As the financial crisis was being resolved in December 2008 I heard someone say, “Wait ’til the startups get going – they’ll end this recession and crank up the economy again.” Of course, this maxim had caught on previously because when you start a business, you create at least one job.
But as I thought about how that entrepreneurial expectation had been true in past recoveries, I considered the environment we were entering and concluded that this recovery was going to be different. Indeed, in my 2009 predictions I reckoned that there were going to be fewer startups in this recovery cycle than ever before based on two conditions I saw coming. Unfortunately, things got even worse due to two factors I didn’t forecast.
Typically, the founding of most Main Street startups are funded initially with access to the personal credit and home equity of the founders. I saw problems coming for both of these sourcesbecause:
- One morning in February 2008 – months before the financial crisis but with storm clouds on the horizon – millions of credit card holders woke up to discover their card issuers had withdrawn any available credit they had the day before.
- Then, over the
next year, the bursting of the real estate/mortgage bubble – the prime cause of the 2008 financial crisis – resulted in wiping out or significantly reducing the home equity of millions of U.S. households.
The two factors I did not forecast are:
- The youngest – and largest – of marketplace participant groups, Gen Y and Gen X, age 20-44, apparently are not as entrepreneurial as their Baby Boomer parents were at that age. According to the Kauffman Foundation, since 2009 startup activity for those two demographics has been declining.
- In my half-century career, and my study of the history of the American marketplace, prospective founders of new businesses have never been subjected to the level of anti-business rhetoric and policies from the federal government as they have in the past seven years.
One of the seminal findings of the Global Entrepreneurship Monitor (GEM) is a direct connection between a country’s entrepreneurial vitality and its economic growth. The Great Recession ended in June 2009. But the subsequent U.S. recovery, now well into its sixth year of moribund performance (2% annual average GDP growth), has been stuck in a kind of circular reference: expansion-creating startups aren’t happening because of the four entrepreneurship-repressing factors.
Write this on a rock …Real economic expansion – more than 3% growth – will require a return to favorable entrepreneurial conditions lost since 2008.
Next week my column will reveal counter-intuitive ways the lack of startups since 2008 have been positive.