By Andy Gordon on May 30, 2014 Dear Early Investor,
I spoke at an Oxford Club conference in San Diego a month ago. A well-dressed gentleman ambled over to me after my talk on how to invest in startups and thanked me. He said he hadn't realized that he could make investments in private startups online for as little as $1,000. And he didn't even need his broker to do it.
He just wanted to know one thing. Does he have a large enough choice of companies? "I'm from Grosse Pointe [Michigan]," he said. "And I just don't see many new companies, never mind ones I'd be excited about investing in."
The next day, another person approached me. She asked me how many companies were actively raising funds on the public portals at any one time. I said dozens, and there's more every day. She said, "That's too many, isn't it? You can't possibly take an in-depth look at every one."
So, who's right? Is this country producing too many startups or too few?
Turns out, it depends on who you're asking.
The Steady-Eddy Generator of Jobs
If you're the president, you'd probably say too few.
Startups used to fill the gaps where companies went out of business. But our economy has changed. And startups are doing less of this.
Economists call the phenomenon of new companies coming in and old companies dying out "dynamism." It can be measured by sector, as you see below.  Since 1978, every sector has seen more companies leaving than entering.
Construction leads the pack. Only 20% of companies that have disappeared have been replaced. In manufacturing, only 60% of the companies have been replaced. In agriculture, only half the companies. Yikes!
The gray bars show job loss or "reallocation," as the authors from Brookings call it. The picture is just as bad.
Just how worried should we (or the president) be about this?
Well, two things are going on here. Sectors like agriculture and retail have seen a great deal of consolidation and franchising. Think of a new Wal-Mart store appearing in your neighborhood instead of a new mom-and-pop store. In other areas, like construction and manufacturing, sector shrinkage is to blame for the negative dynamism.
Even if the number of startups ramps up, can it reverse these trends? I hate to say it, but probably not. But startups still make a difference in other important ways (more on that in a minute).
Construction was fed by the fierce housing boom pre-recession. Those days are gone. And manufacturing goes where labor is cheapest, material inputs are nearest or markets are growing the fastest. Falling energy costs offer hope here, motivating big companies to locate their manufacturing in the U.S. Right now, though, 75% of new jobs created by our multinationals go overseas.
But don't expect startups to move the needle. And as far as retail, I've come across plenty of startups, but only rarely those of the brick-and-mortar variety.
Startups have even had a muted impact in Silicon Valley. Yes, San Jose and San Francisco boast higher firm entry rates compared to other cities. But even their rates have fallen off over the last 30 years.
Clearly, ramping up startups isn't a panacea to the country's economic sluggishness. But they do play a positive role. Take a look at this chart (which doesn't show startup jobs rebounding recently because it ends in 2010, one year after the recession ended)...  Now look at the gray verticals, representing our past recessions. When the economy catches pneumonia, startups catch a slight cold. Startups keep generating jobs at only slightly lower rates, while jobs at established firms plunge.
That's not the whole story. The value of startups can't be completely captured by job numbers. They also introduce big moneymaking ideas. They remove complacency. They increase competition. They challenge the behemoths to think and move faster. As Naval Ravikant put it, "Startups are here to save the world."
And, importantly, they create new demand.
Plus, they give college grads a third choice, says the godfather of startup investing, John Graham. Rather than joining an existing firm or going to grad school, more grads can now start their own company.
The Simple Rules Still Apply
They also give investors more choice, which brings us back to our original question. How do I feel about more startups as an investor?
The good news? More startups mean more young companies maturing into successful enterprises.
Roughly 15 startups really hit it big per year, says Graham. That number should increase as new regulations allow startups to ramp up.
The not-so-good news? It won't increase proportionately to the growth of startups hitting up the portals and angels for funding.
The combination of increasing availability of money and the lower costs of starting up companies dilutes an important filter: lack of cash.
We'll see money go into more startups whose founders aren't serious or tough enough to succeed. But we'll also see many more good founders start companies, who would never have done so in previous years.
I'm all for it. An open competition of economic players is how markets work best. It's not as if the startup space is a winner-take-all game. Startups will experience various degrees of success, some wildly successful, some modestly. Some will never know even a modicum of success.
The simple rules apply. Do your homework. Spread your investment among 15 to 20 startups. Diversify. And do your homework. (Already said that, but it's important.)
There will be more deadbeats looking for your money. With just a bit of research, you can avoid them. Studies show the more research you do, the more success you'll have.
More startups are good for investors and for the economy. In either area, just don't expect miracles.    
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