Drive to create new businesses is running out of steam

Waiting for a free table at Four Barrel Coffee, the artisan coffee shop in San Francisco’s Mission neighbourhood filled with tech-savvy 20-somethings tapping out business plans on their Apple Macbooks, it is easy to swallow the received wisdom that the emergence of an entrepreneurial society has only just begun.

It is an image perpetuated in the growing number of largely urban clusters of tech start-ups, such as London’s Shoreditch neighbourhood — where dilapidated 1970s office blocks are being knocked down and replaced with gleaming office skyscrapers — or in the cool cafés popping up on Karl Marx Strasse in the former East Berlin.

The problem is that the drive to create thousands of businesses in some countries, such as the US, appears to be running out of steam. After several years of recession-defying growth in the number of US companies being formed, there is now a flatlining in start-up activity or even decline.

The latest US Bureau of Labor Statistics data on self employment shows that the number of incorporated self-employed fell from a high of 5.88m in November 2008 to 5.38m in April 2015. Activity has recovered from the trough of just below 5m in September 2011 but is struggling to regain former levels. The number of unincorporated self-employed Americans also fell from a high of 10.8m in June 2007 to 9.64m in April 2015.

Rather than representing a new dawn in individuals taking charge of their own destiny, the US is back to levels of self-employment last seen in 1986.

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Even in the UK, where company formations are still rising, the growth curve has flattened significantly in recent months.

Experts are left scratching their heads why this should be at a time when the popularity of entrepreneurs appears to be at a high and governments of all political colours are eagerly pursuing policies to nurture start-up activity and business growth.

Jonathan Ortmans, president of the Global Enterprise Network, a US-based organisation that promotes start-up activity at events around the world, admits to being curious.

“I do not think peaks matter as much as we might think. What we want is activity — the constant organic process of company formation breathing innovation into individuals and teams in our society. It keeps our enterprises on their toes — being surrounded from all sides by people attempting to disrupt models and find better ways of doing things quicker and cheaper.”

The drop in company formations in the US contrasts with the rising enthusiasm for entrepreneurs, recorded in the Global Entrepreneurship Monitor (GEM), a primary piece of research into early stage business and attitudes to entrepreneurship, conducted by Babson College, a US-based business school.

The GEM continues to record highly positive views about entrepreneurship in US society. Its latest data show that more than half of the adult population think there are lots of opportunities for starting a business. More than three-quarters of the US adults it polled thought entrepreneurs had high status and receive positive media attention.

After a dip in 2009 and 2010, entrepreneurship in the US as measured by the GEM questionnaire has been on the rise since 2011, and is now at the highest rate since Babson started this research in 1999.

The rebound has been driven by “necessity entrepreneurship” because of persistent shortcomings in the US jobs market, as well as a return to “opportunity entrepreneurship”, where people want to start a company because they think they can add something to a market or create a product or service category, says Donna Kelley, one of Babson’s entrepreneurship professors.

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Emma Jones, who provides support, resources and networking opportunities for British start-ups through her business venture, Enterprise Nation, believes the levelling out of company creation in the UK is inevitable after the recent period of unprecedented new business growth.

“For the past two years, the UK has witnessed more than 500,000 companies start in the space of a year,” she notes. “This is incredible and represents historic highs. I’ve said for a while that we should now expect to see a levelling-off.

“Much of the focus from the [UK] government and private sector has now turned to growth, and rightly so, in my view, so the emphasis now is helping these record numbers of start-ups stay in business.”

Ms Jones does not think the UK has reached a peak in the number of companies it can sustain. She predicts another high in five or six years as a result of recent initiatives to teach entrepreneurship in schools to the next generation of Britons.

What the business formation data show is that much of the growth, and the vast majority of small businesses many countries are sole trader operations. Traditionally, these have been in blue collar jobs, particularly builders and taxi drivers, although recently there has been a rise in professionals setting up on their own too.

Although these people are not creating jobs in the sense that they are not hiring others, Ms Jones sees many benefits to these types of enterprise.

“The majority of businesses start as sole traders to test the water before moving on to a limited company,” she says. “Another factor to take into account is that small businesses are growing in different ways. They are not necessarily growing by taking on staff but by subcontracting and outsourcing to others.

Timothy Barnes, director of UCL Enterprise Operations, which helps nurture start-up activity at University College London and supports outside entrepreneurs by connecting them with students and faculty, says the idea of encouraging everyone to think about founding a company is flawed.

“We need to be careful we don’t over-promote starting a business just because it seems sexy,” he says.

What are important, and in even wider need, are entrepreneurial skills and behaviours for established organisations, Mr Barnes notes.

“Society needs teachers, miners, doctors, accountants, builders, artists, soldiers and factory workers, and businesses need employees,” he says.

“The ability to understand a situation, create ideas, test them and gather the resources to make things happen is vital, but is probably not best measured by crudely counting the number of start-ups.”