I spend a lot of time on entrepreneurship. If I'm not working with entrepreneurs, I'm reading about the subject. Sitting at a conference in Iowa this week, I wrote some questions in my journal. Specifically, what are we going to do with all these entrepreneurs? Are there too many? Has this just become a fad?
Entrepreneurship is a pretty 'hot' topic these days. There are conferences everywhere on the subject. It's often in the mainstream media. Schools are launching new entrepreneurship programs. It seems everyone is in the entrepreneurship game. Right now, I'm sitting in a coffee shop between three tables, all of which are having some sort of entrepreneurship conversation.. and I'm in Iowa City!
And then there is this: I know that most endeavors fail. That's pretty common knowledge. I think many of us know the standard statistic: 50% of small businesses fail in the 1 year, and 95% percent fail in the first 5 years. I hear that all the time, which leaves me sitting in a room looking at a group of accelerator entrepreneurs and knowing most of them will fail.
Here is what I'm seeing:
- What appears to be a ton of new entrepreneurs
- Universities and colleges starting entrepreneur 'programs'
- Current startups in the Midwest are telling me they can't find growth stage funding
- Venture capital companies are telling me they can't find startups worth funding
- Investors showing me how broken the VC industry is, with terrible performance
So I ask myself, do we simply have too much? Is this a bubble that will burst? Maybe these things are happening because we've hit an unsustainable mass in this sector. It's possible that the whole thing just needs to right-size.
Or maybe not.
Here are some interesting statistics for you. First, let's consider that the SBA defines a small business as under 500 employees. There are about 28 million of these small businesses in the US, but only 6 million of them actually have more than a single employee. So, most of these "failing small businesses in the US" are really just single person companies.
About 60% of Americans work for one of these 6 million small businesses with more than 1 employee. The US labor force, which is those over 16 and either currently employed of seeking a job, is about 157,072,000. So US small business supports approximately 85 million people with jobs. Our labor force is shrinking for a variety of reasons, but as our economy starts to grow it's likely this labor force will increase a few percentage points. This means more people needing jobs. Many startups employee only a few people, even when they are successful, so we're going to need more to create more jobs.
The US Bureau of Labor Statistics started tracking business establishment age in 1994. You'll see in the following chart that there are less businesses starting now than at any time since 1994. Further, the failure rate of these businesses is on the rise. The number of firms with less than 250 employees is at it's lowest since 1993, and job creation through small business is also at it's lowest in 2 decades. Finally, the survival rate of new business at it's lowest, hanging at about 5% to 7% lower than in the early 1990's. Fewer business are being started, and the ones that are starting are failing more often. The reality is that we actually need more entrepreneurs, more small business, and more job creation in this area.
I believe the disconnect is the change in our economy.
In the 1990's, few people were starting internet companies. Few were starting 'high growth' technology companies. Today, as the millennial generation and digital natives begin to take over the globally connected and technically charged economy, more small business will be technology related. The difference between traditional small business and tech startups will blur significantly.
What does it all mean? Here are my thoughts:
- Technology companies are more volatile, so the increase in failure rate will likely continue.
- We need to see a dramatic increase in company start rate. We'll need to track this differently, as entrepreneurs will "start" a few things that fail before they every become a "business".
- Universities should be adjusting education in the business department to better align with these needs. Students need to be starting and working in small companies. Large corporations will be starting more internal innovation as well. Students need to learn to create value.
- Because of our connected environment, my theory is that our economy will be supported by a greater percentage of small businesses than at any other time.
- We need to better align VC, seed capital, banks, and government assistance, to support this new type of small business growth. It's high risk, which is difficult to institutionalize.
- We need to see technology startups as "small business" and not "the next Facebook". Not every tech company will be a massive hit, but that doesn't mean it can't sustain 25 employees and make millions of dollars. How do you grow that company when VC funds need 25% IRR and banks can only offer debt financing post-money?
I'd love to hear your thoughts on the subject as well. Feel free to leave them in the comments bellow, or e-mail me.