As a country, we like to pride ourselves on our entrepreneurial and ‘bootstrapping’ abilities. With hard work and dedication you can bring your idea to life and turn it into a living (and even create wealth), but is that still happening today? According to data found in the 2014 Federal Reserve Board’s Survey of Consumer Finances, this might not be the case.
The Fed’s Survey of Consumer Finances has been conducted every 3 years since 1989 and “collects information about family incomes, net worth, balance sheet components, credit use, and other financial outcomes.” According to the Survey, the number of families owning privately-held business in 2013 was 11.7%, the lowest recorded level since the Survey began. While there seem to be less families owning businesses, the mean value of successful businesses has increased from 2010 to 2013, but remained below the pre-2007 level. The Survey further explained that while the top income group experiences the increased business value, the upper-middle income group mean value was unchanged and the bottom-income group saw a substantial decline.
In January of this year, an article analyzing the Fed Survey by Ruth Simon and Caelainn Barr titled “Endangered Species: Young U.S. Entrepreneurs” appeared in the Wall Street Journal. While the piece focuses on the entrepreneurial efforts of those under 30, it provides some valuable insights into the Fed’s data. Contrary to popular belief, it seems 20 somethings are not forging their own paths with only 3.6% of households headed by someone under 30 whose main source of income comes from company ownership. This is a sharp drop from 10.6% in 1989, and even from the 6.1% figure reported in the last Survey from 2010.
What do these statistics mean? The authors feel this is due to a variety of factors including: post-recession challenges raising capital, a skills gap, the internet drastically increasing overall competition, and possibly even a low appetite for risk. Also of note, the startup rate (percent of new firms out of total firms) has been cut in half between 1978 and 2011, according to an analysis referenced in the WSJ piece. One theory is that 20 somethings face a uniquely post-recession challenge of raising money, especially since fast growing sectors such as technology energy and health care require so much start-up capital. The article states “the average net worth of households under 30 has fallen 48% since 2007,” indicating that the days of working for someone else while saving up to strike out on one’s own are long gone.
Simon and Barr interviewed academics who noted that we need startups – not just for employment, but for new ideas. Between 2000 and 2012, new business formation slowed even in the aforementioned high-growth sectors. Based on the data both in the Fed Survey and the analysis in the WSJ article, I think the fear of failure is real. Where before people were tied to local and regional businesses, now they can shop on price looking at nearly every option in the world thanks to the internet. This is a huge barrier to entry for some, as they feel they’ll never be able to carve out their space. Banks have also pulled back from small business loans in the wake of the financial crisis, narrowing potential lines of credit. Even though there is high earning potential, these factors prevent many from taking the chance.
I feel that the keys to success as an entrepreneur are timeless skills that can be deployed regardless of what else is going on in the economy at large. The most crucial skills are agility and listening – you need to be engaged with your customers in order to see and hear what creates value for them and any potential future customers. You also need to be quick in utilizing any useful feedback to tweak your business model accordingly. By adding value for your customers, you increase the odds of success in any economic climate.
It seems like there is plenty of entrepreneurial capacity waiting to be filled with bright people and new ideas right now, but not enough people are jumping on it. What do you think? Should we be worried about this downward trend in the amount of entrepreneurs and startups? Let us know on Twitter, Facebook or drop me an email.
If you would like to read the source material referenced in this post, please click here to access the Fed’s Survey and here to read the WSJ article. Additionally, supporting documentation to the Fed Survey consisting of charts and graphs can be found here.