The Rise of Tech Startups: Good or Bad?

Over the last few years, tech startups have captured a good portion of financial news headlines. For the most part, tech startups seem to be enjoying a positive reception by the American public; this vote of confidence emanates from a belief that innovative companies are good for the economy, particularly during a period of recovery.

What is interesting about all the attention that tech startups have been getting recently is that there are so few of them. According to statistics compiled by the Economic Innovation Group, which participated in the 2016 Democratic National Convention, the participation rate of startups in the United States economy has sharply declined from 1977 to 2013.

In the late 1970s, startups made up 16.5 percent of all active businesses in the U.S.; these days, that rate is down to 8.0 percent. Though financial news headlines may suggest otherwise, tech startups in the last 20th century were more numerous and active than they are today.

Startup Inequality

Data compiled and analyzed by the Economic Innovation Group reveals that only 20 counties across the U.S. are meaningfully active in terms of tech startups, and these counties are located in California, Texas, Florida, and New York.

One of the problems with tech startups being mostly located in Silicon Valley and other “creative hubs” is that they attract entrepreneurs and tech-savvy talent away from regions that are traditionally dedicated to other industries such as manufacturing.

The geographic inequality of startups is not limited to the U.S. In the United Kingdom, more than 100 tech startups considered relocating from London to Germany and Ireland in the wake of the Brexit referendum to leave the European Union. This is a lesson to be learned by government officials and politicians that wish to develop technology hubs in their jurisdictions: startups need to be enticed with policy, subsidies, talent, and a positive business climate.

Financial Elitism in the Tech Sector

The gloomy forecast issued by respected investment analysts at the beginning of 2016 has largely failed to materialize. In the second quarter, Wall Street experienced a welcome rebound that extended to venture capital firms that invest in tech startups.

From April to June, venture capital firms convinced investors to write big checks for tech startups such as Uber and Snapchat. All in all, more than $15 billion were injected into tech startups during the second quarter, but only a few dozen companies benefited from this funding.

It is certainly encouraging to learn that investors are willing to inject $15 billion into tech startups; however, analysts believe that there is too much elitism in the venture capital scene. At any given time, thousands of promising tech startups that struggle to get funding are routinely ignored by the venture capital club. Thankfully, equity crowdfunding platforms now have the blessing of the Security and Exchange Commission, thus making it easier for investors and tech startups to connect.

The Talent Advantage

One major benefit that tech startups provide to regional economies is related to human resources. Talent pools in the metropolitan areas where tech startups do business tend to be highly sought after.

Talent management firms in places such as Silicon Valley, Dallas, Miami, and Seattle enjoy a sort of home field advantage when it comes to placing talented tech in companies that offer great salaries along with perks and benefits.

In the end, it is safe to say that tech startups are good for the economy. It is up to local governments, investors and business leaders to ensure that their communities are prepared to welcome the tech sector and develop the skills of the local workforce.