U.S. Entrepreneurship Thrives Despite Bubble

Another study on entrepreneurship is out. This one, by Florida International University, reports that 18 million people in the United States are actively engaged in startups (versus 31 million engaged in startups and established small businesses.)

Yet the report notes a 20% drop in the levels of entrepreneurship in one year, from 2003 to 2004.

Does this mean that America is moving away from its entrepreneurial, self-reliant culture?

Well, not so fast there, bucko.

First of all, even counting the 20% drop, the U.S. still is in the upper third of all countries for overall and opportunity-based entrepreneurship. Among developed or high income countries, the U.S. compares favorably. It has more than twice the levels of entrepreneurship of Western and Central Europe.

Second, as the report notes, the drop in entrepreneurship may be an anomaly. The drop may simply reflect the aftermath of the dotcom bubble.

According to the report, in the United States the peak year for entrepreneurship levels was the year 2000. Those were the days when every 23-year old thought he could get millions of dollars for a mere idea encapsulated in some PowerPoint slides. Venture money flowed like beer at a frat party. Large blue-chip companies actually worried about losing their employees to startups, as the best and brightest went off to work for dotcoms they hoped would turn them into millionaires upon going IPO.

In 2000 the dotcom business I ran commissioned a valuation from a well-known valuation firm. The most interesting part of that valuation process was seeing the comparable values used to peg market value.

The comparable values were from companies with hot names back then.

Yet, had you seen their financials at that time, you would be amazed at how little revenue (sales) some of the hottest Internet businesses had.

And don't even mention profits -- many of the best-known dotcom names at that time were deep in red ink (Amazon, for instance) and wouldn't turn a profit for some years to come. That is, if they ever turned a profit and didn't go out of business first.

Yet, these same companies were valued at hundreds of millions of dollars. I am quite certain that today, companies with the same financials would not be valued anywhere close to the unjustifiably high levels of 2000.

That's the kind of environment we had for entrepreneurship. So is it any wonder that everyone had startup fever in 2000? As the report notes on page 119:

"On the other hand, in the U.S. there has been a 20% drop in participation in the entrepreneurial process -- as defined for the TEA index -- in one year. Given that the peak in the year 2000 may have been an aberration, a reflection of entrepreneurial "irrational exuberance," this decline may not be a major cause for concern. Entrepreneurial participation rates are still more than twice what they were in the early 1990s. It would seem wide to carefully follow developments in the participation in entrepreneurship -- perhaps continuously or at six-month intervals -- to determine if this decline continues."

Hat tip to Doug the InfoMan, who sent me this helpful link.