According to a new study by New America Foundation[i], America has witnessed a decline in the number of entrepreneurs over the last 40+ years. How can this be, you ask? A statistical look can provide us some answers:
Keep in mind that we are looking at percentages rather than absolute growth. While the annual absolute number of "employer businesses" has *grown*, the annual percentage number has dropped. Should "employer businesses" grow linearly with the population? I doubt it, and I see a number of macro factors that probably prevented it over the last 40 years, including the following:
1. In 1977 baby boomers were in their entrepreneurial prime. As they have settled into retirement age over the last decade, many of them are still working, but for more-established companies rather than their own companies. Starting - and even maintaining -- your own company tends to be a young-man's game.
2.Forty-percent of the growth in US population (and the denominator of the study's equation) has been driven by immigration in the last quarter century. Immigrants typically have a harder time accumulating enough capital to start their own businesses because they don't have the money, credit or network to rely upon. That will have depressed their entrepreneurial numbers overall. However, for those that have started their own businesses, they are less likely to meet the definition of an "employer business" because they are operating in a business grey zone. I think of the loose federation of North Indian town car drivers that regularly shuttle me to and from the Seattle airport. These are true entrepreneurs with a solid businesses, but I assure you that each of them does not count as an individual "employer businesses" as defined by the Census Bureau. I'm guessing that one of them has a business license to get a credit card account and they all share that credit card account.
3.Another factor is the rise of massive corporations, particularly in the retail sector. In 1977, you did not have Walmart, Costco, Amazon or Gap. We bought many of our goods and services from local, small retail outlets. As the superstores have grown in size both offline and online, fewer mom and pop shops can compete, pressuring them out of business, into retirement or to work for the superstores. The Internet has really accelerated this pressure.
4.Finally, since 2009, we have seen almost a complete cratering of the short-term debt markets. It started with the auction-rate security markets and has moved its way into small business loans and lines of credit. Banks have tightened their lending standards which makes small business debt financing very hard to come by.
What about reversing the decline? Well, that's kind of like asking if we can change the weather. Macro supply and demand is incredibly hard to predict and control. There are small things we can do, such as more liquidity coming from SBA and state-run programs, but we cannot change the baby boomers work habits or our desire to shop at superstores. We need to continue to have solid policies that encourage entrepreneurship - both establishing the businesses and investment in them. This includes strong capital markets, reasonable capital gains rates, available debt, reasonable IPO requirements, etc., etc., etc. But, ultimately, what *percentage*of Americans decide to seize the opportunity is as uncontrollable as where the next rain may drop.
-Mark Britton is the founder and CEO of Avvo.com, a social media platform that provides trusted answers to consumer legal and health questions every 10 seconds.
[1] Study by New America Foundation http://www.newamerica.net/publications/policy/out_of_business