The U.S. is experiencing a decades-long decline in a key measure of entrepreneurship.
Entrepreneurs have always been a rare breed. Unfortunately, experts are worried they’re becoming even rarer.
By one measure, more Americans appear to be starting businesses. Last year, in a typical month, 330 adults out of every 100,000 launched their own businesses.
That’s an improvement over 2013, when the rate of new entrepreneurs was 0.28 percent, according to the Ewing Marion Kauffman Foundation. The foundation studies new business creation through its annual Kauffman Index of Startup Activity.
But if you look at new businesses that employ someone other than the owner—the companies that tend to have the greatest economic impact—they make up a shrinking share of the nation’s businesses.
In 2013, out of every 1,000 companies, about 80 were less than a year old and employed someone other than the owner. That measure, “startup density,” is 20 percent lower than what it was before the Great Recession, and has been declining over the last few decades.
This is bad news because new businesses help drive the larger economy.
In the 1990s, new companies regularly created more than 4 million jobs per year, the Bureau of Labor Statistics reports. Last year, they generated about 3 million.
“This is a major concern at the local and national level,” said Steve Bradley, the head of Baylor University’s Baugh Center for Entrepreneurship & Free Enterprise, one of the country’s leading entrepreneurship programs.
“Small businesses create the majority of new jobs in the U.S.,” Bradley said. “New businesses also bring many
innovations to the market, challenging larger competitors, leading to lower costs for consumers.”
Put simply, fewer new businesses could lead to serious repercussions for all of us.
What’s Behind the Decline?
Nobody has a definitive explanation for the drop-off.
“There’s some research that indicates what could be behind it, but we don’t fully know,” said Arnobio Morelix, senior research analyst at the Kauffman Foundation.
It’s possible the United States is experiencing a natural trend toward fewer, larger companies—a Walmartization effect, he said.
Or technology could be taking over jobs that new small businesses would otherwise do. Tax-prep and accounting software might reduce the need for new accounting or bookkeeping firms, for example.
The Kauffman Foundation has also warned about artificial obstacles like overly restrictive noncompete agreements, Morelix said. While noncompetes help small businesses protect themselves, overly restrictive agreements can throttle innovation.
Meanwhile, several states have expanded their professional licensing requirements— maybe beyond what makes sense. In some places, you need the government’s blessing to braid hair or recycle scrap metal for a living.
Licensing has a larger impact on entrepreneurs in low-income fields. Kauffman and the Institute for Justice found that states that license more than 50 percent of their low-income jobs had, on average, an entrepreneurship rate 11 percent under the national average.
Supporters say the rules are there to protect the public. Opponents argue they mostly benefit established businesses at the expense of newcomers.
Bradley suspects would-be entrepreneurs are staying on the sidelines because they don’t want to deal with these and other regulatory hassles.
He points to a recent study from the Heritage Foundation: In the past 15 years, the federal government has instituted 47,661 regulations with a price tag of $176 billion.
Where Things Stand in Kansas City
When Kauffman released its most recent report on startup activity, Kansas City was ranked 18th among the country’s largest metro areas, up from 29th place in the previous year. It was one of the biggest jumps for any city.
One of the reasons for the change: In 2015, about 0.32 percent of Kansas City adults became entrepreneurs in a typical month. A year earlier, that rate was 0.23 percent.
“I think we’re seeing a steady flow of people with the desire to start new businesses,” said Maria Meyers, the director of the University of Missouri-Kansas City Innovation Center.
Meyers is also the founder of KCSourceLink, which connects would-be entrepreneurs with free or low-cost business help. During the Great Recession, KCSourceLink’s hotline had a surge in calls from “opportunity entrepreneurs”—those who had lost their jobs and, as a result, decided to go into business for themselves.
When the unemployment rate is high, KCSourceLink tends to get more calls for help. But as the economy has picked up, interest has stayed high, Meyers said. Part of that might be due to the increased public focus on making Kansas City “America’s most entrepreneurial city.”
