Once again, entrepreneurial activity showed big in the United States. Last year was a tough year for entrepreneurs. We have experienced a deep recession, credit crunch and record unemployment rates. But although the odds were against them, new-business creation during the 2007-2009 recession years increased steadily year to year (e.g. 60,000 more starts per month in 2009 than in 2007) and 2009 became the year business startups reached their highest level in 14 years. The number of startups even exceeded the count during the peak of the 1999-2000 technology boom.
I encourage all readers to view the interactive graphics highlighting the Kauffman Index of Entrepreneurial Activity. The Index is an indicator that captures new business owners in their first month of significant business activity through the Current Population Survey (CPS), which is conducted by the U.S. Bureau of the Census and the Bureau of Labor Statistics. The graphics really bring numbers to life and allow one to see key Index findings since 1996.
In addition to the overall rate of entrepreneurial activity, the Index offers insights into the demographic and geographic composition of new entrepreneurs across the country between 1996 and 2009. For example, the latest Index report reveals that although their rate of entrepreneurship remains below other racial groups, African-Americans experienced greatest increases in business-creation rates from 2008 to 2009. In terms of age, entrepreneurship growth was highest among 35- to 44-year-olds. Among states, Oklahoma and Montana had the highest entrepreneurial activity rates, with 470 per 100,000 adults creating businesses each month. In general, business creation is highest in western and southern states, and lowest in the Midwestern and Northeastern states.
From the perspective of policymaking, these fascinating findings beg the questions of what motivated these surges in entrepreneurship, and of course, how to sustain them. The data clearly suggests that a difficult economic environment can actually motivate individuals who may have been forced out of the corporate world to finally launch their ideas on the marketplace, creating a job for themselves. How do we help tap into their experience and talent to allow them to grow so that they create many more jobs?
Other new findings offer some guidance. In particular, the latest Kauffman Firm Survey data suggests key factors influencing firms’ survival. The fresh data confirms that external debt markets become increasingly important as startup firms survive and grow in their early years. Out of the 4,928 firms new businesses founded in and tracked by the survey since 2004, 2,606 firms survived in 2008. These surviving startups injected about $78,000 into their businesses in 2008, with outside debt markets making up nearly 67 percent of that total, compared to 40 percent in these companies’ first year of operation. The implication of frozen credit markets for the recession-born startups is clear. Lenders have been and are still wary about issuing new credit to young businesses, seeing them as an overly risky bet in uncertain economic times. Unfortunately, the recession creates a dilemma in which banks are looking for greater certainty that consumer demand will enable businesses to pay back their loans on time, while entrepreneurs need access to financing to grow their businesses.
Of course, numerous factors affect whether or not a new company survives, but access to credit is a significant influencer. Credit is the oxygen for young firms. Policymakers need to find a way to make young firms more attractive to investors and credit markets in order to break the cycle where the economy recovers slowly because young businesses can’t access credit to expand. As has been noted many times before, more than half of the companies on the 2009 Fortune 500 list were launched during a recession or bear market, along with nearly half of the firms on the 2008 Inc. list of America’s fastest-growing companies.
The government’s moves in recent months to expand and raise caps in some loan programs and to offer more aid to community banks are all good news. However, experts have argued that we need policies that have a long-term effect, such as more flexible bank capital standards that allow prudent lending in bad times, when many firms need it the most to survive, as well as a payroll tax holiday for new and young companies.
The upward trend in business creation despite daunting economic conditions is encouraging in terms of our economic recovery, but we cannot rest on our laurels. Policymakers need to continue to learn how to make the path of entrepreneurial risk taking easier and scholars need to continue to help us better understand why the most successful companies succeed so more young businesses can become viable job creators and lead us into a full recovery.
Jonathan Ortmans is president of the Public Forum Institute, a non-partisan organization dedicated to fostering dialogue on important policy issues. In this capacity, he leads the Policy Dialogue on Entrepreneurship, focused on public policies to promote entrepreneurship in the U.S. and around the world. In addition, he serves as a senior fellow at the Kauffman Foundation.