Thursday, February 12, 2015

WSJ: Young people turning away from starting businesses

Starting your own business is part of the American Dream. Take the risks, struggle, and hopefully earn the rewards that come from owning a successful business. The Wall Street Journal reported last month that young people are shying away from this path in increasing numbers. Some fear failure, some lack the financial means to start a business. Others have no real work experience that gave them the needed skills to start a business. The Journal reports:

The share of people under age 30 who own private businesses has reached a 24-year-low, according to new data, underscoring financial challenges and a low tolerance for risk among young Americans.

Roughly 3.6% of households headed by adults younger than 30 owned stakes in private companies, according to an analysis by The Wall Street Journal of recently released Federal Reserve data from 2013. That compares with 10.6% in 1989—when the central bank began collecting standard data on Americans’ incomes and net worth—and 6.1% in 2010.

The Journal’s findings run counter to the widely held stereotype of 20-somethings as entrepreneurial risk-takers. The sharp decline in business ownership among young adults, even when taking into account the aging population, adds to worries about business formation heading into 2015, economists said. The number of new U.S. business establishments fell in the first quarter of 2014, according to the latest available data from the U.S. Labor Department.

It is difficult to pinpoint the precise reasons for the decline in private business ownership among young Americans. One theory is that they face more postrecession challenges raising money. Such fast-growing sectors as energy and health care likely require a significant access to credit or capital.

The decline also reflects a generation struggling to find a spot in the workforce. Younger workers have had trouble gaining the skills and experience that can be helpful in starting a business. Some doubt their ability. .....

Matthew Sattler, 22, of New York temporarily set aside his entrepreneurial dreams in 2014. He created a social-rewards app in college. But in February, he instead took a job in financial planning and analysis with a major airline.

Having watched as his own father ran a custom home-building firm, Mr. Sattler said entrepreneurship seemed too difficult a path at his age. “It’s much more challenging to be successful without experience,” he said.

Some would-be entrepreneurs fret of stiffer competition in the Internet age. The broad use of the Web “raises the level of skills that are required to establish a business” because it vastly expands the number of potential competitors, said Daniel Pierson, 25, who lives outside Boston.

Mr. Pierson started a landscaping business at age 12, worked on two startups in college and received a master’s degree in engineering in 2013. But in 2012, he took a job with a consumer-electronics company.

The proportion of young adults who start a business each month dropped in 2013 to its lowest level in at least 17 years, according to the Ewing Marion Kauffman Foundation, a Kansas City, Mo., nonprofit that focuses on entrepreneurship. People ages 20 to 34 accounted for 22.7% of new entrepreneurs in 2013, down from 26.4% in 2003, it found.

The plunge in business ownership captured in the Fed survey is an “interesting and worrisome finding,” said John Davis, faculty chair of the Families in Business Program at Harvard Business School. If the trend continues, he said, the U.S. economy could become less vibrant.

“We need startups not only for employment, but also for ideas,” Mr. Davis said. “It’s part of the vitality of this country to have people starting new businesses and trying new things.”

The decline in young entrepreneurs is part of a broader drop in private business ownership over the past 25 years. Between 2000 and 2012, new business formation slowed even in such high-growth sectors as technology, according to economists John Haltiwanger and Ryan Decker of the University of Maryland and Javier Miranda of the Census Bureau.

Slowing U.S. population growth since the early 1980s has reduced the supply of potential entrepreneurs of all ages, and lessened demand for new goods and services, said Mr. Litan of the Brookings Institution. Meanwhile, business consolidation has led to more formidable competition for startups, making it harder for new entrants to gain a spot in the market, he said.

Overall, the U.S. “startup rate”—new firms as a portion of all firms—fell by nearly half between 1978 and 2011
, according to an analysis by Mr. Litan and his research partner, economist Ian Hathaway.

The costs of operating many types of small businesses have come down in the past decade, with the greater use of technologies that reduce labor costs. But young entrepreneurs face formidable financial hurdles.

The average net worth of households under 30 has fallen 48% since 2007 to $44,354. More than half of 18-to-29-year-olds reported one or more financial problems in the past year, a 2014 Pew Research Center survey found.

Their poorer financial condition hurts young graduates’ ability to tap their own savings, draw equity from a home or obtain bank loans to cover their startup or ongoing business costs, said Karen Mills, a senior fellow at Harvard Business School and a former head of the U.S. Small Business Administration, which sponsors programs to help small firms obtain financing.

Many banks that pulled back on small-business lending during the recession that stretched from December 2007 to June 2009 have continued to keep lending standards tight. The amount of small-business loans held by banks increased by 1.8% in the third quarter of 2014 from the same period a year earlier, according to the Federal Deposit Insurance Corp. But the beneficiaries of the increase are more likely to be established companies, analysts said.

The decline in business ownership among young graduates also reflects a relatively low appetite for risk. Young people have less confidence, said Donna Kelley, a professor at Babson College. In an annual survey she oversees, more than 41% of 25-to-34-year-old Americans who saw an opportunity to start a business said fear of failure would keep them from doing so, up from 23.9% in 2001. “The fear of failure is the measure we should be most concerned about,” she said. Rest of article.


Anonymous said...

We need more businesspeople in government. Those who have actually taken the risks and succeeded understand how difficult it is in the marketplace and how government can get in the way.

Anonymous said...

I would not recommend starting a business in Mississippi. We have become a non friendly state to small business. Our MDA spends millions helping large business with loans, low interest etc... That fail and costs tax payers and economically sound businesses in our state are constantly hurt by our workmans comp board, tax structure, and lack mof leadership at our capitol. Being a small business owner in Mississippi is not something I would recommend to anyone at this point and I own more than one in this state and its an uphill battle everyday!

