While not all new businesses incorporate, Dun & Bradstreet's periodic reports on new incorporations are generally regarded as the best barometer of start-up activity in the United States. Since 1986 the barometer has been falling. One major reason for the decline, according to David Birch, has been the elimination of favored tax treatment for capital gains. "Why go out and risk everything you've got when your sweat equity is going to be taxed at the same rate as ordinary income?" says Birch, author of Job Creation in America (The Free Press, 1987) and founder and president of Cognetics, in Cambridge, Mass. "This, combined with the virtual disappearance of bank credit for new businesses, has had a chilling effect on start-ups."
Nor has the recession produced the burst of start-up activity that many experts predicted. What the experts overlooked, Birch explains, is that national unemployment is hovering around 7%, a rate not much higher than what economists often refer to as virtual full employment. "In most parts of the country, anyone who wants a job can get one," says Birch. As a result, we're seeing many fewer "start-ups of desperation" -- that is, companies begun by people who view entrepreneurship as their last resort.
On the other hand, Birch believes the current start-up lull is temporary. "I see the rates bottoming out and remaining stagnant for a year or two. Then we'll see them start to climb again." The reason? Demographics. "We know now that the prime entrepreneurial age isn't 25 or 30; it's between 40 and 50, after you've gone out and gotten some real-world experience and developed some confidence. And we're about to enter a period when that demographic pool will be larger than ever. Many entrepreneurs will be managers whose careers have peaked in established companies. Others will be women with children reentering the professional world. These are people who will be starting businesses out of inspiration, not desperation. The companies themselves may not grow as wildly as they did in the '80s. But the start-ups will be there. It's all in the math."
New Business Incorporations 1950 - 1990
1950 93,092 1975 326,345
1955 139,915 1980 533,520
1960 182,713 1985 662,042
1965 203,897 1990 647,655
Source: The Dun & Bradstreet Corp.