Survey shows surprise decline in US startups run by young people

5 Comments

Credit: Signe Brewster

Heard about all those young people who drop out of college to build their own business? Turns out there are far fewer of them than you might think. Contrary to popular perceptions about tech and millennials, the number of people under 30 who own companies has fallen to a 20-year low.

According to new Federal Reserve data parsed by the Wall Street Journal (paywall):

Roughly 3.6% of households headed by adults younger than 30 owned stakes in private companies … That compares with 10.6% in 1989—when the central bank began collecting standard data on Americans’ incomes and net worth—and 6.1% in 2010.

Meanwhile, the number of young people as a percentage of all entrepreneurs is also shrinking. According to a separate study cited by the Journal, only 22.7 percent of new entrepreneurs in 2013 were aged 20–34, compared to 26.4 percent the year before.

The story suggests that various factors are driving the dearth of young entrepreneurs; these include banks making fewer loans to small businesses and a lousy labor market that has deprived millennials of job skills. In turn, young people may have become more risk-averse, and have less confidence to embark on their own.

The overall picture would be brighter in the event that more older people were picking up the slack by launching startups later in life. That appears unlikely, however, given other numbers:

Overall, the U.S. “startup rate” — new firms as a portion of all firms — fell by nearly half between 1978 and 2011, according to an analysis by Mr. Litan [of the Brookings Institute] and his research partner, economist Ian Hathaway.

5 Comments

Glenn A

What about the raw numbers? Percentages don’t allow us to draw too many conclusions, it could ostensibly be more older people who lost their savings in the downturn and have been forced to start a company…

Daniel Lawrence

“Overall, the U.S. “startup rate” — new firms as a portion of all firms — fell by nearly half between 1978 and 2011, according to an analysis by Mr. Litan [of the Brookings Institute] and his research partner, economist Ian Hathaway.”

An easy example of people using math to confuse and claim their data shows something it doesn’t. New firms as a portion of all firms means over time, naturally, the rate will fall. Say your startup rate in 1978 was 5%; of your 10,000 companies, 500 of them are new. Next year, you’re going to have 10,500 companies, another 500 new if your start up rate hasn’t changed. 33 years later, in 2011, if your startup rate hasn’t dropped and your rate of firm closure isn’t ridiculously close to 100%, you should have 50,000 companies, and in order to maintain a 5% growth rate, you would be opening 2,500 companies per year. The fact that the U.S. startup rate fell by *nearly* half means we’ve got 1,250+ new companies – 2.5 times as many as in 1978.

(These numbers obviously assume 0 firm closures, which is also absurd.)

Sine Nu Condrum

I think the ‘start-up’ hype is bringing into the space people that have nothing to do with it and would be better off keeping their permanent job, whatever that is.
E.g. tired bankers becoming founders. It’s hard enough to do a start-up without needing to be surrounded by a-holes whom one left back at the previous job.
The problem is that some of them are actually ‘lucky’. The kind of people who are just ‘lucky’ at life, and because they are good at talking, they ‘impress’ investors and take precious investment capital away from the real entrepreneurs that create value.

Fred Davis

One can learn how to sell ideas. It’s not just luck that some people know how to do that. It’s more likely experience and focusing on what has worked in the past when selling an idea.

It’s easier to let yourself off the hook though if you can convince yourself it’s just luck.

exhibit44

The great American start-up myth is a great story, but it’s the VCs and tech bankers who come in with tens of millions of dollars to make it a reality. So you’re not so much inventing something as impressing a backer.

It’s great to think that these start-ups are a source of innovation and growth, but most people need a steady job in their chosen field with decent pay, and frankly, that’s the macroeconomic model that leads to the greatest national prosperity. Americans’ obsession with novelty can seriously hinder the growing of our national wealth.

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