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Has America Really Lost Its Capitalist Mojo?
If you’re worried America is no longer great — excluding US Olympic prowess, of course — the above chart might neatly encapsulate those concerns. Looks like the Startup Nation is in the midst of an entrepreneurial crisis. Since the late 1970s, startups as a share of all firms have fallen by more than half, while the share of workers employed at new firms has fallen by three fourths.
This seems troubling on two levels. First, entrepreneurship of all kinds can provide employment and upward mobility. Second, high-growth or “transformational” startups are big drivers of high-wage job creation, innovation, and competition. As the Financial Times (source of the above chart) recently put it: “The suggestion that the US has a problem in the entrepreneurship department has come as a jolt for a country that prides itself in the red-blooded capitalist spirit that spawned the likes of Henry Ford, Ray Kroc and Steve Jobs.”
Theories to explain this chart include (a) the rise of big box retailers in the 1980s and 1990s, (b) a growing cronyist, regulatory state that favors big incumbent firms, and (c) access to capital, whether due to tougher post-financial crisis lending standards, the decline in housing wealth, or 80% of venture capital being concentrated in just a few states.
When looking at startups, however, it’s important to differentiate between high-impact startups — and those that dream of being the next Google or Facebook — and your local small business such as a dry cleaner, restaurant, or antique shop. Recent research finds the US economy seems to be creating lots of startups with high-growth potential, but they’re having trouble scaling up.
That finding is at least a bit curious to me though, since it is based on the idea that a “successful” startup goes public or is bought out. Yet one characteristic of the recent Silicon Valley boom is that valuable software firms are staying private, longer. Likewise, many tech startups are able to generate big revenue and valuation without necessarily hiring lots of workers. As Andreessen Horowitz analyst Benedict Evans has explained, “The way I try to think about it is the prototypical startup 15 years ago, you’d raised $10 million and you had a hundred people and you had a million users. And now you’ve raised a million dollars and you’ve got 10 people and you’ve got 100 million users.”
Some good news on this front: Kauffman Foundation research shows a recent pickup in “growth entrepreneurship.” Of course, things could always be better. Helpful policy might include labor market reform (occupational licensing and noncompete agreements), housing deregulation in high innovation cities, increased basic science research, a more pro-investment tax code, looser intellectual property rules, and greater government investment in science research. In general, government needs to think harder about how new regulation affects innovation or favor incumbents over startups.
If the US is to grow anywhere near as fast in the future as it has in the past, an even more dynamic entrepreneurial sector will be needed.
Published in Economics
I meet with fellow investors in biomedical and pharma. Our conclusion is there are fewer and fewer opportunities worth pursuing.
The burden of regulation, drug trials, and the vagaries of the statistical thresholds required to move foward mean that many more small firms are reducing their development risk, skipping venture capital and instead presenting ideas for development directly to drug firms to fund. Of course this limits payout on the top side for the winners, because the drug companies get in the ground floor. And, there appear to be fewer hits for the deals we do see.
Those big drug firms who kind of soak up the better opportunities are not that interested in taking the whole risk, want to define and contain exposure, and are not interested in IPO’s. They just want a slice of lots of bets. They may be drafting the wake of some small companies to augment and in-house project. Whatever, this phenomenon keeps some projects off the radar, or hidden from private or public funding.
Cronyism is a huge problem and one of the culprits is ZIRP policy. Why start a chain of nail salons when you can work on Wall Street, risk less, work less and make more?
Thank you for your post James.
Over-regulation is the main killer. However, over-regulation will vary State to State. I am part of a start up in a mid-western state, where the State pretty much leaves us alone. There regulation is not the main problem; access to capital is.
In my home state, California, where I have worked on dozens of projects-regulation kills most projects right away. Other states including mostly the Red and rural states not so much, but crazy regulation is starting to rear it’s ugly head there too.
Cronyism also is a problem, particularly any product that might have the government involved in some way.
Since 1981, I have been a business attorney working with small businesses and their owners. From what I have seen over several business cycles, this last recession has never really let up for these folks.
Regulatory policies and government functionaries are skewed heavily in favor of large, well capitalized businesses. And the biggest impediment I see from the Obama years is the collapse in community-sized banking. The so-called reforms put in place in the past 8 years or so have concentrated capital in the big money-center banks, and they are certainly have little interest (pun acknowledged) in the tiny loans necessary to operate many smaller enterprises. Small banks have been bought up in part because the costs of compliance with Dodd-Frank and other regulations have skyrocketed, so the local banker who dropped by for a cup of coffee and a chat while discussing the plans to grow have all but disappeared.
Meanwhile, the media vilify business as a rule, and the educational establishment continues to churn out semi-literate graduates who have no idea how to enter into a business other than as an employee with a demand for high starting wage, all the bells and whistles as far as benefits, and no work ethic.
Not a pretty picture.
Perhaps the US is not as great as you think with regard to the Olympics. When viewed on a medals / population basis. On that basis Oz is miles ahead of the US.
It would be interesting to see the trend