Small Business Labs

The Important Role Small Businesses and Independent Workers Play in Corporate Ecosystems

McKinsey's Ecosystem 2.0: Climbing to the next level summarizes ecosystem 2.0 as:

In the emerging world of Ecosystem 2.0, data are the holy grail, the breakdown of sector borders is a given, and successful players try to lock in control points to expand horizontally and vertically across the grid.

The article chart below (click to enlarge), which shows the 7 largest companies in the world by market capitalization, really jumped out at us. 

The reason is small businesses and independent workers are important business partners for all 6 ecosystem companies.  They are also important end customers for these firms.

The ecosystem roles small businesses and independent workers play varies across the 6 companies.   

Examples include using their marketplaces to sell their products and services (Amazon and Alibaba marketplaces; Apple and Google's App stores), acting as value added resellers (Microsoft and Apple) and providing value added services (marketing help for those using Facebook and Alphabet's ad and marketing services). 

And in most cases, SMBs and independent workers are integrated into the ecosystems of these companies in multiple ways.  

There's also a large and growing number of other ecosystem companies that are reliant of SMBs and independent worker business partners.  This includes well known marketplace firms like Uber, Etsy and Upwork as well as firms like Schwab, who has thousands of small and solopreneur wealth managers as part of their ecosystem.  

In fact, there are ecosystem companies in almost every industry and most have SMBs and independent workers as important ecosystem partners.  

The rise of ecosystem companies is one of the drivers behind the shift to barbell industry structures.  

These industry structures consist of a relatively few giant corporations on one end, a narrow middle consisting of a shrinking number of mid-sized firms, and a large and growing number of small, micro and one person (solopreneur) firms on the other end.

See our Industry Structure section for more on this topic.  

Business Applications Continue to Surge

There were 1.15 million applications to get a business tax ID (EIN) in Q4, 2020.  This is an impressive 27% increase compared with Q4 of 2019.

As the U.S. Census chart below shows, business applications fell from Q3 by 28%.  But Q3 of 2020 was a blow quarter by any measure.  So despite the quarter over quarter decline, the Q4 numbers still show very strong growth by historical standards.

When we reported on the Q3 numbers last November, we said:

It's too early to know if this surge is a one-time event, or it signals a substantial uptick in small/solopreneur business formation going forward.  

Two quarters is still not enough to declare a long term surge in small/solopreneur business formation.  But it's enough to say we're likely going to see a substantial near-term increase in small business formation over the next 2 years.

See our post the Q3 business formation numbers for more detail on the data.  

Poshmark and the Rise of Social Selling

Poshmark is a social e-commerce platform where people buy and sell secondhand goods, mostly used clothes.  It went public last week and closed its first trading day worth $3 billion.  

In the Barron's article Poshmark CEO Sees Huge Market for Used Goods. Investors Agree the firm's CEO described the trends driving their growth and opportunity.  Key quote:

In a Zoom interview on Thursday with Barron’s from his office in Redwood City, Calif., Poshmark CEO Chandra said the company is riding three trends: the acceleration of e-commerce; consumers embracing social selling; and the growing market for second-hand goods. He sees a huge opportunity, and one the company is only just beginning to tap.

While we track all three trends, consumers embracing social selling is a powerful trend that we regularly see in our research.  

Social selling is defined a variety of ways, but at a high level we like LinkedIn's definition:

"Social selling is about leveraging your social network to find the right prospects, build trusted relationships, and ultimately, achieve your sales goals."

Social selling isn't new. 

The traditional direct selling industry (also known as multi-level marketing) has been around at least since the 1940's, with well known brands such as Avon, Tupperware and Mary Kay.  

The direct selling industry is also large, with about 6.8 million direct sellers serving about 37 million customers.  

But the growth of social media has made it easier and cheaper for consumers to leverage their networks to sell things.  This has expanded the interest in social selling.

The chart below (click to enlarge) is from the MBO Partners State of Independence study series.  It shows the percent of independent workers who said social media was their top source of customers (orange) and one of their top 3 sources (blue).

As the data shows, the use of social media by independent workers (self-employed, freelancers, independent contractors, etc.) to find customers has substantially increased since 2014. 

Especially interesting is the percent of independent workers reporting social is their top source of customers has gone from effectively zero in 2014 (it was .3%) to 10% in 2020.  

Social media is just one part of social selling - there are obviously other ways to leverage a network in the sales process.  

But as this data shows, social media has become an important customer acquisition tool for a growing number of independent workers.  We expect this growth to continue.

What is Good Information Hygiene?

Edelman released their 2021 Trust Barometer, which is an annual global study on the level of trust citizens have in institutions.

The Trust Barometer focuses on trust in governments, corporations, NGOs and the media and Edelman has conducted this study for two decades.

