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High Stock Market, But 'Imbalanced' 40-Year Low of Business Creation

WASHINGTON – A House panel on Wednesday discussed troubling trends in entrepreneurial investment, in which business creation is at a more than 40-year low, the number of young small-business owners is at a 24-year low and economic innovation has largely been reserved to five major cities.

“We know this (economic) recovery has been imbalanced,” Karen Kerrigan, president and CEO of the Virginia-based Small Business & Entrepreneurship Council, told the House Small Business Committee. “There are those who have been left behind. There are those who think we are still in a recession, and we know this difficult period has left scars on many.”

While unemployment hovers around 4.4 percent and the stock market continues to climb, the U.S. economy is only growing at half its historic rate. In 2014, the U.S. saw the creation of 450,000 new firms, the lowest number in more than four decades. According to a gap analysis study released in 2016 by Kerrigan’s organization, the U.S. is about 3.5 million businesses short of projections.

The concentration of business creation is also striking. Kerrigan cited an economic innovation study showing that New York, Miami, Los Angeles, Houston and Dallas produced as big of an increase in business creation as the rest of the country combined between 2010 and 2014. That compares to the 1983-87 economic recovery, in which 25 metro areas matched the rest of the country in business creation.

Rep. Brad Schneider (D-Colo.) asked how Congress can help spark a resurgence in American entrepreneurial spirit, a return to entrepreneurs “with blind spots” who don’t “see stop signs or hear the word ‘no’” while exhibiting a problem-solving approach.

Kerrigan said that more optimism will bring “people off the sidelines,” but that optimism can only be fostered through sustained economic growth.

Joe Schocken, CEO of Seattle-based Broadmark Capital, said that Congress needs to unleash “the power of the U.S. innovation economy,” while pointing to the Jobs Act, a bipartisan piece of legislation passed during the Obama administration in 2012, as a good example. The bill encouraged small-business innovation through the easing of securities regulations.

About $70 billion of capital was raised in the first 27 months after the Jobs Act enactment, and Schocken said that fundraising was done under the heavy burden of third-party verification. He said that if the U.S. were to return to self-certification, that $70 billion figure would grow immediately and exponentially. Other suggestions he offered: fix equity crowd funding, expand the pool of accredited investors and allow companies to raise additional capital by selling their net operating losses, which, he said, could make the difference between success and failure for young startups.

Kerrigan noted the age gap in the current makeup of startup ownership. Both Small Business Administration’s Office of Advocacy and the Wall Street Journal have offered reports that show that the amount of young people who own small businesses has reached a 24-year low. That’s despite the fact that about one-third of the workforce is millennial, and by 2020 it will be closer to 50 percent.

According to Kerrigan, the 55-64 age group made up 25 percent of all entrepreneurs in 2016, which is up from 14.8 percent in 1996. She described millennials as “risk-averse,” but also cited an American Small Business Development Center survey released in May showing that 50 percent of millennials plan to open businesses in the next three years.

“We need to enable that,” Kerrigan said. “We need to encourage that.”

Kerrigan noted that immigrants account for 30 percent of new entrepreneurs, while Rep. Nydia Velázquez (D-N.Y.) said that more than half of startups valued at $1 billion or more were founded by immigrants. The Puerto Rican congresswoman suggested the U.S. build from this platform.

“I am concerned that the current administration’s policies and anti-immigrant rhetoric could severely stifle this important source of talent,” she said.