Global Trend

The Entrepreneurial Explosion

Several forces are converging to make this an unprecedented time to start a business. And that trend is already bearing fruit. Consider the fact that the number of the nation’s smallest businesses, those which only employ their owners, increased by 2.2 million from 1997 to 2002, according to the Census Bureau.

As a result, one of every nine American adults was involved in entrepreneurial activity in 2003, the most recent year for which statistics are available from The Global Entrepreneurship Monitor.

Why are so many Americans going into business for themselves? As Roger McNamee, a Silicon Valley venture capitalist and investor, argues in his book, The New Normal, technology, demographics, and economics have presented entrepreneurs with opportunities that are unprecedented ? and apparently unlimited.

For example, as companies work to reduce their fixed costs and become more flexible, they are trying to outsource many activities that were done, until recently, in-house. This new wave of outsourcing activity benefits small businesses in two ways:

First, it makes world-class services like accounting, call centers, human resources, tax preparation, marketing, and IT support affordable to even the smallest business that can’t afford a dedicated staff for those functions.

Second, it provides outsourcing clients for entrepreneurs who excel at a specialized skill.

Consider Salesforce.com. Marc Benioff, a former executive at Oracle, started the company in 1999. It provides tools to help small companies manage their direct sales. Because it is an on-line service, clients can gain all the benefits of salesforce automation and customer relationship management, without paying to install expensive software and complicated IT infrastructure. The company quickly grew to $50 million in revenues by 2003, and raised $110 million in an initial public offering in 2004.

A second factor driving the launch of larger high tech startups is the flood of venture capital available, sitting in the coffers of the leading funds. However, only a tiny fraction of entrepreneurs should look to venture capital to fund their start-ups.

Why? First, as McNamee insists, the best business ideas don’t need investors. With interest rates low and home equities high, entrepreneurs can often borrow the seed capital themselves. More importantly, if the new product or service is popular with customers, their purchases and a little trade credit will pay for the company’s growth.

That was the case at eBay, which became an instant success. The company’s founder, Pierre Omidyar, wrote the software for eBay during his free time. As soon as the site debuted on the Web, it was profitable because it had nearly no overhead, and users paid to sell their goods on the site.

Furthermore, venture firms invest in only a small percentage of American start-ups, and most of those are focused in IT, health-care technology, and consumer services. Worse yet, venture capitalists are likely to demand at least half of a new company in exchange for a few million dollars.

If an entrepreneur still thinks he needs the help of a venture capital fund, McNamee advises entrepreneurs to build up their businesses before seeking funding. Bill Gates only accepted funding after Microsoft’s revenues reached $24 million, and Scott Cook waited until Intuit’s revenues climbed to $30 million. By bankrolling their own business plans, Gates and Cook shaped the companies around their own visions, and they retained a large share of their companies.

Aside from outsourcing services for companies big and small, one of the hottest growth areas for entrepreneurs is in the field of personal services. Because time is the scarcest resource, especially for the most affluent Americans, opportunities abound for businesses that make people’s lives easier.

For example, McNamee knows an entrepreneur who started a business of picking people up at their homes and using the customers’ own cars to drive them to the airport. He didn’t have any overhead, and he only needed to price his rates lower than the parking fees at the airport. Before long, he added services like taking the customers’ cars in for repairs while they were out of town. By mid-2004, the business employed 10 people and was very successful.

But, it’s not just the emerging market opportunities and the availability of funding that’s making starting a small business easier. Today’s fast, powerful, and affordable technologies provide much of the infrastructure a business needs, at a very low cost.

For example, for less than $1,000, an entrepreneur with a PC and an Internet connection can give a home-based business the on-line look of a large company. For not much more, he or she can open a shop on eBay or Amazon.com. Buying search terms on Google and other search engines allows entrepreneurs to reach highly targeted customers with an interest in their products and services.

Another big factor driving the trend toward entrepreneurship is demographics. For aging Baby Boomers, women, and minorities, it has never been easier to start a business.

Let’s discuss the Boomers first. As corporations outsource entire functions and downsize their payrolls, middle-aged Americans find themselves either without jobs or competing for jobs with recent college graduates who can afford to accept lower salaries. For many of those graying Baby Boomers, the best option is to go into business for themselves. Sometimes, this means doing the same thing they’ve done for years for the same employer and/or the employer’s competitors, but now they run it as a business.

According to a report in USA Today, 5.6 million Americans aged 50 and older are now self-employed. That’s an increase of 23 percent from 1990. The same trend is unfolding in Canada, where the fastest-growing sector of the small business market consists of businesses started by people aged 55 and older.

