U.S. tech startups: An endangered species?

U.S. tech startups: An endangered species?

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Source: Kauffman analysis of Census and BDS data – 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.

By J.D. HarrisonUpdated: Wednesday, February 12, 12:40 AM E-mail the writer

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 Foundationa 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.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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