There's a reason politicians of every stripe seem to be madly in love with entrepreneurs. Economic research consistently shows that startups do more to create new jobs than any other sector of the economy. So here's a trend that should worry everyone: New business creation is dropping and has been for years--most precipitously in the past decade, according to a Brookings Institution report

"But wait!" you may be thinking. "Silicon Valley is booming. Unicorns (startups with $1 billion or higher valuations) are proliferating. More new companies are getting more VC funding than at any time since the tech bubble at the turn of the millennium. This is a great time for entrepreneurship ... isn't it?"

The answer is yes, for some. Many, many others are getting left behind, and that fact threatens to take down our entire economy. Here's a closer look at what's wrong with today's entrepreneurship boom, and with the economic recovery in general:

1. Everyday business creation is in retreat.

If you have a new idea for a disruptive mobile or Web-based app, then these may well be the golden days of entrepreneurship for you. Particularly if your ambitions lead you toward pitching VC firms. VC funding these days is robust, but companies that go this route generally can have only one of three possible outcomes. First, and perhaps most desirable, is an IPO. Second is acquisition by a larger company. Third--and dramatically most likely--is flameout and failure. In all three cases, you are not so much selling your product or service as you are the idea of your company, first to angels, then to VCs, then to acquirers or stock analysts and investors. As we've seen from such success stories as Amazon, whether your business ever turns a profit may not matter.

All of that is great fun and does a lot to liven a website like this one. But the bulk of job creation has traditionally come from a legion of smaller startups with less oversize ambition, from pizza shops to dog-walking services to landscapers. And this sort of business creation has pretty much fallen off a cliff, as would-be entrepreneurs face tight lending policies and an uncertain economic recovery.

2. New business growth is highly localized.

A depressing new report by the Economic Innovation Group shows that, while in previous recoveries economic growth was spread across the country, in 2010 to 2014, more than half of the 166,000 new businesses created were located in just 20 counties. Not surprisingly, these are all urban counties and include Silicon Valley and San Francisco, Los Angeles and San Diego, Austin, Houston, and Dallas in Texas, New York, Chicago, Miami, and Las Vegas (thank you, Tony Hsieh!). Unfortunately, most of these communities are unaffordable to most entrepreneurs, especially if they are not seeking the sort of big money only VCs can provide. 

In the rest of the country, new business creation is down. About 59 percent of the nation's counties actually saw more businesses close than open in 2010 through 2014. "The collapse in new establishments should serve as a wakeup call," the study's authors conclude.

3. Young people are no longer starting businesses.

Much of the research that shows entrepreneurship on the decline points to a particular segment of the population that once started businesses frequently but now shies away from entrepreneurship: young people. "In 1996, young people launched 35 percent of startups. By 2014, it was 18 percent," Leigh Buchanan wrote in an Inc. piece about the startup decline about a year ago--in spite of the rock star status accorded to young entrepreneurs these days. There's been a lot of speculation about why today's younger generation is so risk-averse, but none of it so far has touched on what seems like an obvious factor: Many or most of today's college graduates start their careers already deeply in debt. That could curb anyone's appetite for risk.

I wish I could see an obvious solution to this trend, but I can't. Perhaps finding a solution could begin with recognizing the problem. We seem to have created a society that idolizes high-profile unicorn entrepreneurs while making life much harder for those from middle-class or working-class backgrounds whose ambitions are to build solid, community businesses as opposed to achieving world domination. We need to tip the scale back in the other direction. Because it's the second group and not the first that we need to transform today's lackluster recovery into a high-performing economic engine.

Published on: May 26, 2016
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