What Happens When The Pace Of Startups Slows Down

Oct 31, 2013
Originally published on October 31, 2013 11:45 am

Since the financial crisis hit five years ago, there aren't as many Americans starting new businesses. In uncertain economic times, it's harder for entrepreneurs and investors to take the risk.

And if you look back over the past 25 years, it turns out the overall trend is toward fewer new businesses getting started, too — and that's not good at all when the country needs more jobs.

The Next Google

New businesses are really important for the economy. For one thing, they often come up with new technologies and better ways of doing things. And when they do that, a small percentage start growing very fast and hiring hundreds or thousands of people.

"Out of this vast number of startups, about 10 percent take off, and they create an enormous number of jobs," says John Haltiwanger, a professor at the University of Maryland. He's an economist who studies these young, high-growth companies.

"If you add up the job creation in the United States from just the fast-growing businesses, they account for over 50 percent of all job creation in the United States," Haltiwanger says.

So some of these are companies like Google, or before that, Starbucks or FedEx — and plenty more that aren't quite that big or well-known but that grew very quickly selling soy milk or mountain bikes or a break-out popular chain of hair-cutting salons.

"And do we know ahead of time who these guys are going to be? No, we actually don't. That's actually one of the most interesting issues. We can't even predict what sector they're going to be. We can't predict what location in the country they're in," Haltiwanger says.

But one thing we do know is that since the financial crisis, entrepreneurs just aren't starting as many of these businesses.

There are a couple of different ways to measure this. But Haltiwanger suggests looking at the total number of new firms created every year as a percentage of overall firms.

"It used to be the case, in any given year we were up in the 12, 13 percent range. Now we're down in the 7 or 8 percent range. ... We're talking about hundreds of thousands of less startups today than we used to see," he says.

Maybe some of this is longer-term demographics. As the baby boomers aged, there weren't as many younger people who are more likely to start businesses. And then when the financial crisis hit five years ago, the entrepreneurship rate fell more sharply.

"Young firms got really hammered in the Great Recession, and they've been very slow to recover," Haltiwanger says.

Cautious Investing

One reason it's been harder for people to start companies: money. Since the bubble burst, banks, angel investors and venture capital firms got much more cautious. But some of that is now starting to change.

"We will fill this space in less than a month, absolutely, with stuff," says Chris Pacheco, CEO of Bayesian Ventures. His new company is moving into a lab next to MIT in Cambridge, Mass. He's working on technology to help surgeons tell the difference between cancer cells and healthy cells.

The No. 1 reason he quit his job to start this business?

"The access to capital," Pacheco says. "I had somebody who was willing to give me capital in order to do this."

And in this area in particular — medical technology — there's plenty of optimism.

Johannes Fruehauf is opening an innovation center called Lab Central. It'll house Pacheco's company and a dozen other startups.

"Every single one of them has the potential to really change medicine," Fruehauf says. "The stuff that Chris is working on — you know, I'm a physician, so we cut out tumors, and we don't know if it's healthy or bad. Now you stick a probe into it and it's going to tell you ... cut more, cut less. These things are paradigm changing."

So Fruehauf sees entrepreneurship in America from where he sits as alive and well.

Still, Haltiwanger says, when you look across the country, the entrepreneurship rate hasn't recovered from the financial crisis.

"Each month that goes by, I'll say, I become a little more pessimistic that ... this is indeed stunting our growth," he says.

Haltiwanger says millions of Americans desperately need jobs. And the engine of job growth — these young, fast-growing companies — is still sputtering along at the lowest level in 25 years.

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It's MORNING EDITION from NPR News. Good morning. I'm Renee Montagne.

STEVE INSKEEP, HOST:

And I'm Steve Inskeep. Since the financial crisis, the number of new business startups in America has slowed. That may be no surprise, but this is: The number of business startups has been generally slowing in this country for 25 years across good times and bad. Which is not good because the country needs more jobs. Chris Arnold is one of the NPR reporters who's been looking into the state of small business.

CHRIS ARNOLD, BYLINE: New businesses are really important for the economy. For one thing, they often come up with new technologies and better ways of doing things. And when they do that, a small percentage start growing very fast and hiring hundreds or thousands of people.

JOHN HALTIWANGER: Out of this vast number of startups, about 10 percent take off and they create an enormous number of jobs.

ARNOLD: That's John Haltiwanger, a professor at the University of Maryland. He's an economist who studies these young high-growth companies.

HALTIWANGER: If you add up the job creation in the United States from just the fast growing businesses, they account for over 50 percent of all job creation in the United States.

ARNOLD: So some of these are companies like Google, or before that Starbucks or Federal Express, and plenty more that aren't quite that big or well-known but that grew very quickly selling soy milk, or mountain bikes or, say, a break-out popular chain of hair cutting salons.

HALTIWANGER: And do we know ahead of time who these guys are going to be? No. We actually don't. That's actually one of the most interesting issues. We can't even kind of predict what sector they're going to be. We can't predict what location in the country they're in.

ARNOLD: But one thing we do know is that since the financial crisis, entrepreneurs just aren't starting as many of these businesses. There are a couple of different ways to measure this, but Haltiwanger says if you look at the total number of new firms created every year as a percentage of all the firms out there...

HALTIWANGER: It used to be the case - in any given year we were up in the 12, 13 percent range. Now we're down in the seven or eight percent range. And that's a huge number in terms of - you know, we're talking about hundreds of thousands of less startups today than we used to see.

ARNOLD: Some of this could be due to longer-term demographics. As the Baby Boomers age, there just weren't as many younger people who are more likely to start businesses. And then when the financial crisis hit five years ago, the entrepreneurship rate fell much more sharply.

HALTIWANGER: Young firms got really hammered in the Great Recession and they've been very slow to recover.

ARNOLD: One reason that it's been harder for people to start companies is money. Since the bubble burst, banks, angel investors, venture capital firms, everybody got much more cautious. But some of that is now starting to change.

CHRIS PACHECO: We will fill this space in less than a month - absolutely with stuff.

ARNOLD: That's Chris Pacheco, the CEO of Bayesian Diagnostics. His new company is moving into a lab next to M.I.T. in Cambridge, Massachusetts. He's working on a technology to help surgeons tell the difference between cancer cells and healthy cells. And he says the number one reason that he quit his job to start this business...

PACHECO: The access to capital, right? So I had somebody who was willing to give me capital in order to do this.

ARNOLD: And in this area in particular - medical technology - there is actually plenty of optimism.

JOHANNES FRUEHAUF: Here's where we purify water.

ARNOLD: Johannes Fruehauf is showing me around the innovation center he's opening up. It's called Lab Central. And it'll house Chris Pachecko's company, and a dozen other startups.

FRUEHAUF: Every single one of them has the potential to really change medicine. The stuff that Chris is working on - you know, I'm a physician so we cut out tumors and we don't know if it is healthy or bad. Now you stick a probe into it and it's going to tell you, is it a tumor, cut more, cut less. These things are paradigm changing.

ARNOLD: So Fruehauf sees entrepreneurship in America from where he sits as alive and well. Still, John Haltiwanger says when you look across the whole country, the entrepreneurship rate has not recovered from the financial crisis.

HALTIWANGER: Each month that goes by, I'll say I become a little more pessimistic that indeed this is indeed stunting our growth.

ARNOLD: Haltiwanger says millions of Americans desperately need jobs. And the engine of job growth, these young fast-growing companies, is still sputtering along at the lowest level in 25 years. Chris Arnold, NPR News, Boston. Transcript provided by NPR, Copyright NPR.