Not surprisingly, the past year was not a good one for institutional trust.  Key quote from Edelman:

After a year of unprecedented disaster and turbulence – the Covid-19 pandemic and economic crisis, the global outcry over systemic racism and political instability – the 2021 Edelman Trust Barometer reveals an epidemic of misinformation and widespread mistrust of societal institutions and leaders around the world.

The Trust Barometer has lots of good information and is well worth reading.

But we were particularly struck by Edelman's concept of "information hygiene" in this year's report.  

According to Edelman, "good information hygiene means having regular engagement with news, engagement with differing points of view, verifying that information and not amplifying or spreading misinformation."

They measure information hygiene across 4 dimensions:

1. Regular engagement with news: Do they stay informed?
2. Engagement with differing points of view: Do they avoid information echo chambers?
3. Information verification: Do they avoid assuming something is true simply because it supports their point of view?
4. Avoids spreading misinformation: Do they check information veracity before forwarding content to others?

Unfortunately, as their chart below (click to enlarge) shows, only 26% of Americans practice good information hygiene.

We constantly run into examples of bad information hygiene in our work. 

It's stunning how often we're presented with information and data that are obviously wrong -  and easily proven wrong with minimal fact checking.  

The culprit is is almost always bad information hygiene, which often manifests itself in the form of confirmation bias.  

Bad information hygiene is obviously a huge societal problem and there are no easy fixes. 

Regular readers know we somewhat regularly write about biases and how we try to overcome them in our work.  A big part of this is practicing good information hygiene, which we will continue to do.

Side Hustle Stack - A Directory of Gig Platforms and Marketplaces

Side Hustle Stack describes itself as:

"... a resource for finding various platforms to earn income—ranging from side hustles to building a full-time standalone business. With COVID-19, many people in our communities are looking for ways to supplement their income, and we wanted to create a resource for those looking for work."

The site currently covers about 200 different platforms and marketplaces and the chart below (click to enlarge), which from the Side Hustle Slack homepage, shows the categories they cover.  

Since we follow this space, we do our best to keep track of new gig work marketplaces.  But honestly, we haven't heard of most of the gig work marketplaces listed on this site.  

That's because there are now literally thousands of such sites, with more being added all the time. And almost all of the new marketplaces target a specific vertical market of niche.

These sites are part of the rapidly growing set of infrastructure and support services that make it easier and cheaper to start and operate a full or part-time microbusiness.  

Yet Again, Flying Cars are Predicted to be Just Around the Corner

Both the New York Times and the BBC have recent articles claiming that flying cars, in the form of flying taxis, will soon be common.  And it could be true this time.

The reason we say "this time" is people have been predicting flying cars will soon be in the air for over a century.  So far, they've been wrong.

Both Ford Motor Company and the Curtis Aircraft Company built flying car prototypes as early as 1915. 

The picture below is from a 1917 newspaper article and shows the Curtis prototype, which, of course, never went into production. It's also unclear whether or not it ever got off the ground.  

And in 1955 the Smithsonian Magazine predicted that by 2000 atomic powered flying cars would be common.  Their flying car picture, which doesn't looks very aerodynamic, is below.

         

More recently, the concept of the flying car has gained traction with many predictions they would soon be ferrying passengers around and avoiding crowded city streets. 

The picture below is from Uber's Elevate air taxi effort and according to Uber in 2018, their air taxi services would be in trials in multiple cities by 2020. 

In case you wondering, there are no trials underway and Uber sold its air taxi group last year.

But despite 100 or so years of the flying car predictions not coming true, they likely will over the next decade.  And as Uber and others have predicted, they will likely come in the form of flying taxis.

BBC's The flying car is here - and it could change the world claims, well, that flying cars already exist. Key quote from the BBC article:

In fact, flying cars are real – and they could shape how we commute, work and live in the coming decades. Advances in battery energy density, materials science and computer simulation have spurred the development of a range of personal flying vehicles (and the navigation systems that will allow them to run), from electric gliders to fixed-wing craft and quadcopter drones.

They are correct, flying cars are real - if prototypes and very limited production models count.  

But we still have a ways to go before we get to flying taxis being common.

Air taxi demand and economics are yet to be proven, air traffic control is still an issue and so are a large number of safety issues.  It's also not clear when regulators will allow a bunch of air taxies overhead in highly populated areas.  

However the technology has reached the point where flying taxis are likely going to happen over the next decade, and maybe even in the next 3-5 years.  

And since we've been waiting over 100 years, that's pretty soon.  

