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New Study Shows Startups On Decline, Fewer Firms Being Formed

Written by Ken Gaebler
Published: 8/13/2014

Despite the entrepreneurial pace of startup hubs such as San Francisco and Silicon Valley, a recent study shows American businesses are aging and startups are on the decline in every state, metropolitan area and industry--even high-tech.

Startup trends come and go. But the latest startups trends seem to indicate that startups are on the decline.

Number of Startups in US Economy

According to a recent Brookings report, the U.S. economy is becoming increasingly dominated by older firms. Over the past two decades, the percentage of U.S. firms that are more than 16 years old has jumped from 23 percent to 34 percent. This can be seen even in Silicon Valley, which, aside from new powerhouses like Facebook and Salesforce, is largely powered by older technology companies.

The growing number of mature companies is accompanied by a sharp drop in entrepreneurial activity. From 1978 to 2011, the percentage of U.S. companies that are startups fell from about 15 percent to 8 percent.

Robert Litan, nonresident senior fellow at Brookings co-authored the report with Ian Hathaway of Ennsyte Economics. They used U.S. Census data to investigate the age structure of firms in the economy and to explore how structures have changed over time. The study pulled numbers from 1978 to 2011--the lowest point of the recession.

Litan said they may have missed the recent upsurge in startups since they did not have access to numbers after 2011 and that there "has probably been a partial reversal of the trend since 2011 or 2012 (especially in the Bay Area)."

However, he said even a "modest uptick" of startups wouldn't be nearly enough to reverse the 20-year slowdown in business formations.

The report also found that a large percentage of the labor force is working for older companies as opposed to startups. Older firms employ 77 percent of all workers, up from 67 percent in 1992. The authors also pointed out that this is not limited to a single market or industry.

Other studies have reached similar conclusions. Economists Ryan Decker and John Haltiwanger of the University of Maryland, and Ron Jarmin and Javier Miranda of the Census Bureau reported in The Journal of Economic Perspectives that shrinking entrepreneurship is hurting job creation and productivity.

According to Hathaway and Litan, an economy saturated with older firms is likely to be "less flexible, and potentially less productive and less innovative than an economy with a higher percentage of new and young firms."

Litan said he has two theories as to why entrepreneurship has been on the decline the past two decades. First is the "cumulative weight of regulation, not just federal, but state and local." He believes that tilts the balance away from startups toward older companies. The second reason is the aging American population.

"The peak ages for successful entrepreneurship are late 30s and early 40s," said Litan. "With fewer people in that age cohort (you have fewer successful startups)."

The authors offered several solutions, such as expanding the number of immigrant entrepreneurs granted permanent work visas to enter and remain in the U.S. Another solution was to allow foreign students who majored in science, technology, engineering or math at U.S. colleges to remain in the country on green cards, since immigrants are more likely to launch businesses than native citizens.

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