Part hip, part nerdy, today's startups—new, lean businesses—exude a certain coolness factor.
But therein lies the problem, that most of today's new businesses are lean. And while "startup" has become a buzzword, there actually aren't that many of them, a new report shows. Which means that while new businesses may be raising the bar on innovation, they aren't creating enough of what our economy needs most: jobs.
"Even though we're out of the recession, these new businesses still apparently are having a hard time getting started and are starting very lean," says E.J. Reddy, a research fellow at the Ewing Marion Kauffman Foundation, a think tank that focuses on entrepreneurship, and author of the report. "There's just a lot of uncertainty about customers and the markets for the products, so that makes it harder, obviously, to hire."
Since 2006, the number of new businesses created each year that employ people in addition to the founder has dropped by about a quarter, the report shows. Not only are fewer startups being created, but businesses less than a year old are hiring fewer employees than they have in years past. And this can't be blamed entirely on the recession; rather, it's a long-term trend that began before the economy tanked.
Employment at new companies has decreased steadily since 2000, the report shows, based on data from the Labor Department. In 2010, 2.5 million jobs were created by startups, compared with 4.7 million jobs annually between 1997 and 2000. Because of how the Labor Department's data is collected, these figures also include new-location expansions of already-existing businesses, counting, for example, each new coffeehouse opened by Starbucks.
Still not convinced? Consider this: Startups created about 2.6 percent of total jobs annually across the nation in the 2000s, compared with 3.5 percent in the 1980s.
Those who work in the startup world say the decreases could be partly due to the mindset of people who create today's new businesses, entrepreneurs who tend to value producing more with less. "In '99, it was this badge of honor, how big of a party could you throw and what aging rapper could you get to come perform at your party," says Greg Russell, a recruiter who works exclusively with startups as CEO of Lake Managed Recruitment. "Today the badge of honor is kind of, how lean can I do this?"
Indeed, Internet tools have made it easier and cheaper to sell and promote products and services, lowering costs for entrepreneurs. Even those that don't strive for lean are often forced down that road because loans and funding can be difficult to come by in this struggling economy—another reason some new businesses don't hire.
Instead, they outsource, says Michael Mayernick, co-founder of Proudly Made in DC, a new group that documents and connects startups in the nation's capital. New businesses tend to want to produce the core of their business in-house, he says, but it's trendy to outsource other tasks. "There's a huge culture around outsourcing or finding service online, like to do your accounting," says Mayernick, who's also co-founder of Spinnakr, which helps companies increase sales by optimizing digital content. "Anything that's non-core, I think there's a desire to outsource it, not necessarily internationally, but just find some other tool or some other resource that's outside the formal employment structure of the company ... It's a huge part of the early-stage business community that I've seen and I can only imagine it's a trend that will continue to accelerate."
Another reason some startups aren't hiring, particularly technology companies, is because they can't find employees with the right skills. Especially in hot spots across the country, there simply aren't enough engineers to go around.
New businesses may not be fueling our economic recovery—although June's lousy jobs report shows older businesses aren't either—but they provide a much-needed bright spot for new college graduates looking for a job in this sputtering market. Many of the employees hired at startups are in their twenties, even those hired for non-programming positions. "That's often where the [cultural] fit is," Mayernick says. "It's really important to founders that that kind of enthusiasm and energy that a founder may have is part of the culture."
Sometimes, the new graduate is the founder, a concept that entrepreneur Scott Gerber works to encourage. "Job numbers are terrible [and] youth employment especially is in the toilet," says Gerber, founder of a new organization called The Young Entrepreneur Council. "There needs to be some other way of creating an income."
Yet while self-employment has a new appeal in the wake of a layoff-filled recession, entrepreneurs often work alone, which doesn't create jobs. A previous Kauffman report showed that while more people became self-employed in 2010 than during each year over the last 15 years, many of those entrepreneurs did not hire employees.
Today, a new business starts with an average of 4.9 jobs, the foundation reports, far lower than the average of 7.5 employees startups had at launch in the 1990s.