Most Small Businesses Shouldn't Be

In “The Illusions of Entrepreneurship,” author and professor Scott A. Shane shows the reality of American entrepreneurship as being decidedly different from the myths that have come to surround it.

An A. Malachi Mixon III Professor of Entrepreneurial Studies at Case Western Reserve University, Shane equates "entrepreneurship" with small business start-ups. He compared data from the past 30 years done by university researchers on business startups and found, first of all, that the United States isn’t very entrepreneurial.

In 2002, the top 10 countries in percent of population that owned new and young businesses were Thailand (27.2%), China, New Zealand, Greece, Brazil, Switzerland, Australia, Jamaica, Venezuela, and Finland (16).

America was at 9.9%. And America hasn’t gotten more entrepreneurial over time. In fact, Shane cites that a higher proportion of people started businesses in 1910 than they do today in the U.S (7).

Shane points out that the more entrepreneurial countries are generally poorer than less entrepreneurial countries. One explanation: capitalism, as equipment increases production, more people quit working for themselves (traditionally, farming) and go work for other people who own the equipment.

Also, as countries get richer, “they change where economic value is created; first from agriculture to manufacturing, then then from manufacturing to services,” which also accounts for a shift from people working for themselves to people working for others (19).

Image from highwoodsbees.com

Farmers and Postmen

In the U.S. from 1983 to 2002, all 100% of horticultural specialty farmers were self-employed, and 98.59% of all farmers were self-employed. Health practitioners, podiatrists, dentists, auctioneers, fishers, and authors all scored as over 70% self-employed, as well (49). 

The lowest percentage of self-employed workers during that same time were Federal mail carriers (0.02%) and elementary school teachers (0.03%). Police, high school teachers, bank tellers, miners, technicians, administrative support and assemblers all scored less than 2% self-employed.

• 7.2% of engineers were self-employed; 
• 12% of car and boat salesmen;
• 26% of actors and directors;
• 29% of carpenters;
• 39% of lawyers;
• 45% of musicians and dressmakers;
• 50% of hunters and trappers;
• 54% of veterinarians;
• 71% of writers.

Photo from eating colorful.blogspot.com

Wyoming and California

San Francisco has a far lower proportion of small businessmen than the U.S. city with the highest: Laramie, WY. Per capita, there are two and a half "new-business entrepreneurs" in Laramie for every one entrepreneur in San Francisco, which is ranked 121st behind places like Bozeman, MT; Farmington, NM; Rock Springs, WY; Rapid City, SD; Pikesville, KY; Laredo, TX; Brunswick, GA; Newark, NJ; Anchorage, AK; and Enid, Oklahoma (23).

Most of Americans think only of venture-capital backed, high-growth technology businesses as "entrepreneurial," but those firms—Microsoft, Apple, Google, etc.—make up only a tiny fraction of new businesses. Businesses of opportunity rather than necessity, venture-capital backed tech and medical companies generate virtually all value and jobs from start-up businesses.

“Since 1970, venture capitalists have funded an average of 820 new companies per year. These 820 start-ups—out of the more than 2 million efforts to start a business in this country every year—have enormous economic impact. In 2003, companies that were backed by venture capitalists employed 10 million people, or 9.4% of the private sector labor force in the United States, and generated ... 9.6% of business sales in this country” (162).

That means venture capitalists only fund 0.03% of all new businesses every year, making the odds of getting venture capital for a new business 1 in 4000. The odds of fatally slipping in the bath or shower? 1 in 2232 (91).

So what do most small businesses in the U.S. look like?

Shane says, “The typical entrepreneur [is] a married white man in his forties who started his business because he didn’t want to work for someone else and who is just trying to make a living, not build a high-growth company.

“The characteristics that make people more likely to start businesses aren’t all the desirable ones that our myths associate with entrepreneurship. The data show that the likelihood that a person starts a business increases if he:

• is unemployed
• works part-time
• has changed jobs often
• makes less money

“Finally ... the experiences often associated with being an entrepreneur—immigrating, dropping out of school, and networking—don’t actually increase the odds that people will start businesses. 

