The decline in the number of young entrepreneurs starting companies in the U.S. has put some industry observers on edge. In January, the Wall Street Journal reported that the share of under-30-somethings who own private businesses has reached a 24-year low.
New York City, Chicago and other well-known start-up hotspots have seen the greatest contraction, but the tide has been slower to turn in Michigan, which is nurturing a strong entrepreneurial ecosystem. The national downturn in entrepreneurship stems from a number of factors, says David Brophy, finance professor and director of the Center for Venture Capital and Private Equity Finance, or CVP, at the University of Michigan’s Ross School of Business. These factors include:
Economic recovery: “During the 2008 economic downturn, entrepreneurship in many cases was a substitute for a job,” Brophy observes. “Now that the U.S. economy is rebounding, jobs are becoming more plentiful.”
Increased hiring: “A lot of established companies find that smart, entrepreneurial young people make attractive employees, especially with respect to analytics, big data, technology and marketing,” he says. “These aspects of business increasingly have become recognized as important for stimulating faster growth in companies ─ not just start-ups, but also those in the second or third stage of growth, as well as large, established companies.”
Entrepreneurial hard knocks: Young people who opted to follow an entrepreneurial pathway have discovered it is not as easy as it looks, according to Brophy. “They may have tried to start their own company or watched others struggle to get a start-up off the ground, so they have experienced the downside of being an entrepreneur,” he says. “It’s not all skittles and beer. When faced with a job opportunity, many young people choose to take it instead of going down the start-up pathway.”
Student debt: “The overarching drag on entrepreneurship is rising student debt,” Brophy remarks. “Student debt is a dead weight and a liability that individuals must pay. It is not forgivable, even in bankruptcy.” That debt depletes the amount of money available for bootstrapping a new enterprise.
“A” Round Funding: “It’s becoming evident to many entrepreneurs that securing the A round of funding is very difficult,” Brophy observes. “In fact, the A round has been called the ‘New Valley of Death.’ A lot of money is available for start-ups, but not for companies as they move up the ladder. The tests for financing get harder as entrepreneurial businesses attempt to go forward.”
The confluence of these factors has proven daunting to would-be entrepreneurs under age 30. “The appetite for start-up risk is being reassessed,” Brophy says. “In the future we will probably see fewer flippant entrepreneurial start-ups launched by someone who gets a wild idea and starts a company.”
In Ann Arbor, however, entrepreneurship is still flourishing, in large part through the efforts of the Zell Lurie Institute, CVP and the Michigan Growth Capital Symposium. “Ann Arbor, despite its small size, has become a beehive of interactivity for young people who are interested in starting or joining entrepreneurial companies,” Brophy reports. “There are dozens of meet-ups going on at bars and restaurants, and around the University of Michigan, where individuals have an opportunity to test their ideas, personalities and smarts against the common standard.”
The University’s faculty and professional staff are becoming more engaged in the practice of technology transfer and the role entrepreneurship plays in its commercialization, according to Brophy. “Now there is greater interest in linking breakthrough technologies to start-ups and early-stage companies across the Michigan campus, and this trend is gaining traction,” he reports. “Our new president, Mark Schlissel, for example, is active in the biotechnology field.” One of Brophy’s graduate courses, Financing Research Commercialization, attracts Ph.D. students from science and engineering who want to learn how to commercialize and fund the development of companies based upon new technologies.
“The bottom line is that we need to build strong companies that produce value-providing products based on innovative methods or technologies which people want to buy and use,” Brophy concludes. “This is important if Michigan, both the University and the state, wants to further the development of our local market.”