Is Entrepreneurship on the Decline in the United States?
The Census Bureau’s data shows a decade long decline in business formation in America.
If you’ve been paying attention you might be under the impression that entrepreneurship and the overall startup ecosystem in America are on the decline. Many pundits have observed that Silicon Valley has lost it’s magic while others claim it is now a “kill zone” for startups. Headlines like, “American Entrepreneurship Is Actually Vanishing” and “The US startup is disappearing” are commonplace today. I’ll let you in on a little secret — they’re wrong. The good news is that entrepreneurship in this country has never been healthier in both real terms and as a percentage of the economy. The bad news is that if we don’t get people to stop reporting that entrepreneurship is dead we might end up killing innovation in this country.
According to the most recent startup data from National Venture Capital Association, the startup ecosystem in the United States is healthier than it has ever been in history. For example, just last year startup investors raised a record $54B and the average VC fund doubled in size from the prior year. As a group, VCs invested more than $131B in more than 8,380 startups last year — compare that to the previous record of $100B set almost 20 years ago. On top of that venture investors pumped more than $10B in more than 2,000 very early stage startups — companies that had never previously raised institutional capital — this is a 15 year record high. By the end of the year more than 85 venture funded startups went public — raising more than $63B in IPO cash from investors — another record. Ironically, it has never been easier to start a high growth company and as a result fewer entrepreneurs bother to raise institutional capital to start — something that wasn’t possible just a decade ago. So why is everyone getting it so wrong?
The answer is actually very simple. Last year the Census Bureau released a new public-use data product called the BFS (Business Formation Statistics) and the media, always looking for new stories, jumped all over the data. The service is still in BETA and tracks the number of EINs (Employer Identification Numbers) applied for each quarter (between 500,000 and 800,000 typically). The data goes back fifteen years to 2004 and strongly correlates to the economy; stronger economy = more EIN applications; weaker economy = less EIN applications. The overall trend is fewer EIN applications from 2004 to the present — and is the source of many of the negative headlines. Of course the data has NOTHING to do with with the sort of startups we think of when we think of Silicon Valley. In reality, each year American entrepreneurs start about 30,000 high growth startups (e.g. companies that could become the next Google, Facebook, or Uber) compared with more than 2,000,000 ‘startups’ as defined by the Census Bureau — i.e. an entity with an EIN.
The BFS data is actually really interesting as a macro tool for understanding the overall economy, but that being said I’d take the data with a grain of salt. Over the years there have been a number of legal and tax changes that have reduced the number of business entities that are needed each year. For example in the past Texas didn’t charge a franchise tax on Limited Partnerships and as a result a lot of businesses were formed as LPs. The only problem was that the General Partner of an LP was personally liable for obligations of the partnership. The solution was to create a second entity in the form of an LLC that serve as the General Partner and would own 1% of the LP protecting the partners from personal liability. With a stroke of the pen Texas made this two EIN structure obsolete and if you looked at the BFS data for Texas the next year it would appear as though 20% of companies in the state went out of business in relatively short order.
So what is the big deal? The big deal is that people actually believe what they read and eventually they will amplify and act on those beliefs — true or not. For example, yesterday I was reading a post on Medium where the author states as a matter of fact that, “In America, innovation has been slipping for quite some time.” He argues that “China’s ecosystem is now the only place where real innovation is likely occurring”. He continues by explaining that Silicon Valley is actually a “kill zone” for “new startups and real innovation”. Finally, he concludes by calling on Congress to breakup Silicon Valley’s most successful companies and institute stiff regulations to guarantees fairness in the marketplace — to fix a problem that doesn’t exist. Investment and innovation are at an all-time-high in Silicon Valley and in the rest of the United States.
Sadly many of our leaders — even a leading contender for the White House in 2020 — agree with him and are promising to “breakup big tech” if elected. For each of the last five years investors have pumped more than $35B a year ($54B last year) into VC funds focused on investing in early stage startups. The reason there is so much cash available for our entrepreneurs and innovators is that they might actually succeed in creating the next Facebook, Google, or Uber — making their investors and employees very wealthy. If well intentioned politicians are able to breakup the most successful technology startups we’re not going to be able to attract capital into the asset class. Success has to be an option if we want to attract capital and human talent. Silicon Valley is one of our greatest assets — hopefully we won’t screw it up by making success impossible.
About The Author
Alexander Muse is a serial entrepreneur, author of the StartupMuse, contributor to Forbes and managing partner of Sumo. Check out his podcast on iTunes. You can connect with him on Twitter, Facebook, LinkedIn and Instagram.