Robert Shane has an interesting piece on the per-capita rate of entrepreneurship in the US. The data shows a declining rate of entrepreneurship based upon a number of factors. His conclusion is that companies like Wal-Mart simply out-compete early stage entrepreneurs.
Assuming that this data is accurate, his conclusion is false. Key questions to ask:
- If Wal-Mart out-competed startups, wouldn’t this affect the survival rates of startups?
- What is the impact of taxes on startups. The more you tax people, the less money they have to reinvest in their business. This would include all tax rates and associated fees.
- How is the increase in regulations affecting the ability of startups to get off the ground and execute to their business model?
- What about our educational system? Are they as active promoting entrepreneurship as they have in the past?
What do you think?
About nathan kaiser
My conclusion is that the general population is becoming increasingly risk-averse. Look at the fears (and entire product lines) around child abduction, when statistics show that your child’s about as likely to be kidnapped by a stranger as they are to be hit by lightning twice.
I don’t have statistics regarding Wal-Mart’s impact on small businesses, but I don’t buy it. Most small businesses are not in direct competition with Wal-Mart, and even if you sell the same product line, there are many ways to differentiate yourself. Penn & Teller had an interesting Bullsh*t episode about it.
Public school by definition is not a place that fosters entrepreneurship. When I was in fourth grade I was one of eight kids chosen to participate in a year-long project where we went to a special class and spent the year designing our own planet (language, foods, topographical maps, the works). That’s when I first remember loving the taste of freedom and having control over my own work. However, the program was shut down the following year, not because of funding, but because other kids were jealous and their parents complained to the Board of Education that we weren’t doing any work. ARG.
This comment is quickly turning into a long digression so I shall leave it at that
Interesting conclusions, but at the risk of coming off as some sort of a liberal apologist, I am skeptical of at least a couple of your conclusions.
1) Wal-Mart – I think there is good evidence that Wal-Mart does have a tangible impact on smaller retailers who are locally established before the Wal-Mart store comes in. These retails simply can not compete with the volume (lower prices) that Wal-Mart brings to the market. But who does this really effect? Start-ups? I am skeptical again, I think that very few smart business people would start-up a “cookie cutter” retailer anywhere near a Wal-Mart. And those entrepreneurs that do decide to start-up near a Wal-Mart, probably (or at least should) have a differentiated enough product that their proximity to Wal-Mart is actually a plus. Get all the customers who don’t find what they’re looking for at Wal-Mart.
2) Taxes — I don’t buy this. If you consider that 95% of all businesses employ less than 20 people, you quickly come to the conclusion that the drain on working capital from taxes, even if completely eliminate would rarely equate to enough hire a single additional employee. No the companies that love to complain about taxes effecting their business tends to be the large mega-corps who are squeezing every penny of profit out. Nothing wrong with profits, but lets not hide behind small business when we lobby for reduced corporate taxes.
3) Regulation — same issue as Taxes. I am skeptical that most small businesses are effected by Regulations. Most small businesses that would naturally choose to do things that are “good” and “right” because most small businesses are led by a passion for whatever it is they do. It’s usually only once the organization because larger that that moral compass begins to fade, and regulations even matter.
4) Education — I agree with Marina on this, our public schools are broken. But, here’s where you’ll really accuse me of being a liberal: the solution requires a massive investment of money and public “rearchitecting” to fix the incentives so that smart and inspiring leaders are willing to dedicate their time and effort to becoming teachers and administrators.
To start things off, his charts look really weird. He starts two of his charts at 1990 and one at 1977. Also, it looks like if the first year on the first two charts were excluded, the trend line would be almost flat. Cherry picking?
Another issue is the date range. Since his charts are so short, 2000-2002 ends up having quite a large impact on the top and bottom.
Beyond data quality issues, it seems like there are a mix of three possible reasons why the data could be trending downward:
1. Fewer people want to start startups
2. Fewer people are able to find market opportunity
3. The yearly rate of failure is increasing
Frankly, I have no data on any of this, so I’m not going to speculate. The Walmart argument really only applies to #2 for startups or #3 for existing businesses.
Brad:
2. The issue isn’t about hiring more workers. The issue is return on capital – how does running a business compare to working a job at a company? A seemingly small tax can end up having a relatively large impact on profit margin. Also, small companies are less able to amortize the services of lawyers, cpas and other strategic tax specialists. Lastly, small companies are less able to extract benefit from lobbying or venue shopping.
