Entrepreneurship Gets Attention, Kauffman Foundation Says, But Funding And Success Rates Are Lacking

By Diane Stafford
The Kansas City Star.

These signs point to a renaissance in business creation:

Entrepreneurs with successful young companies are having an easier time finding venture capital and angel investors, city and state governments are offering many development incentives and there’s more entrepreneurial education than ever before.

Despite all that, these signs suggest otherwise:

Business creation still remains low, startup or seed funding is difficult to get, new firms are having a tougher time surviving and the recent economy has limited startups by members of the big millennial and baby boomer generations.

In its annual “State of Entrepreneurship” report released Wednesday, the Ewing Marion Kauffman Foundation built on its positioning as a leading national research organization on business development.

The study detailed hope balanced by concern for the sector of the economy that traditionally has been the source of innovation and job creation.

Kauffman’s interim chief executive, Wendy Guillies, summarized its findings in remarks designed to reach a broad national audience at the National Press Club in Washington. She said one positive is that venture capital funding — investment that generally follows some kind of track record — is growing.

By the end of the third quarter of 2014, more venture capital had been invested in U.S. startups than in any year since 2001, and angel investments — in deals and dollars — has rebounded toward pre-recession levels.

What’s lacking is startup funding, the loans of several thousand to several hundred thousand dollars from banks or other sources that help entrepreneurs get off the ground.

There also exists a barrier to millennials who are saddled with student debt or baby boomers who were battered by job loss, wage stagnation or the housing market’s downturn that robbed them of equity that once might have been used to start a business.

“New business creation peaked in 2006, then plummeted 31 percent to its nadir in 2010,” the Kauffman report said. “As of 2012, it was still 27 percent of that recent peak.”

Furthermore, survival rates for new firms have fallen since the early 1990s.

What’s equally concerning to researchers is “that the jury hasn’t even convened about the effect of entrepreneurial education,” said Dane Stangler, Kauffman’s vice president of research and policy. “We’ve put a lot of money into that research as a foundation, and we’re still not sure what that’s adding up to.”

Students are being exposed to business creation ideas as early as elementary school, and graduate business school are offering more entrepreneurism programs, but — perhaps because of the recent severe recession — it’s still unknown whether this education fosters entrepreneurial success.

“This is our most open-ended report,” Stangler said of Kauffman’s annual series of entrepreneurship reports. “We don’t have the answers.

We’re posing the questions. And we’re saying that we want to work with others to find the answers. We know it’s hard. There are no magic bullets.”

The 2015 report was delivered at a time when headline economic and job market numbers are positive. But, Stangler acknowledged, “there’s so much going on under the surface that is still moving in the wrong direction to encourage job creation.”

The downsides include sluggish wage growth, baby boomers leaving the workforce with no interest in chancing a loss of assets by plowing funds into a new venture, and millennials who need a paycheck instead of betting on building a business.

The report said that millennials, defined as those born between 1981 and 1997, “have created fewer businesses since they entered the workforce in the early 2000s” despite being exposed to more entrepreneurial education.

Meanwhile, boomers born between 1946 and 1964 have been starting more businesses in the last 10 years, perhaps because they lost their jobs or perhaps because being “serial entrepreneurs” is in their nature.

But as the boomer population ages, “common sense indicates that an older population won’t start new companies at a very fast pace,” the report said. Plus, many boomers were hard hit by the Great Recession and lack the savings to invest in new ventures. Others, financially comfortable, have retired with no desire to stay in the workforce in any way.

Researchers have found that older entrepreneurs typically don’t start businesses out of retirement or unemployment but rather when they still are employed.

Another downside: Even when older people start companies, history shows that they tend to employ fewer workers.

“The state of entrepreneurship in the United States over the next several years will continue to be shaped to a large extent by this generation,” the Kauffman study said.

Looking forward, the technology adeptness of millennials will help prompt business creation by these “digital natives,” the report said.

They’re also the best-educated generation in history, and “more education does appear to lead to greater entrepreneurial success.
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Studies show that the peak age for business creation in the United States has been 40, and millennials “are on the cusp of mass entry into that age,” Kauffman reported. The big question is whether the Great Recession “dealt a permanent blow” to that potential.

“Historically, housing wealth has been a major source of seed capital for new companies,” the report said. “Compared to older age groups, millennials’ home ownership rates plunged during the Great Recession and have yet to recover. … The decimation of home equity in the recession may be one reason that the volume of business creation has remained … very depressed.”

The foundation will continue to study the effect of high student debt on business creation. It also will follow tax reform efforts for their possible effects on entrepreneurs. And it will track “mounting evidence that higher protective barriers across the economy may be keeping entrepreneurs out.”

Kauffman’s efforts to better understand entrepreneurship have also led to its cooperation with the U.S. Census Bureau to conduct an annual “Survey of Business Owners.” Currently the bureau gathers such information only every five years.

One other promising development, Stangler said, is research into “equity crowdfunding” and “lending clubs,” two comparatively new forms of financing that use online sites to tap lenders and investors.

“One-fifth of startups are now using online lending,” Stangler said. “But there’s still not enough startup funding.”

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