Ten 2021 Future of Work Predictions from MBO Partners

Last week MBO Partners released their annual future of work predictions for the coming year.  Their forecast themes for 2021 are:

Ten: Dip & Climb  
Nine: Happiness & Health  
Eight: Gen Z Arrives  
Seven: It’s All About Control  
Six: Exports Not Imports  
Five: Make It A Trillion
Four: Side Hustle Nation  
Three: Virtual Just in Time Orgs  
Two: Radical Remote Work 
One: Gunning for Growth  

One of the most interesting from our perspective is "Virtual Just in Time Orgs". MBO Partners describes this as:

Before, to build a larger business, an office, a staff and a payroll was needed. With the advent of new work platforms that enable real-time teaming between independents, we’re predicting a rise in the virtual, just-in-time organization – where talented individuals come together to deliver work and then disband until the next project arrangement. They maintain more control and flexibility, lower margins and raise efficiencies and satisfy their client’s needs for great results. With teaming on the rise (20% did so in 2020), we think that it’s only a matter of time before virtual reality is surpassed by virtual corporations.

Virtual corporations and related new forms of organizational structures have long been forecast to replace traditional corporate structures.  

One of the most popular futurist forecasts in the late 1990s was that large corporations would soon disappear and be replaced by virtual corporations made up of lots of independent workers.  

Obviously, this didn't happen - or at least hasn't happened yet.  In fact, large corporations have gotten much larger since the 1990s.  

But there clearly is a strong trend towards virtual microbusiness formation where independent workers, through teaming, outsourcing and the use of nonemployee labor are creating virtual organizations with the reach and capabilities of larger traditional businesses.

We'll have more on this trend in the near future.

MBO Partners is an Emergent Research client.

Key Findings from 10 Years of Studying the Gig Economy: The Rise of Microbusiness Exporters

Despite trade wars, tariffs, and the erection of other barriers to cross-border commerce, the past decade has seen a substantial increase in the number of U.S. microbusinesses and freelancers who export goods and services.

As the chart below (click to enlarge) from the MBO Partners State of Independence study series shows, the share of independent workers (freelancers, independent contractors and other microbusinesses) providing goods and services to customers outside the U.S. more than doubled since 2011.

The increase in exports is being driven by several factors:

• Online marketplaces have made it much easier to find and service customers outside of the U.S. They also simplify and facilitate transactions and payments.
• Collaboration software has reached the level where communicating with remote customers is easy and efficient. This has greatly increased the ability of service providers to serve customers outside of the U.S. 
• Improvements in outsourced logistics services have reduced the costs and greatly simplified the process of delivering physical products to pretty much any global destination.
• Global markets are enormous, with 95% of the world's population and 84% of the world's economic activity taking place outside of the U.S.

Most U.S. independent workers and microbusinesses who sell to customers outside of the U.S. start out as "accidental exporters".  This happens when a customer outside of the U.S. finds and buys from a U.S. based independent worker or microbusiness.

Often these first exports are done via online marketplaces like Amazon, Etsy, eBay or Upwork. 

Once exporting has occurred, it tends to lead to more exports. For example, according to eBay's 2020 United States Small Online Business Report:

"... 96 percent of small businesses on eBay in the United States export internationally, sending goods to an average of 17 foreign countries. Additionally, nearly 60 percent of eBay entrepreneurs ship goods to customers across four or more continents."

Not surprisingly, independent workers and microbusinesses who sell goods are much more likely to be exporters and those who sold services.  Almost half (48%) of those producing goods reported being exporters in 2020 compared to 16% of services firms.

Despite attempts to rein in or reduce global trade, the rise of microbusiness exports will continue.  The drivers and market opportunities behind this trend are simply too powerful for it not to continue to grow.

Happy Holidays!

We'll be back next week.

Key Findings from 10 Years of Studying the Gig Economy: Freelancers Happier and Healthier

One of the clearest findings of the decade-long MBO Partners State of Independence study is full-time Independent workers (freelancers, independent contractors, the self-employed) consistently report that they believe they're happier and healthier because they are independent workers.

In 2020, 83 percent of full-time independents said they are "happier working on my own," and 71 percent said that "working on my own is better for my health."

These results are not surprising.

Numerous academic studies show that having work autonomy and control leads to better mental and physical health and higher levels of happiness.

And most full-time independent workers report having high levels of work autonomy and control.

One of our favorite studies on this topic - This Job Is (Literally) Killing Me: A Moderated-Mediated Model Linking Work Characteristics to Mortality – found that mental health and even mortality strongly correlate with the amount of work autonomy and control.

In other words, low levels of work control and autonomy not only makes you less likely to be happy; it also increases your risk of dying.

Dan Pink's book Drive also points out that autonomy is one of the three keys to intrinsic motivation. 

According to the book (which is based on extensive research), when people are allowed to choose what they work on, when they work on it, how they accomplish it, and who they work with, they're more motivated and perform much better. 

And those who are motivated and perform well at their work tend to be happier than those who are unmotivated or perform poorly.

The State of Independence study series has also found autonomy, control and flexibility are linked to work satisfaction.   Independent workers who report having these work attributes report much higher work satisfaction than those who don't. 

