Small Business Formation is Down – Here’s Why That’s a Problem

It’s widely agreed that the U.S. economy is in a great place. A quick skim of any newspaper’s Business section tells a story of hope and recovery. The unemployment rate has dipped to a 17-year low of 4.1%, over 6 million job openings are available, and new collar jobs (positions that offer better earning and career opportunities to historically blue-collar workers) are on the rise. These indicators of growth are even more encouraging when compared to the doom-and-gloom headlines that characterized news cycles for years surrounding The Great Recession.

However, there’s one area of the economy that has not recovered to pre-2008 levels, and its failure to bounce back is an unsettling issue that could develop into a major problem. The U.S.’s rate of new business creation (i.e. the number of new startups founded every year) is in decline.

This figure peaked in 2006, when 558,000 new companies were founded. It plummeted to less than 400,000 businesses in 2010 (a decrease of over 30%), and had only recovered to 414,000 companies by 2015—the most recent year surveyed. This stalling of startup creation is a problem for a few reasons, and multiple factors are fueling the phenomenon.

Why It’s a Problem

It’s not innately apparent why the decline of SMBs (small and medium-sized businesses) is a problem. The issue becomes clear when we consider that these companies are huge drivers of new jobs creation, and they hire consistently through economic highs and lows. In the 1990s companies less than a year old contributed an average of 7-7.5M new jobs annually. But by 2004, only 5.2M jobs were added by startups.

What’s more? The pace of business closures began to rise in 2005 and spiked soon after in 2008. Now, company closures outpace births for the first time since researchers began tracking these numbers in the 1970s. With each business that closes, potentially dozens of great jobs are lost too.

A slowdown in startup creation is being seen across all industries, even high-growth ones like tech. That means, it’s not a simple case of changing customer needs or technology in a few niche fields, but a more pervasive shift. Unless entrepreneurship sees an uptick soon, the economic growth we’ve recently experienced cannot continue.

The Roots of the Problem

A few leading causes explain the decline of startup creation:

  • During The Great Recession, home ownership plummeted, and people lost the savings potential and loan collateral that comes with owning a home.
  • With unemployment at 4.1% and so many jobs available, job seekers are opting to find salaried jobs they enjoy in lieu of risking striking out on their own.
  • Pricey student loans deter many young people from funneling their money into business ventures.
  • The rise of mega-corporations could be hampering entrepreneurship by creating marketplaces that are so competitive, newcomers cannot succeed.

A combination of reasons, namely a lack of disposable capital and fear of the fallout if their startups fail, is keeping young people away from entrepreneurship.

Finding Solutions

The statistics about SMBs in decline paint a bleak picture for the future of the U.S. economy, but all hope is not lost. In fact, a lot of economists are convinced that startup creation rates will improve and soon.

One solution experts point to is creating legal policies and incentives that encourage entrepreneurship. Not many politicians focus on the issue of startup creation on the campaign trail, but now might be the time for them to start.

Next, cracking down on mega-companies and antitrust laws could be another good way to create more room in the economy for small newcomers.

Some experts believe that as the economy continues to recover, the rate of startup creation will follow suit. These experts theorize that instead of being scared off from entrepreneurship forever, millennials are simply biding their time and preparing to found businesses and companies in the coming decade.

Millennials may in fact be better equipped to lead an entrepreneurial recovery than anyone. Here’s why: millennials were raised on technology, have accessed higher levels of education than other generations, and by 2020 they will make up the largest segment of the U.S. population. Ten years from now, we’ll have more working people in their 30s than we’ve had at any other point in history. The expectation is that these millennials will soon launch their startups and drive the small business creation our economy needs.

The decline of SMBs shows just how important these startups actually are to the U.S. economy. In the era of mega-retailers and conglomerates, mom-and-pop style companies can feel passé, but they’re still crucial to creating new jobs. Our investigation of SMBs shows that we don’t want these businesses to disappear anytime soon. It’s also evident that a few different solutions will be needed to drive the creation of startups in the coming decade. A combination of new policies, brave entrepreneurs, and mindful politicians will be required to work in tandem to tackle the problem.

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