It’s hard to know where to begin with a story up at the Wall Street Journal, Risk-Averse Culture Infects U.S. Workers, Entrepreneurs.
The headline alone raises the question of whether the Journal knows anything about real entrepreneurship, as opposed to fantasy version noisily promoted by management gurus and other folks in the fee-extraction business. While any class as large as “entrepreneurs” or small business founders is going to have a great deal of variability within it, studies have repeatedly found that business founders aren’t gamblers or risk seekers. They typically think hard about the downside of launching a venture and take steps to limit it, such as syndicating risks (like getting suppliers to supply financing or materials, as Steve Jobs did by taking his first purchase order for Apple and persuading vendors to give him parts against it). And the “infects” in the headline suggests that the former wild-man thrill-seeking new business types have been afflicted with a mad cow disease variant that eats away at the parts of their brain that produces animal spirits. No, it’s even worse than that: America has gone “soft on risk”. Flaccid dick alert! Bring out the entrepreneurial Viagra!
Here’s the overview:
Companies add jobs more slowly, even in good times. Investors put less money into new ventures. And, more broadly, Americans start fewer businesses and are less inclined to change jobs or move for new opportunities.
The changes reflect broader, more permanent shifts, including an aging population and the new dominance of large corporations in many industries. They also may help explain the increasingly sluggish economic recoveries after the past three recessions, experts said.
“The U.S. has succeeded in part because of its dynamism, its high pace of job creation and destruction, and its high pace of churning of workers,” said John Haltiwanger, a University of Maryland economist who has studied the decline in American entrepreneurship. “The pessimistic view is we’ve lost our mojo.”
The article deplores the fact that:
In 1982, new companies—those in business less than five years—made up roughly half of all U.S. businesses, according to census data. By 2011, they accounted for just over a third. Over the same period, the share of the labor force working at new companies fell to 11% from more than 20%.
It does not occur to the author, Ben Casselman, that he’s got the causality backwards, that it was never terribly rational to start new businesses to being with. Even in the supposed heyday of the early 1980s, the rule of thumb was that nine out of ten failed in their first three years. And in our new economic paradigm, of the deliberate effort to weaken labor bargaining power, reduce regulations, foster the growth of an increasingly predatory financial services industry and rein in government (and let us not forget that government has been a major spur to innovation, both through financing R&D and critical infrastructure, as well as through regulations that spur innovation, as tougher fuel standards) has, despite its billing of being business-friendly, instead simply redistributed income and wealth to the top 1%.
Unfortunately, I can’t track down a source, since I saw it back in pre-Internet stone ages, but one factoid I read right after business school stuck with me: the most common characteristic of people who started new businesses back then was that they’d been fired twice. That applied to my father, who was fired once and later forced out as a result of a reorganization that had him supposedly slotted to take over a division when it turned out the guy running it had no intention of giving up his post. If you have the personality to thrive in or at least tolerate being on the corporate meal ticket, you need to be nuts or have delusions of grandeur to throw that over and take a flier on a new business.
Now having said that, there situations where it’s not a big leap of faith to start a new venture. Amar Bhide, who was the first academic to do large-scale studies of the non-VC backed companies that constitute the bulk of new businesses (even the majority of Inc. 500 companies), found that the most common type that succeeded was when the founder(s) had worked in an established firm, noticed that there was a niche that was being ignored by industry incumbents and set out to take advantage of it.
And let’s go back to 1982. Aside from the fact that the era of stagnant worker wages and rising levels of consumer debt was just getting started, what else was different? First, even though the economy sucked (the Volcker-induced early 1980s recession was short but painful), the PC revolution was in full throttle. Atari was the hot employer in business schools. All sorts of software and hardware and peripheral companies were being built, not just Apple but Lotus, VisiCalc, WordPress, Compaq, Sun, Oracle, disk drive makers, etc. In those days, with better labor markets, if you flopped as a young (or not so young) person starting a new business, the normal between-job period was six months or less. You might have a bruised ego, have lost some of your own and your friends’ and family’s money, but you weren’t worried about eating out of garbage cans and sleeping on the street if you bombed. Oh, and let’s not forget about another sea change, namely, the brain drain to Wall Street. Why take a flier when you can make big bucks before you are 30 with someone else taking the risk?
And what about the lack of corporate hiring? The Journal, again:
In the eight recessions from the end of World War II through the end of the 1980s, it took the U.S. a little more than 20 months, on average, for employment to return to its prerecession peak. But after the relatively shallow recession of the early 1990s, it took 32 months for payrolls to rebound fully.
After the even milder recession of 2001, it took four years. Today, nearly four years after the end of the last recession, employment has yet to reach its precrisis peak….
Companies, too, are taking fewer risks. Rather than expanding payrolls, for example, they are keeping more cash on hand—5.7% of their assets at the end of 2012, up from under 3% three decades earlier, said the Federal Reserve, a rise that accelerated after the recession. Workers are hired more slowly, particularly at newer companies, Labor Department data show.
