Newswise — Less than one out of every five businesses started in the U.S. has the innovative spark that could lead to strong job generation capabilities over the next five years. While research shows a rise in new business start-up activity last year after two years of decline, most of these businesses are self-employed start-ups that replicate existing goods or service businesses and project less than five employees over the next five years. While the U.S. maintains a leadership position in encouraging new business formation, more is needed to spur innovation.
These are the findings of the 2003 Global Entrepreneurship Monitor (GEM), according to researchers at Babson College in Wellesley, MA, who compiled the data from this unique study on entrepreneurial activity around the globe. The study was sponsored by the Ewing Marion Kauffman Foundation of Kansas City.
After two years of decline, entrepreneurial activity in the U.S. is bouncing back, increasing from 10.5 percent in 2002 to 11.9 percent in 2003, according to GEM.
But many of these business start-ups merely replicate existing goods and services businesses. In fact, six out of every ten business owners say that their products or services are not new to any customer.
Further, many of these businesses do not seek to hire. Forty percent of current new business owners are self-employed and do not offer jobs to other people. Of the remaining 60 percent, nearly two-thirds employ less that 20 people.
"The good news is the increase in overall entrepreneurial activity. The bad news is the lack of job growth and a disappointing drop in the level of classic venture capital funding," said William D. Bygrave, the Frederic C. Hamilton Chair for Free Enterprise Studies at Babson College.
Bygrave reports that the study found an 80 percent decline in VC funding in the U.S. since 2000. This is the greatest percentage drop in all the G7 nations plus Israel.
According to Bygrave, "The GEM report shows an indisputable need to invest in seed funding, start-ups, and early-stage companies."
Although all ethnic groups are represented in entrepreneurial activity, an entrepreneurial gender gap continues to exist, with two out of every three entrepreneurs being a man," said Maria Minniti, Associate Professor of Economics at Babson College. "More than 50 percent of the U.S. population is female and represents a great potential source of entrepreneurial activity," said Minniti. "More and better research on what drives women entrepreneurs, and raising awareness of entrepreneurial opportunities through education is critical to narrowing the gap."
Key GEM Study Findings
Expected Job Growth. Around 40 percent of current new business owners are self-employed and do not offer jobs to other people. Of the remaining 60 percent, forty-one percent of new business owners employ 1-5 people, 11 percent have 6-19 employees, and 8 percent have more than 20 employees. Many new business owners expect their company to grow in the next five years. Only 33 percent expect to work alone in their company five years from now, 40 percent expect to have 1-5 employees, and 27 percent expect to have more than 6 employees. Forty-six percent of current nascent entrepreneurs do not have employees yet. However, 80 percent of those currently involved in a start-up plan to employ at least one additional person in the next five years. The employment plans of current nascent entrepreneurs are more optimistic than the employment plans of current new business owners. This might reflect the improvement in general economic conditions or over-confidence of those currently in the early stages of setting up a new business. In either case, considering the large contribution of new firm formation to the job pool in the United States, it is likely that the increase in total entrepreneurship rates from 2002 to 2003 will have a positive impact on employment statistics in the near future.
Rise in Activity and Enthusiasm. After two years of decline, entrepreneurial activity in the U.S. increased from 10.5 percent in 2002 to 11.9 percent in 2003. U.S. entrepreneurship is moving ahead of the country's general economic recovery and Americans are pursuing it with passion to improve conditions; and not primarily for alternative job opportunities. The U.S. continues to be a very entrepreneurial nation and the leader among the G7 countries.
Gender Gap Increases. In 2003, there were 1.9 men involved in entrepreneurship for every woman (Total Entrepreneurial Activity [TEA] rates of 15.7 among men versus 8.2 percent among women) showing a slight increase from 2002. The gender gap is marginally larger in the U.S. than the world-average for both opportunity-and necessity-driven entrepreneurs.
U.S. Entrepreneurs are Young, Male, and Ethnically Diverse with Specialty Expertise. People between 25 and 34 years of age are the most active and men (2003 TEA 15.7 percent) are more likely to be involved in starting a new business than women (2003 TEA rate 8.2 percent). Entrepreneurial activity includes people with a broad variety of ethnic backgrounds led by individuals with a specialized professional, technological, or business school degree (2003 TEA 17.8 percent).
Education Yields High Rate of Opportunity-Driven Entrepreneurship. The U.S. continues to lead in entrepreneurship education and training. The recent development of joint programs between engineering and business schools and the increasing number of university incubators indicate a renewed appreciation for entrepreneurship education. Entrepreneurs with specialty professions and technology or business degrees have the highest rate of opportunity-driven entrepreneurship.
"Informal Capital" is U.S. Strength. The U.S. has the highest prevalence rate of informal investors among the G7 countries, with 5 out of every 100 adults having invested in someone else's business during the previous three years. The more education that persons have, the more likely are they to be informal investors. Formal venture capital continues to decline from its peak in 2000, but appears to have bottomed out in 2003 based on positive trends in the final quarter of 2003 and first quarter of 2004. The bad news is the acute shortage of VC funding for embryonic high-potential, mainly technology-based-ventures seeking to develop new products and services.
"Informal investment is the lifeblood of entrepreneurship," noted Bygrave, "If informal investment dried up, entrepreneurship would wither." Informal investors provided more than $100 billion of financing to 3.5 million startup and small businesses in 2003.
Says Bygrave, "Entrepreneurs seeking investment for their businesses should first ask male relatives who are entrepreneurs with college degrees and have high incomes; next expand the search to female relatives, friends, neighbors, and work colleagues; then turn to strangers; and finally, and in very rare cases, approach formal venture capitalists."
Study Implications
Narrow the Gender Gap. Women make up more than 50 percent of the population, yet the gender gap did not improve in 2003 with 1.9 men involved in entrepreneurship for every woman. Understanding how to tap this enormous potential source of entrepreneurial activity is critical to narrowing the gap. Increased awareness of opportunities and greater exposure to entrepreneurship education for women are key.
Diversify Funding. Gone are the VC funded IPO quick hits of the 90s. There is a need, now more than ever, to build sustainable financing venues that will focus on investment in seed and startup companies. Strong intellectual property rights laws will further increase R&D transfers and cooperation between university research and new, growing firms.
Step-up Support from Governments. U.S. government policy, programs and market openness indexes are the closest in value to the world averages. Much more can be done in the U.S. to increase the extent to which entrepreneurial framework conditions sustain the efforts of new and potential entrepreneurs. Governments at all levels need to work to provide an environment in which the entrepreneurial spirit may flourish.
A copy of the report is available at http://www.gemconsortium.org or http://www.kauffman.org
About the Groups
Babson College in Wellesley, Mass., is recognized internationally as a leader in entrepreneurial management education. Babson grants BS degrees through its innovative undergraduate program, and grants MBA and custom MS and MBA degrees through the F.W. Olin Graduate School of Business at Babson College. Babson Executive Education offers executive development programs to experienced managers worldwide. For information, visit http://www.babson.edu.
The Ewing Marion Kauffman Foundation of Kansas City works with partners to advance entrepreneurship in America and improve the education of children and youth. The Kauffman Foundation was established in the mid-1960s by the late entrepreneur and philanthropist Ewing Marion Kauffman. Information about the Kauffman Foundation is available at http://www.kauffman.org.
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