The number of startup businesses continues to slide. In 1977, the share of US firms that were less than a year old was at 16%. In 2014, the latest data, the percentage was 8%.
The Wall Street Journal says Sputtering Startups Weigh on U.S. Economic Growth.
Is that the case?
The U.S. economy is inching along, productivity is flagging and millions of Americans appear locked out of the labor market.
One key factor intertwined with this loss of dynamism: The U.S. is creating startup businesses at historically low rates.
The American economy has long relied on fast-growing young companies to fuel job growth and spread the latest innovations. As recently as the 1980s and 1990s, a small number of young firms disproportionately contributed to U.S. employment growth, helping allocate workers and resources to burgeoning segments of the economy.
But government data shows a decadeslong slowdown in entrepreneurship. The share of private firms less than a year old has dropped from more than 12% during much of the 1980s to only about 8% since 2010. In 2014, the most recent year of data, the startup rate was the second-lowest on record, after 2010, according to Census Bureau figures released last month, so there’s little sign of a postrecession rebound.
The share of employment at such firms, meanwhile, has slipped from nearly 4% to about 2% of private-sector jobs.
While only a few percentage points, the drop translates into hundreds of thousands of companies and jobs. If the U.S. were creating new firms at the same rate as in the 1980s, that would be the equivalent of more than 200,000 companies and 1.8 million jobs a year.
Researchers at the Massachusetts Institute of Technology delved into state business licensing information and found somewhat different but also discouraging results. That is, tech entrepreneurs are generating good ideas and founding companies at a healthy pace, but those ventures aren’t breaking out into successful big companies.
“The system for translating good, high-quality foundings into a growth firm, that system seems to have broken,” said Scott Stern, an MIT professor and co-author of the study on startups.
CB Insights tracked 1,027 tech companies that received seed funding in 2009 and 2010. By the end of 2015, nine—fewer than 1%—reached a value of at least $1 billion, a common measure of success. Those include Instagram, Uber and Slack.
At least for now, those companies appear more the exception than the rule.
Problem or Not?
Microsoft was founded in 1975. Such a company could not be founded today. It would already be bought out.
Is that a problem?
Notice the brief up trend from 2000 to 2005. How many of those companies became real estate failures?
How many of companies were never more than one person businesses or family-run business? Think about small restaurants or self-employed persons selling trinkets on eBay. And how many people tried multi-level marketing programs as a business, then gave up?
None of those job categories are going to add a thing to productivity.
The stated decline is meaningless unless we see the numbers of people in small real estate companies, small restaurants, MLM programs, eBay marketing schemes, etc that start, then give up.
When small tech companies get bought out by Google or Apple, is that a problem? It may be the other way around. Google and Apple have large resources to throw at new ideas. Small entrepreneurs don’t.
At best, there is not enough data to presume there is a problem. More than likely, the problem is imaginary even though the decline in productivity is not imaginary.
Ironically, the next big worry will occur when millions of long-haul truck drivers, Uber drivers, taxi drivers, etc. all vanish, providing the huge jump in productivity everyone seems to want.
Mike “Mish” Shedlock
Not a problem.
We will just making our markets more and more efficient until there will be only one employer left, our government. The best part is that they will be our landlord and dietitian too.
Maximum efficiency AND 100% participation.
I can’t tell if you’re just being flippant or really mean what you said. I’m hoping it’s the former, but you could be a Bernie supporter who actually believes that drivel.
If you can’t tell, I ain’t telling.
Eric Coote said:
Why start a business when you can work for a Government that produces money for nothing.
And nothing for money.
People are clamoring for government jobs. A warehouse dispatcher I work with just took a job with the regional water district earning $16/hour plus all the retirement and other benefits, and he will likely be able to retire before fifty, just to mow grass and pick up trash. There seems to be some type of mass delusion that believes that government can virtually hire everyone and the money will just come from heaven. How much of our “service economy” is serving government and government contractors now? They’ll be giving us classes on how to prepare meals harvested from our own appendages next. Finger sandwiches? Arm roast?
Are WE MAD?
I totally disagreed with you. It is an issue. Back in the 70s people were eating much less outside than today.