We've often pointed out that work/life flexibility, control, and autonomy are key reasons people become and like being independent workers.

The science of happiness (yes, there is such a science) provides evidence that these are good reasons.

Key Findings from 10 Years of Studying the Gig Economy

Last week, MBO Partners released its 10th annual report in the MBO Partners State of Independence research series. Emergent Research (that's us) worked with MBO Partners on this ongoing study across all 10 years.

The research was based on surveys of over 23,000 independent workers, gig workers, and micro-business owners and was augmented by 1,500 in-person interviews throughout the decade. 

Over the next couple of weeks, we'll be highlighting some of the key findings and insights from this research. 

And we're starting with one of the most interesting and surprising findings: 

Most full-time independent workers now consider independent work to be more secure than traditional jobs.

As the study chart below shows, the percent of full-time independent workers reporting that independent work is more secure than a traditional job has grown from a minority share of 32% to a solid majority of 56% over the past decade (2011-2020).

This is interesting both from a sentiment perspective as well as the magnitude of growth. Its' also interesting the growth was relatively steady across the study timeframe.

When we ask in interviews why independents feel more secure, we hear three common themes:

1. Because they control their work and business, they feel more secure than being at the mercy of an employer and a boss. 

2. They feel that having multiple clients and diversified income streams is more secure than relying on a single income source.

3. Due to layoffs, company failures, changes in corporate directions, and a broader lack of corporate loyalty to their employees, they report that traditional jobs are no longer as secure as they once were. This makes independent work feel more secure on a relative basis.

The pandemic has amplified all three themes, and the third in particular.

Even though independent workers have been hit hard economically by COVID-19, most believe they are better off than those who have lost their traditional jobs and their entire income source.  

There are several other reasons why independents feel more secure.

Over the ten years of this study, there's been a growing array of products and services that make it easier to be a successful independent worker. These include low-cost, Internet-based tools, services, and online marketplaces for everything from billing and project management to marketing and sales. 

The ACA (Obamacare) was rolled out early in the study series, making it much easier for independents to get health insurance. Health insurance is often considered the most important job benefit, and prior to the ACA the lack of affordable health insurance options for independent workers was a major problem.  

Independent work is also viewed much more positively than it was a decade ago. Because of this, consumers and businesses are more open to hiring independent workers, making it easier to find and retain customers than a decade ago. 

One of the biggest reasons people don't pursue independent work is that they consider it too risky - and much riskier than a traditional job. And while most non-independents will continue to see it that way (we'll have more on this topic in the near future), more people now realize that independent work can be as secure, or even more secure, than having a traditional job.

Because of this shift, more people will likely choose to become independent workers in the coming years.

The Stunning Financial Success of Gig Economy Marketplaces

Last week Airbnb and DoorDash went public with breath taking valuations.  Airbnb closed Friday with a market capitalization of $83 billion and DoorDash's came in at $55 billion.

As the chart below shows, they aren't alone.  Other gig economy online marketplaces have also achieved huge financial success.

To put these numbers in perspective, Airbnb is worth more than Marriott ($42 billion) and Hilton ($29 billion) combined. 

Other notable firms to compare with include the global chemicals giant Dupont ($47 billion), the large financial institution Capital One ($41 billion) and the food and cereal giant General Mill ($36 billion).

Interestingly enough, the much maligned Uber ($92 billion) tops the list.  While their core business of rides has been hit hard by the pandemic, their food delivery business has benefitted. 

As the Financial Times article Airbnb and DoorDash IPOs leave gig economy issues unresolved points out, most of these firms are still not profitable.  Key quote on the combined losses of Airbnb, DoorDash, Uber and Lyft: 

But that has not translated into profits. Even the flattering financial metric these companies prefer to be judged by — adjusted earnings before interest, taxes, depreciation and amortisation — showed all four to be lossmaking in the 12 months leading up to their listings, with some $3.3bn in red ink between them. So are their business models half-baked, or just half-evolved?

And the Wall Street Journal article Sizzling Tech IPO Market Leaves Investors Befuddled also points that even the companies themselves are stunned and concerned about their valuations.

Stock prices and market caps are subject to rapid change (to say the least), and as the financial ads say, past performance is not an indicator of future results.

But the rapid rise (most of the firms on the chart above are less than 10 years old) and financial success of online gig marketplaces show how big and important the gig economy and independent work have become.

The Pandemic Accelerated Rise of Ghost (Cloud) Kitchens

The global marketing agency Wunderman Thompson's article Ghost Kitchens covers the growing popularity of delivery-first dining and the related growth of ghost kitchens, which are also called cloud kitchens.

Ghost restaurants are delivery only, online restaurants that skip storefronts and deliver food straight to the customer. 

