Every entrepreneur has his or her reasons for starting a business. As noted in our recent Entrepreneurship In America 2018 report, the “why” ranges from the pursuit of greater independence to leaving behind a family legacy. For me, as co-founder of ThinkNow, I knew there was a better way to gather meaningful insights on hard-to-reach audiences but needed the freedom to do it. The challenges I faced in starting a business, however, are specific to me. It would be a mistake to assume that my experience is reflective of those had by entrepreneurs of different social, ethnic, gender or geographic groups.
To truly understand entrepreneurship in this country, we must drill down to the myriad of faces and cultures that make up the class “entrepreneur.” Data shows that gender and ethnicity matter when it comes to determining who starts a business in the U.S. Women and ethnic minorities, for example, don’t feel they have adequate support systems in place to help them start businesses so they shy away from it. This belief teeters on both perception and reality as research done by The Milken Institute, The Kaufman Foundation and Stanford Latino Entrepreneurship Initiative all reveal different aspects of the challenges faced by founders from historically disadvantaged groups.
The work these organizations are undertaking is a big step toward leveling the playing field of entrepreneurship and I hope more public and private efforts join the effort. But in the meantime, I’m still curious. Are there additional reasons the U.S. is experiencing a decline in entrepreneurship?
Before we look at possible reasons for a decline in entrepreneurship, let’s look at the numbers. With all the press Silicon Valley and wonderkid founders get, one could be forgiven for the belief that all millennials are in the process of starting the next Facebook, Amazon, or Uber. That’s not, in fact, the case. Millennials are less likely to be self-employed at age 30 than generations past. According to the U.S. Census’ Current Population Survey, at age 30, less than 4% of Millennials reported self-employment as their primary job in the previous year, compared with 5.4% for Generation X and 6.7% for Baby Boomers when they were 30.
This may be a reflection of disadvantaged groups not being adequately supported since Millennials are more ethnically diverse than previous generations. Efforts expended in increasing ethnically diverse entrepreneurship could pay double-dividends by increasing entrepreneurship among both younger and more diverse Americans. Still, start-ups, regardless of age group, are about half of what they were in 1980.
In addition to the hurdles faced by historically disadvantaged groups, there are other factors at play in the decline of entrepreneurship related to economic and social changes underway in the country.
It usually takes some start-up capital or collateral to start a business. Americans do not have the savings they once did. Stagnant wages plus increases in the cost of healthcare, housing and education have undermined the ability of most Americans to accumulate personal savings and in-turn, business start-up capital.
The dearth of personal savings has made the need to rely on bank lending greater. This is a problem, however, because today’s ethnically diverse entrepreneur is less likely to qualify for a bank loan using traditional underwriting formulas.
Another factor at play is the consolidation of businesses across the media, technology and retail sectors. Fewer large companies means fewer small companies needed to service their needs. Larger concerns also discourage competition by either undercutting their prices or acquiring them before they become competitive threats. Large, nearly monopolistic, enterprises also motivate entrepreneurs to build businesses with the sole intent of being acquired which stifles both competition and innovation. Additionally, once employed by large corporations, it’s difficult to leave that security to start a business. The high cost of self-funded health insurance and the burden of non-compete agreements and stock vesting schedules imposed by corporations often prove too big a hurdle to overcome.
Shows like Shark Tank and the emphasis on Silicon Valley start-ups by the media may be warping the perception of what it takes to start a business. Pitching ideas to venture capital firms is exciting and an important step for capital-intensive start-ups but most businesses don’t require that type of early up-front investment. Placing so much emphasis on the Zuckerbergs, Pages, & Musks of the world distorts the image of what the vast majority of successful entrepreneurs look like.
Running a business, at its most basic level, is providing a good or service that others are willing to pay for. It doesn’t have to cost a lot of money to start. Micro-lending can often get the job done. Many of today’s successful big businesses started out small. Whole Foods was started by two guys who had to live in their natural food store in Texas to make ends meet. Ben & Jerry’s was started in an abandoned gas station. Airbnb started with a few airbeds and the list goes on and on.
Starting small needs to be championed. It was once the default for the waves of immigrants that started businesses in the U.S. because regular jobs were not available to them. MBA’s are not required to start a business. In fact, the majority (56%) of small business owners in the U.S. don’t have college degrees. Small business success is more tied to a founder’s comfort level with risk, the ability to stick with it, even when times are hard, and the ability to sell ideas (literally and figuratively) to employees and customers.
Local governments often bend over backwards to attract large companies to their cities and states. Spending tax dollars on supporting independent entrepreneurship may, however, be a better long-term investment because the majority of U.S. jobs are created by small businesses.
The next generation of entrepreneurs looks different. They are more racially diverse, more likely to be female, and less financially stable than in generations past. Many of them are discouraged from pursuing entrepreneurial dreams based on real and perceived obstacles. Alleviating those obstacles through creative lending, education, and private and public support is necessary to ensure our continued national economic stability.
Finally, listening to potential entrepreneurs is key. Starting new businesses is messy. The needs entrepreneurs have are specific to each person and environment. It’s important that entrepreneurs doing business today mentor the next generation and offer advice, encouragement, and sponsorship but do so in a way that acknowledges the mentee’s lived experience. Running a successful business doesn’t necessarily make for good television nor is it inherently glamourous, but it can be one of the most rewarding professions someone can do.