Mounting evidence concludes that entrepreneurial activity is declining in the US. Over the past 30 years, the annual number of new business startups has declined significantly. There is also evidence that this trend has accelerated in the last decade. Today we’ll look at some of the reasons why.
New businesses represent virtually all net new-job creation and nearly 20% of gross job creation in the US, according to the Kauffman Foundation. They also strengthen our local communities and provide new ideas to advance the economy. The opportunity for all Americans to start and own a business has always been a fundamental part of the American Dream.
Yet the number of new business startups today is half of what it was 30 years ago.
A young person trying to start a traditional business in today’s entrepreneurial climate faces far greater challenges than Debi and I did when we started ProFutures in 1984. More industries are dominated by huge companies that make it difficult for new competitors to survive.
Additionally, our government, rather than helping to level the playing field, imposes barriers through unnecessary regulations and red tape. Today, the World Bank ranks the US 53rd in ease of starting a new business — falling behind Russia, France and Israel, among others.
Interestingly, the increased obstacles facing American entrepreneurs today do not affect everyone equally. There is a widening opportunity gap. Federal Reserve data reveals that the number of people under 30 who own businesses has fallen by 65% since the 1980s and is now at a quarter-century low.
Millennials, who might otherwise be today’s dominant force in starting new businesses, remain largely on the sidelines. A massive increase in student debt, lack of home ownership (which has historically been a great source of capital), and risk aversion stemming from the Great Recession contribute to this lack of startup activity.
Additionally, our country’s startup environment is dominated by urban, white male entrepreneurs with much less participation by women and minorities. Morgan Stanley reports that women and minority-owned businesses receive 80% less investment than the median investment in new businesses overall. The Kauffman Foundation also reports: “Among firms that started with at least $100,000 in capital, 82% are white-owned, 13% are Asian-owned, 4% are Hispanic-owned, and 1% are black-owned.”
While venture capital has kept the “unicorn” technology startups in Silicon Valley and other entrepreneurial hot spots like Boston and New York well-funded, traditional entrepreneurship throughout most of the rest of the country suffers. Pitchbook reports that 75% of venture capital funding goes to the Bay Area and Silicon Valley, New York and Boston.
Here’s another statistic that surprised me: The Economic Innovation Group reports that half of the new businesses started today are concentrated in just 20 counties out of 3,149 (only 0.006%) in the country.
In the modern economy, “Mom-and-Pops” have little chance against large chains like Wal-Mart. As a result, the decline in dynamism has been especially severe among retail and service businesses. This trend isn’t just a result of the Internet; it’s been happening since the 1980s.
If smaller and less productive businesses are driven out by bigger, more productive ones, is that bad for the economy? Maybe, maybe not. But it is having profound social and political effects that are hard to measure.
For centuries, small business has been a route to the middle class and the upper-middle class for the enterprising and the self-reliant. What happens when this class shrinks? What happens when business ownership stops being something anyone can do because access to capital is harder to come by, especially in the case of Millennials?
Entrepreneurship used to be the great equalizer, but the lack of financing available for new startups in some parts of the nation – and to people of different genders, races and socioeconomic statuses – has exacerbated a growing opportunity gap for would-be entrepreneurs.
While the statistics on small business startups are bleak, a lot of economists are convinced that this trend will improve going forward. They point to the fact that our economy remains strong, regulations are becoming less burdensome and consumer demand has never been stronger.
ZipRecruiter, the large job search engine, sees signs of a rebound in small business startups. It believes that instead of being scared off from entrepreneurship, Millennials are simply biding their time and preparing to found new businesses in the coming decade.
They also point out that 10 years from now we’ll have more working people in their 30s than ever before, many of whom will start their own businesses at some point. ZipRecruiter concludes: A combination of new policies, brave entrepreneurs and mindful politicians will work in tandem to tackle the [startup] problem. Let’s hope they are correct!
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