Today's small-business forecast is for bright skies, but ominous clouds are massing, according to the Kauffman Foundation's annual State of Entrepreneurship report, released Thursday morning.
Business starts, Main Street activity, and growth-company dynamism are rebounding strongly from the Great Recession, reports Kauffman, a grant-making and research organization that fosters entrepreneurship. Job creation and optimism among small businesses are up as well. But changing demographics and business models--specifically the ability to grow larger and larger companies with fewer and fewer people--suggest that the rising tide may lift fewer (or different) boats.
First, the unalloyed good news: The rate at which Americans start companies is up 15 percent since 2015. Main Street companies are doing well, particularly in terms of five-year survival rates, which approach 50 percent, according to an earlier Kauffman report. The foundation's 2017 growth entrepreneurship index--which among other things measures how fast new firms hire and the number of fast-growing new firms--saw its highest year-over-year increase in a decade.
Despite these signs of health in the entrepreneurial economy, Kauffman identified three "mega-trends" that may have worrisome consequences:
1. Demographics: In terms of racial diversity, startup America looks more like America overall than it did 20 years ago. Among companies in their first month of operation, almost 40 percent were founded by minorities, compared with 23 percent in 1996. But minority-owned companies start and stay relatively small, comprising less than 20 percent of all businesses with employees and 17.4 percent of businesses with at least $1 million in revenue. The average revenue of mature non-minority-owned companies is $2.3 million, compared with $1.6 million for mature minority-owned companies. While the startup gap between minorities and non-minorities is narrowing, says Kauffman, "the scale-up gap is huge."
And while both startups and the population overall are more racially diverse, minorities are still underrepresented among entrepreneurs. "If minorities started companies at the same rate as non-minorities do," says the report, "the U.S. would have more than one million more employer businesses and as much as an extra 9.5 million jobs."
Kauffman also noted that women continue to lag behind men in company starts, particularly as founders of employer businesses. Meanwhile an aging population threatens the pipelines of both founders and employees.
2. Geography: Entrepreneurship is expanding from expensive big-city hot spots on the coasts to more-affordable midsize cities throughout the country, with access to venture capital and alternative means of financing making those regions more hospitable. The Kauffman report highlighted crowdfunding, which is particularly strong in parts of North and South Carolina, Nevada, Tennessee, Minnesota, and Oklahoma.
But smaller cities and rural areas--often those most in need of revitalization--are falling further behind. In the late 1980s 20 percent of startups were in rural areas; today that number is just over 12 percent. This may not bode well for national unity. "No matter where you are on the political spectrum, one of the things that became abundantly clear is the enormous divide between rural and urban America," says the report. "We see at least a version of this divide in entrepreneurial activity also."
3. Scale: New businesses are responsible for the lion's share of job creation. But the number of new businesses that actually employ people stubbornly remains 20 percent below pre-recession levels. And even those entrepreneurs creating jobs need fewer of them, with technology and software-based business models increasingly substituting for labor. Kauffman cites the example of Kodak, which employed 75,000 people when it reached $1 billion in sales more than 50 years ago. Facebook achieved that milestone (in today's dollars) with just 6,300 employees. "It is not clear how much [new and young] companies will be able to contribute to net job creation in the future," the report states.
On the bright side, Kauffman points out that platforms like Airbnb, Uber, and Etsy are creating new opportunities for micro-entrepreneurship.
Kauffman also announced the launch of a nationwide program called Zero Barriers to Startup, which will enlist entrepreneurs, policymakers, and others to address these mega-trends and other challenges. "If you have an idea, we believe that you have a fundamental right to start a business to make it a reality," states Kauffman. "You should be able to do it fast, without confusion, and for free, without any artificial barriers imposed by others."