3. While it is true that large companies are larger targets, due to greater exposure and accumulated capital placing an artificial cap on lawsuit damages, small companies are less able to amortize the services of lawyers, etc. Not sure which way the scale tips, but it’s pretty clear that small businesses can’t just “do the right thing” and avoid regulatory cost.
4. Educational organizational structure and dynamics are generally a product of political structural – both at the local and national levels. The chance of meaningful reform without changing these underlying political structures is slim to none.
Well I disagree with all of you I’m not sure Mr. Shane has done a fair evaluation of the situation. He is using a per/capita number which is always flawed. He then makes a few other difficult to compare mistakes….
Nothing about the success of entrepreneurs over this period (higher success rates would logically lead to less new ventures), a 10-20 year period is not exactly macro for this kind of trending (we need to see 100yr levels to get a picture of what is happening), nothing about what it means to be an entrepreneur in the past and what it means today (how many presidents are there at GE, Boeing, or Microsoft that do more to run their own business then do what their CEO says), the chart timelines are different (as are the sources, and the definitions of the different charts are no where to be found). So although I think this guy is doing a horrible job at explaining himself, I think he does have a point. Per-Capita, entrepreneurship is declining. I will agree with that whole heartedly. Of course I agree because as a nation we are growing and the natural ratio of entrepreneurs to employees is being magnified as the population grows. I have no idea what the ratio is, but assuming an 80:20 rule, and population growth at around 2%… his 10-20 year periods shed light on the situation. With a make believe city where there are 100 people, the 80/20 ratio applies, and the population grows by 2% every year we would start with 80 employees and 20 entrepreneurs and end up with 121 employees and 30 entrepreneurs. That is a growth of 40 employees for the 10 entrepreneurs – graphically this looks like a decline (especially assuming a straight trend line).
In reality the fact that his graph shows highs and lows is a good thing, it means that the ratio of entrepreneurs to employees is changing. In other words people are experimenting with their dreams and failing and starting again if they so choose. This does not mean the Wal-Mart effect is impacting people. I don’t see anyone in Seattle flocking to wal-mart because they are the best option. I don’t see this happening in New York, LA, or any other metro area where visiting well run small shops is convenient. I do see this happening on Whidbey Island where the little stores simply don’t offer a convenient, well run alternative. A lot of people love to hate Wal-Mart because of their practices – so let’s take the emotion out and look at book stores, walk through pioneer square and count the number of book stores, there are loads of well executed convenient places beating any option for a true large competitor. Now drive around Bellevue and do the same thing, the large book stores are more convenient there or are executed better so they win. Taking this example further, Amazon (previously an entrepreneurial endeavor) could be said to competing with the traditional small bookstores. Now they are offering these specialists to sell their used and rare books online, essentially allowing them to thrive.
As for the things to think about? Well I think you hit most of them on the nose Nate (all controversial topics, but the right ones to worry about)
1. More competition will always drive a benefit for the market (although we need to decide if the market is always the one that should benefit)
2. Fewer taxes will always mean that people keep more money, it won’t mean that basic services will be taken care of so a balance needs to be considered.
3. Regulations should favor innovation, not big business or small business – expanding opportunities should be rewarded especially when we measure our capitalistic success through a measure called the GDP.
4. Public education is broken, it has been since it was built. A good alternative is needed here, one that is federally accepted. One that would allow Marina’s parents to send her to planet invention school instead of whatever lame topics she was taught instead.
You did miss resources – to be successful in any way, raw materials are required. This is true for large or small businesses of any kind. Ensuring these resources are renewable, usable, and accessible over the long term is critical. This kind of falls into regulation – but is not generally accepted there so I am bringing it up separately. If we deplete things like oil, wood, etc the limited supply will cost a lot more tomorrow then it does today and the capital requirements to use these limited resources would only be in the hands of big business. Kind of an upward price spiral with no one to stop it…
@nordsieck – My point was about taxes impacting return on capital in general, and I was using the “employ one more person” as an example of the kind of investment decisions small businesses are often trying to make. I’ll stand by my position that taxes rarely impact small businesses the way the “anti-tax” crowd likes to promote it. I’m totally willing to change my mind on this if someone could show me hard data about the average small business and how they budget the profits toward reinvestment vs. taxes. As I said in my first comment, I’m skeptical.