Shyama Venkateswar Distinguished Lecturer, Hunter College and Director, Public Policy Program, Roosevelt House

Posted on March 28, 2014 · Posted in Frank Friday

In a special report on the state of entrepreneurship in the U.S., The Economist referred to America as a “beacon of entrepreneurialism.” Pointing to Americans’ culture of innovation and risk-taking behavior, the report shows that in the decade following 1996, 550,000 small businesses sprouted up every month. These high levels of entrepreneurship reflect is a widely-held perception in boundless opportunities; according to the Global Entrepreneurship Monitor Report, a surprising 43 percent of Americans — the highest level recorded since the survey started in 1999 — believed that economic opportunities were plentiful. It also found that despite the volatility of the U.S. economy, 56 percent of Americans believed that they had the capabilities to start a business.  The most positive feature of the report was the fact that Total Entrepreneurial Activity (TEA) showed a good distribution and diversity across age, gender, immigrant status and other characteristics.

Several factors beyond the culture of risk-taking explain America’s successes with entrepreneurship compared to other similar economies, particularly in Europe. First, is the availability of venture-capital. A study calculated that in 2005, companies backed by venture capital funds accounted for nearly 17 percent of U.S. GDP and 9 percent of employment in the country. Capital is also available from corporate or philanthropic sources. Goldman Sachs’ 10,000 Small Businesses Initiative and 10,000 Women initiative provides educating, training, and access to network and capital for entrepreneurs in the U.S. and in the developing world. Hertz Foundation’s The Newman Entrepreneurial Initiative Fund supports entrepreneurial efforts by Fellows with an understanding that the as their ventures expand, the entrepreneurs might be able to return some of the capital for future generations. The Kauffman Foundation spends about $90 million a year by supporting research at universities, providing skills training to potential entrepreneurs, and funding a global “Global Entrepreneurship Week.” Ashoka Foundation’s global work to promote social entrepreneurship, Echoing Greens seed monies for social innovators, and Acumen Fund’s support through venture capital monies to tackle poverty are other examples where institutions have supported innovators whether in business ventures or in social justice causes.

The second factor is the close ties that leading American universities have with industry. Universities play a key role as incubators for technology start-ups. For example, almost half of the start-ups in Silicon Valley have their roots in Stanford University. Similarly, Route 128 in the Boston area is a tech center hub that is closely connected with the rich presence of leading universities.

A third factor is the United States’ relatively open immigration policy that welcomes highly-skilled workers — almost 52% of Silicon Valley start-ups were founded by immigrants and as much as a quarter of American patent applications were from foreign-born nationals in 2006. That said, many people, including Bill Gates and other business leaders, believe that the immigration system could be doing even more for the economy, arguing that in order to maintain America’s global competitiveness in key industries like technology, the county needs to overhaul its immigration policies and make it easier for high-skilled immigrant workers to contribute to the economy of the U.S.

However, many serious challenges remain for would-be entrepreneurs. Among those who closed their businesses, 18 percent attributed their closure to the lack of financing.  The GEM report found that entrepreneurs required a median amount of $15,000 to launch their businesses; 82 percent of funds came from sources that included personal, family and friends, which, for most small businesses, was unsustainable. The news is even worse for female entrepreneurs; women were less likely to be entrepreneurs, a ratio of 7:10, and women were twice as likely as men to discontinue businesses because of lack of funding. 

These numbers not only impact the entrepreneur, they also have implications for the wider economy and job seekers. The Bureau of Labor Statistics, which tracks new businesses and their contribution to job creation, finds that the number of jobs created by businesses that are less than 1-year old has decreased from 4.1 million in 1994 to 2.5 million in 2010. In a comparison across businesses, the Bureau of Labor Statistics shows that survival rates vary by industry; the health care and social assistance industries have the highest survival rates over time, while construction ranks among the lowest. Since the start of the Great Recession in December 2007, new small businesses are not being created at the same level as before the economic downturn began, thereby unable to create the badly needed jobs necessary for full economic recovery.

Access to capital is the critical issue that acts as a barrier to entry for interested entrepreneurs. To that end, Governor Cuomo recently announced the Bridge to Success loan program that provides short-term funds for Minority and Women-Owned Business Enterprises (MWBEs) so that they can participate in up to $1 billion in contracting opportunities provided by New York State. Successful candidates can then hire staff, purchase equipment and buy materials that will make them more competitive bidders for New York State contracts.

Aside from providing access to necessary financing, nurturing a new generation of risk-taking and innovative entrepreneurs should be a long-term policy goal. Organizations like the Network  for Teaching Entrepreneurship focus on providing entrepreneurship education — technical skills as well as developing the entrepreneurial ‘mindset’ —  to low-income youth in education in middle and high schools, an area traditionally neglected in favor of college and graduate programs. Operating through domestic and international licensees, NFTE has served over 500,000 young people since it was founded. In addition to providing classes devoted to entrepreneurship, NFTE’s strength lies in incorporating entrepreneurship education in traditional academic classes like economics and social studies for studies in designated schools.

Even as the country struggles to recover from the 2008 economic downturn, inequality figures remain stubbornly entrenched. Current poverty rates of 15 percent represent 46.5 million people without adequate food, housing or income security. Since the 1970s, the incomes of the bottom 90% have been stagnating while the incomes of the top 1% have soared. Income concentration at the top is the highest in 80 years. And job creation, an indicator of recovery and related to the current unemployment rate of 6.7 percent, remains persistently slow.

The future of American competitiveness in the global economy lies in business startups and self-employment. In a 2011 Gallup survey, almost 45 percent of the pre-college students polled said they planned to start their own business. Education, skills-training, access to capital, and a perception of opportunities — the necessary ‘mind-set’ for success — are the ingredients to revive America’s success with entrepreneurialism, while setting the country on a path to  bridge the growing  inequality gap.

Follow Dr. Venkateswar on Twitter @DrSVenkateswar

The writing and opinions expressed herein are those of the authors and do not necessarily reflect the positions of the Roosevelt House Public Policy Institute or Hunter College.