“Instead, going to college, getting a professional degree, and having some experience managing others in a business setting are the experiences that actually increase a person’s odds of starting a company” (63).

According to Shane's research, the typical start-up is home-based, employs one person, and has no intention or prospects of growing. It was started using $25,000 or less of the founder’s savings in a run-of-the-mill industry where there are many firms and profits are slim. The business's lifespan is five years or less, during which time the founder makes less money and has fewer job benefits while working more hours than if he worked for someone else (160 - 161).

Image from Flickr.com

Don't Forget the Death and Taxes

In his NOLO series book "Deduct It! Lower Your Small Business Taxes," accountant Steven Fishman reports that these kinds of sole proprietor start-ups are much more likely to get audited than other business entities—especially middle-income sole proprietors (462).

In 2010, the IRS audited:

• 0.4% of partnerships
• 0.4% of S corporations
• 0.7% of regular C corporations with assets worth less than $250,000

However, in that same year, the IRS audited:

• 2.5% of sole proprietors earning between $25,000 and $100,000
• 4.7% of sole proprietors between $100,000 and $200,000, and
• 3.3% of sole proprietors above $200,000

Fishman advises that incorporating or forming an LLC greatly reduces your audit risk, but comes with added complexity, fees, and, in some states, additional taxes (467).

Don't Believe the Job-Creation Hype

Contrary to popular political arguements, Shane says “start-ups don’t generate as many jobs as most people think, and the jobs they create aren’t as good as jobs in existing companies” (161).

“New companies—those that are one to two years old—employ only 1% of people in this country,” Shane says, “Newly formed firms account for only 6 to 7% of gross or net new jobs created every year. ... For ‘new’ firms to create 50% of net new jobs, we would have to expand the definition of ‘new’ to include all firms that are nine years old and younger” (158). 

Add to this, “most businesses are started by people who have a significant amount of experience working in the industry in which they are launching their new companies.” (69).

Photo from heirloom radio.com

Small Business Is Usually Necessity

So why do Americans start small businesses that aren’t innovative, have no intentions to grow, lack a competitive advantage, and generally involve providing the same skill or service provided at the founder’s last place of employment? Because they are forced to.

Should we create policies that make it easier and more attractive for more people to start these small businesses? We should not. America isn’t getting more entrepreneurial. More than anything, we are repackaging entrepreneurship out of surplus unemployment.

Shane says we need to reduce loans, subsidies, regulatory exemptions, and tax benefits for small businesses. “Because the average existing new firm is more productive than the average new firm, we would be better off economically if we eliminated policies that encourage people to start businesses instead of taking jobs working for others”—assuming that jobs working for others exist (163).

Shane dismisses the claim that we don’t know which start-ups will become high-growth businesses. “This view may be politically appealing, but it is naive. It assumes that we can’t identify the things that make new businesses more likely to survive, generate profits, increase sales, and hire people. 

“Unless the beliefs of venture capitalists and sophisticated business angels are completely wrong, and the research discussed in this book is completely incorrect, we know what criteria to focus on” (63).

Image from Daily Mail UK

What If You Can't Resist the Myth?

For those who feel they must start a business, Shane’s advice is fairly straightforward: 

• Recognize that 90% of the fastest growing private companies in this country sell to businesses (118)
• Start marketing sooner rather than not at all (119)
• Don’t compete on price, but rather on quality or service (119)
• “Improve your chances of success as an entrepreneur by starting a company in an industry that is better for start-ups” (116)

D'uh. From 1982 to 2000, the best industry for start-ups was pulp milling. If you started a paper pulp mill during the 1980s or 90s, you had an 18% chance of becoming a big, rich, job creating, Inc. 500 firm. Six mills made it in 18 years! 

Computer firms were second with 4.2% of 2,359 firms becoming Inc. 500 firms; Guided missiles and space vehicles were third with 3.3% of 60 (115).

