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Recessions Don't Spark More Startups


Do bad economic times mean a surge of new businesses? Not at all, according to a study by Dane Stangler and Paul Kedrosky released today by the Kauffman Foundation. Exploring Firm Formation: Why Is the Number of New Firms Constant? shows factors that might bear on prospective entrepreneurs’ decisions to form new companies—recessions, expansions, tax changes, population growth, scarce or abundant capital, technological advances—has little impact on the pace of U.S. startups. In fact, the study, which used firm formation datasets from the Census Bureau, Small Business Administration, and Bureau of Labor Statistics, shows the annual number of new companies founded in the U.S. remains steady from year to year. More from the press release:

Likewise, the study showed that entrepreneurship education and venture capital, two indicators that have received heightened attention in recent years, had no appreciable impact on entrepreneurial activity in the United States. However, the authors point out, it could very well be that entrepreneurship education, venture capital and similar entrepreneur-friendly measures have helped maintain a constant level of firm formation.

[…]

Perhaps, the authors say, the volume of new firms is irrelevant. The impact of firms is what matters, and it doesn’t necessarily require a certain number of startups to make a given impact. Google, for example, was one of dozens of search engines founded during the dotcom frenzy, but it has had more impact than all the others combined.

Of course, starting a business during a recession has its benefits. In her February article, All in the Timing, Stacy Perman interviewed Kedrosky about his take on when to launch: “Companies that are created in a bad economic period are more disposed to succeed. These entrepreneurs are the few, the proud, and the crazy. They tend to be highly motivated and can work on a shoestring budget.”


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