Start-Up Stagnation

A trend that is deeply concerning to me is the lack of new high tech business creation in the US during the past ten years.

I have written several times on this blog that the ultra low interest rates between 2002 and 2005 should have created huge amounts of new small businesses. Instead there was a housing boom, unprecedented growth in complex financial instruments, outsourcing, and in general a great deal of new debt. The eventual consequences in terms of the 2008 financial crisis were catastrophic.

I think America in some ways is still experiencing the effects of the .com bust. Further, the lack of capital for risky new ventures is alarming. The following link discusses this important issue:

The Venture Capital Depression

Now a far greater threat has arisen. Beyond risky start-ups, there is a drop-off in small business creation. This is important because every large business was once a small business. In my view, America's future in terms of wealth creation is at risk unless there is a pick-up in small business vitality.

This article published last week in the WSJ on a related topic has caught my attention:

Lahart, Justin, Whitehouse, Mark, 2010. Few new businesses sprout. The Wall Street Journal, Nov. 18.

This quote is extremely informative:

"In the early months of the economic recovery, start-ups of job-creating companies have failed to keep pace with closings, and even those concerns that do get launched are hiring less than in the past. The number of companies with at least one employee fell by 100,000, or 2%, in the year that ended March 31, the Labor Department reported Thursday."

"That was the second worst performance in 18 years, the worst being the 3.4% drop in the previous year."

Since small businesses are responsible for a significant percentage of job creation in the US economy, the outlook for unemployment during the next five years looks bleak.

Further, there continues to be a reduction in capital available for risky start ups, mostly in technology areas:

"Venture-capital firms invested $25.1 billion in the year that ended in September, up 10% from the same period a year earlier but still down 27% from two years earlier, according to Dow Jones VentureSource. Angel investment amounted to $8.5 billion in the 2010 first half—30% below the average level in the five years leading up to the financial crisis, estimates Jeffrey Sohl, director of the Center for Venture Research at the University of New Hampshire." bold added

Folks should keep this observation in mind when planning for the future:

"'I've never seen seed capital so low,' says Mr. Sohl. 'This is alarming.'"