Scott A. Shane - The Endangered Entrepreneur?: How American Entrepreneurship Is Changing

Is Entrepreneurship Dead?

IS ENTREPRENEURSHIP DEAD?

THE TRUTH ABOUT STARTUPS IN AMERICA

SCOTT A. SHANE

Yale
UNIVERSITY PRESS

New Haven and London

Published with assistance from the foundation established in memory of Amasa Stone Mather of the Class of 1907, Yale College.

Copyright 2018 by Scott A. Shane. All rights reserved. This book may not be reproduced, in whole or in part, including illustrations, in any form (beyond that copying permitted by Sections 107 and 108 of the U.S. Copyright Law and except by reviewers for the public press), without written permission from the publishers.

Yale University Press books may be purchased in quantity for educational, business, or promotional use. For information, please e-mail (U.K. office).

Set in Gotham and Adobe Garamond types by Newgen North America.

Printed in the United States of America.

Library of Congress Control Number: 2017954786

ISBN 978-0-300-21211-2 (hardcover : alk. paper)

A catalogue record for this book is available from the British Library.

This paper meets the requirements of ANSI/NISO Z39.48-1992 (Permanence of Paper).

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To Hannah, Lynne, and Ryan

Contents

Preface

This is not the book I intended to write. About two years ago, I sent a proposal to William Frucht at Yale University Press for a book explaining why entrepreneurship in the United States was in long-term decline. After concluding a series of conversations with entrepreneurs, academics, government officials, media pundits, and representatives of major foundations that support economic development, I had become convinced that something was seriously wrong. The experts showed me evidence of a long-term decline in business formation and gave me earnest explanations of what had gone wrong. Each one encouraged me to investigate the problem and then write a book explaining the causes and offering his or her solution.

It took me longer than expected to write this book because my initial premise was wrong. American entrepreneurship isnt in decline. But it has changed. The entrepreneurs, academics, government officials, media pundits, and economic development professionals I had spoken to were incorrect because they had looked at only a small part of the total picture. Because they often sought to advocate a particular set of policies, they had drawn conclusions from small bits of data.

Examination of all of the data tells a far more complex story. The Twitter-length summary of my two and a half years of investigation is this: Entrepreneurship up, but new employers down. Existing small biz doing OK. Labor costs and chain growth to blame.

If you think you can understand complex economic phenomena from tweets, save your money. Put the book back on the shelf. You have the answer.

But for those of you who want to understand what has happened to entrepreneurship in America, read on. Its an interesting and complex story, and one that few people in government, the media, or academia know. As someone whose job is to follow statistics on entrepreneurship intensively, I was surprised at where the data took me.

I looked at statistics from the Internal Revenue Service, the Federal Reserve, the U.S. Census, the Bureau of Labor Statistics, and many other sources. At first they were a jumble of conflicting numbers, but eventually they began to tell a story. It wasnt the story I set out to tell.

Once I had all the data patterns, I went back to all the theories the policy makers, academics, and media folks were proposing, and I compared the data to their explanations to see whether they could possibly be correct. In a few cases, they could. In most cases, they could not. The data were simply inconsistent with the explanation on offer.

I ended up looking through many more data sources, articles, and books than I had intended. From that process, I discovered the work of several obscure researchers who had figured out what was happening when the rest of us were largely clueless.

I am indebted to the authors of the surveys, research projects, books, and articles who gathered and summarized these answers. Their work was crucial to my effort to describe the reality of entrepreneurship and how it has changed.

I had the great fortune of working with Mark Schweitzer at the Federal Reserve Bank of Cleveland and Ian Hathaway of Ennsyte Economics, both of whom helped this book immensely. While an astute reader will see that I do not necessarily agree with everything these authors have written about entrepreneurship in recent years, their analysis of the topic has forced me to sharpen my own analysis and to look harder at what the data showed.

Over the years, many colleagues have taught me a great deal about the topics discussed in this book. Howard Aldrich, Per Davids son, Frederic Delmar, Jon Eckhardt, Bill Gartner, Dave Hsu, and Nicos Nicolaou stand out as particularly important. This book would not have been possible without their help.

My editor, William Frucht, believed in this project when many others did not. He did not flinch when the book took a completely different turn from what I had initially proposed. For his willingness to take a chance on it and stick with it through the turns, I am truly grateful.

Lastly, I would like to thank my wife, Lynne, daughter, Hannah, and son, Ryan. They have all helped me in their own ways: Hannah and Ryan by being excellent playmates when I needed breaks from writing, Lynne by encouraging and supporting my efforts, including the creation of this book.

Introduction

We Americans love entrepreneurs. As Malcolm Gladwell wrote, we see company founders like Sergey Brin, Bill Gates, Steve Jobs, and Mark Zuckerberg as our new prophets.

Gladwell aside, however, this attitude is not new. Entrepreneurship has been central to our nation since its inception. Entrepreneurs have played an important role in the development of new technology, the generation of wealth, and the creation of jobs and have been a major reason other nations have looked to the United States as an example. As Alexis de Tocqueville wrote (not entirely approvingly) nearly 200 years ago, As one digs deeper into the national character of the Americans, one sees that they have sought the value of everything in this world only in the answer to this single question: how much money will it bring in?

The importance of entrepreneurship to America means that those in Washington take very seriously any indication of weakness in its performance. Lately, many policy makers and pundits have become worried. They have seen evidence of stagnation, even a downturn, in American entrepreneurialism. As David Burton, senior fellow in economic policy at the Heritage Foundation, told a congressional committee in 2015, Entrepreneurship is in decline.

Americans, it appears, are not starting new businesses with paid employees at the rate they once didat least according to several

If entrepreneurship were in decline, the implications could be enormous. Shrinking entrepreneurship could mean a more rigid economy, one less able to respond to shocks. Older firms are less flexible than new firms. They cannot hire and fire as quickly or shift direction as easily. A reduction in entrepreneurial activity could thus make it more difficult for the economy to respond to changes. New technology might spread through the economy more slowly; labor markets might adapt less well to recessions and recover more slowly during expansions.

New employers are a key source of job creation. If American entrepreneurs are founding fewer new companies, then the economy might be producing fewer jobs, leading to less employment in the long run.

The opportunity to start companies plays an important social and economic role. Starting a business has historically been a key avenue for getting ahead for those not born wealthy. A big decline in employer firm formation might mean a dramatic cut in class mobility.