U.S. tech startups: An endangered species?


The number of technology startups has dropped off significantly since the turn of the century and is falling even faster in the wake of the recession. (Source: Kauffman analysis of Census and BDS data)

Spend some time in San Francisco, Boston or New York City, and it seems high-tech entrepreneurship is alive and well in the United States. Read about the clever new products and services being built in emerging technology hubs like Seattle, Denver and the District of Columbia, and you come away with the same impression.

Take a look at the actual numbers, and the outlook is starkly different.

A steady decline in start-up rates within the technology sector, one that briefly reversed course with the dot-com boom in the late 90s, resumed at the turn of the century and is now plummeting faster than ever, according to a new study released Tuesday by the Kauffman Foundation, a research organization. Researchers noted that the sector has historically punched well above its weight in terms of generating new jobs, thus, the findings should alarm policymakers in Washington.

“Because young high-tech firms are so disproportionately important for innovation and job creation, a slowdown in this sector calls for a new approach to fostering a stronger entrepreneurial economy,” Dane Stangler, the group’s vice president of research and policy, said in a statement about the report, which was conducted with researchers from the University of Maryland, the Census Bureau and technology research group Engine.

Using Census data, they found that the number of start-ups (firms age five years or younger) as a percentage of all companies has dropped steadily over the past three decades, from around 50 percent in the early 80s to about 35 percent in 2012. During the first half of that period, the same trend occurred in the high-tech sector (firms with a large share of workers specializing in science and math fields), with the ratio dropping from around 60 percent to around 50 percent in 1995.

The Internet’s arrival turned the tide for a few years, lifting the start-up share of the high-tech sector back up to about 55 percent by the turn of the century. The dot-com bubble quickly burst, however, and since around 2002, the ratio has plunged at a faster clip than before the online boom “at a pace that even exceeds the decline in entrepreneurship for the private sector as a whole,” the researchers noted.

The decline is not simply the result of an increase in older technology firms. Since 2000, the raw number of high-tech start-ups — which had grown consistently since the early 80s even though their share of the overall business population had fallen — has dropped off, too, falling at an even faster clip than the number of new firms overall.

As a result, job creation by the high-tech sector, which had trended upward since around 1987, peaked about a decade ago and has declined steadily ever since.

“Interestingly, the high-tech sector bucked the national trend by exhibiting rising dynamism until 2002,” the researchers wrote, later defining dynamism as the rate at which firms are launched, shuttered, expanded and contracted. “But even it has exhibited a trend decline since 2002.”

That could spell trouble for an economy that is still struggling to find its footing in the aftermath of the recession. Studies have shown that new firms are responsible for creating nearly if not all of the nation’s net new jobs (job gains minus job losses), with new firms in the technology space contributing a significant share of those positions.

“Consequently, a slowing in high-tech entrepreneurship could have disproportionate effects on the nation’s overall long-term economic growth,” Ian Hathaway, Engine’s research director and one of the authors of the study, said in the report.

Follow J.D. Harrison and On Small Business on Twitter.

J.D. Harrison covers startups, small business and entrepreneurship, with a focus on public policy, and he runs the On Small Business blog.
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