Startups Need a Leg Up

May 3, 2012

Startups, long viewed as a driver for innovation and job growth, are now accounting for a much smaller share of U.S. businesses than they used to.

A new report from the Kauffman Foundation, using data from the Census Bureau’s Business Dynamics Statistics, shows that the startup rate in 2010 fell to an all-time low of 7.87% from 8.10% in 2009.

Sure, it’s easy to argue that’s because of the Great Recession, but it turns out this is a steady and increasing trend. According to the report, the number of start-ups in a given year declined from about 12% of all companies in the 1980s to less than 8% in 2010.

The share of young businesses – defined as those started within the last five years – as a total of all companies also declined, from 50% in the early 1980s to 35% in 2010.

The Kauffman report doesn’t get into the factors that might be causing that slide, but in a speech before the Economic Club of Washington, serial entrepreneur Steve Case suggested a few obstacles in the way for new startups and offered up some solutions, reports the Washington Post.

Case first denounced current immigration restrictions that send highly skilled immigrants back to their home countries, where they then build businesses, create jobs and compete against American companies. He also underlined the importance of improving access to capital by allowing entrepreneurs to tap into modern financing alternatives like online crowd-funding platforms.

Later, Case, who co-founded America Online (the first technology IPO), urged lawmakers to reduce the regulatory costs of going public in an effort to help more firms jump into the markets more quickly, which has traditionally proven healthy for the overall economy.

Case might be on to something when it comes to startup financing, according to American Express OPEN Forum.

“Two new studies indicate that funding for U.S.-based startups fell nearly 20 percent in the first quarter of the year, with cautious venture capitalists backing fewer deals.

A MoneyTree study conducted by PricewaterhouseCoopers and the National Venture Capital Association (based on data from Thomson Reuters) puts the figure at 19 percent. DowJones' VentureSource puts the figure at 18 percent.”

That picture may not be quite as grim as it looks, however. Mark Heesen, the president of the National Venture Capital Association, noted that with the rapid pace of innovation, fledgling companies likely are being funded in "stealth mode, forming a pipeline that is not yet visible to the public eye."



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