News Column

U.S. Business Startups Hit 30-Year Low

May 19, 2014

Diane Stafford and Mark Davis, The Kansas City Star

Entrepreneur (file photo)

May 19--Where has America's entrepreneurial mojo gone?

Startups of new businesses, which are historically the key source of new jobs, are at their lowest point in 30 years. They're occurring so sparingly that U.S. businesses are now dying faster than they're being born.

The news is "shockingly bad" and "starting to look like a death spiral," political blogger and small business advocate Jean Card said on U.S. News' Thomas Jefferson Street Blog.

It "runs totally counter to the narrative" of America's entrepreneurial embrace with TV shows like "Shark Tank," added Ben Casselman, chief economics writer for FiveThirtyEight.com.

The trend, dissected in recent reports from the Brookings Institution in Washington, D.C., and the Kauffman Foundation in Kansas City, sounds alarms about the economy.

"It's a real worry," said Robert Litan, a former Kauffman economist now at Brookings. He co-authored the Brookings report that found the decline in new business formation spreads across all states, nearly all metropolitan areas and each sector of the economy.

"It didn't matter where you're from or what industries. They're all down," Litan said.

And unless the trend reverses, he added, America may continue to face the same frustratingly slow economy and job market that has lingered since the Great Recession.

Americans' failure to launch means would-be young entrepreneurs face a steeper climb to prosperity than previous generations. It means less income to set aside for a house, children's educations or retirement.

Personal wealth is not all that suffers. The national economy grows poorer, too.

Businesses that fail put resources back into the economy: workers, machines, buildings. Often, it's up to new businesses to put those resources to better use, sometimes as the first company in a new industry.

That has been happening less and less since 1978. And the protracted decline means you can't blame just Democrats, Republicans, the Great Recession or even this sluggish recovery.

Risk culture

Economists aren't especially worried about business failures. These are no more common than usual.

They're more concerned about what has been a 30-year steady slide in business startups. Over that time, the pace of startups has been cut nearly in half, according to Brookings, with a "precipitous drop" beginning in 2006.

The number of startups crossed below the number of failures sometime after the financial crisis, so that beginning in 2009 more companies were failing than being born.

Economists behind the recent studies say all the reasons behind the long decline in startups remain unknown. But contributing factors may be shifts in banks' lending habits away from small businesses, mounting regulatory burdens in some industries, and the greater effort needed to make products and get them on store shelves.

Card, formerly with the National Federation of Independent Business, wonders whether something has changed culturally.

"Why are people less interested in taking the risks to start a business?" she said.

Touted cures target those concerns and more, including immigration policies that would help America tap into the above-average entrepreneurial bent of those who come to these shores in search of opportunity.

The data defy the political attraction entrepreneurs have gained, as communities like Kansas City seek to bring them to town. Kansas eliminated state taxes on personal business income last year, hoping to spur more residents to start businesses and lure owners in other states to move there.

Leap of faith

Fortunately for the national economy, hope springs eternal in entrepreneurs.

With a passion to fill a need, an Internet fundraising campaign and a few thousand in savings, Kansas Citian Hayley Besheer, 25, is launching Make a Difference Intimate Apparel.

The company will use a South Carolina manufacturer to produce "organically sustainable" women's underwear. For each pair sold, she will donate a pair to someone in need.

"I'm taking a leap of faith," acknowledges Besheer, who hopes to attract investors and customers who believe in U.S. job creation, cause-driven marketing or organic products.

"I think entrepreneurs have to live by the saying, 'Imagine what you could do if you can't fail,'" she said.

There is plenty of startup interest among the life-sciences students at universities, said Rosemarie Truman, founder of the Center for Advancing Innovation.

"I think there are not enough platforms to train them." she said. "There's tons of people, but they have no idea how to start."

Truman helped provide a platform through the Breast Cancer Startup Challenge that launched last fall at the University of Missouri-Kansas City. It paired startup candidates from universities globally with licensed inventions produced through the National Cancer Institute.

