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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.