There is a disturbing trend in the U.S. regarding startups and the rate of new business formation. More businesses are dying each year than are being started according to the new study “Where Has All The Skewness Gone? The Decline In High-Growth (Young) Firms In The U.S.” The authors – economists Ryan Decker of the Federal Reserve, Ron Jarmin and Javier Miranda of the Census Bureau, and John Haltiwanger of the University of Maryland – found that “Since 2000 the decline in dynamism and entrepreneurship has been accompanied by a decline in high-growth young firms.”
This is a terrible sign for the economy and may reflect a general uneasiness with the current economic climate. As the study points out, a relatively few number of startups are responsible for a significant amount of the new job creation. Using Census data, the researchers discovered that “In 1999, for example, the top 10% of startups grew almost one-third faster than median for all startups. By 2007, that ability to pull away had almost disappeared.”
As to the causes, the authors don’t reach definitive conclusions. One thing is for certain: The worse people feel about the economy, the less likely they are to start new businesses. Quitting a job to start a business is one of the biggest decisions any person can make, with many factors going into the decision. Most people who strike out on their own have special expertise that is particularly valuable in the market. When the economy is strong and the risk is low, the most talented are more likely to go for it.
As I wrote earlier this year, one issue is the current focus on chasing unicorns rather than other investments that may yield solid – though less potentially exciting – exits. With a glut of money going to unicorns, investors will realize that they cannot make as much ROI as they thought. This will make it increasingly more difficult to raise money, perpetuating the downward cycle of startup creation.
For whatever reason there aren’t as many “high-growth firms” being formed. You rarely hear this talked about in the national political conversation, but it should be.
Here are two articles that provide more details about this new research: