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Study: The High-Tech Startup Slowdown Started Before the Recession

A new report from the Kauffman Foundation shows that the slowdown in the U.S. high-tech entrepreneurship sector goes beyond the recent effects of the Great Recession.
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Aspiring tech entrepreneurs, the whole country needs you to get off the bench.

The high-tech startup community boxes way above its economic weight, and, unfortunately for the entire U.S. economy, it’s looking a bit run down, a new report shows.

“Despite its relatively small size—representing just 4.1 percent of total private-sector firms in 2011—the high-tech sector packs a lot of economic punch,” reads a report released this week from entrepreneurship advocacy organization the Kauffman Foundation.  High-tech startups are classified as those young firms with a relatively high percentage of science, technology, engineering, and math workers -- commonly called STEM employees.

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Since 2000, that sector has been showing signs of a slowdown, the report found. And, since high-tech entrepreneurs disproportionately contribute to income, jobs and productivity in the U.S., the greater economy has felt the effects. “Because of this, a slowdown in high-tech entrepreneurial activity might have disproportionate effects on long-term economic growth overall,” the report says.

Even though high-tech startups fail at a relatively high rate, the number of jobs they bring to the table outweighs the losses, according to the report. “In short, firms aged five or younger are key drivers of new job creation, a fact that is especially true in high-tech,” the report says. That said. With so many of these high-tech startups failing each year, “sustaining a robust rate of net new job creation requires a constant supply of firm births each year,” the report says.

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While the number of high-tech startups in the U.S. shot up during the dot-com era of the 1990s, it has been slipping since before the Great Recession (see graph below).

Also, as a percentage of total number of firms, the high-tech startup entrepreneurship rate in the U.S. has been falling since near the new millennium (see graph below). In 1982, the high-tech entrepreneurship rate was 60 percent in the U.S. By 2011, it was just 38 percent.

“In the early 2000s, entrepreneurial activity in the high-tech sector began declining sharply during what is well-known as the dot-com bust,” the report says. “The slowdown we find for the high-tech sector might be an even larger source of concern than that for the overall economy, since young high-tech firms may be more important for innovation and new job creation than their non-high-tech counterparts are.”

While the Kauffman report shows that high-tech entrepreneurship has indeed taken a hit in recent history, it does not attempt to predict why. The 12-page report only says that the reason for the decline remains an “open question.”

The Kauffman report, which was authored by John Haltiwanger, Ian Hathaway, Javier Miranda, used Bureau of Labor Statistics technology data, and identified those industries that had high-tech employment of at least five times the national average. 

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