In an otherwise contentious 2016 U.S. presidential election, there will be one issue on which both candidates can agree: Entrepreneurship is good. Entrepreneurs have been embraced by both political parties, along with a wide swath of the American people, who tell pollsters they trust small business more than almost any other institution.
That is why some of the statistics about the state of American entrepreneurship are troubling. There has been a long-term decline in the number of new business starts. There are some recent years where more American businesses closed than opened. Quantitative measures of business formation paint a grim portrait of a supposedly entrepreneurial nation.
These numbers are not just cherry-picked factoids by pundits with axes to grind. These facts are accepted by a broad consensus of mainstream economists working with U.S. government statistics on business startup activity.
On the other hand, if we look only at Silicon Valley, New York or Boston, and other highly educated, high-technology regions, we find an entirely different view of American entrepreneurship. Despite the aftermath of Brexit and some recent reminders that the laws of gravity also apply to startup valuations, entrepreneurship is still incredibly hot.
New companies are being started and funded every day, targeting billion-dollar markets and attracting the best and brightest minds of our generation. The innovations these companies produce will almost surely transform the way that daily life operates. Indeed, the term unicorn, which applies to companies valued at over $1 billion, was initially coined because it signified something elusive, rare — but the term has lost that meaning. With more than 170 private companies with valuations of over $1 billion, we might just be living in the golden age of American entrepreneurship.
So what is going on? How can both sets of facts be true at the same time? How can more businesses be closing than opening (true) during the same period in which smart money will tell you there has never been a better time to start a new venture (probably also true)? The answer lies in which data you are looking at and, more importantly, how you measure entrepreneurship.
Many U.S. government statistical series that count employment in newly started firms suggest that entrepreneurship is declining in the U.S., and has been for a long time. Data from the U.S. Census clearly show that the rate of new firm creation has been steadily declining since the 1970s. While the rate of new firm creation ticked up briefly between 2002 and 2007, it has plummeted in the aftermath of the financial crisis. In the mid-to-late 1970s, there were about 1.5 new firms created for every firm that exited the economy, but after more than 30 years of secular decline in the rate of firm creation, firm deaths now outnumber firm births — and have since the Great Recession. Entrepreneurship is getting more selective.
However, when we move from simple counts of employees at newly created firms — including the vast majority of small businesses that have low growth potential and little intention to grow — to measures of entrepreneurship that place more weight on innovation, other teams of researchers have found no evidence at all that entrepreneurship is on the decline in the U.S. In fact, the quality of entrepreneurial ventures being started today could be at an all-time high.
The economists Jorge Guzman and Scott Stern at MIT have used state business registration data to zero in on businesses that are formed by founders that intend to grow. Their key insight is that many characteristics observable at firm founding are predictive of the intention to grow.
For example, formal business registration is a mandatory first step for any business with any intention of growing — incorporating in business-friendly Delaware also raises the odds. So does an application to protect intellectual property.
Using these cues, and others, Stern and Guzman build a statistical model that predicts entrepreneurial quality. With their quality-weighted entrepreneurial index, which does a good job of tracking broader economic fluctuations, they find no evidence of a decline in American entrepreneurship.
In short, both of the competing narratives about American entrepreneurship are true because we are witnessing a divergence based on the skill set of would-be founders. Fewer new businesses are being started in aggregate, but the expected quality of the new businesses that are starting is high — possibly higher than ever before. Entrepreneurship is getting more selective.
More on https://techcrunch.com/2016/06/30/the-golden-age-of-american-entrepreneurship/