But my point is that true innovation never come from established business. Take new drug. Most of them are developed by startups that are purchased AFTER a couple of years where they only focus on R&D. Take IT security, one the field of IT still full of innovations. None of them come from the big established player like cisco or checkpoint. It’s always startups.
The fact that there are less and less startups is an issue because innovation is going somewhere else or is simply not done anymore. And true growth come through productivity increase created by innovation.
Lionel – You did not understand one of my comments.
Take out food, real estate, eBay trinket selling, MLM marketing ventures, is it even clear that the number of startups is down?
Michael Rudmin said:
Mish, I’ understand that you are saying there isn’t enough solid data here. Nonetheless, I’m going to say it is *indicative* of a problem. For every valuable startup, there are going to be a dozen or a hundred failed attempts. If there aren’t flawed startups, it is indicative that the total startups are down too. More than that, in order to work its way to a valuable startup, a person often has to try and fail several times with worthless startups.
When the cost of entering business is too high to enter business, it’s indicative of a problem, at the very least.
Now, based on the next blogline “Flash Manufacturing Report Shows Strongest Upturn Year, Input Cost Acceleration”, I’m also going to say there’s potentially another problem here. Manufacturing records a strong upturn. However, suppose I have a declining economy, and each year there are 5% fewer sales. Each year, 10% of the businesses go under. Each year, the number of businesses also increases by 12% as startups are attempted. Then, you cancel the startups only. Now, in fact you have the number of businesses dropping: 100%max, 90% max, 81% max, and so on. At that point, assuming that you simply call each business, and (if you get an answer) record the number of sales and total dollar amount, and assume that the businesses that didn’t answer average like the ones that did answer… you will find that you’ve had a sudden upturn in business! Business is booming! But in fact, it’s a flawed model.
Thus, a loss of total startups indicates to me that there is a problem, and possibly there are several more: it’s time to look at models, and see if they are invalidated by the change.
The start-ups most likely to reach critical mass may be those destroying the most jobs.
There’s also more to this than appears. More regulation is dampening start-ups as is complexity in new areas like bio. Globalisation and regulation favour large corporates that can more easily carry the costs.
The most surprising timespan on the graph was the DtoCom era. I would have expected the rate of start-up formation to increase up to the bubble bursting. Venture capitalists were throwing money at anything generating mouse clicks. Instead, the percent of start-up formation shrank.
I had the same expectation
If there had been more start-ups there might have been more resilience in the economy.
Well, this thirty year old start up is strongly considering giving up. Standing in line at the parts counter this morning while listening to a 86 year old man explaining how he is qualifying for 100% disability. Seriously. Isn’t a 86 year old man necessarily pretty much disabled from about everything due to his age? Are we really paying elderly people (and many more) disability simply because they are OLD?
Everyone is entitled EXCEPT those who work to EARN IT.
This is a big area to study as it brings together so many themes in globalisation, regulation, market segments able to deliver start-up opportunity and education.
Education is the big one as start-ups at big growth frontiers will likely be in areas of new science. Not necessarily McDonald’s types. They are most likely to come out of educational establishments and leading research.
bill McClure said:
education is a problem as well. To much emphasis on sports, music, and extracurricular activities. Less on useable skills. When was the last time you got the wrong change at a fast food place. If the youth are not taught basic skills how cant they hope to create a new business.
Less emphasis on WORK.
I’m fascinated by this whole area as the themes it brings together are so wide ranging and important given the number of people SMES employ in total.
a) Has the downside to failure increased?
b) Have combined barriers to entry increased – education needed etc?
c) Have incentives reduced by welfare?
d) Has large corporate culture changed making it more attractive to sell-up or nor break sway?
Here’s the latest disincentive to developing a salable product: China will copy it the minute if comes out.
Kinda puts a damper on any thoughts of starting a company to produce something.
I have 2 parts here. 1st, government spending as a part of GDP at 40%.
Then there’s an old video that is reminiscent of what we leaned a long time ago that doesn’t exist in today’s world. We need a reset button
In 1999 Friedman predicted that the Federal Government would get smaller in 10 years due to the Internet as the Internet will make it harder for the Government to collect taxes. In the following years we had a 2 term Republican President. Government grew !!
Even Nobel Prize winners can be dead wrong.
