Small businesses drive our economy — and yet, they’ve gone missing. Historically, we’ve come to expect the creation of around 600,000 new businesses a year. While the Great Recession took those numbers down, economists anticipated we’d grow back to those previous figures. Instead, we’ve hovered around the 400,000s. Only a fraction of those new businesses end up surviving beyond a year or two.
This is a problem. Though the number has fluctuated, the percentage of new jobs created by small businesses has hovered around 40 to 60 percent for a couple decades. Startups and small businesses also tend to be more agile, enabling them to innovate more. And the turnover rate is actually a good thing — it keeps fresh ideas and fresh talent in circulation. Also, well, every new big business has to first start as a small business.
Small businesses aren’t facing a major crisis — at least not yet — but there’s definitely something stopping us from creating and nurturing more small businesses. Here are some of the major contributing factors:
1. Exaggerated fears. Have you heard that 60 percent of restaurants close within their first year of opening? It’s easy to believe, especially with anecdotal evidence: You see a lot of restaurants opening and closing in your area, confirmation bias takes hold, and you end up believing that restaurants are an exceptionally risky business venture.
The real number, however, is closer to 20 percent. Yes, 60 percent actually close within three years of business. But one of the biggest problems is banks refuse to lend money to restaurants because they perceive more risk than there is, which leads to an ongoing cycle of limited capital, which leads to business failure.
This same principle applies to a number of different industries, and even to entrepreneurial experience. New entrepreneurs are inexperienced, and are less likely to get funding. But because they never get funding, they never have the chance to gain entrepreneurial experience.
2. Walmartization. Americans are increasingly favoring chains and big businesses over small and local businesses, in a process known colloquially as Walmartization. Large chains have had the time to develop highly efficient processes and have the resources necessary to build infrastructure that maximizes profits while minimizing consumer costs. Consumers, in turn, rely on those businesses for the cheapest possible goods and the most familiar brand image. Go to any Walmart in America, and they’ll likely have the product you’re looking for, going for a reasonable price. Heading to a small business becomes a gamble.
As chains become more popular, they get more money to spread even further. The cycle spreads. Entrepreneurs struggle to get the opportunity to start their own endeavors.
3. Lumped funding. Venture capital has been on the rise for more than a decade, peaking in 2015 with $63.3 billion dollars in investments — and 2016 was impressive, too, with $47.1 billion in investments. Looking at the total dollar values alone, it’s easy to think that this is actually a “golden age” for startups and entrepreneurs.
The vast majority of this funding, though, pools in a small number of potential businesses. Venture capitalists and angel investors tend to gravitate toward the ideas and businesses with the greatest possible chance of success — and understandably so. Yet startups with more tenuous models, or those covering less familiar territory, hardly ever get a slice of the pie. This means fewer total businesses get the funding they need to grow, with a minority of exceptional businesses getting a ton of capital they probably didn’t badly need in the first place.
4. Millennial barriers. With the overabundance of articles about millennials’ professional habits, preferences and even personality traits, it’s easy for contradictory information to circulate. Some claim that millennials are starting more businesses than previous generations, while some claim they’re starting fewer. The reality is, millennials are starting lots of businesses worldwide — but in America, they’re started by a small percentage of the generation. Most millennials are interested in becoming entrepreneurs, but aren’t able, for one reason or another.
As one of the most significant reasons, millennials are burdened with crushing amounts of student debt and are forced to take whatever jobs they can to cover those debts as they try to build a life. The last thing they want to do is take a massive financial risk that might result in even more debt. A lack of encouragement for millennials to take the plunge compounds this effect.
Can we recover?
We’re not approaching crisis-level figures yet. But there is a shortage of the entrepreneurial motivation and conditions that small businesses need to develop.
There’s no “quick fix” that can address all these factors at once. But we can shop at more small and local businesses, to encourage their economic development. We can improve our education system to not only encourage more entrepreneurship and risk-taking, but avoid long-standing college debt that prohibits new business development. We can also avoid reserving our investment capital only for the surest bets, taking risks ourselves to support the worthy risks of others.
In all likelihood, this is a temporary “down” period in an ongoing cycle of fluctuations. Yet the sooner we’re able to climb out of it, the stronger our economy is going to grow.