Early-stage activity lowest since 1977

March 24, 2011

At WSJ’s Real Time Economics blog, Justin Lahart reports on Census Bureau data that indicate the most recent recession has been exacerbated by a dearth of start-up activity, which is down 17.3% from a year ago and is the lowest level since records began in 1977.  Even more worrisome is the fact that the slowdown in investment activity in the last three years is far worse than we have experienced in past recessions.

One reason that fewer companies got started in the most recent recession is that the availability of financing dried up. Angel investors and venture capital funds cut back on putting money into new businesses, and opportunities for self-financing, like taking on additional mortgage debt, became more limited.

Mr. Haltiwanger [a University of Maryland economist]  worries that the drop in start-ups could make the U.S. economy less vibrant. Fewer new businesses amount to the country not rolling the dice as often on creating the innovative, fast-growing companies that will help drive the economy. “Not only did we lose all those jobs, we may have lost future, successful businesses,” he said.

Mr. Haltiwanger’s point about future growth is worrisome, since over half of the Fortune 500 were started during a previous recession or bear market.

Although it does remain a challenging environment for entrepreneurs – due to both the scarcity of early stage capital and an uncertain tax/regulatory environment – the good news is that venture financing has rebounded and is higher than last year.  The bad news is that venture financing is still well below where it was two years ago.  While we’ll take any movement in the right direction, it is clear that legislators at both the national and state level need to think hard about enhancing the incentives for both individual and institutional investors to invest in small, private growth companies as key elements of their economic recovery strategies.

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