What is government but a massive complex of people DEPENDENT upon government’s ability to extract wealth from society. We see increased government direct employment, sub contract employment, numerous other businesses designed to serve government needs and mandates, AND direct dependents upon government entitlements. ALL DEPENDENTS. When considering the size of government, we should consider ALL government dependents, and there is more than you could imagine. Like our national debt, it is an irrelevant number until it suddenly becomes the ONLY number that matters. WE are wondering why it feels like we are getting less and less for our earnings, until we consider that likely 75% of it has already been siphoned off through the support of all of these dependents. It’s like we are being forced to hire people who do nothing while paying them top wages. Wealth is a function of productivity, not jobs or even wages. Paying more and more to do nothing is going to kill us eventually, especially when we consider that many of these leaches are at the highest levels of earnings. How many of these banks and financial institutions would be churning their kind of money without government enabling them?
We compete directly against GE. Hard to believe, but true Nevertheless. In the bad times,( when GE finance was “The bank”,) they got all the jobs by vendor financing. Now, not so much. Meanwhile, our technology is superior. By about 5X. That’s a lot. Speaks volumes about how distorted our economy was. It’s fun to kick the shit out of GE. No. really. It’s fun!
Nice one. Large corporates cannot handle everything at the frontier and start-ups are critical to kicking large corporate backsides. They can respond more quickly, more personally, adjust and customise. This is a real positive to all of us.
How long has your business been going?
Thirty friggin years! New Logic Research. Google us. It’s been a very frustrating log slog. But victory is sweet. The winds of change they are a blowing my brother. It’s a hard rain that’s gonna fall.
Good luck with everything.
in My old Job we competed and Sold to GE ( different divisions ). It was hilarious because they were always so insanely arrogant but their quality, through-put, and other Numbers were Way behind ours. our Enterprise had 250 people all of whom just worked hard.
With the regulations, taxes and paperwork today, there is no way I would start a business.
At least, not in this country.
Mike Bravo said:
One logical fallacy is considering the number of small business that convert into large businesses to be a sign of dynamism. It is a sign of individual business success, but the reasons small businesses are not growing into big ones can be many … the cited ‘The get bought out by big businesses’ is but one permutation, but they also get put out of business by big businesses that lobby government to tighten the various screws. This last point goes specifically to why a decline from 16% to 8% of all businesses is salient to further consideration.
Truth is, Big Government prefers to deal with Big Business because Big Business has enough waste to allow for comfortable funding of various unfunded or semi-funded mandates, e.g. Obamacare, and it is a lot easier to collect the taxes of millions of individuals from a few large companies than to scramble about trying to get it from sometimes under-capitalised small business owners who let the quarterly tax filings slide from time to time or, worse still, from individuals themselves.
They don’t want you to be an entrepreneur, full stop.
I have been a Member of a prestige club in a major metro area for over 30 years. 30 years ago the club was populated by properous guys who owned businesses that made stuff. Today, it’s prosperous guys who work in finance.
The decline of small and mid-sized business in the US is due to a host of factors; taxes, regulations, offshoring, and insane “‘other costs”.
For example, since ObamaCare health insurance now costs the employer $18,000 a year for a decent family plan. That’s $9/hour burden for each FT worker, add in 15% for social security – it’s insane. Hire a guy for $15/hout and social & medical add $11/hr.
So the kids of small & medium businessmen say to themselves; to heck with that; I’ll go sell Stocks
I believe Obamacare only kicks in once you get 50 employees. But, it likely increases costs if you want to provide health benefits as opposed to being required to provide them.
Ron J said:
“Truth is, Big Government prefers to deal with Big Business because Big Business…” can pay $675,000 to a politician for 3 speeches and $100,000 for a political dinner.
You got it, Ron.
Absolutely. I listen to people telling us that while our stated corporate tax rate is 35%, that in reality, the average corporation only pays 19%. If this is true, and we also know that many large corporations are paying ZERO, then we must also assume that many more are paying the full 35%. It is THOSE corporations, the ones who cannot buy protection from government (because that is EXACTLY what they are doing) are either failing or relocating to lesser tax areas. The arrogance of ignorance is unbearable. Business, like any entity, seeks first to survive, long before thoughts of patriotism or nationalism come into play. When our government DELIBERATELY sets forth laws that they KNOW will harm business, it is an overt calculation…..to what ends? Or do they even care? Every bit f destruction is met with another “political program” designed to remedy it, but yet typically only makes it worse. The is a direction here. Do we see it?