For public companies, the answer is easy: it’s the short-term-ism! Notice how the change in hiring activity in a recovery dates to the early 1990s. Ahem, that coincides with the publication of what may be the most destructive single paper ever written, which by Michael Jensen arguing that CEOs should have significantly equity-linked pay…so they’d act like entrepreneurs. Yet while most real entrepreneurs I know are serious about building their organizations and shudder at the idea of getting rid of people to bolster margins and placate investors, it’s become the norm in major corporations. After all, it’s hard and takes time to build new products and operations. It’s so much easier to take an established franchise and run on brand fumes by cutting service levels, advertising, and running the staff you do retain to the bone.
But what about the under-investment?
Investors, meanwhile, appear to be losing enthusiasm for startups. Total venture capital invested in the U.S. fell nearly 10% last year and has yet to return to its prerecession peak, said PricewaterhouseCoopers.
The share of capital going to new business ventures has fallen even faster, PricewaterhouseCoopers data show, and is more concentrated: Silicon Valley took 40% of venture funding in 2012, up from about 30% in the late 1990s.
The problem here is drunk under the streetlight. Investment in new businesses is conflated with VC investment, when fewer than 2% of all startups have institutional backers. The overwhelming majority of new businesses are funded through savings, family, friends, and credit cards. And in the aftermath of the crises, as the Journal in particular recounted, a lot of small businesses got killed when credit card companies slashed credit lines on established customers with good payment histories and FICOs because they were in the wrong ZIP code (the credit line reductions were particularly aggressive in the markets with the biggest home price declines). Many small businesses use credit cards seasonally, placing large orders in the spring or summer for materials so they can build and ship in time for fall season buying. The survivors often downsized, and anyone who knew someone who got whacked like that would likely be wary of using that type of financing.
As for venture capital firms, one of my VC buddies predicted the decline of VC in 2004. He said then if you looked at industry returns, it was due almost entirely to the dot-com era, and then to a remarkably small number of monstrously profitable deals at the top players. Once those deals were far enough in the past to no longer be included in fund consultant metrics, the allocation to VC would fall sharply. The industry did get a new lease on life due to the social media boomlet, but that is past its peak.
Moreover, investor behavior tracks corporate short-term-ism. Why tie up your money in an illiquid investment when you can play the markets? Andrew Haldane of the Bank of England has found that investor return requirements are several percent higher than they ought to be. That restricts investments of all sorts, particularly on ones with longer-tailed payoffs.
The article does, at points, mention changes in the structure of the economy which make it harder for small businesses to succeed, such as:
One barrier for prospective entrepreneurs may be the growing dominance of large corporations in nearly every industry, which make it tough for new ventures to gain a foothold. A small bookstore no longer needs just a better selection or a friendlier staff than the crosstown competition—it also has to compete with national chains and, increasingly, such Internet retailers as Amazon.
Funny how it fails to mention how failure to enforce anti-trust rules is a big culprit in the increased dominance of large firms.
But the really bizarre omission is the crappy state of the economy. Casselman seems puzzled that people who have jobs are staying in them longer. Did he somehow miss what happens when people, particularly those over 35, lose a well to decently paying job? They might never work as anything more elevated than a burger-flipper or Walmart greeter ever again. For the most part, the employed hang on to jobs for dear life because the downside of job loss is so much worse than before.
Another gaping oversight in the decline in starting new businesses is the failure to mention indebtedness, particularly student debt. The sort of kids who might have bootstrapped a company in 1982 are often saddled with loans. Older people who are carrying personal debt (say a car lease, which would have been almost unheard of in 1982, and likely higher mortgage payments relative to income as banks raised the debt to income levels they’d approve) would often correctly question the wisdom of taking on more debt to fund a venture.
The story also tisks-tisks the reluctance to move:
Americans move less often, with rates of interstate migration falling for at least 20 years, according to census data. They also have less workplace wanderlust: 53% of adults last year held the same job for at least five years, up from 46% in 1996, according to the Labor Department.
The author clearly missed it, but one reason is companies themselves transfer people less often. When I was a kid, the “I’ve Been Moved” life of mid level to senior corporate managers was sadly common. It went out of fashion partly because the managers themselves started pushing back (bad for kids, and hard to manage with the rise of two-earner households) but also because the companies stopped subsidizing it, realizing it was one of those costs it could live without (when I was a corporate brat, the companies not only paid for the move, they’d advance proceeds against the sale of the house in the old location, and would eat any losses on its sale. This happened more often than you’d think, since a move in a 2-3 year period would mean the house would not appreciate enough to recoup brokerage costs). And with the job market so competitive, someone looking for a job long-distance is even more disadvantaged than the past.
So for the most part, this article ignores the elephant in the room: “It’s the economy, stupid.” It’s completely rational to shun entrepreneurship when conditions are crappy. Too bad the paper resorts to blaming workers as risk slackers rather than fingering the real perp, namely, failed neoliberal policies.