New Businesses Are Decreasing
Past issues of this column and other studies suggest new businesses are the most important source of new jobs in the U.S. economy. They also account for much of the innovation and productivity that create overall economic growth.
Despite this fact, the number of businesses being started in the U.S. is decreasing. New businesses need to replace dying firms. This reported decrease in start-ups slows the growth of the overall economy.
Between 1978 and 2012, the proportion of businesses less than a year old that made up the total number of businesses declined by 44%. Almost all industries were affected by this decline, including the tech sector.
One reason for this decrease is generational. The percentage of younger people starting new businesses is much lower than during the Baby Boomer era. Millennials are much more risk adverse than their older counterparts.
Leadership is part of the problem, according to Tom Corrigan, retired President of Search Masters. “In my humble opinion, the problem lies in a lack of passion in our new leaders.”
“You need a good-sized ego to become a leader, to believe that you are good enough to create a position of leadership for yourself. But once you are in that leadership role, you must be rid of your ego and replace it with a sense of caring for the team, it's individual members, and the achievement of the team's goals. I am afraid that many of our Millennial leaders never make that transition,” Corrigan stated.
It is not just the percentage of younger people that is the problem, but the literal numbers of them. The slowing of U.S. population growth is reducing the number of potential entrepreneurs on the supply side as well as the number of potential customers for new businesses on the demand side.
“I think much of it has to do with culture. Young people who leave college with large student loan debt are not thinking about starting a business. They have no credit to start a business,” stated Bill Knoble, serial entrepreneur, member of the Business Advisers of Cleveland, and former mayor of Rocky River.
Big vs. Small
Another factor is the growth of existing larger businesses and franchising. Knoble said, “Franchising has eliminated business for locals and taken up many of the prime locations. It’s a big investment thing.”
Large companies also tend to be able to attract better talent. Typically, the big players can pay more and offer better benefits than a newer business.
New, unproven entrepreneurs often have difficulty securing funding. Venture capitalists look to fund growing companies more often than new ones. Recent trends show that even "angel investors" are becoming more conservative when it comes to funding new businesses.
The same applies for government and other community groups that assist new firms. The Small Business Administration and Business Advisers of Cleveland get much more bang for their buck if they help one firm employing 100 people rather than five businesses employing five people each.
The economy has contributed to this problem. The number of new ventures decreased when the economy crashed in 2008 and the slow recovery since is attributed to a slower increase in new start-ups.
Jim Riedl, owner of 911 Driving School and member of the Rocky River Chamber of Commerce, has seen the decline in the number of new start-ups. “I do see that many of my peers (trailing Baby Boomers in their early 50s) have a reluctance to start something on their own, especially in this uncertain economy.”
“There is a definite flight to safety where working for any company does not seem like such a bad deal. You will exchange a lot for economic security, including the idea of being your own boss and having the freedom to set your own agenda,” Riedl said.
All is not lost. There are some good signs that the number of new businesses will increase. Some studies indicate that many Millennials will consider going out on their own when they believe the economy is better. And many of them think it will get better.
“I am a big supporter and believer of young people; I am not one of the older people who simply write off an entire generation. There exists some tremendous young entrepreneurial leaders,” Corrigan stated. “We just need more of them with passion. Nothing great is ever accomplished without passion."
Dr. Perry Haan is Professor of Marketing and Entrepreneurship, and former Dean of the Business School at Tiffin University. He lives in Rocky River and can be reached at 419-618-2867 or firstname.lastname@example.org.