WASHINGTON – American businesses are aging, I wrote last week, and a sharp decline in startup companies is a big reason. As the share of young firms shrinks, the surviving companies are naturally older – and this may have huge ramifications for the economy. Established companies may create fewer jobs and innovations than do young businesses. So, what’s happened to America’s vaunted entrepreneurs? The experts I contacted last week had a uniform answer: no one knows.
When you write “no one knows,” someone inevitably pops up claiming to know. I shouldn’t have been surprised a few days later to receive a 2013 book, Where the Jobs Are: Entrepreneurship and the Soul of the American Economy, written by John Dearie and Courtney Geduldig. (Dearie works for the Financial Services Forum, a trade group for big banks and financial firms; Geduldig is an executive at McGraw Hill Financial.)
Disturbed by slow job growth after the Great Recession, they decided to see what bothered entrepreneurs. Recall that last week’s column reported research showing that since 1980, young companies (defined as firms five years old or less) seemed to have created most – or all – new jobs. True, many older firms expanded jobs, but gains were largely offset by cutbacks at other older firms. In overall job creation, startups were decisive.
Recall also that startups had dropped from 15 percent of U.S. firms in 1978 to 8 percent in 2011. Their capacity to generate jobs seem to be weakening. To understand why, Dearie and Geduldig in 2011 organized roundtables in 12 cities involving roughly 200 entrepreneurs. The idea was to discover what entrepreneurs thought was holding them back. Despite regional and industry differences, here are six widely cited problems:
1. Schools – K-12 plus colleges and universities – aren’t turning out enough skilled workers. “I have jobs,” said one Texas entrepreneur. “I just don’t have the talent to fill them.”
2. Immigration policy is too restrictive, making it hard to keep U.S.-educated foreigners who might fill the skill gap or might become entrepreneurs themselves. For example, the number of H-1B visas – widely used for foreign technical workers – is capped at 85,000 annually.
3. Investment capital is scarce. Banks find startups too risky. Venture capital firms, stung by losses from the 1990s dot-com bubble and the 2008-09 financial crisis, retrenched. “Angel investors” – individuals investing their money in startups – did the same. (These trends have somewhat reversed.)
4. Federal, state and local regulations add to overhead and distract entrepreneurs from managing their firms. “The degree of exasperation and … anger,” write Dearie and Geduldig, “did surprise us.”
5. Constant tax changes – again from all levels of government – also divert attention and raise costs. “We literally spend thousands of dollars a month on accountants,” said one entrepreneur, sometimes “getting bills for taxes that we’re not even aware that we owe.”
6. Heightened uncertainty – reflecting the legacy of the Great Recession and disillusion with Washington – has bred cautiousness. “We have absolutely no plans to upgrade our equipment or purchase new computers,” said one entrepreneur. “Any kind of long-term investment is off the table.”
I don’t doubt that all these complaints are genuine and that, taken together, probably explain some of the recent slump in startups. It would have been astonishing if the financial crisis and Great Recession, which erased so much personal and corporate wealth, didn’t have an effect. Perhaps some of the other obstacles can be reduced or even eliminated, though many sound like a laundry list of gripes shared by many businesses, new and old.
But I’m skeptical that these problems fully explain the long-term slide in startups. Remember that it began in the late 1970s and that for much of this period – the mid and late 1980s, the 1990s – the country was highly prosperous. Also, tax rates dropped, and entrepreneurs (Microsoft’s Bill Gates, FedEx’s Fred Smith) became folk heroes. These conditions favored new companies, and yet the decline quietly continued. I think we’re still struggling to understand why. Could it be that a society whose members are getting older is more risk-averse and less adventurous? Good question.
Robert Samuelson’s column is distributed by The Washington Post Writers Group.