Does it matter that many small firms don’t make much money?
Should policy makers be advising we poor slobs to rush out and start a business? Will it pay off? According to small-business expert Scott Shane, the answer is: “No.”
But his argument might be only partially relevant.
Shane analyzed Census data for average and median six-year revenues of startups by industry sector. He used that time frame because most new businesses fail in their first five years. What he found is that average and median numbers tell different stories. Only a small number of companies survive past the six-year mark and, also, make over $100 million in sales. So, the average number skews high. But, the median is much lower. In fact, it’s zero in some cases. ($2.1 million is the average for manufacturing, for example, while the median is zero).
His conclusion is that most entrepreneurs are spinning their wheels–”spending a lot to get relatively little”. And he says:
Before policy makers tell everyone that it’s a good idea to be an entrepreneur, they should keep these numbers in mind. The people they encourage are more likely to have the typical outcome than the average one.
So, it’s hard to dispute that many small businesses aren’t rolling in money after six years. But, for one thing, some of them seem be doing just fine. The median for agricultural services, forestry, and fishing, as well as finance, insurance, and real estate, and services, is $50,000. Not huge, but something. Plus, during those years the companies were in business, presumably they made some money, employed some people, helped the owners and their workers pay their rent and feed their families. If they didn’t become tycoons, that doesn’t necessarily matter.
In fact, one conclusion is that government policy makers should, indeed, advise people to go into business for themselves. But they should find ways to offer constructive help to entrepreneurs to boost their chances of success. That means more classes at community colleges, for example, or expansion of SCORE. ( Too often, I hear mixed reviews from patrons of SCORE. It’s like dealing with customer service. You have to keep calling until you get someone who can help. In the case of SCORE, that means someone with solid entrepreneurial experience who knows what he or she is talking about).
This wouldn’t be about becoming super-successful, necessarily, but about operating at a level that allows owners and employees to remain solvent. And that’s important.