The days of rapidly-growing startup companies and new business launches in the United States have slowly come to a halt. Statistics show entrepreneurship in the U.S. has been declining and the startup rate has dropped significantly in the past few decades. A study published by the National Bureau of Economic Research reveals that since 2000, the decline in entrepreneurship and has been coupled with a decline in high-growth firms.
Entrepreneurial rates were high and we were seeing innovation and job opportunities increase rapidly. The Kauffman Index of Growth Entrepreneurship reveals a high point in 2009 with a steady decline through 2011, then a rapid drop by 2013. We have been seeing a steady increase in growth since 2013 but the data overall is still not so reassuring. What caused the game changers? Here’s a closer look:
High Failure Rates
While Silicon Valley is still churning out plenty of new companies, very few make it past the initial growth phase. Recent statistics show 25% of startups fail within one year and 50% fail by the fourth year. Only 29% make it to the 10-year mark. Very few startups are live long enough to make a significant impact on the economy, provide jobs, and grow to the next stage. The impact of the recession and a sluggish economy mean it’s that much harder for startups to survive — and even those that are fully funded and get the support they need initially are at a high risk of failing within a few short years.
Consider that many startups were launched by people in their 20s and 30s during the booming entrepreneurial years. According to data from the Kauffman Index of startup activity in 2015, the percentage of startups launched by those in this age range was 35 percent in 1996. It dropped to 18 percent in 2014, an eight-year period of time that could simply mean that the younger generation outgrew the economy — they now owned successful startups or had already sold them off to investors.
Weak Investment Spending
The Great Recession may be partly to blame for sluggish economic growth which didn’t allow startups to fully flourish or even launch. A weaker economy and fewer investors taking more risks to fund companies that need machinery and other capital to get started or grow their company could also be to blame for the slowdown. Startups simply didn’t have the resources and investor backing to support rapid growth as others did in previous years.
Too Much Regulation
Some economists argue that they can’t trace the single source of the startup slow down but may be able to attribute much of it to the impact of government regulations on smaller businesses. Economist Robert Litan of the Brookings Institution told Robert J. Samuelson of the Washington Post that certain regulations discriminate against new businesses and, “established firms that have the experience and resources to deal with it.” Many potential entrepreneurs may have had to walk away because of too many regulations and costly challenges.
It’s no secret that startup rates are declining and Americans are less enthusiastic about jumping into entrepreneurship than they were just a few short decades ago. Whether the slowing economy, government regulations, or a lack of resources are to blame, we are living in a time where the spirit of entrepreneurship is dwindling and young, bright graduates are settling into jobs with established companies instead of taking a leap of faith to branch out on their own. The debate about what triggered the startup slowdown since 2000 continues and the economic climate is changing as more investment firms are looking to back established companies instead of taking risks they were once comfortable with.