Despite the Hype, US Entrepreneurship Continues to Decline

You wouldn't know it to scan the net or read the papers or watch tv: the big story remains innovation, especially in tech, with its the eye-popping numbers generated by whichever latest IPO catches the markets' - and therefore the public's - fancy.

But the numbers that define the real story of economic growth are less effusive. They tell a very different tale, one of declining new business starts, reduced numbers of IPOs and, except for the few exceptions, smaller 'liquidity events' for those who are fortunate enough to make it to the monetization phase.

There appear to be several reasons for this decline. First, a general caution when it comes to new investment, especially in riskier enterprises. Financialization has created an even greater emphasis on certainty since the crisis almost seven years ago. Corporations and investors are sitting on historically large piles of cash, waiting apparently for some sort of signal that risk has been banished. Compensation systems tied to performance based on calculations that create a bias for inaction are also to blame. And the app economy is just not capable of generating the sorts of payouts that make it worth investors' while.

Concentration and scale, even in the innovation arena, have just made it harder for entrepreneurs to raise the sums necessary to initiate and sustain their enterprises. Short-termism, too, militates against investing in concepts that may take years to build. In short, until confidence in the economy is restored sufficiently to create a more positive long term view and thus free up funds for investment, entrepreneurship may remain more of an aspirational value than a factual economic driver. JL
 
Ben Casselman reports in 538 blog:

For all the buzz about the Silicon Valley tech boom, the actual rate at which Americans start businesses has been falling for more than 30 years.
More Americans are finding jobs. But so far, at least, they don’t appear to be starting more businesses.
Back in May, I wrote about what I called the “slow death of American entrepreneurship.” For all the buzz about the Silicon Valley tech boom, the actual rate at which Americans start businesses has been falling for more than 30 years.
That story was based on 2011 data, when the economic recovery was still in its early stages. Some economists had hoped that the 2012 numbers would show a rebound.
Last week, the Census Bureau released new data on so-called business dynamics (startups, failures, hirings and firings) for 2012. Entrepreneurship did rise in 2012, but barely. Americans started 410,000 businesses in 2012, up just 2 percent from a year earlier and still more than 20 percent below prerecession levels. The startup rate — the number of new businesses as a share of all businesses — was essentially flat at 8 percent.

On the one hand, the lack of a rebound shouldn’t come as too much of a surprise. The decline in entrepreneurship predates the recent recession; in economic terms, it’s a “structural” problem, not a “cyclical” one.
On the other hand, the decline did accelerate in the recession, so we might expect to see at least some increase during the recovery. And we have — just not much of one. Entrepreneurship looks a lot like other measures of economic dynamism: Companies, for example, are hiring more workers, but at a rate well below prerecession levels. Workers, similarly, remain reluctant to quit their jobs, which suggests they, too, remain cautious.

On Friday, we’ll get the latest monthly jobs figures from the Bureau of Labor Statistics. Last month’s numbers were disappointing, but on the whole the job market has shown marked improvement this year. That might eventually translate into more new businesses, as would-be entrepreneurs gain confidence. But the lack of a strong 2012 rebound means it’s looking less likely that the startup rate will ever return to prerecession levels.