Don’t Let the Disruption Hype Fool You: America Is Actually Getting Less Entrepreneurial

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Today he'd be working for Big Lemonade. Photo: Harold M. Lambert/Getty Images

Quick, answer this question: Is the United States getting more or less entrepreneurial? There’s a good chance that you answered “more,” thinking of the second rise of Silicon Valley and the success and proliferation of firms like Uber and Airbnb.

But the glitz, glamour, and big money of San Francisco — as well as the cultural potency of and media attention paid to start-ups — shroud a hard truth. The country is getting less entrepreneurial. In aggregate, firms are aging. People are starting fewer new businesses, and older businesses are doing better than their younger competitors. For all the talk of “disruption” in today’s economy, it is better to be a big, old incumbent dinosaur than it is to be a lean, mean start-up.

Robert A. Litan of the Brookings Institution and Ian Hathaway of Ennsyte Economics provide some scary data points in two research papers they have released in the last few months.

  • The share of all companies comprised by start-ups under a year old fell by half between 1978 and 2011
  • The proportion of private-sector workers employed at older firms has increased from 60 percent to 72 percent since 1992
  • The proportion of workers employed at young firms has declined over the same period
  • Companies under a year old are failing more often, with the “failure rate” for start-ups climbing to 27 percent from 16 percent in the early 1990s
  • The “failure rate” has increased for all but the longest-established businesses

Even the vaunted high-tech sector is seeing the same trends: The share of tech companies that are 16 years old or older has risen from roughly 15 percent to 25 percent since 1992, while the proportion of the industry that works in such firms has increased, too.

Mergers offer an obvious explanation for those increases: Big incumbents like Apple and Google snap up start-ups and absorb their human capital and ideas. But Litan and Hathaway suggest that something else is going on, at least when looking at the broad economy: “Though we document a clear rise in consolidation during the last few decades, it doesn’t appear to be a major contributor to business aging directly — which has been occurring across all firm size classes, and the most in the smallest of businesses.”

None of this is to say that Silicon Valley is not important, or that the business innovations coming out of small firms based in San Francisco are an illusion. But writ large, the economy is becoming more sclerotic and favorable to incumbents — not more favorable to lean, hot, “disruptive” businesses, whatever that term might mean.

In that light, the attention lavished on California's entrepreneurship culture — the magazine covers, the conferences, the television shows, the corporate executives wearing hoodies — seems almost tragic. We focus more and more on the exception as the rule becomes more and more depressing.