It is the US only corporations that get hammered with high rates.
While I would personally lower the rate to 0%, we would be far better off and likely collect more money if the rate was 10% across the board, applied with no exceptions, and no deferments to profits and money held overseas.
By lowering the rate to 10% with no exceptions you would simultaneously give a tax cut to small, local business and give GE and other tax code scumbags the kick in the teeth they so richly deserve.
I mentioned almost exactly this plan to my uncle who recently retired as a VP at a very large, NYSE listed corporation thinking he would oppose it out of some kind of allegiance to that way of life or that company but he immediately agreed that it would be more fair.
Jon Sellers said:
In a global economy, just looking at the US doesn’t make sense anymore. How many small businesses actually outsource manufacturing to China? And with Chinese workers seeing how things can be manufactured better, how many of the startups are in China?
Now add another trendline for the rate of immigration (legal, illegal, refugees) – since we continue to hear how many businesses/jobs these immigrants create
John Smith said:
If all the truck drivers, Uber drivers and taxi drivers suddenly vanish, we can find new ones. This would be good for employment.
Self-driving vehicles? Not Going To Happen. (at least, not for a VERY long time).
If VERY long time means by 2022-2024 you are correct.
Otherwise you clearly do not understand trends, regulations that have already changed, the advance of technology and dozens of related things.
All for OUR benefit, right?
I guess life WILL be easier, setting at home in front of our televised indoctrination device, while waiting for our “account” to be credited once more. Hell, we won’t need a car anymore if we have no job and can make all of our purchases from home on our government regulated, fully automated online store, while still waiting on our back ordered nutrition free loaf of bread and zero calorie nutritional drink. Makes me hungry just thinking about it!
Tony Bennett said:
“The number of startup businesses continues to slide.”
I’ve wondered how accurately BLS has captured this in employment number.
IOW, how close is Birth / Death model to reality?
I wonder how we can believe ANYTHING they tell us. Is it not apparent by now that government employees, sub contractors and the media will NOT bite the hand that feeds them and will spread whatever information/disinformation called for to advance their agenda?
Are we waiting for them to issue a memo to that effect, or have mass admissions of guilt?
We are left to believe what we see with our own eyes and NOTHING more. They have destroyed our confidence and at this point, if they are to retain power, it will have to come in the form of force. The blatancy and audacity of their behavior has left no other option for them.
Yup. Even comically biased politifact looked at the claim that there are 90 million working age americans not working and said, nonsense, it’s only 20 million.
Okay, let’s use that number for the moment. If we have really only have a 5% unemployment rate then those 20 million people are only 1/20 of the possible workforce meaning that there are 400 million working age americans and 380 million of them are working. However, the total population of the U.S. including children, the elderly, the disabled etc is only around 340 million people. The implied overall population of a country with 400 million working age americans must be around 500 million.
Tellingly, politifact did not find anything wrong with the federal government claiming a preposterously low unemployment rate.
The declining numbers are particularly surprising when considering many startups require almost no capital, like selling things on ebay or being an uber driver. Not sure if these are counted as startups.
Ron J said:
“Microsoft was founded in 1975. Such a company could not be founded today. It would already be bought out.”
Speaking of buy outs, news is this morning that TD Ameritrade is buying Scottrade.
Roger Riney gets a seat on the board while employees fall to “$450 million in combined annual expense synergies” commonly known as layoffs.
Brian E Considine (@e_considine) said:
I think you missed a key factor. You casually mentioned companies like Uber and eBay but how many startups have these companies killed?
Uber and Ebay have probably displaced a large number of startups. In a world without either company, there are probably many people who would have spun off new taxi companies or small retail stores. Instead there’s no need to even do a startup as you can now just sign up as a driver with uber or create a storefront on ebay.
Likewise consider the rise of the ‘gig economy’. I suspect decades ago many ‘gig workers’ today would have started at a big company and decide to try to spin off a company of their own. Instead the rise of temp workers and ‘gigs’ allow lots of workers to sell their help to large companies for one off projects without creating a new startup company as middle man.
