By Karl Spain
As an entrepreneur, having started over 30 businesses, and run them, in all shapes and sizes, from a chain of six daily newspapers to an IT company working for Tommy Hilfiger in NYC, from companies with one employee to 350, from huge losses to huge profits, I can tell you America, entrepreneurship in this country is sick, maybe dying, and it’s health, is our own economic health.
My first business was Sly Pie Incorporated. I was 12 and had received an ancient Polaroid for a present. I couldn’t afford the film, ($1 a shot), but I wanted to take pictures (photography became a lifelong pursuit) so I opened up Sly Pie. I would hit one classmate with a pie, in the face; photograph it, and deliver the photo to the kid who anonymously who hired me for $10. Each hit got me a pack of film and only cost me one picture. You’d be surprised how many little boys and girls want a picture of another little boy or girl, moments after being hit with a whipped cream pie in the face. Business was good, and surprisingly I became kind of infamous in my class, and also never got beaten up (my main concern when I started).
I was hooked. I loved owning my own business and making my own money. Immediately I added a newspaper route, sold Hoover brush door to door, all before I was 14. My first full-time job, managing a silkscreen shop, was just like owning my own business, and got me in contact with the absentee owner, who was the first real entrepreneur I met and who owned a lot of different businesses.
Dale Tompkins was his name and in addition to being a fifth or sixth degree black belt, he was a ferocious competitor and cagey businessman. I looked up to him and was genuinely surprised and grateful when he gave me the chance of a lifetime, the chance to make a commercial for his karate business.
Dale caught another employee stealing from an associated business and found out through the exit interview – that I had confronted the thieving employee about the theft and demanded he make good. It amused him that this skinny, pimply, kid manager had stood up for him, the rich, powerful, and physically intimidating Dale Tompkins. It influenced him somehow, and he decided to give me a chance. He knew I’d been raised without a father and sensed that I respected him. I couldn’t sign the contracts to rent the television production equipment because I wasn’t old enough, so I lied to the production company about my age, and the whole thing went off without a hitch. The commercial was a huge hit, and ran for years on whatever channel was showing Kung Fu shows or Bruce Lee movies.
One day while hanging out down at WDCA channel 20 (I ended up using their production company to make the commercial), I was sitting in the front lobby, just waiting to see the man I needed to question about the shoot, and I got talking to a tall, very thin black man who was also sitting there also waiting for someone. We talked for a half an hour about a wide range of topics and really enjoyed ourselves. It took me a few months to figure out that it was Jesse Jackson I’d been talking to. Every day is like an adventure when you own your business; you never know what’s going to happen.
Starting businesses in many different disciplines, from newspapers to a software title company, several service businesses, some retail, even a gas station, each experience taught me something different and fascinating. Nobody, except the entrepreneur, understands the entrepreneur.
Entrepreneurs start businesses. Not one business that they support through a lifetime of effort. Not worked their way up through a business, which they now run. Not loan money to businesses, give advice to business leaders, even teach about entrepreneurism. Those things are actually a far cry from starting businesses, many businesses, over a lifetime.
Doing that requires something extra, a kind of recklessness really, a desire to be in the middle of chaos, but with a plan, an idea, a model that you know in your head, can make money. And most of the time – doesn’t. For that reason, the inevitably tough batting average of start-ups, being an entrepreneur is also about heartache, losses, divorce, lawsuits, of virtually every kind imaginable, to real tragedy, alcoholism and/or drug abuse, suicide and acts which sunder partners, friends, and family.
The most ignored rule in business is the one banning family and friends. Family members and friends resent you for being left out of start-ups when they succeed — and of course — hate you voraciously when you relent, let them in a deal, and it fails. Entrepreneurs learn not to involve any family, friends, or romantic partners in any business ventures. They learn this from experience, like putting your hand in the fire, a warning about what hot feels like, is nothing like the first tear filled experience.
The worst problems, for most entrepreneurs, aren’t about the investors at all; it’s always about the employees. Motivating the employees, training the employees, battling employee unions, employee theft, lawsuits, and gossip. Modifying the behavior and work habits of the employees, so that all the laws are met, the company makes money, and the employees are relatively happy, is a delicate balancing act, more so for the new company where the norms of how things work, is still being dreamed up and worked out.
