Here’s Why Small Business Startups Are Lagging the Pre-Recession High
Everyone loves a good entrepreneur success story. A couple of dudes decided to rent out air mattresses, and it led to the founding of Airbnb, now worth an estimated $38 billion. The founder of Pinterest quit his job at Google and spent two years getting turned down by investors before launching the site. And we don’t have to go over Mark Zuckerberg’s story — you’ve all seen “The Social Network.”
Hearing about great feats of entrepreneurship gives you the sense that you can take on the world single-handedly and come out victorious on the other side.
So why, in a world where we put the entrepreneurial spirit on a pedestal, is the number of new small businesses being created experiencing a slump?
The number hit a high in 2006. But the following year saw the start of the Great Recession, and naturally entrepreneurship took a hit. Not only did people simply not have the capital to start a business, but the general economic climate made just about everyone wary to even consider it.
Fast-forward to the present: The economy has recovered, and the number of new businesses has grown. But the numbers haven’t hit the levels we were seeing leading up to 2007, and we’re far enough removed from the recession that it’s worth discussing.
In 2016, when the most recent data was available, entrepreneurs started 452,824 small businesses (less than five employees) in the U.S., according to a Penny Hoarder analysis of U.S. Census Bureau data. While that is up from the 440,149 started in 2015, it still lags behind the 2006 high of 495,173 by roughly 9%.
What’s Behind This Startup Funk?
To better understand why entrepreneurship and startup creation is lagging those pre-recession highs, we spoke with Lucas Puente, an economist and applied researcher at professional outsourcing site Thumbtack. He says there are two notable reasons for the less-than-stellar numbers.
Big Business Gets In the Way
First up, the big, established players are slowly but surely becoming the name of the game, pushing out small business startup potential.
“As of 2016 (the latest available year of data), firms with 10,000 or more employees are now responsible for 3.84% more of total employment than they were in 1996,” Puente says.
And while big businesses are trending upward in terms of employment, small firms are experiencing the opposite.
There were a net 982,431 jobs created by small businesses in 2006 — but that number has dropped nearly 20% to 790,654 in 2016, according to the U.S. Census Bureau Business Dynamics Statistics.
It’s also worth noting that the labor market is burning hot right now and the economy is experiencing low unemployment numbers not seen since pre-recession years.
Employers are scrambling to fill open jobs — which now outnumber job seekers. So why go through the trouble of starting your own business when there are plenty of jobs out there waiting to be filled?
Also, the high demand for workers means companies are forced to offer better wages and incentives to attract talent, and startups and small businesses sometimes don’t have the resources to keep up.
Simply put: Large, established businesses are hogging the talent.
The Generations They Are A-Changin’
Ah, millennials — what will they kill next? We know you’re probably sick of hearing about the younger generation and how they differ from the boomers, but stick with us.
“Entrepreneurship has typically been driven by younger Americans, but fewer millennials have decided to start their own business than recent prior generations did when they were the same age,” says Puente.
But it’s not for lack of trying — Puente says there are some factors likely contributing to this generational divide. Hint: They’re related to debt.
Millennials are typically saddled with a higher student debt burden: The average spring 2016 graduate walked off the stage with a diploma and more than $37,000 in student loans.
Looming debt fresh out of college makes it more difficult to generate the type of savings needed to start a business. And not only do they not have the funds for a startup, millennials are also shying away from purchasing a home thanks to their student debt.
“Similarly, a lower home ownership rate has mitigated their ability to get business loans, since homes can be — and often are — used as a source of collateral for new, unproven business ventures,” says Puente.
How Does the Future of Entrepreneurship Look?
So does this mean entrepreneurship is dead and we can kiss small business goodbye? Not necessarily.
There may be hope for those millennials yet. Instead of viewing them as anti-entrepreneurial thanks to the cards they’ve been dealt, we can just assume they haven’t reached the right age and financial well-being yet.
While you might consider the sensational “24-year-old started a multimillion-dollar company” narrative the norm for entrepreneurship, some studies show that the average age for launching a startup is actually 40.
Another sunny stat to mull over: The NFIB Small Business Optimism Index hit a 35-year high in August 2018, continuing a two-year streak of record highs. Current small business owners are feeling better than ever about the economy, so this continuing trend could inspire future entrepreneurs.
If you have an entrepreneurial mindset and want to start your own venture, there are tons of resources and tools to help small business owners succeed. In fact, you can get started by looking into some of our very own tips on entrepreneurship.
Kaitlyn Blount is a staff writer at The Penny Hoarder. Data reporter Alex Mahadevan contributed to this post.
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