Your smartphone’s bright screen offers a glimpse into the colorful startup movement born in Silicon Valley.
As new technology companies regularly grab headlines with astronomical valuations, entrepreneurship seems to be at its cultural prime. However, in reality, successful startups are increasingly few and far between. Recent statistics show that more companies close than open their doors for business every year. Surprisingly, the U.S. now ranks 12th among developed nations in terms of startup activity. And from 1978 – 2011, the nation’s firm entry rate, which measures the share of new firms in the marketplace, fell by nearly half.
Entrepreneurship is vital to both the economy and to society. Startups increase economic and social mobility, thus growing the middle class. New firms historically account for nearly all net new job creation and a shocking 20 percent of gross job creation in our country. Innovation and technological improvements driven by entrepreneurship led to half of the total increase in U.S. productivity growth in the second half of the 20th century.
Entrepreneurship is good for business, good for labor, and good for society.
But the recent Great Recession still casts a considerable shadow: credit remains tight for American businesses, and credit can spell life or death for startups. In 2014, only half of businesses with more than $1 million in revenue were able to secure credit. Between 2005 and 2014, the size of seed investments made by venture capitalists was flat, and it has been sloping downward since. Incubation programs are expanding, but only for companies with proven customer demand, business models, and management teams. Under these conditions, it’s hard for entrepreneurs to find funding for new ideas.
Amid these challenges, some entrepreneurs are finding success in environments that offer incentives for innovation while simultaneously decreasing barriers to entry. For instance, Austin, Texas, is developing a reputation as a thriving hub for small businesses. The city’s tax code was recently ranked first in the nation for being friendly to small businesses, and many entrepreneurs are relocating from the Bay Area to take advantage of lower corporate taxes and cost of living. Additionally, a variety of investment resources are available in Austin that help incubate startup companies. In 2014, Austin’s tech companies alone received more than $1 billion in investment, and that figure is expected to continue to grow. Currently, more than 4,700 high-tech companies are operating in Austin’s metropolitan area.
While Austin has long been regarded as a promising business environment, Detroit is a more surprising example of recent startup success. Muddled by bankruptcy and an auto industry that often seems entrenched in its nearly century-old habits, Detroit has emerged newly poised for reinvention. In 2012, the city instigated a simpler, more competitive corporate income tax. With an average office leasing rate at just a third of San Francisco’s rate, office space is more affordable. Plus, a state-sponsored funding arm dedicates $25 million annually to technology accelerators, incubators, venture funding and grants. Lower costs and business-friendly policies have attracted new growth: in 2014 alone, almost 250 new technology companies were started in Michigan, with private investment totaling $770 million.
As Austin and Detroit demonstrate, new businesses need not suffocate in an atmosphere of tight lending. Policy-incentivized investments and entrepreneur-friendly tax code adjustments can measurably help startups incubate. In a country where the entrepreneurial spirit is an integral part of both the national identity and the economy, policymakers have a chance to rekindle the American Dream by increasing incentives for innovation and by decreasing barriers to entrepreneurship.