Many of these North American “seniorpreneurs” are like Jim Minick, a 51-year-old entrepreneur in Georgia. Minick was laid off three times in 25 years as a human resources and sales professional, and he worried that the next time he was laid off, he wouldn’t be able to find a new job. Instead, he started Home Care Georgia, a service that helps older people with routine activities in their homes like getting dressed. Minick told USA Today the business turned a profit in 2004 and will surpass $140,000 in revenue this year.

Another business the newspaper cited is Seat Co., a custom furniture business started in 2001 by two men in their 50s. The founders, Steve Simons and Russell Bane, worked in the furniture industry for several years before starting their own business. They used their contacts in the industry to get discounts on equipment and material for making furniture, and invested in a Web site as the company’s only marketing channel. The company expects to exceed $1 million in revenues in 2005.

Women are another demographic group that is fueling the entrepreneurial boom. Today, 48 percent of America’s privately-held companies are at least half-owned by women, an increase from 44 percent in 1997, according to the Center for Women’s Business Research. The reasons these entrepreneurs cited for starting their own businesses included the freedom to set their own schedules, the chance to pursue an opportunity, and the desire to escape from the “glass ceiling” that they felt limited their careers in corporations.

Finally, minority group members are increasingly starting their own businesses. In 2003, 1.3 million Hispanic-Americans were self-employed, which is more than five times the 241,000 who were self-employed in 1979. Part of the reason was the increase in the Latino population in the U.S., according to officials of the Advocacy Office of the U.S. Small Business Administration, which conducted the study. Meanwhile, the number of African-American entrepreneurs increased to 710,000 in 2003, up 2 percent; and self-employed Asian-Americans increased 26 percent, to 590,000.

There’s no question that the trend toward entrepreneurship is powerful, and it is accelerating. Looking ahead, we foresee five developments:

First, entrepreneurship will continue to drive the economy’s growth and individuals’ prosperity. Today, small businesses create more than two-thirds of new jobs in America, and they account for more than half of the economic output in the U.S. While large companies will continue to outsource functions that are not part of their core, they will also generate demand for clever entrepreneurs to meet their needs, which in turn will create new businesses and new jobs.

Second, the entrepreneurship explosion will also create lucrative opportunities for entrepreneurs whose business models target other entrepreneurs. For example, social networking companies are poised to profit from the rise in entrepreneurship. Ryze has 250,000 members in 200 countries. The free service allows members to create a home page and send messages to other members to develop contacts, make sales, and build their networks. Ryze makes money by charging members $10 a month for premium services like a more powerful search engine and the ability to create industry-specific groups. Launched four years ago by Adrian Scott, a founding investor in Napster, Ryze is privately held and profitable, according to Scott.

Third, this trend will create big opportunities for major corporations as well as for entrepreneurs. FedEx is among the companies that is finding an attractive market by appealing to entrepreneurs. Its purchase of Kinko’s in 2004 for $2.4 billion gives FedEx another way to serve small businesses. It markets Kinko’s as the back office for people who don’t understand or can’t afford to install technologies like videoconferencing.

Fourth, the trend toward self-employment creates a spectacular opportunity for firms that can offer affordable health-care plans for independent contractors. One of the big expenses for self-employed workers is the cost of health insurance premiums, which can consume several hundred dollars per person each month. If an insurance firm consolidates the risks of those workers and offers them medical insurance at similar rates to those they offer to corporate employees, the revenues will be enormous.

Fifth, as more Baby Boomers reach their 50s, the number of seniorpreneurs will continue to climb. By 2020, there will be 118 million Americans aged 50 and older ? 31 million more than today. These individuals will be healthier and more active than today’s seniors. More significantly, Boomers will continue to define themselves by what they do. Therefore, many will not want to be “retired,” per se. In response, many of them will create new businesses, as well as new opportunities for other businesses that are savvy enough to market to them. This explosion of new small businesses will be crucial for keeping the U.S. economy growing during the demographically weak period from 2011 to 2022.

References List :
1. The New Normal by Roger McNamee with David Diamond is published by Portfolio Hardcover Publishing. ⓒ Copyright 2004 by Roger McNamee. All rights reserved.2. USA Today, January 17, 2005, “The New Entrepreneurs: Americans Over 50.” ⓒ Copyright 2005 by USA Today. All rights reserved.3. St. Louis Post-Dispatch, December 5, 2004, “Latinos Lead the Charge in Becoming Self-Employed,” by Shera Dalin. ⓒ Copyright 2004 by St. Louis Post-Dispatch. All rights reserved.