Unemployment rates are dropping, consumer confidence is growing, and the economy is finally picking up steam.
Yet there’s a soft spot in the nascent recovery: the rate of new business creation.
Even before the onset of the Great Recession, reports the Kauffman Foundation, American entrepreneurship has been declining.
But the Kauffman Foundation also argues that two groups of Americans – the Baby Boomers and the Millennials – could potentially reverse this trend. Together, the Boomers and the Millennials include nearly 140 million Americans.
At its 2015 State of Entrepreneurship Address, the Kauffman Foundation released a new report laying out the opportunities and challenges for both Boomer and Millennial entrepreneurs. Kauffman Foundation Policy Director Jason Wiens argues that the right policies will be critical for ensuring that both groups can succeed in helping to revive American entrepreneurship.
All signs seem to indicate the economy is on the path to recovery. Why should we be concerned about the state of entrepreneurship?
Wiens: Entrepreneurship is really critical to the overall health of the U.S. economy. New firms – in particular those that are less than five years old – are responsible for almost all of the net new jobs created in the economy. Robust entrepreneurship leads to strong job creation.
The reason to be concerned is two-fold.
First, there’s been a steady decline in the rate at which new companies are being started that predates the recession.
New business creation by volume peaked in 2006, and then it plummeted by 31 percent to its low point in 2010. The volume has picked up since then, but the rate of new business creation is still lower today than it was in the ‘80s or ‘90s.
Second, not only are fewer new companies being started, new firms are employing fewer people than they were in the past. They don’t seem to be as robust engines of job creation as they once were.
Why are Boomers and Millennials so important for solving this challenge and for the future of entrepreneurship more generally?
Wiens: We focused on these two demographic groups primarily because of their size. The Baby Boomers have been a catalyst of business innovation and growth in recent history, but now they are approaching retirement age. Questions linger about whether they will continue to start businesses as they age.
As for Millennials, they will soon be the largest demographic group in our country and comprise three-quarters of our workforce. They have high levels of education and have great exposure to entrepreneurship.
Each of these groups has its own strengths. With Boomers, for example, you might point to their experience, their net worth and financial resources, and the networks they’ve built over several decades in the workforce.
For Millennials, their education and exposure to entrepreneurship are perceived strengths as they approach what research shows is the “peak age” for entrepreneurship—around 40. The question is whether it will translate into successful new business creation.
Perhaps there is a way to marry these strengths together in a way that each group is helping one another. To do that, I think more needs to be done to involve different generations in entrepreneurial programs so they can benefit and learn from one another.
The focus on both Boomers and Millennials is also interesting given popular perceptions of entrepreneurship and entrepreneurs.
Wiens: Many people think of entrepreneurship as the province of the young – kids in hoodies in college dorm rooms creating tech startups. But the data we have from the Kauffman Index of Entrepreneurial Activity shows that the age group from 20 to 34 is actually the least entrepreneurial. Older Americans – those 55 to 64 – have had the highest rate of entrepreneurship in many years. I think that catches a lot of people by surprise.
What advantages do older people have as entrepreneurs?
Wiens: One thing that’s interesting when we talk about entrepreneurship is the importance of experience.
The data show that the peak age for entrepreneurship is around age 40. By that time, people have gone to school; they’ve completed college; and they’ve had 10 to 20 years in the work force. They’ve also developed expertise in a particular industry; they’ve been able to build connections; they might have identified some problems or ways to do something better; and now they’re at that point where they’re ready to take that leap into starting a business.
Will Millennials be ready for entrepreneurship by the time they reach age 40 because of the challenges they’ve been through with the recession?
Wiens: That’s a particularly important [concern] for Millennials who came out of college or tried to enter the workforce during the recession.
If they weren’t able to find jobs or they weren’t able to find jobs in fields they had studied in school, those kinds of delayed opportunities will have significant impacts on their future – not only in terms of experience but also in terms of accumulating the financial assets one might need in order to start a business.