John Addessi is a business consultant at the Kansas Small Business Development Center at Johnson County Community College. If there’s been a drop-off in business creation locally, he hasn’t seen any sign of it. The center still gets a lot of requests for assistance from aspiring entrepreneurs.
“We haven’t seen any decline whatsoever,” he said.
That’s not to say there aren’t obstacles for new business owners.
Complying with regulations can be a challenge, Addessi noted. There are a range of state and federal rules that apply to everything from producing your own cosmetics to selling food to importing clothing from other countries.
Another hurdle for many young businesses? A lack of cash.
Addessi recently assisted a client who plans to open an event business. Everything about the concept looks perfect, from the business plan on down. But the startup cost, like it would be for any brick-and-mortar operation, is steep—at least $300,000.
Another client plans to just rent room for a dog boarding operation. Building out the space will still cost about $80,000, Addessi said.
Even the expense of setting up an LLC for a home-based business can run a couple thousand dollars, Meyers said.
That might not sound like a lot of money, but if you’re a young person just starting out, or even a mid-career professional whose assets took a hit during the Great Recession, every dollar matters. Research has found that most new entrepreneurs rely on their personal savings as their business’s primary funding source, Meyers said.
“When personal finances are constrained,” Meyers said, “it’s going to be harder for people to start businesses.”
Saving the Vanishing Startup
So what can we as a country do to reverse the decline in U.S. entrepreneurship?
“We need to expand the ‘window of opportunity,’” Baylor’s Bradley said. “The threshold to entry should be as low as possible so those with a good idea are willing to try.”
Here are a few ideas from the experts:
Rein in noncompete agreements :: Kauffman has recommended limiting the scope of noncompete agreements and restricting them to one year in length.
Employers should also be required to tell new hires about noncompete agreements earlier, Kauffman has suggested. Some employees learn they must sign a noncompete on the first day they show up for work—after it’s too late for them to back out.
Reform state licensing programs There are a range of steps that state legislatures could take, including lowering the fees and educational requirements for certain licenses, limiting the number of licensed practitioners that sit on licensing boards and even reconsidering whether licensing is necessary for certain industries.
Instead of licensing programs, states could switch to a certification system. Under a certification regime, anyone can operate in a particular field. But those who meet certain standards can qualify for certification, which signals a higher level of quality to customers.
Continue to encourage innovative forms of funding :: Peer-to-peer lending and crowdfunding (including equity- based crowdfunding) create other ways for young companies to find the money they need to start and grow.
Offer a safety net for startup founders :: It might be worth offering some form of social insurance to people who launch their own businesses, Kauffman’s Morelix said.
France introduced something similar in 2002. People were allowed to keep the unemployment benefits from their old jobs for three years—if those people started their own business. The business creation rate increased by 24 percent.
Offering a basic safety net—or programs like subsidized daycare—could make it possible for middle-class or low-income entrepreneurs to take the risk of going into business for themselves.
Don’t penalize entrepreneurs :: “We need to minimize taxes that reduce incentives for business initiation,” Bradley said.
Starting a business demands a significant investment of effort and resources. Historically, entrepreneurs have made the leap anyway because of the opportunity to achieve a higher income. If taxes wipe out that advantage, some would-be business owners may decide it makes more sense to remain an employee.
“We are increasingly penalizing rather than rewarding success,” Bradley said.
Create a dedicated, permanent startup visa program :: Immigrants tend to launch businesses at a higher rate than the general population. In fact, some of the United States’ biggest technology firms count immigrants or immigrants’ children among their founders.
But right now, these entrepreneurs often have to be sponsored by an employer in order to win an H-1B visa—meaning they can’t really focus on creating their own company. There’s also the EB-5, but it comes with a financial requirement that’s beyond the reach of many startup founders.
The good news in all this is more policymakers are paying attention to the decline in entrepreneurial activity, Morelix said. They realize that a drop-off in new businesses could ripple out and cause bigger problems for the U.S. economy and society at large.
“I think this is something that should be of concern,” Morelix said. “This is something we should pay attention to.”