Other notable industries and proportions:

• Measuring and controlling devices, 2.0% of 2,482;
• Communications equipment, 1.9% of 1,543;
• Drugs, 1.8% of 1,092;
• Legal services, 0.008% of 129,207;
• Eating and drinking places, 0.007% of 494,731;
• Used merchandise store, 0.004% of 24,442;
• Automotive repair shops, 0.004% of 124,725;
• Beauty shops, 0.004% of 79,081;
• Residential care, 0.004% of 27,710;
• Videotape rental, 0.004%, or 1 of 27,793. 

Even with the terrible odds, we cannot help but admire the riverboat gambler mentality of those who give small business a whirl. After all, somebody wins the lottery: an attitude of hopeless optimism perfectly in line with America's Winner Take All economy.

What If It's Not About The Money?

The only other explanation Shane gives for why people would start a small business involves the human perception of satisfaction. “It makes people happier,” he says, as 62.5% of people who work for themselves report being satisfied or very satisfied with their jobs, compared to only 45.9% of others. 

Women cite the flexibility to work while caring for small children. Men and women both cite the importance of working in a small organization where they can interact directly with everyone and have more autonomy, flexibility and control over their lives.

“Studies show that to be as satisfied when he is working for others as he is when he is working for himself, the average person needs to earn 2.5 times as much money” (109).

Image from fashionfame.com

Is "Satisfaction" Enough?

At the core, it depends on how much an individual enjoys working hard for less money while enjoying the perception of more freedom. Those feelings of satisfaction are probably not worth the opportunity cost of more gainful employment at established businesses, except for those who are truly satisfied working alone against the odds.

Perhaps this fatalism, mixed with a handful of strike-it-rich stories, is what we really mean by “the American entrepreneur" in our cultural myth.

However, to feed the myth by artificially forcing the rates of entrepreneurship up is bad economic policy. As Shane concludes, “Increasing the number of people founding construction firms and hair salons and taxi services that don’t do anything innovative isn’t going to do us much good. In fact, it might hinder our economic growth because new businesses are, on average, less productive than existing ones” (162).

Any political argument that exalts small business probably plays on voters' minds in the same way that Las Vegas casinos do: by turning losing odds into big gains for the few who get the many to put some skin in the game.

Image from mlive.com

As Paul Krugman stated in an op-ed piece "America Isn't a Corporation," we should not mistake governing a macro-system as conceptually the same as doing what’s best for an individual firm.

Shane’s book suggests that perhaps we should govern in a way that’s actually worse for the majority of individual small businesses and strive to create conditions that supplant their having to start in the first place.

Kill Mom-and-Pop businesses? Pay Mom and Pop better in the job market than the satisfaction they feel "working for themselves"? Our myths suggest we will not make that happen: myths about working hard, myths about creating jobs, myths about freedom.

The odds of most small business owners getting a 250% pay raise are worse than slipping in the shower, which is unfortunate, because chances are 50/50 that small business owners and their employees don't have health insurance, either, a situation created by a different set of myths than ones discussed here.

Source:
“The Illusions of Entrepreneurship: The Costly Myths That Entrepreneurs, Investors, and Policy Makers Live By,” Scott A. Shane, Yale University Press, 2008.

No Compromise

Compromise is talk; Collaboration is action. In compromise, everyone represents his own interests and fights to satisfy them in a negotiation of terms. In collaboration, every person works together to build something that changes as it grows and defines itself.

Compromise requires opposing sides and conflict. It makes conflict the central element of problem solving and puts a premium on maintaining an asymmetry of knowledge. Cat and mouse. Cops and robbers. Court-ordered minimums. 

Nobody gets his way in a compromise, and everyone must cooperate for a payoff that is less than the sum of the parts. It’s every man for himself.

Collaboration requires cooperation, too. But in collaboration, everyone pushes his interests to the center of the table. Knowledge is shared, not hoarded. Expertise is offered, not auctioned. Self-organizing maximums, as long as social anxiety doesn't turn it all to mush.

Collaboration can create something greater than the sum of the parts. It satisfies the separate interests each participant has, while illuminating a bigger, shared interest underneath it all.

Compromisers don't share. They mind turf. In fact, that’s what they were doing the entire time you wondered what the hell they were doing.

