Entrepreneurs buck the economy

Nov 24 2009 by Brian Amble Print This Article

Amid all the economic tribulations of the past two years, you might expect that entrepreneurial businesses and new start-ups would have suffered the fall out every bit as much as corporate America. But far from stagnating, entrepreneurial activity in the United States actually increased in 2008 compared to the previous year, although new ventures tend to be smaller and the risks of failure greater.

That's according to the annual Global Entrepreneurship Monitor (GEM) National Entrepreneurial Assessment for the United States, produced by Babson College and Baruch College, which found that total entrepreneurial activity (TEA) increased from 9.6% in 2007 to 10.8% in 2008.

Moreover, it tends not to be necessity that is the main driver for entrepreneurs, but opportunity. Just 13% of entrepreneurs started their ventures out of necessity, the report suggests, while 87% did so because they had identified a business opportunity.

The continuing strength of entrepreneurial activity in the US means that it continues to be at or near the top of the world's innovation-driven economies in terms of early-stage entrepreneurial activities.

Just how much these new-stage businesses matter to the US economy is hard to under-estimate. A recent report from the Kauffman Foundation revealed the startling fact that since 1980, almost all net job creation in the US has been thanks to firms less than five years old. And in 2007, new firms created nearly two-thirds of new jobs.

As the Kauffman Foundation points out, net job growth is marked by churn - the process by which jobs are created and destroyed by shifts in the economy. Every year new companies emerge to create jobs and are succeeded in subsequent years by a new pool of firms. The net effect of this has been to add around two million new jobs to the US economy each year.

But with new businesses playing such a critical role in any long-term economic recovery, it is a worrying sign that the GEM report found that the size of the ventures entrepreneurs are thinking about is getting smaller and the number of jobs they expected to create decreased from 2007 to 2008.

And these worries are reinforced by the fact the trend away from manufacturing start-ups and towards an economy dominated by business services (which tend to employ fewer people), looks set to continue.

Fear of failure also increased appreciably Ė hardly a surprise given the state of the economy in 2008 Ė but levels of perceived opportunity remained strong. This contrasts with the marked decrease across-the-board in GEM countries for individuals who expect to start a business in the next three years.

Another significant finding is that entrepreneurs are getting older. The GEM figures show a marked reduction (almost 9%) in entrepreneurial activity among the 18-44 age group and a similar increase among those aged over 45.

Women also appear to have a tougher time setting up a business, starting ventures with eight-times less funding than their male counterparts. In the realm of established business, women entrepreneurs have reported greater fear of failure and lower perceptions that business success leads to higher status than male entrepreneurs.