GO
Loading...

Fewer start-ups in the high-tech sector? Actually, yes

Fewer start-ups in the high-tech sector? Actually, yes

Friday, 14 Feb 2014 | 10:24 AM ET

Despite the current war for tech talent in hot start-up regions including Silicon Valley, new research paints a more muted, long-term picture of American entrepreneurship and job creation under pressure.

The number of start-ups and subsequent jobs they generate have been declining for decades due to barriers, including limited visas for skilled workers. Another roadblock is soaring student debt, which can discourage would-be entrepreneurs from striking out on their own.

In two separate white papers from the Kauffman Foundation released this week—on the tech sector and on the broad state of entrepreneurs—the rate of small business creation has been steadliy declining for the past 20 years or so. This dip—particularly in the technology industry—has been occurring well before the most recent recession began in 2007.

Wait a minute. Since the depths of the 2008 economic collapse, the Nasdaq has more than doubled with plenty of tech buzz, heralding the next big thing. "Equity crowdfunding. Start-ups and mobile apps galore. Aerial GoPro cameras!"

But researchers at Kansas City-based Kauffman, which studies entrepreneurship, say the recent tech climb is part of a longer start-up view that includes a distinct slump.

The recent runup "is a blip in a long-term decline in high-tech start-up rates and dynamism," said Dane Stangler, the foundation's vice president of research and policy. Business dynamism includes how fast firms and employees turn over—all factors that help drive worker productivity and the overall U.S. economy.

Also worrisome is the decline of new tech start-ups amid more consolidation. Firms are either growing quickly or getting swallowed up—with fewer businesses left in the middle, which might otherwise expand organically. The net result: Fewer ventures churning, innovating and creating products and jobs.

Dane Stangler, vice president of research & policy at the Kauffman Foundation.
Heesun Wee | CNBC
Dane Stangler, vice president of research & policy at the Kauffman Foundation.

The number of new U.S. start-ups per 100,000 individuals was about 185.6 businesses 20 years ago in 1991, according to data from Kauffman and the U.S. Census. New start-ups per 100,000 people declined 29.3 percent, to 131.3 for 2011, the most recent year of figures available.

"That raises some concerns about what's going on," Stangler said.

Few start-up visas and rising student debt

Start-up trends naturally reflect population changes, including aging baby boomers or those born after World War II. But Kauffman research shows older entrepreneurs aren't being replaced fast enough with younger upstarts.

Barriers preventing younger workers from becoming the next Mark Zuckerberg or Elon Musk include limited visas for skilled workers and rising student debt levels, Stangler and other economists say.

Overhauling U.S. immigration law has been long-awaited for years. But lacking political consensus, start-ups have struggled to absorb high legal fees associated with acquiring visas. And the months-long hiring process can delay key business decisions as they wait for visa lottery outcomes. Workers in high demand include engineers, computer scientists and software developers.

Visas are key to growth because immigrants are more likely to be entrepreneurs and create new jobs, says Donald Marron, director of economic policy initiatives at the Urban Institute. Marron is among those pushing for more start-up visas.

Of the engineering and tech companies founded in the U.S. between 2006 and 2012, 24.3 percent had at least one key founder who was foreign-born, according to Kauffman data. In Silicon Valley, the number was 43.9 percent.

(Read more: How lack of immigration reform harms start-ups, US economy)

Another speed bump to more new businesses and job creation is rising student debt. Exorbitant loan payments can deter young professionals from starting businesses.

President Barack Obama and the administration are pushing for student debt loan reform in which payments don't exceed more than 10 percent of an individual's income. "We need to abolish these fixed student loan payments and move toward income-contingent loans," said Gene Sperling, director of the National Economic Council.

Small businesses unwilling to take risks: survey
Liam McGee, Hartford Financial Chairman & CEO, says his company's third annual survey of small businesses and entrepreneurs shows they're not taking risks due to uncertainty over the future.

Eat or be eaten

Beyond rising debt levels and absence of immigration reform, tech start-up growth is being dampened by more consolidation that favors mature firms over younger businesses. "The share of young firms in the high-tech sector has exhibited a more pronounced secular decline in the post-2002 period than in the rest of the economy," according to Kauffman.

In other words, a grow fast or get acquired"eat or be eaten"landscape has emerged. "That's different than it was 20 years ago, when organic growth was prevalent," said Stangler.

The upshot is fewer young, tech firms, fewer jobs—and ultimately fewer choices for consumers amid thinner ranks of businesses. Stangler noted we're already seeing shades of this trend as giants including Amazon.com crowd out other retailers.

Entrepreneurship broadly has come into vogue, of sorts, as the recession pushed more Americans to create their own work. But whether these perceived opportunities translate to more start-ups and jobs remain to be seen.

As Kauffman researchers summarized in their report, "We need entrepreneurial growth, with more new and growing businesses creating new types of products and jobs across the entire economy."

(Read more: More Americans see entrepreneur opportunities)

By CNBC's Heesun Wee. Follow her on Twitter @heesunwee.

  Price   Change %Change
AMZN
---

Featured

Contact Small Business

  • CNBC NEWSLETTERS

    Get the best of CNBC in your inbox

    › Learn More