Mystery: What is causing the sharp decline in tech startups?

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(Reuters) – Sluggish growth among young technology companies could bode trouble for the U.S. economy, according to a new report from the Kauffman Foundation.

The number of technology companies aged five years or younger — key drivers of job creation — has fallen to below 80,000, down from a high of 113,000 in 2001, according to the report. Today’s levels are roughly on par with the mid 1990s.

Kauffman  Fig 3Factors that could help account for the drop include a tendency of older technology companies to acquire increasingly younger technology firms, taking them out of the pool of young companies prematurely, said report co-author Ian Hathaway in a telephone interview.

For example, when Facebook acquired Instagram in 2012 for $1 billion, it was just 2 years old. Separately, many old-line Silicon Valley companies buy startups simply to acquire their talented engineers in a phenomenon that has become known as the “acquihire.”

Focus on highly successful young technology companies such as online-bulletin board Pinterest and microblog Twitter draws attention away from the fact that the overall pipeline is thinner than previously, said Hathaway, research director at Engine, a policy group funded by start-ups.

Kauffman  Fig 4Although he believes the technology sector experienced a rebound in the past couple of years that is not reflected in the report’s data, ending in 2011, Hathaway said the technology economy is weaker than many believe.

“It’s just not as dynamic as it used to be,” he said. “We would expect that to mean lower productivity.” Last year, U.S. productivity rose 0.6 percent, compared with 1.5 percent in 2012, the Labor Department said earlier this month.

Meanwhile, the job reallocation rate — the rate at which jobs are created plus the value of the job destruction rate — at technology firms has fallen to about 28 percent in 2011 compared to the year before, the report shows. That is the lowest rate since the late 1970s.

(Reporting by Sarah McBride; Editing by Cynthia Osterman)

Photo courtesy of ShutterStock

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