Over the years, repeated research studies indicate that, at one time or another, some 14% of Americans (approximately one in seven) become an entrepreneur for at least a brief period. This has been considered a very important part of the bustling American economy. New business start-ups that survive (most do not) are vitally important in job creation. They also are bastions of innovation and force larger entrenched companies to adapt and up their game.
Over the last decade, the share of U.S. households including an active entrepreneur has halved down to roughly 4%.
There are several explanations for this:
1) In recent years, many college graduates with strong skills have discovered that they may earn high incomes with larger companies particularly in tech.
2) Business formation is tough for prospective entrepreneurs who often do not have access to capital. One part of this that I never see discussed is that Venture Capital firms (VC) and the larger Angel Investors (Informal Private Investors) are much more selective and smarter than they were 30 years ago. There was a time when someone could say “internet” and funds would come their way. The big VC firms made a bundle on the giants that still exist today but had many failures. Now, they have very shrewd teams analyzing start-ups and their batting average is much higher than it has been in the past. Angel investors have also improved their game as well. Early-stage financing remains a real problem for young upstarts.
3) Within the tech giants, entire squads are looking at new ideas and do not have to beg for funding. I will never forget the first annual letter from Jeff Bezos way back in 1997. He wrote “Given a 10 percent chance of a hundred times payout, you should take that bet every time.”** Okay, that is great for Amazon. However, can a bootstrap entrepreneur take a shot like that? Not likely. And, risk averse CEO’s and CFO’s in established companies in many cases have one goal—don’t screw up. They rarely bet on longshots.
4) Young people also have other issues that did not exist for previous generations. In recent years, I have spoken with dozens of college students who lamented that they would never own a home due to their huge college loan bills. I always try to be encouraging. The college loan overhang must be discouraging some prospective entrepreneurs from going out on their own. Do you wish to launch your dream knowing the odds are strong that you might fail and, despite bankruptcy you still must feed the meter monthly on your large college or grad school loan tab?
Can the situation be reversed? Critics say that loosening up on licensing requirements would help a great deal. Also, allowing health insurance at reasonable prices would help a start-up with only a few employees. Encouraging early access to accredited investors sounds great but is tough in the real world for many. Some politicians think a silver bullet is allowing newbies to write off R&D expenses immediately. That would help but they have to get the seed money first and launch.
I have long believed America became the economic powerhouse that it is and has been is due to how risk taking was encouraged. Look at the billionaires who have been minted in our country. Rockefeller, Vanderbilt, Carnegie, Ford and today’s tech titans. The uber-wealthy took giant risks and had many bumps in the road on the path to vast riches. When you fail, you keep going. America, a nation of immigrants, has always appealed to the risk takers of the world. Our bankruptcy laws may be the most lenient in the entire world. It you go bankrupt in many European provider states you spend the rest of your days paying off your creditors. Here you can come off the deck and keep fighting. America tolerates the risk takers unlike no other nation in my view. Immigrants with the right spirit can only help us grow.
If we can turn this entrepreneurial dip around, it could mean great things for our nation.
**Amazon.com, Inc. 2016 letter to shareholders
If you would like to contact Don Cole directly you may reach him at doncolemedia@gmail.com or leave a message on the blog.
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