The Hidden Decline In American Business Start-ups
As the developed economies pulled themselves out of the recession of 2008, the state of the economy was on everyone’s minds. Political leaders turned to entrepreneurs and small-business owners to help put the country back to work. In Barak Obama’s first State of the Union address in 2010, he mentioned the terms “small business” and “entrepreneur” 14 times. According to the Kauffman Foundation, new business creation is critical to a healthy economy for two reasons: job creation and innovation. Contrary to popular rhetoric, it is not small businesses, but rather new or young businesses that drive new job creation. For the purposes of this paper, I will focus on measuring entrepreneurship in relation to the rate of new business creation (which researchers identified as being five years or younger).
A study conducted in 2013 showed that nearly all new net jobs are created by new and young companies (Haltiwanger). A study by the US Census Bureau, called Business Dynamics Statistics, also revealed that America’s true engine of job creation is not small businesses broadly defined, but rather new businesses (Business Dynamics Statistics).
According to an article published in the Journal of Economic Perspectives, business startups account for about 20 percent of US gross (total) job creation while high- growth businesses, which are disproportionately young, account for almost 50 percent of gross job creation (Decker). This might sound like a healthy rate of start-ups and job creation, but after further examination it proves not to be. In a recent report from the Federal Reserve Bank of Cleveland, Americans created 12 new firms for every existing firm, but in 2011 this dropped to almost half, to 6.2 new firms per existing business (Cuomo). Even more startling, economic research suggests that the number of startups has actually decreased and the share of job creation from startups has declined by almost 30 percent over the past 30 years (Decker). Figure 1 shows the downward trend in both job creation and destruction.
Figure 1.
Source: Decker et. Al analysis of the US Census Business Dynamic Statistics
Ryan Decker and colleagues found that the startup rate has declined in all major sectors (Decker). Hathaway and Litan reported that the decline in new firm formation rates had occurred in every U.S. state and nearly every metropolitan area, in each broad industry group, and in all firm size classes (Hathaway). However, Decker noted that in high-tech sectors, the startup rate only began to decline in the post 2000 period (Decker). As noted in the history section, most of the big tech companies mentioned were founded in the early 2000’s. Figure 2 depicts technology startups decreasing significantly since the turn of the century.
Figure 2.
Source: Kauffman analysis of Census and BDS data
In 2008, the startup rate hit a shocking threshold, in which the percentage of new businesses created that year was smaller than the percentage of businesses that closed down. In other words, the birth rate of new businesses dropped below the death rate for the first time since these metrics were first recorded — and that downward track has continued (Ryan). Figure 3 maps out that downward trend.
Figure 3.
Source: Benjamin Ryan using the U.S. Census Bureau information.
When we see these rates we may wonder how this happened and why the public believes otherwise. To answer that question, I would point to the popularization of entrepreneurship. It is believed that the United States is the best place to start a business; it is, after all, the land of opportunity. Could it be that the popular images of the startup have developed a momentum that has outlasted, or even exceeded, the realities?
Not only do these new firms create employment opportunities, but they often innovate new products and services that keep our economy competitive internationally. Given the outsized importance new enterprises play in job growth and competitiveness, it is disturbing to see long-term reductions in the rate of new business creation. Despite recent research, no definitive answer has been offered as to why the rate of U.S. startups has declined so precipitously (Ryan). Some contributing might be:
1. Public policy and laws: When starting a business, one must make the effort to
obtain proper licensing, abide by regulations, obtain insurance for the company and
health insurance for employees, pay the government for unemployment, and make sure that all paperwork is submitted to authorities in a timely manner to avoid major penalties and fees. These increased regulatory and tax burdens can be a significant deterrent to someone contemplating starting a business. If a business begins to grow, so do the regulations. Occupational Safety and Health Administration regulations kick in at 10 employees, triggering the requirements of the Americans with Disabilities Act and the Civil Rights Act, plant-closing-notification and family-leave mandates at 50, Employee Retirement and Income Security Act, and Equal Employment Opportunity Commission reporting at 100. In a public policy report, the author wrote, “Removing obstacles and reducing the regulatory and tax burdens on small business could have a substantial, positive impact on the ability of small business to facilitate job creation. Lawmakers have a unique opportunity to unleash America’s entrepreneurial potential” (Lopez).
2. Recent Gallup research suggests that a crucial factor influencing the declining rate of U.S. startups is a decline in the personal savings rate. It was found that the Personal Savings Rate in any given year is most closely correlated (r = .92) with the rate of business startups four years later (Ryan). Not only are saving rates declining, but debt is increasing. Students nowadays are coming out of college 60k in the hole and their debt tends to follow them. This makes it much more difficult to personally invest or find an investor to start a business. We also see the middle class shrinking, which can be a contributing financial factor when creating a new business. In summary, individuals don’t have personal money to invest in a business, lenders don’t want to lend money to unreliable sources, and with the middle class shrinking there are fewer friends and family to ask for money to invest in a startup.
3. Brookings Institution researchers Dr. Robert Litan and Mr. Ian Hathaway indicate that the aging American population is one possible explanation for the decline in business startups in the U.S. Their theory is that the “baby boomer” generation (generally understood as those born between 1946 and 1964) is transitioning into retirement and becoming less entrepreneurial. At the same time they are being replaced with a smaller cohort of working-age individuals. The end result is fewer working-age adults to start new businesses (Hathaway). Both Gallup data and the Kauffman Foundation have indicated that the average age at which business owners founded their business is about 40 years old.
Millennials (Born from 1981 to 1997) represent approximately 85 million Americans today. By 2025, they could represent up to 75 percent of the American workforce. The oldest Millennials turn 34 this year, entering prime age, historically, for entrepreneurship (Ewing Marion Kauffman Foundation- Infograph). In pop culture we see the stereotype of an entrepreneur to be a 20 something year old that creates their business from their dorm room or garage. Contrary to this popular belief, the average age at which business owners founded their business is about 40 years old. Over the next 20 years, there will be more people than ever before in there 30s and 40s, the peak age for entrepreneurship (Ryan). These figures not only explain the decline in startups, but it also suggests that millennials are the people society should be looking to for taking the reins for the future of entrepreneurship.
Figure 4 shows the results of a nationwide cell phone and landline survey, conducted by the Young Invincibles in conjunction with Lake Research Partners and Bellwether Research. This research polled 872 millennials on their thoughts about the economy and entrepreneurship, and some obstacles were clearly named.
Figure 4.
Source: Kauffman Foundation
The Kauffman Foundation, which funded the survey, writes, “The poll points out specific barriers to entrepreneurship, including the inability to access capital needed to get a business going, lack of knowledge needed to run a small business, concerns with overcoming current debt burdens, and few mentors from whom they can learn. In fact, 65 percent of young people think that making it easier to start a business should be a priority for Congress, with 41 percent saying it should be a top priority. Eighty-three percent of millennials believe that Congress should, at a minimum, increase the availability of startup loans.”
I want to point out one last thing, it is not just the fact that money is lacking. It is also saturation. How many restaurants can exist on the same block? The environment of startups has changed. Technology is king. In that retrospect there are a lot of tech startups that are under the radar. They do not file for business licences. These entrepreneurs work on projects on the side or wait for traction before filing a proper business licence. Nevertheless, the decline of entrepreneurship is apparent from this data. Formidable barriers stand in the way of future entrepreneurship. With this in mind, it is important to find solutions that will help boost entrepreneurship in America.
