02.05.09
Know The Facts About Small Business
Not one study disputes the fact that only 45 percent of all start-up businesses survive five years. Over half of start-up small businesses fail in five years. Good odds huh? Less than one-third of start-ups make it to ten years. At any one time in this country, 13 percent of the population is in the process of starting a business. Poor saps.
Business Statistics
Author and educator Scott Shane wrote a very good book in early 2008 titled The Illusions of Entrepreneurship: The Costly Myths That Entrepreneurs, Investors, and Policy Makers Live By. It is well researched and contains heavy evidence that back up my points. He debunks all of the myths about small business and start-ups. But, he pulls up short of saying what I am exhorting: do not even try.
According to author Shane, the typical small business is started by a man. He is White, in his 40’s, had some college but did not graduate. He has lived his whole life in the town where he started his business. He started a low-tech business and has worked in the industry. His business is structured as a sole proprietorship. Twenty-five thousand dollars of his savings went in to his start-up business. He also borrowed money. He just wants to earn a living and has no plans for growth, employees or wealth. Kind of depressing isn’t it?
But what’s wrong with this snapshot? Firstly, some of you reading this are saying, “That’s not me at all”. Well, it’s not me either.
Statistics and You
Although I am a White male, I have graduated college and earned a Masters in Business Administration. I started companies in my home town, but also started them in Mexico and outside the county where I live. My start-ups have been both low-tech and high-tech. None of them was a sole proprietorship, only corporations. I started my first company with less than $1,000 and my latest one with over $100,000. But yes, I borrowed money – too much money. My latest ten year plan included growth and employee expansion. I wanted to build wealth, not just earn a living.
Here’s the point: if you disagree with author Shane because you do not fit his “typical” entrepreneur definition, your logic is wrong. Wrong because “typical” is an amalgam of the demographics in statistics and studies. It does not follow that because you are different than the typical person who starts a business, you will succeed.
Different and the Same
Shane’s research states the typical start-up is out of business in five years. When I was a budding entrepreneur, I would have said, “that won’t happen to me”. I’m different, I’m smarter. I know how business works, or I know how to market…blah, blah, blah. You and I are not different than the statistics, we are the statistics!
Disconnected Logic
As many as 40 percent of the U.S. population will be self-employed for some time in their life, according to Shane. Illogical people will say it’s proof that entrepreneurship is alive and well in America. Yet only 13 percent of America are non-agricultural business owners. So if small business is so attractive that 40 percent try it, why aren’t there more small businesses in the U.S.? Why are only 13 percent currently business owners? That’s some kind of disconnect isn’t it? Wouldn’t you estimate that number to be higher in such fertile ground as America?
The 13 percent who are business owners is not a static group. The group changes out people every day. One day you’re part of the group, the next you’re not. This turnover is the statistical reason why the number of people owning a business is not anywhere near 40 percent of the population. The prime reason these percentages do not match is because businesses fail. Businesses Fail.
America’s Fallacy
The mainstream media and all of the “gurus” will tell you that our country is the greatest place in the world to start a business. Our population has the highest disposable income. Consumerism is king. We enjoy the greatest quality of life. Population growth ensures new customers. The Internet brings the civilized world to your doorstep. So succeeding in small business is easy. It’s like falling off a log. What a load of manure.
Shane proves that developed countries, like America, do not start a higher percentage of businesses than developing countries. And the disparity is huge. As a percentage of population, the highest rated developing countries produce four times more than the U.S.
The number of solid opportunities is not available anymore. It’s all been done before. And as a country becomes more wealthy, people’s economic choice gets easier. They can earn more by working for companies, not starting them. As developed economies move away from agriculture, to manufacturing and services, start-up opportunities dry up. The only industries where high growth and substantial wealth-building takes place are dominated by savvy investors and venture capitalists. Shane notes that less than one-tenth of one percent of start-ups are financed this way. Overall, about two percent of all small businesses are linked to professional investors.
If people who make their living by investing in companies only finance two percent, what does that tell us? Do you know more about small business than professional investors? If you said yes, you definitely need help.
The total number of new businesses in America has not grown since FDR took office. Taking out my Abacus, that’s nearly 80 years. There is no groundswell of entrepreneurial activity. There is a lot of self-financing, failure and heartache. There are many ruined lives.
False Confidence
The fallacies would-be entrepreneurs embrace give them false confidence. It’s GroupThink in a dispersed population. They may have confidence already. The fallacies merely bolster it. They cling to any illogical or unsubstantiated claim. They are riding an optimism bubble that will burst and throw them off the bumpy ride. Any scrap of “evidence” seen as beneficial they will use. I did the same thing.
Their confidence is false because the “facts” are a myth. If you start a business believing in false facts, Shane states the odds are against you. I can easily tell you your business will fail.
The Odds
What are the odds? If you travel to Las Vegas and gamble, they’re not very good. The best odds in Vegas are playing Craps. Or so I’m told because I don’t gamble. Or do I?
I have not gambled money on games of chance. I have gambled my money on a meaner game. It’s meaner because it takes longer to lose. When you lay money down on a table in Vegas, in a short time it will either grow or be swept away. Swept away is the usual occurrence. How else do you think they can build billion dollar hotels?
Small business odds are not much better than Vegas. After you have worked and made your mind into mush for seven years at your small business, only one-third will make it. No matter what measurement you use, the law of averages and statistics say you will not make it.
“But I will be part of the one-third that does make it” you will say. And you may try to convince yourself that your idea, methods, the market, your acumen, or any number of other reasons, will win out. You’re playing with fire.
The Odds, Your Life
You must seriously ask yourself this question: Am I willing to risk all that I have? Risk it on a less than 30 percent chance? That I will, at a minimum, merely make a living? If you say yes to these questions, ask yourself this one. Am I prepared to completely sacrifice my family’s future? And am I willing to put my marriage under stress, possibly to the point of divorce? Read on, it gets worse.
Policy and You
But small business is the economic engine of America, isn’t it? Small business provides the lion’s share of employment and wealth, doesn’t it? In the words of a movie character played by John Wayne – not hardly.
The facts according to author Shane are stark. The typical start-up is “not innovative, has no plans to grow, has one employee, and generates less than $100,000 in revenue”. And there’s more: “only 1 percent of people work in companies less than two years old, while 60 percent work in companies more than ten years old”.
In the all-too-often used words of business people, “What’s the takeaway?” Simply this: government and public policies are directed at these erroneous assumptions about small business. This incentivizes the wrong behaviors and expands the problem!