It is difficult to collaborate with compromisers, because they cannot contribute to the actual work of a project. Contracts become the main product for compromisers, and those who plan on breaking contracts love nothing more than to draw one up. “It won’t work without us,” is a favorite slogan, because it absolutely could.

A compromiser can't imagine playing a game without any rules. Have you played the exciting game without any rules?

The words say it all. “Compromise” means to settle differences with mutual concession or reciprocal modification of demands. “Com + promise” literally means to declare what will be done, together: to promise something together.

“Col + laborate," on the other hand, literally means to engage in productive activity, together: to labor on something together.

Henry Clay of Kentucky, The Great Compromiser

Beware the compromiser. Promises over action, concessions over gain, his incredible devotion to finding a balance between the slave and free state.

The compromiser fears he has nothing to offer in collaboration. He is correct. If not in the beginning, by the end, he will leave the business of enforcing rules to people who, for better or worse, never wanted them.

We think the same things at the same time. We just can't do anything about it, together.

East Meets South

Lafayette Cemetery #2, New Orleans

These lines were taken from Liberation Through Hearing During The Intermediate State (Tibetan Book of the Dead), written in the 8th century to be read 49 days after death and before one’s rebirth:

Let consciousness rise up through your abdomen
up through your body
up through your neck
and finally out the top of your head.
Dissolve there into the light around you.

In this way you may enter directly into the pure realm of light.
The uncertainties of life will not affect you.
Recognition and liberation are simultaneous.

Listen without distraction.
You have not recognized your own nature
and now you experience painful uncertainties of life and death.
Give up anger
give up attachment
and give up yearning for relatives and friends.
Take refuge in the buddha.
With your head held high, enter the human realm
any distraction dissolving back into the heart.

Anything that has a shape will crumble away.
Anything in a flock will disband.
We are all like bees alone in the world
buzzing and searching with no place to rest.

Delusions are as various as the reflections of the moon on a rippling sea.
Beings so easily become caught in a net of confused pain.
May you develop compassion boundless as the sky
so that all may rest in the clear light of their own awareness.

Funeral Shoes, Backstreet Cultural Museum, New Orleans

The Original Lady Buckjumpers Annual Second Line Parade, 2011, New Orleans

The Stooges Brass Band lead the second line.

Link to:
Backstreet Cultural Museum and
More photos of The 2011 Original Lady Buckjumpers Second Line at Offbeat Magazine's Flickr page.

Mojo Working

About mojo "tobies," from Ann Anderson’s wonderful history Snake Oil, Hustlers and Hambones: The American Medicine Show:

In contrast to righteous melodrama, a decidedly non-Christian approach to the medicine-show game was favored by Southern pitchmen who specialized in the sale of tobies. These lucky charms, also known as mojo bags, mojo hands, or conjure bags, are in use even today. Tobies are integral to hoodoo, a body of folk magic that combines African, European and Native American lore.

Like many folk-magic traditions, hoodoo places a great deal of confidence in the mystical properties of certain roots, herbs and minerals. Mojo hands typically contain a root called “High John the Conqueror,” prized for its magical power. ...

Mojo hands containing High John the Conqueror root are believed to improve one’s love life, break jinxes, attract money, bestow luck, stop evil conditions, keep a lover at home, compel another to do one’s will, find and keep steady work, put an end to fearful thoughts, heal the guilty heart, break bad habits, win a court case, master dangerous situations, bless a new baby, and much more.

J.C. Julian worked in the oil fields near Seminole, Oklahoma, during the Great Depression. To supplement his income, he pitched tobies on the side. He appeared to be sincere about the value of his product:

“A toby helps people to be lucky. If you want something real bad, you don’t get what you want without some help. That’s where my tobies come in. I guarantee my tobies. But don’t never let nobody else touch your toby. If you do, the toby will lose its charm. ... The last time I got careless and left my toby home, I damn near got myself killed. I ought to have had better sense than to go to a dance sober and without my toby. If I hadn’t have been sober, I couldn’t of got drunk. And if I had had my toby with me, I wouldn’t of got in that fight. And even if I couldn’t of kept out of the fight, I wouldn’t of been the one to get all cut up.”

