Entrepreneurship has never been easier, but entrepreneurship is on the decline. I first heard this surprising paradox a few months ago in a talk by MITs’s Andy McAfee. Digital technologies are inexpensive and ubiquitous, startups have access to all kind of cloud-based business services, and customers can now be easily reached and supported over mobile devices. It should be easier than ever, - as books and articles keep reminding us, - to become an entrepreneur and start your own company. But in fact, entrepreneurship has been in decline for years.
Most everyone I’ve mentioned this paradox to, - business colleagues, investors, journalists, - doesn’t quite believe it. But that’s what the data shows. In a recent paper, University of Maryland economist John Haltiwanger and collaborators used business data from the US Census Bureau to calculate the annual startup rates over the past several decades, - i.e., the number of new firms in each year divided by the total number of firms. The startup rate was 12.0% in the late 1980s, went down to 10.6% just before the 2007 Great Recession, and then fell sharply below 8%. Such sharp declines add up over time. In the late 1980s, 47% of all firms were 5 years or younger. The percentage of young firms declined to 39% in the mid 2000s, and has since continued its downward trend.
In another recent paper, economists Ian Hathaway and Robert Litan analyzed the same Census Bureau Data and showed that in addition to the continuing decline of new firm formations, failure rates have steadily increased for all companies under 16 years old, and they’ve been particularly high for early-stage firms.
Further evidence of this entrepreneurship decline is found in Where the Jobs Are: Entrepreneurship and the Soul of the American Economy, published in September of 2013 by John Dearie and Courtney Geduldig. Their book is primarily focused on the close link between entrepreneurship and job creation. It cites a 2009 study that shows that between 1980 and 2005, all net new job creation in the US came from young businesses less than 5 years old. They conclude that as a result of the decline in entrepreneurship, “the nation’s job creation engine - new business formation - has been breaking down in recent years.”