Few Businesses Sprout, With Even Fewer Jobs

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Fewer new businesses are getting off the ground in the U.S., available data suggest, a development that could cloud the prospects for job growth and innovation.

In the early months of the economic recovery, start-ups of job-creating companies have failed to keep pace with closings, and even those concerns that do get launched are hiring less than in the past. The number of companies with at least one employee fell by 100,000, or 2%, in the year that ended March 31, the Labor Department reported Thursday.

That was the second worst performance in 18 years, the worst being the 3.4% drop in the previous year.

Newly opened companies created a seasonally adjusted total of 2.6 million jobs in the three quarters ended in March, 15% less than in the first three quarters of the last recovery, when investors and entrepreneurs were still digging their way out of the Internet bust.

Research shows that new businesses are the most important source of jobs and a key driver of the innovation and productivity gains that raise long-term living standards. Without them there would be no net job growth at all, say economists John Haltiwanger of the University of Maryland and Ron Jarmin and Javier Miranda of the Census Bureau.

"Historically, it's the young, small businesses that take off that add lots of jobs," says Mr. Haltiwanger. "That process isn't working very well now."

Tough economic times have pushed more Americans into business for themselves, working as consultants or selling wares online. But many are not taking the additional step of forming a company and hiring employees.

...lack of funding seems to be the biggest problem. Two traditional sources of start-up cash—home-equity loans and credit cards—have largely dried up as banks wrangle with massive defaults and a moribund housing market. Venture-capital firms that typically invest in young companies, as well as angel investors that focus on early-stage start-ups, are pulling back as they struggle to sell the companies they already own.

Venture-capital firms invested $25.1 billion in the year that ended in September, up 10% from the same period a year earlier but still down 27% from two years earlier, according to Dow Jones VentureSource. Angel investment amounted to $8.5 billion in the 2010 first half—30% below the average level in the five years leading up to the financial crisis, estimates Jeffrey Sohl, director of the Center for Venture Research at the University of New Hampshire.

"I've never seen seed capital so low," says Mr. Sohl. "This is alarming."

Some entrepreneurs say it's not all about financing, though. They express concern about taxes, health-care costs and the impact that wrangling in Washington over the federal budget deficit will have on them....

To be sure, some companies are still getting started, particularly in biotechnology, where cash-rich pharmaceutical concerns are eager buyers and investors. In the first half of 2010, health care and biotech accounted for 44% of all angel investments, Mr. Sohl says.

And in many cases, entrepreneurs today don't need as much money, or as many people, to start new businesses. Software, communications technology and high-tech equipment are far cheaper and far more powerful than they were a decade ago.

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