We think entrepreneurship is alive and well in America. But several recent studies report that small business formation and entrepreneurship are in decline.
The Wall Street Journal's Risk Adverse Culture Infects U.S. Workers, Entrepreneurs summarizes much of this research. Another example is a recent Brooking study, which states "new firm formations have been on a persistent decline during the last few decades".
So what’s going on?
We think what’s happening with studies on small business formation and entrepreneurship is similar to what happened in the 1980s with studies on the impact of computers and IT on productivity.
These studies showed that investments in computers and IT did not improve productivity. But at the same time, businesses were investing heavily in computers and IT to increase productivity.
This productivity paradox led economist Robert Solow to quip "You can see the computer age everywhere but in the productivity statistics."
Eventually the statistics caught up with what everyone knew – IT added to productivity.
We think we're seeing the same thing today with small business data.
We recently toured a number of U.S. cities including Kansas City, Baltimore, Milwaukee, Chicago and Philadelphia and were stunned by the amount entrepreneurial activity we encountered.
Businesses are also investing heavily in products and services targeted at small businesses and venture capitalists are pouring money into startups focused on small and micro businesses - especially related to peer-to-peer commerce and the sharing economy.
And, of course, the traditional startup meccas like San Francisco, Austin, Boulder, Seattle etc. are booming with entrepreneurial activity.
To paraphrase Solow, you can see America's entrepreneurial energy everywhere.
So why isn’t this activity showing up in the statistics and studies?
Based on our research, we see 3 shifts that are changing entrepreneurship and the small business sector but are not being picked up in small business statistics.
1. Digital technologies have made it much more attractive to start and operate businesses without traditional employees.
These solopreneur firms are owned and operated by a single person. But in many cases they use contractors, freelancers, outsourced services and other forms of contingent workers instead of traditional employees.
Using contingent labor has gotten easier and more effective due to the growth of online talent exchanges such as Elance and oDesk, improvements in collaborative technologies for managing non-employees and growing numbers independent workers available for hire.
Government and academic researchers do not consider these solopreneur firms traditional small businesses and instead calls them "non-employer" firms. These firms are rarely included in small business studies.
We think this is a big miss and is leading to the under counting of U.S. small business starts.
For example, the MBO Partners State of Independence study showed that in 2013 26% of all solopreneur firms - roughly 4.6 million - employed others on a contract basis.
We also found that roughly 180,000 new solopreneur businesses were started in 2013 that hired the equivalent of at least 1 employee through contract hiring. None of these firms are included in government statistics on new business formation.
If they were included, the data on small business formation would look quite different.
For example, Census data shows there were about 405,000 new employer businesses (businesses with at least 1 traditional employee) started in 2011. This was 2nd lowest level of new business formation in several decades (2010 was slightly lower).
But if add in our 2011 estimate of 150,000 new solopreneurs that hired the equivalent of at least 1 employee via contract hiring, 2011 becomes one the best years in decades in terms of new business formation.
2. More Americans are becoming micropreneurs.
While not reflected by the official statistics, it's clear the number of U.S. micropreneurs is growing. There are simply too many people participating in online commerce sites like Etsy, Airbnb, Elance, oDesk, Uber for this not to be true.
Elance alone, for example, is reporting it's creating more than 50,000 new U.S. freelance jobs per month.
Also, the number of people in our interviews reporting they have side gigs of some sort has dramatically increased over the past few years.
There's a lack of data on micropreneurship and side gigs. Because of this, we're uncertain how much of an impact it's having on overall small business formation and entrepreneurship. But we suspect the impact is consequential.
We're planning on collecting much more information on side gigs and micropreneurship as part of this year's State of Independence study. We'll report back as the results come in over the next couple of months.
3. More of America's startup energy is going to non-profits.
As reported by the NY Times, according to statistics compiled by the Urban Institute:
From 2001 to 2011, the number of nonprofits in the United States grew 25 percent while the number of for-profit businesses rose by half of 1 percent, according to the most recent figures compiled by the Urban Institute.
This growth will likely continue due to the interests of both millennials and aging baby boomers.
New non-profits are not counted as new business starts in government statistics or studies on business formation. Nor are the roughly 1.6 million small non-profits included in the overall small business numbers.
So in summary, we believe a combination of social, economic and technology shifts are leading to new and varied forms of small business and entrepreneurship - especially in the areas of peer-to-peer commerce, micropreneurship and solopreneurship.
We also believe our methods for identifying, counting and studying small businesses and micropreneurship have not kept up with these changes - especially the growing use contingent workers instead of traditional employees.
Lots more work needs to be done to better understand what's going on in the small business economy.
But to borrow from another 1980s quote, we think it's still morning in America for small businesses.