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Jul. 6 2010 - 2:38 pm | 114 views | 0 recommendations | 4 comments

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.

via The Typical Entrepreneur’s Sales Are Below Average | Small Business Trends.

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.


Comments

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  1. collapse expand

    As a long-time business owner, the conclusions drawn here from the original data do not ring true to me. (I saw no opportunity to comment directly to Scott Shane, so I am asking you, Anne.) The answers to a few questions would help clarify:
    1) If median receipts for so many establishments is $0, then half reported a loss, correct? Many S-corps are established to provide a tax loss for their individual owners in order to offset other income — so by that standard, they could be considered successful, correct?
    2) The Statistics of U.S. Businesses from the Census Bureau clearly says it reports only on establishments with employees, and that it has difficulty with reliability for multi-location establishments. Many successful self-employed individuals have no employees, though they may have many contractors or other self-employed people helping them. Were establishments without employees counted in any way?
    3) Were the businesses that had closed/gone out of business as of the 6 year point, and therefore had $0 receipts, included to reach the median of $0 receipts?
    4) Which six years were included in the statistics?

    I am old enough to remember sloppy statistics being used for many years to conclude that there were very few women business owners and/or that they didn’t earn very much money. It turned out there was no good way for the U.S. government to determine the gender of business owners, so new standards for data collection needed to be developed.

  2. collapse expand

    I can’t answer those questions, but they’re great. So I’d urge you to ask them of Shane.

    You can click on the link in the post above. Or:

    http://smallbiztrends.com/2010/07/the-typical-entrepreneurs-sales-are-below-average.html

    It seems to be a case of lies, damn lies and statistics. I believe that in general Shane’s bias is in favor of high-growth firms–the tiny group of startups that grow really fast.

  3. collapse expand

    I guess my question is, what metric is being used to measure success? As you point out, some people start small businesses simply to earn a living, not to make millions. I’m planning to start a service business in which my (very attainable) goal is simply to replace the wages I would have made in corporate life, which, in my case is a middle class income for where I live. I would consider myself to be wildly successful if I surpass that goal within five years.

    I would think there are plenty of businesses like these that get overlooked by the pundits–architects, residential contractors, even sole proprietor CPA’s. Why is the assumption always that people want to grow huge businesses and have scores of employees?

  4. collapse expand

    I agree. There’s a school of thought that the entrepreneurship that counts is the kind that creates big companies, employing a lot of people, however. That approach has implications for policy–for the type of incentives and programs you put in place. And, in fact, there’s a school of thought that government policy should discourage the sole proprietor.

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    About Me

    It's just in the past few years that I've become interested in not-only-for-profit startups and small businesses. In fact, I can remember a time when I thought the concept of "enlightened capitalism" was simply an oxymoron. Now, I see the possibilities. Plus, it combines my own political bent with my long-time coverage of small business for such places as the New York Times, Business Week, CNNMoney.com, Portfolio.com, Harvardbusinessonline, and Fortune. Otherwise, I live with my son, a soccer fanatic, my husband, a journalist and avid rower, in Pelham, NY. My daughter, a former varsity wrestler, is away at college, studying art. You can see more of my work at www.annefieldonline.com. Or follow me on Twitter@annearfannearf.

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