And one reason we're covering this topic is yesterday the food delivery firm Door Dash went public in spectacular fashion, ending the day worth a stunning $60 billion.

The food delivery business has been growing for about a decade and the rise of ghost kitchens was already a trend prior to the pandemic.  But COVID-19 has massively accelerated this trend and greatly expanded the market.

And according to Euromonitor, the growth trend will continue. They're predicting food delivery will be $1 trillion global business by 2030.  Key quote from a Restaurant Business article on the forecast:

The firm predicts that by 2030, food delivery could account for up to a third of consumers’ $3 trillion food spend globally. That includes roughly 50% of drive-thru business, or $75 billion, and 50% of takeout, or $250 billion. It will also take share from frozen meals (35%),  packaged cooking ingredients (30%), dine-in (25%) and packaged snacks (15%).

The Wunderman Thompson article does a nice job of covering the trend, so we'll not bother rehashing their article.

But they end with a very positive view of the long term outlook for ghost kitchens:

Global head of food and beverage research Michael Schaefer predicts that ghost kitchens will define the restaurant industry over the coming years in the same way that third-party delivery services have marked the industry over the past 10 years.

A Third Way to Classify Workers Gains Momentum

In the recent election, California voters overwhelmingly passed Proposition 22.

The passage of Prop 22 means that firms like Uber and Lyft can legally classify their drivers as contractors instead of employees.  And it has also effectively created a new, 3rd way to classify workers.

The reason is Prop 22 requires firms like Uber and Lyft to provide their drivers with benefits not normally given to independent contractors. 

Other countries have long had third ways to classify workers.

Most countries refer to them as "dependent contractors" and they get some, but not all, of the benefits and legal protections associated with being a traditional employee.

But the U.S. has only had two classifications (with some minor exceptions).  By law you are either an employee or a nonemployee.  And nonemployees don't receive many of the benefits and labor protections that those classified as employees get. 

To comply with Prop 22 - which only applies to "app-based drivers" retained by "network companies" - hiring organizations (such as Uber and Lyft) must provide a set of benefits normally not provided to contractors or gig workers.

J.D. Supra's article Reconciling the Gig Economy in California: Changes to Worker Classification Laws Since AB 5 nicely covers these. Key quote:

Proposition 22 provides several legal employment benefits and protections that are required in California for workers classified as employees. For example, app-based drivers now have a guaranteed "net earnings floor" comprised of 120 percent of the applicable minimum wage of the worker's "engaged time," guaranteed tips and gratuities, and a guaranteed quarterly healthcare subsidy. Proposition 22 also requires the applicable companies to provide occupational accident insurance to cover at least $1 million in medical expenses and lost income resulting from injuries suffered while a driver is online, and disability payments of 66 percent of a driver's average weekly earnings before the injuries suffered. Proposition 22 further requires the applicable company to provide accidental death insurance for the benefit of a driver's spouse, children, or other dependents when the driver dies while using the app.

Under current worker classification laws, companies effectively cannot offer nonemployees benefits like those described above. The reason is providing these benefits would be seen by regulators and the courts as evidence that a nonemployee should be classified as an employee. 

So offering these types of benefits would lead to companies being forced to classify the workers as employees and would also expose them to very expensive legal actions.

But under Prop 22, they have to be offered, which is why Prop 22 has effectively created a 3rd way to classify workers - at least in California for a relatively small subset of gig workers (rideshare and delivery drivers).

But we think other states will adopt laws that create various forms of 3rd ways to classify workers. 

The reasons are our current classification laws clearly aren't working, the gig economy continues to expand, and attempts to modify existing laws - like California's AB5 - have been a mess.  

We've not been in favor of a 3rd way to classify workers. 

Our view has been it would lead to greater confusion and even more lawsuits and legal issues than we currently have. 

We're also concerned that a 3rd way to classify workers will lead to more workers losing out on the benefits and protections that come with traditional employment status.

But AB5 has shown that trying to fit gig work into our current laws simply doesn't work.  And because of that, we now think a 3rd way to classify workers is the best way to move forward.

COVID-19 Accelerating the Trend Towards Vertical and Indoor Farming

The interest and investments in vertical and indoor farms has been growing steadily for several  years.

This is due to the advantages of indoor farming. By taking plants out of their outdoor environments and moving them inside to a controlled environment you can eliminate the problems associated with drought, pests, weeds and extreme weather.

You can also locate farms closer to urban areas, which means fresher produce for consumers and lower transportation costs. 

But COVID-19 has added another advantage.

Urban farms provide greater levels of food security because they don't rely on far away crop production and related supply chains.

MIT Technology Review's Inside Singapore's Huge Bet on Vertical Farming covers the island nation's decision to invest heavily in indoor vertical farming.  A key reason is control over food production and its supply chain.

