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Startups Not Revving Up US Economic Growth

The image of the startup carries with it thoughts of high-flying product design teams, funding rounds and innovations that change (maybe) the very fabric of our lives. Startups — coming by the dozen, as fast as can be minted by entrepreneurs in Silicon Valley and Silicon Alley.

Imagery does not always equal reality, of course.

The Wall Street Journal reported Monday (Oct. 24) that, in the United States, the economy is “inching along,” with several million workers left from entering the workforce. The reason is that there are not enough startups starting up. The creation of those businesses, the publication noted, is crawling at a rate that can described as a nadir.

The lifeblood of any economy is the creation of small businesses, which, as a group, is the main engine that drives hiring. That is a trend that WSJ traces back decades to before the 1980s, where the smallest and youngest enterprises had an outsized effect on U.S. employment. More recently, WSJ reported, the share of firms as a percentage of the U.S. economy has slipped from 12 percent 30 years ago to about 10 percent as of the start of this decade. The share of individuals employed at those very same firms has declined as well, to 2 percent from 4 percent over the same timeframe. The impact of a few percentage points, said WSJ, becomes weighty, to the tune of several hundred thousand jobs. By way of contrast, the heady pace of job creation during the 1980s came out to 200,000 companies annually, to as many as 1.8 million jobs annually. Nowadays, the economy is growing at about 2 percent.

What lies beneath: Grabbing backers and getting funding committed can be a daunting task, said WSJ. In addition, there are demographic issues that may explain the slowdown, in part, due to baby boomers retiring and millennials not quite old enough to have a real impact here (yet). Fewer new companies, of course, means fewer job openings.

For the startups themselves, said WSJ, getting to critical mass, which also means gaining scale big enough to hire on a grander scale, can be elusive, as, according to CB Insights, less than 9 percent of firms make it to $1 billion valuations, commonly referred to as unicorn status.


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