Five years ago, startup activity was in a slump. But things are looking up, according to the 2015 Kauffman Index. Last year the downward trend reversed, meaning more entrepreneurs launched their own businesses in what is the largest year-over-year increase in the past 20 years.
Findings in the 2015 Index show that 310 out of 100,000 adults, or 0.31%, started new businesses each month, on average an increase over the previous year’s 0.28% of the adult population. That translates to just over half a million (530,000) new business owners a month.
The percentage may seem incremental, but it’s important, according to the researchers at the Kauffman Foundation. As Dane Stangler, the Kauffman Foundation’s vice president of research and policy, wrote in the report, "The creation and growth of new companies, as well as the closure and shrinkage of existing companies, are at the heart of ‘economic dynamism.’" That means that unemployment, wage growth, and productivity, among other factors, are driven by entrepreneurial activity, he states.
Not surprisingly, the Startup Activity Index usually mirrors the rises and falls of the business cycles of the past two decades, dipping down during the years of the economic recession. There is a glimmer of hope given the current rebound, but the Kauffman researchers caution that the increase is still well below historical trends.
Yet taken together, the numbers in the report reveal a multilayered portrait of entrepreneurship in America right now.
Across the board, the Startup Activity Index revealed a couple of additional major trends:
People who weren’t unemployed and not looking for a job before they started a new venture represented a hefty majority of the total number of entrepreneurs. About eight out of every ten new business owners (79.6%) were not previously employed, with the other two of ten starting after the loss of a job. The trend continues upward from 2013 and indicates that the U.S. continues its recovery from the Great Recession when the 2010 Index revealed that opportunity entrepreneurs were at their lowest rate since the Kauffman Foundation began collecting this data in 1996.
"Entrepreneurs starting new businesses because they saw market opportunities is back to historical norms," said Arnobio Morelix, research analyst at the Kauffman Foundation and one of the study’s authors, in a statement. "When broad-based entrepreneurial opportunity improves at this pace, it’s an indication that the labor market is slowly recovering."
This number has experienced a moderate rise from 128.8 startups per 100,000 people to 130.6 startups per 100,000, after falling sharply for four consecutive years. This is the second year in a row that Startup Density has risen in the U.S, although it too remains below historical rates.
It’s important to note that startups in this segment are defined as "employer firms less than one year old employing at least one person besides the owner." All industries are included, but because these ventures have employees, they tend to be at a more advanced stage than companies measured in the rate of new entrepreneurs segment.
Drilling down even further, the Startup Activity Index parsed portions of the entrepreneurial population by gender, ethnicity, and age, among other factors. The results:
The preponderance (63.2%) of newly minted entrepreneurs were men, while only 36.8% of women started their own venture in the most recent year. The number of female entrepreneurs is close to the 20-year low of 36.3% from the 2008 Index. For comparison, there was more equity between genders in 1996 than there is now.
Men: 1996 56.3%, 2014: 63.2%
Women: 1996:43.7%, 2014: 36.8%
Much like the rise and fall of the Index according to economic cycles, the ethnic and racial data for new entrepreneurs mimics population trends. While all racial and ethnic groups saw the rate of new entrepreneurs increase over the past two years, the rate is highest among Hispanics—who dominated the entrepreneurial landscape during economic downturns and peaked in 2010. Overall, the Hispanic share of all new entrepreneurs rose from 10% in 1996 to 22.1% in 2014.
Asian entrepreneurs also increased their share during this recent year, while blacks only saw incremental gains in entrepreneurial activity.
The report also found that an influx of immigrants contributed to a rising share of new immigrant entrepreneurs. Over a quarter (28.5%) of all new entrepreneurs are immigrants in the 2015 Index, compared to just 13.3% in the 1997 Index.
Millennials may be entering the workforce in unprecedented numbers, but that doesn’t mean they’re starting their own companies. The rate of new entrepreneurs is the lowest among the youngest group aged 20-34. On the flip side, as boomers reinvent themselves for the second or third chapter of their careers, those aged 55-64 represented the group with the sharpest increase, to 25.8%, of the total of new entrepreneurs. For comparison, this same group in 1996 represented only 14.8% of startups.
You may better your odds of earning more during the course of your career if you are a college graduate, but it’s not quite the same picture for those starting their own ventures. In fact, the rate of new entrepreneurs is highest among the least educated group—those who dropped out of high school. The Index authors say this "partially reflects a high level of ‘necessity entrepreneurship’ for this group, arguably driven by more-limited labor market opportunities."