One of the leaders in vertical farming is Berlin-based Infarm.  They recently raised $170 million in funding and signed a major agreement to supply produce in Japan. 

Another vertical farming firm, Plenty, recently showed a 2 acre vertical farm could grow as much produce as a 720 acre flat farm, and match the costs of a flat farm.

The main reason they can be cost competitive with traditional farms is vertical farms use much less water and pesticides, have higher crop yields thanks to the controlled environment and have reduced supply chain costs.  Vertical and indoor farming is also more environmentally sound.

And with COVID-19 showing that food supply chains can be unexpectedly disrupted, food security programs like Singapore's will lead to greater investment and use of vertical farming.

Because of these reasons, expect vertical and indoor farming to become increasingly common.  

Marie Claire and the Mainstreaming of Freelancing

The magazine Marie Claire was first published in 1937 and describes itself as "the site that women turn to for information on fashion, style, hairstyles, beauty, women's issues, careers, health, and relationships."  

The magazine has long targeted working women, so it's not surprising they are covering freelancing.

But what's a bit surprising is the extent they are covering it. 

Marie Claire is currently featuring a multi-article Guide to Going Freelance as its top content offering right now.  

The guide starts with The Grey Area Economy, which covers the growing role freelancers are playing in the economy and some of the issues they face.  Think of it as an overview of freelancing.

The guide continues with three other articles, each of which covers a specific freelancer-related topic.  These are:

• How to Afford the Freelance Life
• Maximize Your Productivity as a Freelancer
• Freelancing With Benefits? You Bet.

All the articles are well done and contain useful information, especially for those thinking about becoming a freelancer or new to freelancing.

But what makes this interesting from a trends perspective is this coverage is a clear sign of how mainstream freelancing has become.  It's now a major topic in general interest publications.

It wasn't that long ago when this was not the case.  

The Surge in New Small Business Applications

Applications to get a tax ID as part of starting a business jumped a dramatic 77% in Q3 from the prior quarter. 

This was the largest increase ever in business applications - and there's nothing even close.

As the U.S. Census chart below shows (click to enlarge), both solopreneur business applications (referred to as "Applications Other than High-Propensity") and High-Propensity Business Applications (those indicating they are planning on hiring employees) significantly increased in number. 

An interesting aspect of this data is the difference between the current surge compared to the slight uptick in applications during the last recession (2008-2009).  

There are several likely reasons for this surge.  

First, it's much easier and cheaper to start a small/solopreneur business than it used to be.  This is especially true for gig economy businesses. 

Another reason is that the CARES Act stimulus started running out in late Q2, which meant the 30 million Americans relying on the added benefits needed to find alternative income sources.

A third reason, which comes from our interviews, is that many people see starting a small/solopreneur business as a better post-COIVD option than returning to a traditional job.  

The business applications data comes from IRS Employment Identification Numbers (EIN) applications.  EIN's are the tax id number that identifies a business.  Not all small/solopreneur businesses have EINs. Some, and especially independent workers working part-time, use their social security numbers instead.  But almost all employer businesses have EINs.  

An important point to note is that not all EIN applications result in a small business being started.  Census data shows around 15% of EIN applications lead to a small/solopreneur business being started over the following  2 years.

Our research on small business formation shows about 9% of those who say in surveys they plan to start a small/solopreneur business over the next 2-3 years in our surveys end up doing so. 

We've also found that people who have applied for an EIN and opened a business bank account are much more likely to follow through and start a business, with about 18% of those doing so.  So our data is pretty consistent with the Census.

It's too early to know if this surge is a one-time event, or whether it signals a substantial uptick in small/solopreneur business formation going forward.  

We are forecasting an increase in the number of small and solopreneur businesses post-COVID, but nowhere near Q3's 77% increase.

We'll have more on our forecast in the near future.

TechCrunch's 5 Startup Trends for the 2020s

TechCrunch's 5 startup theses that will transform the 2020s looks at 5 broad startup themes that will define the next decade. 

These are:

1.  Wellness: TechCrunch defines wellness more broadly than most.  They say it encompasses building "... humanistic societies with strong social fabrics that enliven, enrich, and build meaning for our lives …". More concrete is their view on the needs of our health system.  Key quote:

Then there’s the health system in general. While America deservedly receives huge criticism for its overpriced and under-insured system, health systems worldwide face incredible pressures to improve efficiency. How do we make care better, more personalized, and more open? How do we reduce costs while ensuring that care is accurate and delivered expeditiously? There is huge work to be done to make health a key component.

To increase wellness for individuals, we need to increase wellness for our societies, building systems that are designed for the humans that inhabit them. Flexibility with security, engagement with individuality, expression with support. Our existing systems are already antiquated — and we haven’t come up with anything better.

2.  Climate: Again, they take a broad approach and include everything from infrastructure to food to the need for greater resiliency due to climate change.  

