Start- ups are surging again, but for new reasons
More entrepreneurs driven by opportunity rather than necessity
The economy has been mired in a funk since late last year, but there's cause for optimism: Business start- up activity has returned to near pre- recession levels.
Eric Griffin and his partner, Dennis O’Donnell, are part of the shift. In January, the duo launched a Philadelphiabased company called PAW5 that sells bowls and feeding mats to make meals a healthier, more interactive experience for pets.
They already owned a cellphone- related company, but struggled to persuade their bank to increase their line of credit from $ 100,000 to $ 300,000 to fund the venture— until this year.
About 550,000 new businesses were launched each month last year, on average, up from 466,000 in 2013, according to figures released this month by the Kauffman Foundation based on Census Bureau and Labor Department data. That’s the highest level since 2009 and 2010, but the totals in those years were inflated by the economic downturn, which forced many laid- off workers to start their own consulting firms or other enterprises to generate income.
The current crop of entrepreneurs is more likely to form a business based on a viable idea, increasing the chances that the ventures will be successful and longerlasting, says Dane Stangler, Kauffman’s vice president of research and policy.
“Now that the unemployment rate has fallen ( to 4.9% from 10% in 2009), you’re seeing people start businesses not out of necessity … but because they’re pursuing an opportunity that’s better than staying at their organization and at salaried jobs,” Stangler says.
The share of entrepreneurs-motivated by opportunity rather than necessity reached 84% last year, up from 79% in 2014 and 74% in 2009, a Kauffman report says.
Griffin is encouraged by strong consumer spending, particularly in the pet space.
“We feel very confident the U. S. economy is strong and will continue to be strong,” he says.
The number of business start- ups with at least one employee — a subset that better captures firms that contribute significantly to economic growth — also is rising.
There were 398,000 additional employer businesses that were a year old or younger last year, up 7% from 2014 and the most since 2008, according to the Labor Department.
New entrepreneurs are critical to a dynamic economy because they’re more likely to come up with innovations that boost productivity, says Diane Swonk, head of DS Economics. Productivity, or output per labor hour, fell for the third straight quarter in the April- June period and recorded its first annual decline in three years. Fledgling firms also are more likely to add workers rapidly.
“It’s all part of what a healing economy is about,” Swonk says.
Driving the increase in entrepreneurship, in part, are rising home values that have allowed small- business owners to again use their houses as collateral to take out loans after the mid- 2000s housing crash stifled such activity, Stangler says.
Lenders originated home equity lines of credit with limits of $ 146.1 billion last year, up 20% from 2014, according to Equifax. Consumers, including entrepreneurs, also have begun using credit cards more freely, Swonk says.
And banks generally have increased lending to small businesses.
Also, the low unemployment rate has made workers more willing to quit their jobs and take a risk. And the Affordable Care Act is making it easier for them to obtain health insurance outside of companysponsored plans.