Where are the start-ups? – Part II

January 14, 2015

The U.S. Census Bureau reports that the total number of new business startups and business closures per year -- the birth and death rates of American companies -- have crossed for the first time since the measurement began6 years ago the number of business start-ups fell below the number of business failures, and it has yet to recover.  This leaves us a stunning 12th among developed nations in terms of business startup activity.

So argues Jim Clifton, Chairman and CEO of Gallup, who cites data that show 20 million of the oft-reported 26 million businesses in America are inactive.  Only a small % of the remaining 6 million are responsible for job growth:

Of those, 3.8 million have four or fewer employees — mom and pop shops owned by people who aren’t building a business as much as they are building a life. And God bless them all. That is what America is for. We need every single one of them.

Next, there are about a million companies with five to nine employees, 600,000 businesses with 10 to 19 employees, and 500,000 companies with 20 to 99 employees. There are 90,000 businesses with 100 to 499 employees. And there are just 18,000 with 500 employees or more, and that figure includes about a thousand companies with 10,000 employees or more. Altogether, that is America, Inc.

A common misconception lumps together “lifestyle” companies and high-growth start-ups. Job growth comes mostly from new businesses that grow rapidly, not the more common short-hand of “small businesses.” The jobs created by high-growth companies, busy inventing products and services (and sometimes industries), dwarf those lost in the ongoing employment churn experienced by small businesses. The net result is remarkably stable cumulative job creation from start-ups despite their high failure rate.

Mr. Clifton also writes that “Entrepreneurship is not systematically built into our culture the way innovation or intellectual development is.”  Very true, as this podcast from AEI argues in even greater detail.  The entire wide-ranging podcast is worth a listen. A few highlights:

  • The economy needs more than a narrow rebound in tech entrepreneurship, especially since the current rebound has been accompanied by an uptick in “hardening” or consolidation as early firms are gobbled up before they boom.
  • Using job creation as a measure is problematic because fewer people work for Twitter or Facebook than their previous equivalents – by the nature of what they produce. Michael Spence divides the US economy between the one that competes globally vs. the local market (tradeable vs. non-tradeable). The former generates national wealth but will employ fewer and fewer people; however, that’s what sprinkles money around the non-tradeable localities. “Not everyone can work at Google or Apple.”
  • Innovation can be costly for individuals and firms in the short run, but is the key to wealth in the long run. E.g., productivity enhancements in low-tech/low-wage firms, consolidation that drives out less efficient mom&pops, and innovation that pushes stale incumbents out.

High profile firms such as Google and Facebook (hardly start-ups, anymore) enjoy outsized awareness because they’re personal and omnipresent, and belie the fact that the data show declining business dynamism overall and for start-ups specifically.  No one knows at the outset which high growth firms will explode and disrupt – so we need “more shots on goal.”

For every Facebook there are hundreds of other early-stage companies who receive financial backing and grow nicely. The economy is not built on a series of towering home runs that clear the fence no matter how strong the wind is blowing into the park. Winning takes singles, doubles, walks, anything that advances runners and scores runs. Over-regulating (or over-taxing) early-stage investment activity is like building a pitcher-friendly park and keeping the infield grass long: you better plan on low-scoring games.

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