With Facebook's billion-dollar acquisition of Instagram and impending IPO things sure seem fizzy in Silicon Valley, leading to a whole lot of speculation about whether we're in a tech bubble. There are compelling arguments on both sides of the debate, but there's one thing no one can argue with—cold, hard data. And the Census Bureau just released a bunch on start-ups in America.

What's the headline takeaway? The formation of new businesses has actually fallen to record lows. Start-up mania and the stated ambitions of many to escape their cubicles and found their own ventures aside, Americans overall are starting far few new businesses. New firms made up 13% of all businesses in the 1980s, then fell to just less than 11% in 2006. Now the percentage has dipped sharply with young firms representing just 8% of businesses in 2010, the most recent available data.

That's bad news for job seekers as well as entrepreneurs, with entrepreneurs creating 40% of all new jobs in the 80s but only 30% recently. "New firm formation has waned since the 1980s. If we are to achieve and sustain a hearty recovery, policymakers, educators and organizations that help entrepreneurs commercialize their technologies must be willing to address every obstacle that stands in the way of new business formation," said Robert E. Litan, vice president of research and policy at the Kauffman Foundation.

The decline in the formation of new businesses may be bad for the economy, but the economy is also clearly bad for the formation of new businesses. States in the West, Southwest and West that were hardest hit by the collapse in the housing market and subsequent recession has seen the steepest declines in the number of new business being formed.

These figures highlight the fact that despite the high-profile rises of the likes of Mark Zuckerberg and the increasingly loud buzz surrounding flashy, fast-growing tech start-ups, meat-and-potatoes small businesses spread throughout the country aren't being created nearly as often as they once were. Policy wonks and business leaders need to argue out what should be done about that, but for entrepreneurs the takeaway is more immediate—get out there and start more businesses!

Is this decrease in firm formation just due to the terrible economy? What's your diagnosis?

Published on: May 9, 2012