Entrepreneurs Aren’t Hiring: Kauffman Foundation

Stealthmode Partners has been working with the Kauffman Foundation since 2003, as a regional center for its Fasttrac Entrepreneurial Education program. On Friday, Jan. 29, the Foundation issued a large report about the state of entrepreneurship in America. Unfortunately, it’s not as good as I had hoped, and much more confusing. But that’s why I like Kauffman; they take the time to do the research. And I can supplement their rigorous research with our own anecdotal data points.

In most previous recessions, more new businesses start. Or at least that’s the conventional wisdom. Unhappily, in the current downturn, the formation of businesses did not increase appreciably. That sucks, because young businesses (rather than small businesses) create all the jobs. We’ve been saying it’s small businesses, but we’re looking at the wrong measurement. Mature businesses, large or small, do not create the number of jobs new ones do.

So we need the creation of new businesses. Well, why aren’t they forming? After all, 10% of us are out of work. Isn’t that when new businesses form?
Paul Kedrosky did the Kauffman research that explodes the theory about new businesses forming and beocming successful in recessions:

“removing the Great Depression and WWII years, both of which have exceptional conditions, shows that 138 companies per year went public in expansion periods, and 140 in recession periods. These data therefore suggest that the likelihood of a company being part of the public IPO set post-1975 is unrelated to whether it came from a recessionary or non-recessionary period.”

Who forms these businesses? Kauffman says:

70 percent are men-owned; 30 percent are women-owned; 
81 percent are white-owned;
9 percent are African-American-owned
; 6.6 percent are Hispanic-owned;
4 percent are Asian-owned
;5 percent are owned by Native Americans, Pacific Islanders and individuals of other racial groups.

And if you think tech companies are founded only by 20-somethings, think again. The average age of U.S.-born tech founders when they started their companies was 39. In fact, twice as many were older than 50 as were younger than 25. 

Why aren’t new companies forming at a more rapid rate in this environment? I think I know why. 75% of startup companies are founded with owner equity and bank debt, mostly credit cards. How many 20-somethings have that equity and those credit cards to fund their businesses? Not many.

We have seen over 400 businesses in the past seven years. This is the first year the numbers in our Fasttrac programs haven’t grown. Kauffman’s research tells me why.

1)No optimism. People are bummed. It’s difficult to motivate yourself when you are bummed about the country’s direction, the magnitude of its problems, or your own situation. Young people graduating from college can’t get jobs and are moving back with parents, who are being laid off. Not a high energy environment. Even entrepreneurs who did start businesses do not plan to hire in 2010.

2)Regulatory confusion. Is there, or is there not, going to be health care reform? Bank reform? Uncertainty paralyzes even the most energetic people.

3) No access to capital. In the past, even though most new businesses couldn’t get bank loans, the founders could use credit cards. But not at 29.99%, and not when everyone’s lines of credit have been cut. And there’s no home equity. The time-honored second mortgage entrepreneurs put on their homes to finance new businesses don’t exist. And we entered this recession with the lowest savings rate in decades, so people can’t tap into their savings.

Kauffman says The heavy reliance on external debt underscores the importance of well functioning credit markets for the success of nascent business activity.

Obama is begging the community banks to lend money, and is willing to give them TARP funds. But community banks are businesses, too, and they don’t want to take risks right now for the same reasons would-be entrepreneurs don’t. And they don’t want TARP funds, which come with strings.

I’m going to make a plea here, for angels. If you have any extra money that you were planning to gamble with or invest (it’s almost the same), for God’s sake put it into a startup. You would be surprised how little the average entrepreneur needs. $10,000 goes a long way. Structure it as a private loan if you wish.

We are going to have to make our own credit markets. Let’s get going.

Tagged as: capital, debt, Entrepreneurship, equity, Kauffman Foundation, Kedrosky