A typical sing-song, hypnotic toby sales pitch was street theater:

“Put up and built by the Seven Sisters at the Crackerjack Drug Store at New Orleans, Louisiana. My toby will bring you Honor, Riches and Happiness. It will help you Win in All Games. It will bring you Health and Wealth. It will Protect you against Evil Spirits and Witchcraft. Thieves nor Enemies cannot bother you. Now listen, everything you turn your hand to Prospers you and makes you Money. You succeed in your Trade, Job or Business. You got Seven Wishes to make with each Lucky Bag. Hold the Bag in your Left hand, blow your hot breath on it three times, and Make your Wish, and see if it don’t come to Pass before the Seventh day is gone. To hold your True Loved one. To get anyone you love. To Protect yourself against all Law. To Kill all Voodoo and Witchcraft. Buy a toby. Just one dollar. But it’s worth fifty.”

Tobies were outlawed in many states (including Oklahoma), but with an irresistible offer like that, business continued apace. Julian sold his bags to all kinds of people, but his best customers were poor folks. 

“Let me tell you right now it’s the dumb folks who don’t buy tobies to help them. Understand that right off! Poor folks need more luck than rich folks. That’s the reason they buy more tobies.”

Tennessee Songs: Nina Simone

Nina's not kidding. It all happens too slow: then, now, always.

"Alabama's got me so upset.
Tennessee made me lose my rest.
And everybody knows about Mississippi, goddamn."

The proper title is "I Loves You Porgy":

Tennessee Songs: Via Chicago

Although this song has nothing to do with Tennessee, it does. I've gone home via Chicago. Film by Winterlongfilms. Words by Jeff Tweedy.

I dreamed about killing you again last night
And it felt alright to me
Dying on the banks of Embarcadero skies
I sat and watched you bleed
Buried you alive in a fireworks display
Raining down on me
Your cold hotblood ran away from me to the sea

I printed my name on the back of a leaf
And I watched it float away
The hope I had in a notebook full of white, dry pages
Was all I tried to save
But the wind blew me back, via Chicago
In the middle of the night
And all without fight at the crush of veils and starlight

I know I'll make it back one of these days
And turn on your TV
To watch a man with a face like mine
Being chased down a busy street
When he gets caught, I wont get up
And I wont go to sleep

I'm coming home, I'm coming home
Via Chicago

Tennessee Songs: Chattanooga Choo Choo

The highest-rated comment on this Glenn Miller Orchestra video says, “HOT friggin’ DAMN!” which pretty well sums us this dance by the Nicholas Brothers, a peacock showdown set off by the smokin' hot Dorothy Dandridge.

“When you hear the whistle blowin' eight to the bar
Then you know that Tennessee is not very far.
Shovel all the coal in.
Gotta keep it rollin'.
Woo, woo, Chattanooga, there you are.”

Contrast the Nicholas Brothers' version with the Frances Langford version: a bit of staged, staid militarism from the World War II era.

And then Bette Midler, in a bohemian bathhouse routine that would later propel her to fame.

One Thin Line

Characters by Kyoko Uchida

In Japanese, the difference between suffering and happiness is one thin line.

And these are some thin lines from the film "The Thin Red Line," written by James Jones and directed by absolute genius Terrence Malick:

"How did we lose the good that was given to us? What keeps us from reaching out and touching the glory?"

"Maybe all men got one big soul everybody's a part of: all faces of the same man."

"How do we get to those other shores, to those blue hills? Love. Where does it come from? Who lit this flame in us? A war can put it out, conquer it."

"The world is a box, a moving box. They want you dead or in their line. Only one thing a man can do: find something that's his and make an island for himself. If I never meet you in this life, let me feel the lack. A glance from your eyes, and my life will be yours."

Tennessee Songs: Memphis & MLK

Unlike other songs in the "Tennessee Songs" series, these three don't have "Tennessee" explicitly in them.

