July 11, 2015
Rate Of New Business Formation On Steady Decline, Even In Tech

Company size growing, fewer new competitors forming, number of small businesses shrinking. Start-up failure rate is increasing too. Happening in tech too. This isn't just the death of small town stores and pharmacies and shift to big chains. Read the whole thing.

I suspect that computer and communications tech are behind this trend. Why I think this is happening:

  • It is easier for a single company to sell into many markets because cheap communications, cheap shipping, lower trade barriers. Best company beats lower ranked companies that used to not compete directly.
  • Large IT infrastructure with large amounts of developed source code base by established players serve as barrier to entry. Initial software development costs higher. Though the opposite argument can be made with more reusable software and cloud computing services.
  • Software reduces the need to hire and train-up a big middle management layer to manage expansion into new markets. Middle management has shrunk because its information aggregation functions and communication functions have been automated.
  • The best brains are co-locating more to work together to creates best-of-breed companies. Fewer of the best talent are being wasted propping up also-ran lower tier companies.
  • Online review sites, news sites, and forums allow news of best-of-breed products and services to spread more rapidly.
  • Venture capitalists actively look for the best new thing and cause the best new thing to take off with more talent and money. We do not get rivals slowly emerging around the world. The fastest out of the gate get a lot of money and quickly rise to the top.

The article above also suggests growing government regulations as a barrier to entry. Too much knowledge of regs and time-consuming approval process reduce the number of new businesses. Seems likely. But not the whole story.

20 years ago it seemed possible that the internet would allow more people to work remotely and new tech companies to form in little towns and virtually across rural areas. Instead we have a large surge of start-ups in San Francisco and a big migration of tech talent into urban areas. Technology seems to have made geolocation more important, not less.

Share |      Randall Parker, 2015 July 11 06:45 PM 

Wolf-Dog said at July 11, 2015 8:09 PM:

The high foreign trade deficit is also a barrier to the formation of small new companies. The annual trade deficit of the US is greater than the rate of GDP growth, which explains a lot of things. Probably more companies are being destroyed than created in the US. Legislate and reverse the foreign trade deficit and there will be a massive surge in small companies. And reduce taxes on new businesses, especially in technology.

Brett Bellmore said at July 12, 2015 7:28 AM:

The government doesn't WANT small companies. They're too much trouble, don't generate enough graft opportunities, and so forth. A government that was actually concerned about the nation's welfare might be different, but this one isn't going to be concerned about a drop in business formation.

JohnMc said at July 14, 2015 11:28 AM:

What you are describing is the jack welch economy (former CEO of GE). Jack's argument was if any business segment his company was in was not 1,2,3 by market share and profit then fold it up and get out.

But I think something is not being counted. It is much easier these days to work as an independent. You don't need a massive staff to garner business provided you have a good stable of free lancers available to you. But Bellemore is right, the govt itself is fostering Big in everything. What we need is a regulatory emancipation act for businesses under $10m in annual sales. That would go a long way to new business formation.

anonymouse said at July 14, 2015 12:39 PM:

In tech, the issue is economics of scale. Chips are turning into SoCs, meaning small companies can't deliver the goods needed anymore, only large companies with tons of employees can. Similarly, the software for even a phone now runs into millions of lines of code, massive coordination, and complexity that's impressive. Keep in mind, most of the systems we carry today are more powerful than supercomputers of a decade ago. For tech companies, the niches that small companies can serve are becoming fewer and fewer.

Micha Elyi said at July 14, 2015 12:45 PM:

The article above also suggests growing government regulations as a barrier to entry. Too much knowledge of regs and time-consuming approval process reduce the number of new businesses. Seems likely. But not the whole story.

That the bulk of novel start-ups and new industries grow and thrive in unregulated, little-regulated, or areas discovered to be regulation-dodgeable industries suggests that government regulations are the major barrier to entry. Software and high tech have only marginal effects and are often employed as coping mechanisms against the regulatory burden, rather than as a means to add value for the customer.

coyote said at July 14, 2015 1:12 PM:

As an owner a small business, but one of the largest companies in our very tiny niche, I can say for sure that regulation is driving out startups. It is a major pain for us to keep up with regulation but impossible for ma and pa startups in our business. They have all folded or been bought out -- Obamacare was the last straw that killed the remaining ones.

As for wolf-dogs comment on the trade deficit, I think this is totally wrong. Most of the trade imbalance is with stuff like cars and steel which are unlikely startup businesses. The easy availability of Asian manufacturing sources for nearly anything you want to make or can dream up facilitates startups and entrepreneurship. My gut feel, just seeing what entrepreneurs around me are doing but not from any hard data, is that globalization and easy international sourcing is a net positive for small business formation.

Randall Parker said at July 15, 2015 5:10 PM:

On a related note, see Adam Ozimek's We Are Not a Nation of Freelancers. The self-employed are a shrinking portion of the workforce even though supposedly Uber and its brethren are supposedly changing that.

Dan said at July 16, 2015 2:16 PM:

Highly organized corporations are very effective at making marginally skilled people productive.

McDonalds can get very unskilled people to produce a large quantity of high quality (meaning pure and safe, widely-desired, protein-rich) food very quickly and at low cost.

Chances are, the local diner cannot extract such high productivity out of totally unskilled human inputs. It is much easier to work at McDonalds than the local diner. The local diner will probably have a few key (smarter) employees that know how to run things while other employees contribute far less. At McDonalds, everyone mans an optimized station, ensuring their productivity.

Dan said at July 16, 2015 2:44 PM:

Buyouts of competitors is the norm these days. Trust-busting is dead in America as progressives have no concept of what they historically stood for.

Big tech companies routinely buy out dozens of would-be competitors not because of any interest in mergers but simply to clear the competitive landscape. Another interest is probably as an expensive way to hire star talent, but this is not the same as the old kind of merger where a business remains whole and continues to operate as an internal division or subsidiary.

Brett Bellmore said at July 17, 2015 2:52 AM:

Superficially that looks like change, but on a deeper level?

It's rather like the way 'progressives' switched from being advocates of extreme free speech rights, to advocates of censorship, once they got to be the censors. Advocates of sexual liberation, to "yes means yes" contracts.

They start out tearing down power structures and limits that get in their way, when they're generally out of power. They're tearing down other people's power. Once entrenched in power, they build up power structures they expect to be useful to themselves, and start creating restrictions to get in the way of their enemies.

No contradiction. It's the same principle being implemented under different circumstances: They, and only they, should have power. They, and only they, know what's good for everybody. And the end justifies the means.

Progressives have no interest in trust busting, once they've taken power, and have achieved a generally fascist state, where government (them) so tightly regulates the trusts that they effectively become arms of the government. They'd be busting their own arms, then. But small business? They don't control that, too much detail to take control. So they suppress it.

Progressives are quite easy to understand, once you've figured out their animating principles.

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