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Growthology

Rewriting the history of small business: What you didn't know

The standard narrative is too simplistic about the role, origins, and impact of entrepreneurship. But the closer you look, the fuzzier it gets, finds guest blogger Dane Stangler.

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Over the last several months, however, I happened to come across several pieces of evidence--some new, some older--that would appear to contradict the typical narrative. (I am not claiming any particular insight here, nor do I intend to mean that the U.S. economy was somehow "better" in the 1960 and 1970s than today. I heartily endorse Brink's arguments in "Nostalgianomics" on this point.)

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Writer, Kauffman’s Growthology.org

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Let's start with the most basic empirical information: the number and rate of new business formation. When the Census data cited above are expressed in per capita terms, the apparent doubling of firm formation disappears: the population doubled, bringing new business creation along with it without a corresponding increase in the rate. Indeed, we have published two papers on the puzzle of relatively steady levels of entrepreneurship in the United States, both across the past thirty years (the purported period of extreme entrepreneurship) and, potentially, across the entire twentieth century. In fact, firm formation fell from the 1980s to the 1990s and then flattened, neither falling nor rising. Per capita rates of new business formation today are actually quite similar--and certainly no higher--to those in the 1940s and 1950s, the ostensible high tide of bureaucratic capitalism.

What about IPOs? Using historical data from Gompers and Lerner and more recent data from Fama and French, here are the average annual IPOs for various time periods back to 1935 (the groupings are dependent on the authors' work, not my own manipulations):

1935-1949: 11

1950-1959: 45

1960-1972: 233

1973-1979: 37

1980-1989: 328

1990-2001: 413

The averages obviously mask variability, but it is generally true that after 1980 the United States saw sustained levels of historically high numbers of IPOs. But it is certainly not true that the era of bureaucratic capitalism was without entrepreneurial excitement. From 1959 to 1962, the average number of IPOs per year was 224. From 1968 to 1972 it was 388, a number much closer to the supposedly go-go 1990s than even the 1980s.

At the same time, the IPO explosion after 1980 brought its own issues. Fama and French found that the "decline in the cost of equity capital for new lists" meant that weaker firms could now go public. In particular, in the 1980s and 1990s the distribution of revenue growth across newly-listed firms skews to the right, meaning higher growth. Meanwhile, the distribution of profitability skewed left, meaning lower rates of profitability. Survival rates of newly listed firms also fell over this time period. As they stated: "Basically, the evidence says that weaker firms and firms whose expected payoffs are further in the future become viable candidates for public equity financing." This echoes other research finding, since the late 1970s, a dramatic rise in growth rate volatility among publicly-traded companies but a fall in the volatility of privately-held firms--nearly to the point of convergence, in fact. It is true as well that volatility among our largest companies, the Fortune 500, has risen and not quite one-fifth of today's Fortune 500 companies have been founded since 1980. But this is more an indication of turnover among existing companies, including mergers and acquisitions, rather than new firm entry. And even if more companies fall off the list, it doesn't mean they fail; it just as likely reflects the relative rise of other companies.