Why Entrepreneurship Is Declining

Why Entrepreneurship Is Declining

American entrepreneurship is in decline, according to the majority of the metrics used to measure it. But why?

It’s a difficult thing to measure the decline in entrepreneurship, let alone find reasons for it. But there are a number of possible factors.

Big Trees Crowding Out the Sun

When you walk through an old-growth forest, what do you see? Above, a canopy of branches created by the tall, old trees. Below, a layer of undergrowth made up primarily of grasses and bushes.

Here and there you see small areas of sun on the forest floor where bits of light shine through. In those areas, you see the new growth and smaller trees struggling to rise.

Established businesses have always held the edge, and the larger those businesses become, the fewer the startups that sprout.

 

…Given that existing American companies opened roughly 50 percent more branches in 2011 than they did in 1978, the challenge for startups is clear. Back then, 80 percent of “new establishments” were startups; the rest were new locations of existing businesses, according to data from the Federal Reserve Bank of Cleveland.

 

Today, that number is down to 60 percent. Panera has more than 1,880 restaurants, and for consumers that’s great. It’s less great for the baker who dreams of starting Capucine’s Croissant Café. (Thirty years ago, the rise of big-box stores—now in decline—rained similar punishment on small and young businesses.)

 

Inc. Magazine

It’s harder for small businesses to compete with big ones. Economies of scale alone make it hard for small businesses to offer competitive prices and still stay in business.

Like new growth trees, they have to stake out a place in an area with less sunlight (resources, funding, top-quality labor, market share, et cetera) and somehow make it work. Many are unable to do so.

Corporations Doing Entrepreneurship

It doesn’t help that corporations now undertake many of the efforts historically done by entrepreneurs and that they’re taking the funding with them.

Some companies have departments or divisions devoted entirely to entrepreneurship. Others provide their employees with time to devote to new ideas.

Given this, the funding line gets a little blurry. However, it appears that venture capitalists (VCs) are putting less money into startups and more money into entrepreneurial activities at mature companies.

For example, VCs are waiting longer before investing in startups. More funding is going into B, C and D rounds with less going to A rounds, leaving many startups struggling to get the initial capital they need to get off the ground. Also, more money is going towards mature companies.

Economic development officials also tend to favor known quantities looking to expand. “If I had a headline tomorrow that said, ‘1,000 Call Center Jobs Move to Community X,’ I would have everyone in town high-fiving me,” says Karl R. LaPan, former chair of the National Business Incubation Association. “If my headline said, ‘Five Three-Person Businesses Started Last Year,’ it would end up on the back page.”

 

… Research by Mattermark, which tracks startup data, shows that between 2005 and 2014 the size of seed investments made by VCs stayed flat. The size of C, D, and E rounds, by contrast, roughly doubled…Below the VC level, angels and seed funds have proliferated as startup costs have decreased. But even angels’ interest in fledglings is down.

 

“If you look at when people are getting money, it is way past the startup phase,” says LaPan. “There is a dearth of capital for idea, pre-seed, and seed startup companies.”

 

—Inc. Magazine

Student Debt Hindering Entrepreneurship

A corollary to the increasing entrepreneurial bent of large companies is the decreasing desire of college graduates to go out on their own.

Why? In a word: debt.

As the costs of education have risen in the last few decades, the amount of debt for graduates has risen as well. And recent graduates are far less likely to go the entrepreneurial route if they have debt.

According to some estimates, Americans owe nearly $1.3 trillion in student loan debt—about 6 percent of the overall national debt. And the number is rising every year. The average graduate owed about $26,000 in 2013 and over $35,000 in 2016.

With that kind of debt, recent graduates have the education to start an enterprise, but they don’t have the financial wiggle room. More and more, they’re turning to mature companies with entrepreneurial divisions.

Population Decline Influencing Entrepreneurship

As workers leave an area, they take with them their skills, their knowledge and their manpower. It turns out they also take their entrepreneurship with them as well.

When researchers at the Brookings Institute looked into why entrepreneurship is on the decline in the United States, one of the metrics they looked at was population decline.

Slowing population growth in the West, Southwest, and Southeast regions since the early 1980s appears to be a major factor. Firm formation rates were highest in these regions in the late-1970s, when the data begin, and appear to be driven in no small part by expanding regional population growth in the preceding decade.

 

When the rate of population growth in these regions began to decline, so did the rates of firm formation—declining most, on average, in these previously higher-growth regions.

 

The relationship between regional population growth and firm formation rates is remarkably strong, even after controlling for other factors—including unobserved time and regional effects (such as industrial and labor market composition, culture, and potentially, public policies).

 

Brookings Institute

 

How this data ties into the decline of startups across the nation as a whole is unclear, yet there seems to be a connection between population decline and startup decline.

Why Entrepreneurship Is Declining

While it’s difficult to measure entrepreneurship in the United States, the numbers seem to indicate a decline.

And while there are many factors that could contribute to a decline, some of the big ones include the proliferation of chain stores, corporations undertaking entrepreneurial activities, mounting student debt and population decline in certain areas.

 

By Charlie Smith