Good and Bad News on US Start-Ups

Less than one out of every five businesses started in the US has 'the innovative spark that could lead to strong job generation capabilities over the next five years', according to researchers at Babson College in Wellesley, MA. Overall US entrepreneurial activity is on the rise, however.

The 2003 Global Entrepreneurship Monitor (GEM) shows a rise in new business start-up activity last year after two years of decline, but mostly by 'self-employed start-ups that replicate existing goods or service businesses and project less than five employees over the next five years'. The study was sponsored by the Ewing Marion Kauffman Foundation of Kansas City.

The US continues to be a very entrepreneurial nation and the leader among the G7 countries. After two years of decline, 'entrepreneurial activity in the US is bouncing back, increasing from 10.5% in 2002 to 11.9% in 2003', according to GEM - however, six out of every ten business owners say that their products or services are not new to any customer, while 40% of current new business owners are self-employed and do not offer jobs to other people. Only 33% expect to work alone in their company five years from now, while 40% expect to have 1-5 employees, and 27% more than 6 employees.

Although all ethnic groups are represented in entrepreneurial activity, the study points to a gender gap, with approximately two out of every three entrepreneurs being a man - this gap is marginally larger in the US than the world average, according to the study.

The US has the highest prevalence rate of informal investors among the G7 countries, with 5 out of every 100 adults having invested in someone else's business during the previous three years. Formal venture capital continues to decline from its peak in 2000, but there are positive trends in the final quarter of 2003 and first quarter of 2004.

'The good news is the increase in overall entrepreneurial activity. The bad news is the lack of job growth and a disappointing drop in the level of classic venture capital funding' according to William D. Bygrave, the Frederic C. Hamilton Chair for Free Enterprise Studies at Babson College. The study found an 80% decline in VC funding in the US since 2000 - the greatest percentage drop in all the G7 nations plus Israel.

'If informal investment dried up, entrepreneurship would wither' says Bygrave. 'Informal investors provided more than $100 billion of financing to 3.5 million startup and small businesses in 2003... Entrepreneurs seeking investment for their businesses should first ask male relatives who are entrepreneurs with college degrees and have high incomes; next expand the search to female relatives, friends, neighbors, and work colleagues; then turn to strangers; and finally, and in very rare cases, approach formal venture capitalists'.

Among other actions suggested by the study are the needs:

• 'to build sustainable financing venues that will focus on investment in seed and startup companies' and
• 'for Governments at all levels to work to provide an environment in which the entrepreneurial spirit may flourish'.

A copy of the report is available at www.gemconsortium.org or www.kauffman.org . Babson College, recognized internationally as a leader in entrepreneurial management education, is online at www.babson.edu

All articles 2006-23 written and edited by Mel Crowther and/or Nick Thomas, 2024- by Nick Thomas, unless otherwise stated.