Life-science startups, though, face increasingly complex regulatory and legal hurdles that tech startups typically don't. And the hurdles have gotten higher.

Over the last seven years, she said, the Food and Drug Administration has steadily tightened the clinical and manufacturing practices companies must follow.

"These are absolutely practices you have to follow if you want to get anything approved in the United States," Truman said.

Import startups

Litan sees one group particularly willing to fight through business-creation barriers: U.S. immigrants. He pushes for "liberalizing U.S. entry of high-skilled immigrants."

In particular, it would help to grant permanent work visas to foreign graduates of U.S. universities in science, technology, engineering and math.

Kauffman's latest "Index of Entrepreneurial Activity" said immigrants were almost twice as likely to start businesses in 2013 as were native-born Americans. Over the last 18 years, Latinos, Asians and other immigrants accounted for rising shares of entrepreneurs, largely because of population growth but also because of higher rates of business creation.

Better clarity about the laws governing immigrant entrepreneurs would have made the start of St. Louis-based PCV Therapeutics LLC less daunting.

The company emerged last month from the Breast Cancer Startup Challenge. Its founders -- mostly graduate students at Washington University in St. Louis -- seek $3 million in funding to develop personalized cancer vaccines. But to launch they had to clear a legal cloud.

"As international students, it is very murky what we can and cannot pursue," said Hirak Biswas, a graduate student from India and PCV Therapeutics co-founder.

Moreover, Anurag Agarwal, another co-founder from India, graduated Friday, changing his immigration status. Fortunately, he has a job lined up, and the employer will sponsor his visa, allowing him to stay and work evenings and weekends without salary for PCV Therapeutics.

For the economy, the Kauffman study suggested there's a thin silver lining in the recent overall decline in startup activity. It could mean that, as companies have begun to add to their payrolls, fewer people are left to create their own jobs by starting businesses.

Also, data show opportunity rather than unemployment motivated many more entrepreneurs last year than at the end of the Great Recession, said economist Robert Fairlie at the University of California-Santa Cruz.

Smart money

Kansas City's entrepreneurial landscape has improved in the last five years, including the emergence of several business accelerator programs. These match experienced mentors with neophytes as well as provide offices, legal and accounting services, and seed money.

And they bring in potential investors for the startups' funding pitch. Local money is getting smarter, too, said Kevin Fryer, managing director of the SparkLabKC accelerator, whose enrolled companies hail from the Kansas City area.

"People are starting to learn to invest in startups," he said. "Out in San Francisco and the valley, everybody invests in deals. Here in KC, it's not that way, but we're getting a lot better at it."

That the Midwest still lags in startups was evident when Colorado-based Techstars fielded applicants for the March start of the Sprint Mobile Health Accelerator in Kansas City's Crossroads Arts District.

"It was pretty clear, looking at how many applicants we received from Boston, New York and San Francisco. Those outnumbered by a long shot any of the other applications we got," said John Fein, managing director at the Sprint accelerator.

Sean Elwood, 37, a graphic designer working full time at H&R Block, said the Innovation Center at UMKC and the FastTrac business development program gave him the boost needed to turn his hobby into a side business, Elwood Events LLC.

His wedding DJ enterprise takes about 20 hours a week, mostly on weekends. Sometimes he hires "roadies" to help with equipment, but he doesn't consider himself a job creator.

"Creating a business was more to do with my passion for music," Elwood said. "It's not providing my full living ... but maybe someday it could."

To reach Diane Stafford, call 816-234-4359 or send email to stafford@kcstar.com. To reach Mark Davis, call 816-234-4372 or send email to mdavis@kcstar.com.

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(c)2014 The Kansas City Star (Kansas City, Mo.)

Visit The Kansas City Star (Kansas City, Mo.) at www.kansascity.com

Distributed by MCT Information Services

Original headline: Entrepreneurial spirit sags as business startups hit a 30-year low


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Source: (c)2014 The Kansas City Star (Kansas City, Mo.)


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