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Startup activity at "lowest rate ever"

Brian O'Connell on August 19, 2011 Source: Kauffman Foundation

Uh-oh.

The human resources firm Challenger, Gray & Christmas is out with some new numbers on the state of entrepreneurs, and the numbers don’t look good.

According to Challenger, the first six months of 2011 saw the lowest rate of new startups in the history of tracking new companies.

During the first half of the year, only 3.3 percent of job seekers opted to launch their own company. That number is down from 3.7 percent for the first six months of 2010. The numbers really weakened in the second quarter, with only 2.5 percent of job seekers electing to start their own business.

Why the lousy numbers? In a word, it’s all about the economy. With unemployment over 9 percent, housing values down, consumer sentiment in decline, and the stock market in complete panic this month, startup candidates are high and dry.

In fact, Challenger says the number one obstacle to starting a new business in this economy is lack of funding. The company notes that venture capital firms are in retrenchment mode, and they’re tossing nickels around like manhole covers.

If there’s one way to starve the entrepreneurial beast, it’s to keep funding away from potential startup owners.

Challenger has been keeping track of startup activity since 1986, and this past quarter was the worst in history. The company points out that even in the recession of 2001, just after the terrorist attacks on New York City and Washington, D.C., 8 percent of job candidates opened their own shops.

“We are slowly coming out of the deepest recession this country has seen in decades.  While some large and medium-sized companies are finally beginning to see the effects of an upturn, conditions are still very tough for small businesses and would-be entrepreneurs,” notes John A. Challenger, chief executive officer of Challenger, Gray & Christmas.

“(But) lending is still extremely tight and for many of those wanting to start a business, funding the venture with credit cards or through a home equity loan are no longer viable options. Then there is the difficulty of finding customers. Even medium and large companies are having a hard time doing this, as consumers and businesses continue to keep a lid on spending,” he added.

It’s not just startup companies, either. Challenger says that the number of self-employed Americans is down, too. At the end of July, 2011, there were about 8.6 million self-employed Americans. That’s down from 10 million in 2007, and down from 9 million in 2009, Challenger reports.

“Another reason startup activity may be falling is that hiring is improving just enough to keep people on a more traditional employment path,” said Challenger.

The company notes that startups won’t increase until the economy gains traction. That may seem obvious, but the reasoning seems sound. Most Americans want the safety of a job right now, and a guaranteed paycheck. It won’t be until the economy turns around, and entrepreneurs gain more confidence, that startup activity will climb again.

And that, judging from the toxic news coming out of the economy, won’t be for a while.

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