Complying with all the legal, ethical and tax regulations, plus the myriad of rules and deadlines associated with the employees, is a full time job today and most new, young, and inexperienced entrepreneurs — ignore this critical responsibility, to their own detriment.
Starting a new business, something a lot of us in the U.S. — used to do a lot of — is rapidly becoming a thing of the past. Entitled, “The Increasing Dominance of Older Firms” a new report by economist Robert Litan, at The Brookings Institution, concludes that new startups are down dramatically over this same 30-year period. A decline of half in the total number start-ups, (which was their metric), basically extrapolating that startups as a percentage of all businesses — fell from 15%, down to 8%, over that 30 year period, with a steep dip in 2008.
This whole thing of a start up always begins at a very lonely place, inside the entrepreneur’s mind, where he or she first collects the threads of a proposed model and then tests them against what is happening in the real world. Everybody understands a working business, with a visible business model. People trust those. It’s getting to that point, that is the equivalency of climbing an icy mountain, a dangerous, arduous, tricky task, performed under imperfect circumstances.
Here is Litan from the study summary: “Like the population, the business sector of the U.S. economy is aging. Our research shows a secular increase in the share of economic activity occurring in older firms—a trend that has occurred in every state and metropolitan area, in every firm size category, and in each broad industrial sector.”
The older firms did not add as many employees, percentage wise, as they did absorb market share, the study also concluded. Litan points directly at entrepreneurship as the summary continues; “We explore three potential contributing factors driving the increasing share of economic activity occurring in older firms, and find that a secular decline in entrepreneurship is playing a major role. We also believe that increasing early-stage firm failure rates might be a growing factor.”
The workforce problems described above are a huge part of this problem, but for start-ups and young companies, even the good employees are usually a bitter sweet experience. One day, at least once every six months, (if the companies big enough) one of your better employees comes in, hugs you, cry’s with you, and wishes you the best because they’ve got a better job offer — from a company you compete with, that has better benefits, and is also 20 times your size.
This is crushing experience, when they take the knowledge, contacts, procedures, lingo, legal rules and remedies, everything you drilled into them so they could do the job efficiently, and now they’re gone, gone to use all that knowledge, poise and capability, against your company. Of course, one side of you is proud of them, and the winners who began at your company are a great recruiting tool, so it’s not all bad, but the big companies have a huge advantage, and it seems to be getting bigger.
Litan and the Brookings Institution deep thinkers didn’t list all the reasons but they couldn’t miss the result: “This leaves some questions unanswered, but it clearly establishes that whatever the reason, it has become increasingly advantageous to be an incumbent, particularly an entrenched one, and less advantageous to be a new entrant.”
New entrant is code for start-up or new business, the things entrepreneurs and only entrepreneurs do. That’s an amazing conclusion Mr. Litan reached, and right on. The big, rich, well financed, (and older firms) are simply better positioned for manipulation of the government, the employee market, the regulatory market, the financial market and the consumer market, so they are surviving, getting older, not by superior competition, but by preventing it. This combination has tilted the entire field in their direction and it’s killing every other class of business.
Intellectual property measurements don’t have the U.S. on top anymore either. Patent applications by raw number, by capita, and by GDP, all have the U.S. in 5th place, behind South Korea, China, Germany and Switzerland. Entrepreneurship is on the run here.
That is a big problem; established, mature businesses don’t hire new workers, when looked at collectively, in one data study after another. Even in the Litan study, employment in the group of older companies didn’t increase as much as GDP share.
Bigger, older corporations don’t change their business models, unless forced to, by a new business, of course. Established businesses simply don’t have a good track record of creating new employment, and they really never have, with the exception of the 1940’s, which is a bad statistical comparison because of the war effort.
New businesses do create jobs, and they create a lot of other important economic activity. Start-ups drive innovation and most importantly, change business models, allowing more marginally productive practices to become the way things are done, which ultimately, is the sole engine of new wealth creation in any economy.
Fewer new businesses; means less employment, less wealth available at every level in the economy, less mobility, and less monetary velocity in the economy. Now the big question, why has entrepreneurship dropped off in the U.S., while accelerating in Israel, China, South Korea and an ever-growing number of countries including fully industrialized economies like Germany?
Why Regulations are definitely a factor in the decline of Entrepreneurship