If you were skydiving over Africa and accidently descended into a pride of lions, your immediate impression would be that there must be a lot of lions around. It would be hard to reach any other conclusion, given that you would now be surrounded by lions. 

However, there are actually few lions in the world, and their numbers continue to decrease every year.

Such is the case with startups and entrepreneurship.

The amount of content focused on new businesses gives the impression that there are more startups than ever, and entrepreneurship is alive and well--similar to a skydiver who lands in a pride of lions and reports that there are a lot of lions around.

It's not true.

There are fewer entrepreneurs--and lions--than there used to be.

Why is that?

In her new book, Makers and Takers: The Rise of Finance and the Fall of American Business, economic analyst and columnist Rana Foroohar argues that the reason new businesses make up a third of all businesses today, rather than half, as was the case in 1980, is due in large part to the increased "financialization" of the economy.

According to Foroohar, financialization, a term used to describe the explosion of the financial sector, is the root cause of some of our most difficult and persistent economic problems, included stagnating job growth, decreased innovation, and a struggle to compete with international firms that do not face the type of extreme pressure related to quarterly earnings that American companies do.

And financialization plays a large role in the decreased number of new businesses.  

That the proportion of startups is decreasing is a statistical fact. But Foroohar's conclusion--that there is far less funding available from banks and other financial institutions, who have chosen to keep their money within a financial system that exists as a primarily closed loop--is something that is scarcely mentioned when discussing why fewer people, particularly millennials, are starting a business.

In fact, research by the Kauffman Foundation cites practically everything but financialization as the reason why fewer millennials are not becoming entrepreneurs.  

In a study done last year, the Foundation argues that excessive student debt and less home ownership are two factors that have left young people with far too much financial burden and far too little collateral to start businesses.

Without a doubt, student debt and less opportunity for home ownership (which are also related) have a chilling effect on entrepreneurship. However, as Foroohar argues, a banking system awash in more cheap money than at any other time in history is doing very little to play its part in creating new businesses.

The result?

Fewer new businesses, fewer good-paying jobs, and more frustrated, angry people.

And when people get frustrated and angry, they look for someone to blame--and one of those groups to blame might be a generation that, according to a myth that has taken hold, is inexplicably less motivated and less entrepreneurial than previous generations.

What's one piece of "evidence" cited as a part of that myth?

The fact that there are fewer businesses started by young people than there were 30 years ago. That fact then becomes distorted, and feeds a narrative of a generation that is just "different."

Or "entitled."

Or "lazy."

Or any number of pejoratives that are synonymous with "worse."

The reality, according to Foroohar and other researchers, is that the lifeblood of new business--the banking system--has become disconnected from its roots, and now almost exclusively serves itself, leaving everyone, including millennials, without the resources they need to start the new businesses our economy needs.

And that needs to change. 

Published on: Jul 18, 2016