3.  Data Society: The key quote sums up this one:

Remember when data was the new oil? Well, we now have so much data that it is all effectively worthless (supply and demand always seem to show up, don’t they?) While enterprise data infrastructure has improved at least the management of these databases, it’s still amazing how little data enriches our decisions, offers new avenues for analysis, and quite frankly, just makes our lives better on a day-to-day basis.

We find this interesting because we've worked on multiple data analytics and data driven AI projects with our clients, some of which are leading edge users of AI technologies. 

And because of this experience, we agree much more needs to be done to make the analysis of big data truly useful.  

4. Creativity:  We consider this the most interesting of the five.  Key quote from the article:

Creativity has never been more important, nor frankly less valued … How do we empower more creative arts and ensure that artists (very broadly conceived) have the income, time, and support they need to contribute original art to our global discourse? 

We would add increasing creativity in all aspects of business will also be key to improving both business performance and society over the next decade.

5. Fundamentals:  This is about improving our basic R&D capabilities.  Key quote:

We need a massive infusion of new ideas around how to build the best engine for fundamental research and discovery.

We follow startup trends because they've proven to be useful signals on the future of technology.  

We've quoted more liberally from the article than we usually do because it's an Extra Crunch article and behind a paywall.  We're happy Extra Crunch subscribers and think those interested in startups and tech trends will find it well worth the $99 annual price tag.

We're also hoping by plugging their service TechCrunch won't be mad at us for the extensive reprinting of their article.

The Broader Impacts of Prop 22 Passing in a Landslide

Proposition 22, a California ballot measure calling for the exemption of rideshare and delivery drivers being classified as employees, passed by what could be called a landslide - 58% for vs. 41% against. 

Prop 22 passing is a major win for Uber, Lyft, DoorDash and other app-based rideshare and delivery firms. 

It means they won't have to reclassify their drivers as employees, which would have been required had the measure failed.

But as CNBC's What Uber, Lyft Prop 22 win could mean for the future of all freelance work points out, Prop 22 passing has broader impacts.  Key quote:

Independent contractors across the country might breathe a sigh of relief in that California voters sent a message to the state’s legislators that AB 5, the law which was enacted to classify freelancers as employees, is widely unpopular. Other states, including New Jersey, Massachusetts, New York and Illinois, have been among those considering crafting legislation to force companies to deem freelancers as employees. Now those states can more clearly see the risks, experts say.

Worker classification is another issue that is handled very differently by blue and red states.  Blue states tend to have stricter laws requiring workers classified as traditional employees than red states.  

And since California is one of the bluest of blue states, Prop 22 passing by such a large margin will very much be noticed by elected officials of other states - and also at the Federal level. 

Key quote on the broader impact from CNN's Prop 22 passes in California, exempting Uber and Lyft from classifying drivers as employees:

Robert Reich, a public policy professor at UC Berkeley and former Secretary of Labor in the Clinton administration who endorsed a No vote, told CNN Business last week that the outcome of the vote will be "very significant."

 

"Uber and Lyft figure if they win in California they can win political fights in the rest of the states, and probably Congress," said Reich in an e-mail.

 

Prop 22 passing is hardly the end of the political and legal wrangling around the gig economy and freelance worker classification.  To paraphrase Churchill, it's probably not even the beginning of the end of these battles.

 

But perhaps it's the beginning of a process that results in well thought out legislation that clearly defines who is, and is not, and independent contractor.  

 

The articles listed above nicely cover the potential broader impacts of Prop 22 passing, so we won't bother repeating them.  See them for more details.

The Wannabe Digital Nomads

One of the more interesting findings of the MBO Partners 2020 Digital Nomad study is the large number of Americans who aren't currently digital nomads who say they want to be.

Key quote from Bloomberg's When You Can’t Work From Barcelona, Boulder Might Do, which covers the study:

"... there is a massive and growing reserve army of digital-nomad wannabes — people who tell the survey-takers they’re planning on going nomadic in the next two or three years, or at least thinking about it."

The chart below, also from the Bloomberg article, shows that 19 million Americans say they plan to become digital while another 45 million say they are considering it.

As the article points out, we call these wannabes "armchair digital nomads" because most will not follow through and become digital nomads.  

Instead, they will follow digital nomads on social media and treat the trend almost as a spectator sport.  But the large number of wannabes shows there is a lot of interest in digital nomadism.

In our work we've learned survey questions asking aspiration questions or questions on hot topics often result in a large number of false positives.  And the huge number of people saying they are going to become digital nomads is a good example.

Another example is asking people if they're going to start a business.  We've found only about 9% of those who say in surveys they will be starting a new small business over the next 2-3 actually do so.

We don't yet know how many wannabe digital nomads will follow through and become one - there isn't enough historical data to make an estimate.  But if even a small percentage of the wannabes follow through and become digital nomads,  it will be enough to keep the trend growing.

