A Typical Entrepreneur's Aspirations

Editor's note: This is the fourth column in a new series that challenges misconceptions about entrepreneurship. Myth: The typical entrepreneur creates jobs, generates innovation, provides wealth, and rejuvenates communities. Reality: Only a minority of entrepreneurs start businesses that provide these benefits. While it may be true that some entrepreneurs provide substantial economic benefits, our view of what the typical entrepreneur can—and wants to—accomplish is greatly overestimated. In large part, this is because the typical entrepreneur—out of about 12 million people trying to start businesses every year—has low aspirations. To show this, I crunched some of the data about entrepreneurs gathered by the U.S. Census, the IRS, and professors Paul Reynolds and Rich Curtin in the annual Small Business Administration publication, Small Business Economy. These sources are very accurate. The IRS data come from actual tax returns, while the Census data come from a survey that business owners are required to complete. Reynolds' and Curtin's data are from the Panel Study of Entrepreneurial Dynamics, a representative sample of nascent entrepreneurs—their term for people who are in the process of starting a business—drawn from the population of adult Americans representative of the overall population of this country. Here are eight facts about entrepreneurs and their goals and aspirations from these sources. The primary reason people start businesses is to avoid having a boss. Only one quarter of all businesses in the U.S. actually have employees. Only 9.4% of U.S. businesses have more than four employees. Only 15% of the male entrepreneurs and only 7% of the female ones want to maximize their business' growth. Only half of nascent entrepreneurs expect to have sales of more than $100,000 in their fifth year of operation. Only 22% of small businesses have annual revenues of more than $100,000; 58% have less than $25,000. Only 44% of non-employer businesses were the primary source of revenue for their owners. Only 32% of the nascent entrepreneurs have actually created new firms six years after beginning the process. These facts tell us that the majority of people starting businesses aren't trying to build firms that employ people or have much economic impact. And even fewer are succeeding at those efforts. Most people starting businesses are just trying to be self-employed. We can draw semantic distinctions and not call most of these people —entrepreneurs," but policymakers don't do that. They define entrepreneurship as new business creation and then see all of the people starting businesses as job-creating, wealth-creating innovators. From there, it's a simple step to the philosophy that we'd be better off if we just had more people starting businesses. But the numbers don't support that view. Take job creation as an example. Given the numbers from these surveys, every year 12 million nascent entrepreneurs are trying to start 7.4 million nascent enterprises that become approximately 600,000 employer firms. Stated differently, it takes the efforts of 20 nascent entrepreneurs just to get a single employer firm started! Moreover, we can't always be better off if more people start companies. Ultimately this would mean that everyone had his or her own business. Under that scenario, no one would work for anyone else and we'd have to live without the benefits that come from companies growing large. While there is no question that entrepreneurship is an important vocation, data such as those described above are instructive. We need to remember that most new business creation activity is a small-scale effort to allow people to be independent contractors rather than employees. Therefore, policymakers should have more modest expectations of the benefits that the typical new business will provide.

To continue reading this article you must be a Bloomberg Professional Service Subscriber.