How the US Can Revive the Entrepreneurial Spirit
Recent studies have shown that startup creation has declined over the last few years. Meanwhile, big businesses are only getting larger. Are these the final days of entrepreneurship?
While Facebook was loudly announcing their intention to buy Whatsapp for a small sum of $19 billion, several studies showed something staggering:
The rate of new start-ups has been consistently falling since 1978.
A study by the Kauffman Foundation, based on the U.S Census and independent research, showed that the number of companies under a year old had declined by 44% since the late 1970s. And this wasn’t confined to one industry, but almost all of them. Alongside this, another study by the Brookings Institution showed that the number of new businesses isn’t just down but that more businesses are failing than being created.
As this conclusion arrived at the time where entrepreneurship was supposedly in it’s Golden Age, it’s no surprise that many in the business world were left shocked, trying to figure out how this could be possible. New businesses have historically provided almost all innovation, driving new productivity and new economic growth. They also are responsible for the vast majority of new job creation.
Such realities are becoming more well-known. Amazon’s Jeff Bezos, on announcing his plan to create 1 million new jobs in India was met with protests across the country. With one of the beliefs being that the 1 million new jobs might come at the cost of destroying millions of existing ones.
The birth, growth, and death of businesses is part of a dynamic economy. This helps to reshuffle resources and get them put to better use elsewhere. However, if there are fewer and fewer new companies being created, then aging companies keep a tight grip on labor and capital. This stagnates the economy and prevents it from moving forward.
But what is responsible for this decline? While it is universally accepted that launching a business is by no means easy, this new rate of decline suggests something else. In looking for what might be at the heart of the issue, the experts have isolated a few key explanations, which could help guide policy and shape a new culture of entrepreneurship moving forward.
The risk-averse generation
Each generation naturally comes with its own interests, struggles, and characteristics. Boomers thrived in an age of opportunity but also moved through eras of enormous social change. By contrast, millennials onwards grew up alongside incredible advances in technology, actively embracing new social networks, taking steps to defend their online freedoms and speaking out in defense of the environment. However, they may be more competent (and confident) with technology, but their relationship with risk is different.
The GEM reports that across 70 countries, 25 to 30-year-olds were far more concerned about failure than their elders. Likewise, from 1996 to 2015, the rate of young people launching startups has fallen from 35% to 18%.
Another consideration is that the U.S population is shrinking. In a simple matter of supply, if there are fewer new people there will be fewer new businesses created. Likewise, a declining population means less demand and smaller markets for new businesses to compete in.
Considering the number of tools and information available at their disposal – such as free content online for entrepreneurial skill sets like marketing, small business financial planning calculators, or Masterclasses from CEOs – you’d be forgiven for thinking newer generations have far less reason to fear failure than their predecessors. However, given many grew up through the 2008 depression, it’s understandable they’d take a more cautious approach.
Big business wins, small business loses
An established business always has an advantage over a newer one. If that established business also happens to grow larger and larger, then fewer startups will rise to challenge it. This can be seen in cities with a high concentration of chain stores. The more the concentration rises, the faster the startup rate declines.
It doesn’t take much to see how this parallels with the anxiety around Amazon. While Amazon can present new jobs, it also, by its size and the capital at its disposal, gives it an incredible, near-insurmountable advantage over the small homemade startups that populate the country.
There has been a huge increase in businesses expanding their existing operations in America. From 1978 to 2011 there has been a 50% increase in the number of branches opened. Prior to this, 80% of new stores weren’t part of existing megabrands, they were brand new businesses. Gap may have thousands of outlets all over the country, which is fantastic, but it’s not so fantastic for an ambitious young 20-something looking to open his new T-shirt printing business where he can express his creativity.
While the solution to this problem is challenging – the U.S. decries monopolies while it simultaneously allows companies such as Disney to purchase their competition – it’s also a matter of perspective. Tighter regulations on branch expansion may help smaller businesses but branch expansion itself can sometimes indicate a ripe market that more than one business can capitalize on.
Right money, wrong time
Lastly, although Venture Capital has far from dried up – VC firms invested 48 billion dollars in 2014 alone – the timing of the investments isn’t where it’s most needed. Rather than going to small beginners, the money was flowing to established players. Seed investment from VCs between 2005 and 2014 stayed flat, while the later round of investment for established businesses almost doubled.
There is also a question of industry. It is well known that investors flock to the tech industry, accounting for almost two-thirds of VC investments. This is fine if you’re in the tech industry, but if you’re on the outside, the funds can be even harder to find.
For a generation of entrepreneurs coming off the back of a global recession, access to capital is one of the toughest challenges they face. But unless VCs gain more confidence in early seed-stage investment and branch out away from the promised land of the tech industry, the capital is going to remain out of reach.
However, behind these somewhat depressing statistics, dozens of new industries specifically tailored to the interests of younger generations have entered the entrepreneurial space. Influencers across social media platforms like Instagram, and content creators on platforms like YouTube, Twitch and WordPress all have access to potential business opportunities at relatively low upfront costs.
Strangely, perhaps the easiest cure for the declining rates of entrepreneurship is disruptive tech platforms that offer new and numerous money-making platforms for ambitious creatives. Unfortunately, for now, we’ll have to wait and see.