Wait, I Thought this was the Golden Era of Entrepreneurship? Not the Case Says US Census
US Census Bureau Reports New Firm Creation at Lowest Level Since 1970s. What the Hell is Going On?
Well here’s a headline that I didn’t expect to read on the elevator screen as I rode up to my office this afternoon. It shocked me so much that as soon as I walked in, I started reading articles to see what analysis was being presented.
Apparently this isn’t even news. The Kauffman Foundation published a report last year, its Kauffman Index on Startup Activity, reporting that although 2015 was the first time in five years that activity ticked upwards, the state of new firm creation was still its lowest point since the 1970s.
Being in an ecosystem like Cambridge, this isn’t a trend that I can locally spot. My world revolves around startup meetups, pitching competitions, and meeting people with the next ‘big idea’ — (usually a copycat of some Facebook feature that will ‘leverage new disruptive trends,’ but I digress.) So what the hell is going on?
WHAT THE EXPERTS SAY
In case you didn’t read the articles that I linked to above, here’s a quick rundown of what CNN, Inc., and The Atlantic authors have to say.
- The “Walmart-ization of America” — too many big players dominating distribution channels and customer access. The death of the Mom&Pop shop.
- Regulation — too hard to start a business because of government regs.
- Big Companies are Innovating — goliaths like Google and Tesla, among others, are funding innovation in-house.
- Generational Problem — According to the article, “…the portion of 20- and 30-year-old entrepreneurs has declined. In 1996, young people launched 35 percent of startups. By 2014, it was 18 percent.” Apparently my generation will take the risk of eating like Cavemen from 2.6M years ago, but they won’t risk starting their own businesses.
- Big Companies — Chains and national brands are dominating distribution channels and choking out new ventures.
- Funding — VC and Angel money is going to mature companies, with little left over for seed funding.
- Landscape dominated by big companies — The author argues it’s not only the size of companies, but the percentage of market share a small amount of companies occupy. For example, CVS, Walgreens, and Rite Aid own 99% of the drug store market. In other words, oligopoly?
- More Debt, Less Risk — This is the only piece to bring up the fact that my generation will carry more debt for our lifetimes than any other. Piled with student debt, millennials are opting for early job security and then never leaving the corporate world.
I’ll leave the analysis of the analysis to you. I think some of the points have validity while others are much weaker. Here’s what I think could be contributing to the sluggish numbers.
DEBT AND FEAR.
I don’t need to rehash the statistics, but I will. The average personal student loan debt in the United States ranges between $32,000-$36,000, depending on the source. Really, the number could be much higher.
I graduated from Boston University in 2010 with over $95,000 of student loan debt.
Most averages calculate the amount of outstanding federal and state student loan debt, excluding private loans. In 2013, $6.2 BILLION of private debt was taken out for undergraduate loans, per Studentloanhero.com. Even though it’s anecdotal evidence, I know plenty of colleagues who own debt over $75,000.
Facing those numbers, you’d have to be out of your mind to try to work out of your bedroom for scraps and a dream. Even if you could overcome this mental hurdle, plenty of millennials remember the ramifications of the housing crisis — family friends, aunts and uncles, and even parents having to sell their homes to escape misguided mortgage loan decisions. No one wants to repeat the mistakes of their parents, instead seeking refuge in the big salaries on the corporate ladder.
IT’S FREAKING EXPENSIVE TO RUN A STARTUP
There’s nothing cheap about running a new company, regardless of how lean you operate. Why? Because you still have to put a house over your head and food in your stomach.
Let’s look at the three of the top hubs in the United States: San Francisco, New York City, and Boston. Taking into account housing, the cost of food, and transportation, by my best calculation the average cost to live in one of these locations on the cheap is roughly $1,900/month, $22,800/year — to live…before any company expenses.
If you plan to start a new firm in one of these locales, you’d better be able to monetize within days of inception, be prepared to suck on savings, or have external funding. This is a point not spoken of enough, but when you look at the fastest growing cities for new companies you don’t find the Big 3, you’ll find Salt Lake City, Houston, Charlotte, and Boulder, where the cost of living is significantly lower.
TOO MANY STUPID COMPETITIONS AND EXPERTS.
There’s plenty of excitement around entrepreneurship in colleges across the country. New Venture Plan competitions, $100K Pitch competitions, and Business Plan competitions flood local news outlets and my inboxes.
In my opinion, these competitions hurt the prospective of ventures actually starting up.
First, successful companies execute their plans to find success. It’s a common refrain coming from authors, investors, and CEOs. Yet, the overwhelming majority of new venture plans do very little to aid business execution of their entrants. It may be included as part of the grading rubric, but little is done to help students execute on their ideas.
Second, these competitions are deflating for almost everyone who enters them, save the winning team and some exceptions who take the rejection as motivation. Founders that do not win have only rejections and reasons why their ideas will not succeed to reflect upon. Not a great way to start up an already steep journey.
My final issue with these competitions revolves around the funding associated with them. In most competitions, a winning team and possibly one or two runners-up will receive a package of services, grants, and cash.
Let’s look at some of the prizes for Boston collegiate competitions:
- Boston College Venture Competition: $10,000 (1st), $5,000 (2nd)
- Boston University New Venture Competition: $96,000
- Harvard I3 Competition: Up to $50,000 (approx. 4 winners)
- Emerson’s E3 Expo: $20,000
- Tufts $100K Competition: Varies on number of winners, $13,000 per team in 2015
- MIT $100K: $100,000
- HBS New Venture Competition: $150,000 per winning team
- Babson BETA Competition: $20K per winning team, usually 4–5 teams
In total, $631,000 in cash, grants, and services went to about 16 new student ventures in Boston.
As a proponent of rapid business validation, I argue these competitions should be done away with. The goal of student entrepreneurship centers should be to encourage the most number of students to explore starting a new business, not host competitions to award a select few.
Instead of 16 ideas funded with $631,000, why not give 100 ideas $6,310? That’s 6.25x more ideas being tested in the marketplace, and I would wager proportionally more firms being created. Student entrepreneurship centers are not Venture Capital firms, and they should not act like they are.
We encourage students to think big but we fail to teach them how to act small. To quote Jack Ma, “…you have to learn how to survive first before you can learn how to be successful.”
So how do we reverse the trend and encourage more firms to be founded? Start from the bottom. Reduce the student debt burden on millennials by offering forgiveness, forbearance, or deferment programs to graduates who are in business for 3-years, 5-years, and 10-years. Cities must offer more affordable housing and office space to foster, protect, and grow innovation communities. Colleges must focus on teaching business execution over business planning.
But hey, easier said than done.
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