The S⁠t⁠ar⁠t⁠up Economy

By: The James Madison Institute / 2018



By: Connor James

With talk of the nation’s biggest companies including Facebook[1] and Google[2] holding a great deal of market share, it serves as a great time to look back to the beginnings of the goliaths: as startups. Whether it’s Facebook, Google, Amazon, or Apple, they each began at the starting line.

New companies bring innovation to the marketplace as well as net job creation to employ Americans.[3] As stated in a Kauffman Foundation research report on firm formation and economic growth, “without startups, there would be no net job growth in the U.S. economy.”[4] Unfortunately, according to many, the startup economy is falling.

What is known as the “start-up slump,” analysts have considered the slowing rate of companies that are one year or newer. The startup formation rate in the United States has declined over time, from 16 percent in 1977 to 8 percent in 2014.[5] Similarly, startups per 1,000 firms in the United States declined from about 110 per 1,000 firms, to about 85 per 1,000 firms.[6] Startup formation has been shaky over time, due to the effects of various economic factors, especially the 2008 financial crisis.

While the numbers for startup formation have declined over time, other indicators may suggest a brighter future. The Kauffman Institute measured the opportunity share of new entrepreneurs to act as an indicator for business creation due to market opportunity. The Kauffman Institute found that the percent of new entrepreneurs who were previously employed was the highest in sixteen years, reaching the 86 percent mark in 2016.[7]

Another angle that startups may be viewed from is by venture capital backing and exits that make money for those investing in startups. According to Bloomberg’s Startup Barometer, the money raised by startups from investors has increased by 331 percent from April 9th, 2007 to July 2nd, 2018. Similarly, in this same period, the number of startups receiving financing for the first time rose by almost 363 percent, while the number of startups filing for an IPO or being sold to another company rose by over 321 percent.[8]

With these marks in mind, it seems that although startup formation has wavered, business may be succeeding more. One way of analyzing this more deeply is to look at the Bureau of Labor Statistics’ data on private sector establishment survival by opening year. From the years 1998-2002, the new business survival rate after one year was 78.34 percent, deviating by 4.45 percent from the highest to the lowest rate of survival. From the years 2013-2016 this rate was up to 79.58 percent, while deviating by just .6 percent from the highest to the lowest rate of survival.[9]

Startups are essential for economic health in the United States. In 2015, firms under 6 years old accounted for 11 percent of employment and 27 percent of job creation. Firms that were one year of age in 2015 employed 2,343,077 people.[10] Without them, Facebook, Google, Amazon, and Apple fail to exist. Whether you believe that we are in the so-called “startup slump,” or our startups are simply succeeding, there is no denying that startups play a unique, yet sometimes neglected role in economic prosperity. Startups should never fail to be highlighted and defended by each state. It is in working to promote a pro-business environment in a state that gives the nation its next great idea, or simply provides a new job to someone in search of one.

Connor James is a student at the George Washington University majoring in Political Science and is interested in international relations, economics, and data analysis. Connor is an intern with the James Madison Institute.







[7] ibid

[8] ibid