What is the state of entrepreneurship in America?
Fortune columnist Geoff Colvin recently wrote about this topic in a recent issue. He cites "surprising" research suggesting that the rate of new company formation has fallen sharply over the past 30+ years.
Interestingly, the research found that a turning point occurred around 2000 whereby the economy generated fewer young, high-growth firms.
So what happened? Colvin states that the academics/economists who produced the research are still searching for answers.
I don't dispute the negative implications to the U.S. economy of fewer startups that Colvin cites such as stagnating wages, long-term unemployment and low productivity growth. He also suggests that venture capital firms are competing to invest in fewer higher-growth startups which may be driving up company valuations to unjustified levels.
Actually, I don't think this research is surprising at all. The finding of fewer high-growth startups since 2000 correlates rather nicely with the decision by the Bush Administration to weaken the U.S. dollar in a misguided attempt to stimulate exports.
With the decline in the value of the U.S. dollar during the 2000s, limited investment capital largely migrated away from promising new business concepts into hard assets most impervious to currency depreciation. This helps explain the bull market in residential real estate, gold, and other inflation hedges.
Of course, there are a number of notable high-growth startups founded since 2000 cited by Colvin that are thriving today including Facebook, Uber, and Airbnb, but it is impossible to measure the promising ideas that never received funding because capital was instead diverted to hot investments of the day which were hard assets.
Another factor in subdued risk-taking on the part of entrepreneurs, admittedly difficult to quantify, is the poor overall business climate. Entrepreneurs tend to find their way around government barriers to success, such as a rising regulatory burden and poor fiscal and monetary policies, but on the margin I suspect getting a business off the ground has been a lot more difficult in recent years.
A better supply-side policy mix, that is lower taxes on capital and income, free and open trade, a rollback in burdensome regulations and a stable monetary policy would do wonders for entrepreneurship in America. Unfortunately, there are no presidential candidates even talking about such a mix as part of a plan to revive a frustratingly moribund U.S. economy.