A lot of people use personal savings as a way to fund a new business venture, and if your earnings potential or your earnings have been depressed because of poor job prospects, you may not have the financial wherewithal to either fund that business or to feel like you have a large enough cushion to fall back on if you fail in your entrepreneurial pursuit.
Startups also seem to be a place for young people to get jobs and experience. But if there are fewer new firms, that means there are also fewer entry points for young people to enter the workforce.
The oldest Millennials are still in their early 30s right now, so they have several years to go before they start to reach this peak age for entrepreneurial activity. I’m not completely pessimistic that we won’t see a big bump in entrepreneurial activity in five or 10 years.
Millennials have been more exposed to entrepreneurship than any other generation in our country’s history, and one of the ways you can show that is the amount of entrepreneurship on college campuses. The number of curricular, co-curricular and extra-curricular activities that occur on college campuses has exploded in recent years. It’s also a generation that’s grown up with technology and the Internet. There are good reasons to be optimistic that when they get more experience under their belt, they’ll be successful entrepreneurs.
What policy ideas would help both Boomer and Millennial entrepreneurs succeed?
Wiens: The policy environment is really critical because entrepreneurship doesn’t occur in a vacuum. It’s shaped by a lot of different factors determined by our laws and regulations – whether at the federal, state or local level.[For example,] I think everyone would agree that taxes have some impact on entrepreneurship. But there hasn’t been a lot of research done on what those impacts are, and how different provisions of the tax code either encourage or discourage certain types of investment and what effect that has on different types of business structures and how entrepreneurs choose to organize their business.
Another area of policy we’re looking at is competition policy, and how our laws and regulations perhaps benefit incumbent businesses that already exist to the disadvantage of entrepreneurs and new businesses.
At the state level, what’s really interesting in this regard is occupational licensing and the effect it has on keeping new entrants out of the market. A grantee of ours was looking at the effects of occupational licensing on lower-wage occupations, and found that in states where there were higher rates of licensure for low-income occupations, there are lower rates of low-income entrepreneurship, which presumably impacts economic mobility.
But there are also issues around regulation broadly. It’s easier for a large, established business than a young firm to navigate regulatory compliance issues. There are also various issues at the state level around non-compete agreements, which seem to be increasing not only across different types of jobs and industries but also in their scope.
What does that mean for someone subject to one of these agreements who wants to start a business but has to put that entrepreneurial venture on hold for a year or two?
We’re also looking at – and this applies more to Millennials – the impact of student debt. As debt levels have continued to increase and college continues to become more expensive, what does that mean for Millennials and their future as entrepreneurs?
All of these policy areas have some effect, and we’re trying to tease out both their relative weight and how policy can be modified to better support entrepreneurship.
How do you connect these issues with the larger discussion happening now around inequality?
It’s a critical question. Entrepreneurship is part of the story of the American Dream – where anyone can come to our country and through hard work make something of themselves.
If you have a good idea and are willing to work hard at it, you’re not only able to find success for yourself but you can create jobs and opportunities for other people in our country along the way.
Those jobs and opportunities are what advance people up the ladder and reduce inequality.
How do you generate public momentum for the policy changes entrepreneurs need?
Wiens: There’s an education component that has to happen first about what’s really happening under the surface around entrepreneurship, and why there’s reason for concern about declining rates of entrepreneurial activity.
There’s a popular perception – I think fueled in large part by the media with shows like Shark Tank or the movie The Social Network – that entrepreneurship is booming in the United States. Entrepreneurship seems to be everywhere, so a lot of people assume it must be easy to start a company. But it’s really not the case.
Combatting these popular perceptions, uncovering what’s really happening, and then tying that back to the importance of startups and entrepreneurship to our economy can make a compelling case for why certain policies need to be changed. [What we want] is an environment in which not everyone who starts out as an entrepreneur will succeed but will at least have a fair shot at starting and growing a company.
Jason Wiens is the Policy Director for the Kauffman Foundation.
Anne Kim is Editor of Republic 3.0.