates to over 8,500 additional new businesses each year.

I think that number is conservative.

Consider these trends:

• Elevated, consistent small business growth

• An increase comfort level with independent work (i.e. being an entrepreneur)

• The rise of part-time work and side hustles¹

• Elevated quit rates

That alone suggests there will be significant pent-up demand for those newly freed, skilled workers.

Which also means, worker shortages aren’t going away…

Maybe the FTC’s estimate for worker wages to increase $524 per year is light too??

Side note: The US Chamber of Commerce is suing the FTC to overturn this policy. They say the FTC doesn’t have the power to create such a policy.

My take: Regardless of what the law decides, I’m gonna guess the public support for this ban will result in some version of the policy finding a way to become reality (if through Congress or otherwise).

Why Did Silicon Valley End up in Cali??

Did you know non-competes played a major role in Silicon Valley landing on the West Coast?

Turns out California was strategically placed.

In the 1950s demand for semiconductors skyrocketed as the US decided to go to the moon. A small company with an alienating boss, named Shockley Semiconductor, was the first to build silicon semiconductors in Palo Alto. The location was partly chosen because the founder’s elderly mom lived nearby.  

Shockley’s employees, however, grew tired of the dictatorship and unwelcome work environment. They jumped ship and started their own company, directly competing with their former boss.

The company was named Fairchild Semiconductor.

Being engineers and innovative at a time when money was flowing into the industry, many of the Fairchild employees continued the trend to break out and build their own companies.  

Companies like RIM, National Semiconductor, Raytheon, Intel, etc. emerged in the process. A culture of mobility was embraced.

You can point to California’s strict ban on non-competes, which was put into place in the late 19th century, as a driver of this mentality. The policy allowed for a free flow of workers between companies and supported the emergence of offshoots (or start-ups).

You wonder what Silicon Valley would be like if non-competes were allowed back then.

It’s clear, policy, or the lack of it, impacts growth and innovation.

Even if by happenstance.

P.S. I’d be forever grateful if you’d share this with 1 other person who might enjoy it. 🙏

Let’s make The Shift!

Lindsey

Sources:

1. Bloomberg.

2. Center of Strategic & International Studies.