The best part is Uber and Lyft will be actually ELIMINATING jobs once they have fully embrace driverless car fleets….cars very likely made in a foreign land. But we will need cheap transportation so we can affordably get to our healthcare provider to retain our disability status.
” You didn’t build that! ”
~ Barack Obama, rebuking the notion that reward requires risk taking
“You couldn’t say that!”
The citizenry, in turn, pointing out his general inability to speak intelligently without a teleprompter supplying the words.
Brian E Considine (@e_considine) said:
My point is that in many ways a ‘startup’ is inefficient. You have to get a space, hire support staff, invest in computers, furniture etc. The gig economy to some measure eliminates that. You can just troll ads or register with a few agencies and take on temp jobs. A startup is as necessary as an existing company can contract directly with a person.
So on one end you have fewer startups because people are leaping directly into being a solo contractor. On the other end existing companies downsizing and using contractors thereby making the average age of a corporation go up.
Marcin Romaszewicz said:
The lower rate of startup formation is a problem, for various reasons.
The first reason comes from von Mises via the Economic Calculation Problem. The economic calculation problem stipulates that large organizations become become insulated from the price signal, and engage in inefficient behaviors. This is generally applied to governments, but it also applies to large companies. As they get larger, their decisions are increasingly based on approaches closer to central planning than customer needs, so they become less efficient – a recent example of that is Apple’s failed car project, which squandered a lot of money. If all we had are giant companies, I imagine we’d be buying over-priced, just barely good enough goods and services. Continue this process long enough, and the big businesses will start to fail as people opt out of their products altogether.
The second reason is that you have fewer companies from which another giant company could emerge. Such a success story creates a lot of wealth, wealth creation is good.
The third reason, which I think is a big one, is that a decline in startup formation is indicative of economic policies which stifle business creation. I’m familiar with what happens in my industry, tech, and here, SOX changed the exit model for startups. Going public is so onerous, that acquisition is often more attractive than going public. During the last bubble, everyone tried to go public as fast as possible, today, you only hear of the occasional big IPO, and it’s always news when it happens, because there aren’t very many lesser IPO’s because it’s simply not worth the compliance cost.
There should be a healthy churn of startup formation, destruction of large inefficient companies, and the mix of productivity and creative destruction which this would entail. As it is, we’ve got too few businesses starting, and too many zombie businesses still in business due to the regulatory advantages they enjoy from being so large (the large banks, for instance).
Brian E Considine (@e_considine) said:
As they get larger, their decisions are increasingly based on approaches closer to central planning than customer needs, so they become less efficient – a recent example of that is Apple’s failed car project, which squandered a lot of money.
This doesn’t seem like a very intelligent example. Apple has specialized in being the first to capture the market for things that don’t exist yet. Since things that don’t exist typically don’t trade in the market there are no price signals. What people are willing to pay for a watch with a server’s worth of computing power, for example, is only a guess until you put one out there….and even then that may not be the ultimate price. Many things that now seem like no-brainers (tablet computers, smart phones, even smart watches) had previous versions that failed in the market before a big take off. Fifteen years from now we might getting rides in GoogleAuto writing blogs about how foolish Apple was to give up on cars.
But the big problem with such a business model is that you can over estimate what people are willing to pay for something that doesn’t exist and you can also overestimate your ability to actually produce the imaginary product. Saying money is wasted here kind of misses the point. Money is also wasted when someone opens a new restaurant and the theme doesn’t catch or someone drills a new oil well and it turns out it doesn’t produce any oil. Whether such things will work or not is unknown and the only way to know is to do them and see what happens.
This isn’t a price signal problem. The fact that companies like Google and Apple are ‘wasting money’ trying to come up with the next killer product is a positive sign. It signals that neither company is comfortable with their pseudo-monopoly position and huge profit margins.
The third reason, which I think is a big one, is that a decline in startup formation is indicative of economic policies which stifle business creation.
Blah blah blah. There’s always bad economic policies just as ‘finding a job’ is always hard when talking about one’s brother-in-law no matter what the actual unemployment rate is.
Intellipitch Group said:
Small business powers economic growth upward and downward. Very important part of any healthy economy. Build a business today.