Startups

America’s Startups Crisis: It’s Hurting the Economy

From the 1980s to 2014, the percentage of private-sector jobs that startups contributed to the U.S. economy fell from 4% to 2%. This apparently small drop has a big impact, however. If business startups were proceeding at the same pace as in the 1980s, today the U.S. economy would be more dynamic, adding about 200,000 more employers and 1.8 million more jobs per year, according to an article in the Wall Street Journal.

Only a tiny percentage of startups, defined as firms less than one-year old, ever grow to enjoy the extraordinary success that investors and consumers associate with household names such as Facebook Inc. (FB), Twitter Inc. (TWTR), Uber, Airbnb, Instagram or Slack. However, the real engine of economic and employment growth traditionally has not been a handful of star performers in glamorous fields such as tech, but rather broader-based, smaller scale, less headline-worthy entrepreneurial activity.

The current economic expansion has been the weakest in the post-World War II period, with average annual GDP growth at only a 2.1% pace since 2009. The most recent annual economic report from the White House, meanwhile, finds that the current recovery, including employment growth, has indeed been hampered by slow startup activity, since young firms tend to expand faster than established companies.

Measuring the Decline

Data from the U.S. Department of Commerce indicates that the share of private companies that are less than one year old fell from 16% in 1977 to 8% in 2010 and thereafter. The average was about 12% during the 1980s. Meanwhile, startups accounted for 2.1% of total U.S. employment in 2014, down from nearly 6% in 1977. The average for the 1980s was roughly 4%.

Reasons for the Decline

Economists at Goldman Sachs Group Inc. (GS) point to recent financial reforms and regulations that have reduced the flow of credit to startups, raising the barriers to new business formation. Other analysts cite demographic issues, such as Baby Boomers reaching retirement age and Millennials only now reaching the entrepreneurial age bracket. Yet others speculate that potential financial backers of startups in general are more risk averse or expect faster returns on their money than those in previous eras.

Tech Woes

Another worrisome sign is that labor productivity has been trending downward for over a decade. The White House economic report finds that fewer startups mean fewer job seekers finding positions appropriate to their skills, leading to further declines in productivity. Living standards typically cannot improve without productivity increases.

Not enough startups seem to be achieving significant productivity gains. For example, only 9 of the 1,027 tech companies that obtained seed funding in 2009 and 2010 have grown to $1 billion in value, according to CB Insights. A Massachusetts Institute of Technology (MIT) study also found that tech startups seem to be having greater difficulty recently in scaling up to become successful large companies.

 

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