Is Entrepreneurial Activity in Permanent Decline?

This article from highlights a new Brookings Institution study detailing a longstanding decline in startup activity in the U.S., as measured by the share of all businesses that are one year old or younger.  The question for me is whether this is a permanent state of affairs, with basically all business activity destined to be done via large and established institutions, or whether the U.S. can be expected to regain its entrepreneurial spirit, which has propelled its success in the past.  I think the latter is the case, though admittedly this may be a case of wishful thinking, since increased startup activity would be good for my business.  The following are some factors that could increase entrepreneurial activity in the coming years:

  • Lemonade_StandCrowdfunding – the ability for companies to easily access the capital markets, particularly ones that are unable to secure bank lending (e.g., because they do not have current revenue), will make the decision to launch a startup an easier one.  In the pre-crowdfunding era, startups not large enough to attract venture capital investment have often needed to scrape investments together from friends and family, which is time-consuming and may not always be available.  When companies can cast the net wider and be easily connected with investors who are actually interested in the business, startup activity can be expected to increase.
  • Decline of “job lock” – The Affordable Care Act has created a broader market for health insurance purchased by individuals and may be hastening a move away from the  employer-based insurance model that has been dominant in the U.S. since World War II.  Entrepreneurial activity has been held back by the fact that employees who would otherwise like to launch a startup being reluctant to do so for fear of losing insurance provided by the employer, a phenomenon known as “job lock.”  Now, with the ability for anyone to secure a plan with the knowledge that premiums will be subsidized by the government if income is low, job lock will be less of an impediment to startup activity.
  • Decline of risk aversion – The recent recession has, with good reason, caused many to opt for the perceived safety of salaried employment with large companies and shun the risk of entrepreneurial ventures.  Although this financial crisis was clearly a more traumatic event than a garden variety recession, having a great impact on the psyche of the American worker, history shows that these changes in attitudes are not permanent.  The Great Depression of the 1930s clearly changed the outlook of those that lived through it, but the uniquely American appetite for risk eventually asserted itself.