Anonymous said...

Agreed, 11:40. We need more people with your insight making (and getting rid of) laws, fewer lawyers and folks who only care about getting wined and dined with their friends and lobbyists.

Anonymous said...

There is one big reason for a decline in small business, and Democrats & Republicans are both equally guilty. That is the ability to compete. Our lawmakers think they are being pro-business when they draft legislation to help big business, who they think is the "only" business. Inside most of the so called pro business laws are regulations that build barriers to competition for the little guy. As big business continues to scale up they need the government to help keep small businesses at bay. I personally own a business that could not be started today due to increased regulation on the industry.

Anonymous said...

It's lonely at the top. I doubt many business owners have qualified,underlying support from professionals such as bookkeepers, accountants, and legal/lawyers. Many not spousal or family encouragement. A good deal of time and expense is required to break a barrier, such as market potential, special accounting or tax effects, qualified employee potential, not to mention local or state barriers. It is difficult to find reliable counsel from professionals, who wear a one size fits all hat. Given the investment, risk, energy, and time required, it can be a difficult decision, but rewarding, provided all the pieces fit.

Anonymous said...

Well, I think I might start drafting a children's book for the finge parents and their children. 3 bucks a pop.
'the communist next door.'

Anonymous said...

I'm a young person who owns a business. Started it myself. I had to risk everything I owned in order to have the capital needed to start the business.

I also work all the time. I always have to be available. Even on the rare chance I am able to get away for a vacation, I've got calls and emails that cannot wait.

I have to manage employees and deal with the administrative hassle of having employees and all the paperwork that comes with them. I value my people and I am blessed with hard workers but there is an administrative burden with payroll tax forms, insurance, etc.

Most of my friends that are my age get off work at 5 or 6 on a Friday and leave to go hunt or do whatever and they don't think about their job again until Monday morning. There's absolutely nothing wrong with that. But that's not my life. At all.

I think a lot of young people are hesitant to start businesses bc they don't want to put in the long hours that it takes to run a successful business.

Anonymous said...

I've started or been involved in the startup of numerous businesses. I've been out of the game for several years due to health reasons and the single biggest issue that I see as a hindrance is government.

We have incrementally allowed every facet of modern life to be governed. Intelligent advantage is now considered unfair advantage. We promote mediocrity in the name of equality. We have laws that forces one to do one thing or the other for social reasons... things that defy freedom and free market.

The red tape, licensure, taxes and burden with starting a business is too high. The average joe with a good idea can't get it started because they can't afford the red tape, much less the actual startup costs.

We are in an era where it's commonly accepted that the individual should pay more into the tax system throughout the year in order to get a "refund." That's like paying extra for groceries and not having that money available in order to get a "refund" later... like it's a good thing. We have to pay someone to complete our civic duty of paying taxes. The tax code is so complex that even the overseers don't understand the code.

We have servants of the court making a business model out of suing via class action simply to force a settlement. It doesn't matter what the clients get, because the attorneys are making the money like it's a normal business. Businesses settle because the negative publicity.

We have come to accept the obfuscation that our media portrays. Freedom of the press no longer carries the responsibilities of truth, impartiality and informative. It's now about ratings and entertainment sensationalism.

Republican and Democrat alike are mostly progressives and both share equal disdain for those who aspire for a more accurate representation of what the United States was designed to stand for. And progressives doesn't mean progress. It is the belief that government has the answers to the individuals problems. It has, since the 1900s, been about the incrementalism of government into every aspect of the individual's life. Progressivism has had it's place in growing and addressing the human condition, but with statistics in the 1900s, progressivism became a mode of altering facts to create a result to change the social construct one way or another.

Small business just has reached the tipping point where it is no longer rewarding enough for the chances one takes and progressivism is a direct contributor.

pittpanther said...

4:23pm, maybe if you weren't sitting around reading and responding to random blogs in the middle of the work day, you would have time to complete your tasks and delight your clients, and goof around on nights and weekends like the rest of us.

Anonymous said...

The hours are not a problem, everyone knows that it takes blood, sweatband tears for a new small business and its not for everyone that's for sure, it is just upsetting that our representatives, senators and elected officials don't get behind existing small business owners and help. Our country was built on small business. The politicians don't mind asking for donations in election years but seem to forget about us when they get in office. Very disheartening. 11:40 and 12:53 , you got it right! Too many damn attorneys in office!

Anonymous said...

pittpanther - one of the advantages of owning your own business, as 4:23 does, is that you are free to ignore jackasses like yourself.

Thanks for the post 4:23. Being a professional who is a veteran of three years of 36 hour shifts, I sympathize with your similarly grueling lifestyle. So far it has paid off - for our kids' sake I hope it still will, although I have my doubts.

Challenges Statement said...

11:40; Please tell us how the 'workmans comp board' impedes your business.

Think Again, Bub said...

In fact, Workers' Compensation law in Mississippi may actually save your business and your literal ass. If a worker manages to 'get himself injured' while in your employ, workers' comp is the sole remedy; as opposed to suing you, the employer, for his 'injuries' and thereby, perhaps, shutting down your business.

Anonymous said...

Do any of you even know the background of some of the people that have been appointed and serve on workers comp board? Pretty doubtful you do. You might want to check into who these people are that are appointed to make important decisions that affect businesses! It is a high paying salary for the appointment and many are just token placements!

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