Rather, they contain the word "Memphis," the city where a great nonviolent reformer fell to an even greater system of organized violence, where the man who said "Civilization and violence are antithetical concepts" was shot in broad daylight.

"Oh muddy water,
Rolling to Memphis.
If you were there, you’d swear
It was more than a man who died."

In Memphis, on the evening of April 4, 1968, at 6:01pm, Dr. Martin Luther King, Jr. was assassinated while standing on the balcony outside Room 306 of the Lorraine Motel. Dr. King and his colleague Reverend Ralph Abernathy stayed in that room so often that it was referred to as the "King-Abernathy Suite."

The Lorraine opened in 1925 as the "Whites Only" Windsor Hotel. Walter and Loree Bailey purchased the property in 1942 and renamed it. It was one of the only hotels open to black guests in Memphis in the 1950s and 60s. Whenever Louis Armstrong, Sarah Vaughan or Nat Cole came to town, they stayed at the Lorraine.

By 1982, the city had foreclosed on the structure, which had by that time become low-income housing. The last resident, Jacqueline Smith, was forcibly removed from her apartment there in 1988.

The Lorraine has since been restored to its 1968 furnishings and now houses the National Civil Rights Museum. A 1959 Dodge and 1968 Cadillac sit in the parking lot under Room 306. It's one of the most overwhelming museums you will ever visit.

Dr. King was in Memphis to join the Sanitation Workers' Union Strike. The workers were on strike after the city failed to fix the situations that caused the death of two Memphis garbage collectors, Echol Cole and Robert Walker, who were crushed to death by a malfunctioning truck.

In response to the strike, Memphis Mayor Henry Loeb ordered police to mace and tear gas the nonviolent demonstrators on several occasions. Loeb called for martial law and brought in 4000 armed National Guard troops and tanks.

"Early morning [sic], April 4th
Shot rings out in the Memphis sky.
Free at last, they took your life.
They could not take your pride.
In the name of love.
What more in the name of love?" 

In 1964, at the age of 35, Dr. Martin Luther King, Jr. was the youngest man to receive the Nobel Peace Prize. He donated the prize money—$54,123—to charity. Forty-plus years later in 2006, the Nobel Peace Prize totaled about $1.5 million. The award was split between two entities: a person and a bank.

In 1968, the federal minimum wage in the U.S. was $1.60 per hour. At the time of the strike, Memphis sanitation laborers made two dimes more than minimum wage, $1.80 per hour, which Dr. King rightly called "starvation wages."

In fact, one account by a former Memphis sanitation worker puts the figure closer to 75 cents per hour. There were likely two separate pay scales: legal and illegal.

Starvation Wages
Adjusted for inflation, starvation wages in the U.S. have actually gotten lower over the past two generations. A recent study by the Economic Policy Institute shows that the federal minimum wage had its highest purchasing power the year Dr. King was assassinated. In 1968, minimum wage was $8.54 per hour. But by 2006, minimum wage was down to $5.46 per hour. (Both wage figures stated in equivalent 2009 dollars, the year of the study.)

After Dr. King's assassination, the Memphis Sanitation Workers Union continued their strike for basic rights and fair pay, which they never fully received. Based on searches in the Memphis phone book, it appears the union no longer exists.

Starvation wages still exist, continuing to dwindle with no job stability, no benefits and no political representation to stop it.

Violence continues, too. In fact, violence flourishes: as salable as ever, rewarded with riches beyond conscience, paying a mockery tithe to anyone who might slow it down.

"They asked me if I would do a little number
And I sang with all my might,
And she said, 'Tell me are you a Christian child?'
And I said 'Ma'am I am tonight.'
Walking in Memphis."

Tennessee Songs: Chuck Berry

Chuck Berry is so good, this song could play 100 times and not get old.

"Long-distance information give me Memphis, Tennessee.
Help me find the party trying to get in touch with me.
Her home is on the south side, high up on a ridge,
Just a half a mile from the Mississippi Bridge."

(For a good laugh, check out Chuck's face at 1:20 when Yoko does her thing.)