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Dot-Com Hangover May Have Put Damper on Startups

Is the country’s entrepreneurial spirit waning? A just-released study of entrepreneurship found the number of startups and emerging businesses declined by 20 percent in 2004 compared to 2003, the first such drop-off since the study began in 1993. The study authors, the Entrepreneurship Research Institute at the Eugenio Pino and Family Global Entrepreneurship Center at Florida International University, are not ready to sound an alarm just yet, but they do point out that if the trend continues it could have a dramatic effect on the U.S. economy. “If the decline continues in 2005, there may be a justification for policy intervention,” said Prof. Paul D. Reynolds, director of the Institute and the lead researcher in the study. The study, which bills itself as the largest of its kind, looked at startups and young businesses in operation for up to three- and a-half years. In 2004, there were a total of about 18 million such enterprises, reflecting 4 million fewer such businesses compared to 2003. The national study found no significant regional differences. The study also found that the drop-off was concentrated among men and women aged 18 to 35 and mid-career men aged 35 to 54. “Something has changed in the way people see their career options,” said Reynolds of the drop-off. To gauge factors that may be responsible for the shift, the survey asked respondents if they had personal knowledge of others starting a business, if they believe they have the skills to start a business and if they perceive good opportunity for business startups in the area where they live. The responses, particularly within the groups that saw the greatest decline in entrepreneurial activity, reflected a change in these perceptions versus previous years, with respondents having fewer role models and less confidence both in their own skills and the economic opportunity in their locales. The results lead the survey authors to conclude that at least some of the shift may be due to these changes. Another factor impacting the decline may be backlash from the tremendous amount of startup activity associated with the Internet bubble of the late 1990s and early in the 2000 decade, survey authors and others say. “At UCLA students were coming in the late 1990s and they were really, really excited about starting a company or being involved in a startup,” said Bill Yost, adjunct professor in the school’s Anderson School of Management who has developed graduate courses in managing entrepreneurial operations. “That’s changed quite a bit in the last years. The exuberance and interest has waned considerably.” Participation in business startups more than doubled between 1993 and 1999, according to the study. Activity rose by as much as 80 percent from 1999 to 2001, the height of the Internet bubble. “In the 1999 to 2002 period, people though it was too easy to start a business and become a millionaire,” said Reynolds. “What’s happened is it’s become clear that it’s a lot harder than it looks.” Inflated era The shift, Reynolds said, may simply be due to normalization in the number of startups from a very inflated period of activity. “That’s why the report doesn’t make a big cause for alarm,” he said. “There were probably too many people trying to start businesses in 1999 and 2000 that didn’t belong there.” Indeed, some suggest that entrepreneurial activity may be cyclical in the same way that industry sectors experience cycles of growth and retraction. “I think people are still wanting to forget the dotcom bomb,” said Drew J. Kaplan, CEO at Internet Specialties West and an entrepreneur himself. “As time goes on, just like real estate has cycles, I think we’ll see more and more startups, especially with the young generation. Now I just think people are still feeling the sting.” Gone too is the image of entrepreneurs getting rich quickly that prevailed during the dotcom era, and Yost at UCLA suggests that the longer timeframe anticipated for payback may also be affecting students’ plans. “You put a lot of money into getting an MBA and you want to have a lot of money to offset that,” Yost said. “And the typical entrepreneur isn’t going to make a lot of money for the next couple of years.” Interestingly, there has been no drop off in the proportion of blacks and Hispanics starting new businesses. “We’ve been doing this since 1993, and the ratios are pretty constant,” Reynolds said. “Blacks and Hispanics are two to three times more likely to be involved as whites.” The more education black men have, the more likely they are to start their own businesses in comparison to whites. “So black men with graduate education are three times more likely than white men to be involved in a startup,” Reynolds said. “Maybe they find once they work for ran established business their career development is truncated. And maybe they’re founding businesses because it’s the only way they can take advantage of their education. It’s the same with women and Hispanics.” Programs available One reason may be the programs available to some of these ethnic groups, said Scott Hindell, an instructor at UCLA Extension, which offers a number of courses for entrepreneurs. “I think there are incentive programs, and I think there is new acceptance of development,” Hindell said. “Areas that have been rundown, for example Culver City and downtown L.A., are changing their face, so I think there are opportunities for people that own businesses to reshape them and for new ones to come in.” Another study conducted by the Center for Women’s Business Research last year found that that the number of companies majority owned by women of color grew by 54.6 percent while all privately held firms in the U.S. grew by just 9 percent between 1997 and 2004. Of those, businesses owned by African-American women grew by 32.5 percent and firms owned by Hispanic women grew by nearly 64 percent for the same period. According to the Center for Women’s Business Research study, there were 1.4 million businesses majority owned by women of color as of 2004. Despite the downturn, Reynolds pointed out that the U.S. continues to lead the world in entrepreneurial activity.

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