Emergent Research worked with MBO Partners on this study.

Academic Studies Show Gig Work Increases Entrepreneurship and Acts as a Safety Net

Two recent academic studies illustrate several of the benefits of the gig economy. 

The University of Chicago Booth Review article Does the gig economy promote entrepreneurship? covers a study showing that gig economy employment helps people make the leap to entrepreneurship and start their own businesses. 

Key quote:

Gig work may encourage the formation of new businesses by giving potential entrepreneurs a way to supplement their income during the lean times that many new ventures experience, the researchers explain. And if these entrepreneurs start a business and it fails, gig work gives them something to fall back on.

MIT Management's How the gig economy can reduce unemployment and debt reports on a study showing how the gig economy can act as a safety net.  Key qutoe:

A new working paper by John Nickerson, a visiting professor at MIT Sloan, presents a compelling picture of how the gig economy may alleviate situations like this, dampening demand for unemployment insurance while reducing both credit card debt and delinquency rates. 

These advantages of the low friction, highly flexible work the gig economy provides are something we've long covered.   

The gig economy gets a lot of criticism.  But it's clear from a growing list of studies that gig work is beneficial for a lot of people.

The U.S. Has 1.7 Million VanLifers

VanLifers are people who travel, work and live on the road in vans, RVs, and other vehicles. 

And according to the recently released MBO Partners research study on digital nomads, there are about 1.7 million VanLifers roaming the country. Emergent Research (that's us) worked with MBO Partners on this study. 

VanLife, which is a subset of the broader digital nomad trend, has been popularized in part by millions of #VanLife posts on Instagram, Pinterest, Facebook, and Twitter.  

These posts tend to show pictures of young, adventurous, photogenic millennials - often with adorable dogs - enjoying the great outdoors in beautiful places.

For example, the picture below is from the blog of the #VanLife Hearnes family and shows them having fun while touring Utah with their dogs.

You can also find all sorts of pictures on social media of VanLifers doing yoga on the beach or next to a mountain.  

But the VanLife movement is much broader with all age groups participating, including aging baby boomers living, working, and traveling in RVs. 

Although 2020 was the 3rd year of MBO Partners' ongoing digital nomad study, it was the first year specific survey questions on VanLifers were included.  So there's no historical data to compare the numbers with.

But we're sure they increased substantially this year as COVID-19 has resulted in digital nomads staying closer to home (see last week's post on the study for more details). 

One indicator of the growing interest in VanLife is Van manufacturers have noticed.  

Business Insiders RV makers are rushing to cater to the new 'work from anywhere' crowd as the pandemic continues to force people to rethink their lives covers the surge in demand for RVs and Vans. Key quote:

"Many RV, camper van, and travel trailer makers have started catering their road travel builds to accommodate the rising popularity of digital nomads and "work from anywhere" crowd amid the pandemic."

The VanLife is a trend that has been accelerated and amplified by the pandemic.

We believe post-COVID the shift to work from anywhere and hybrid work models will result in the continued growth in the number of VanLifers over the next few years.

Digital Nomad Numbers Skyrocket Thanks to Work From Anywhere

The number of U.S. digital nomads grew from 7.3 million in 2019 to 10.9 million in 2020, a 49% increase.

This data comes from COVID-19 and the Rise of the Digital Nomad, which is the report on the third year of an ongoing research series on digital nomads conducted by MBO Partners.

Emergent Research (that's us) works with MBO Partners on these studies.

The increase is driven by the unleashing of traditional employees due to the shift to work from anywhere policies caused by the pandemic. 

As the report chart below shows, the number of digital nomads with traditional jobs roughly doubled from 2019 to 2020.

Over the same timeframe, the number of independent workers reporting they are digital nomads increased by a relatively modest 12%.  

Independent workers had substantially more location freedom than traditional employees prior to the pandemic, so the impact of COVID-19 on where they worked was much less pronounced.

COVID-19 has also changed what it means to be a digital nomad.  Key quote from the report:

International flight and travel restrictions have made it harder to travel abroad, while health and healthcare concerns have also made travel less attractive. Because of this, only 1 out of 4 (24 percent) American digital nomads said they plan to travel internationally over the next year.

Instead, a resounding majority (76 percent) of American digital nomads are exploring the U.S. Most (52 percent) are also reporting they plan on visiting fewer locations but spending more time at each stop, which is consistent with trends in the travel industry as a whole. Relatedly, 41 percent report they are spending less time traveling. And 40 percent report that, while they are traveling, they tend to stay closer to home to be near family and healthcare providers.

Going forward, we expect continued growth in the number of digital nomads.  The shift to remote work and work from anywhere will allow more traditional employees to pursue their passion for travel.  

We also expect digital nomads to return to international travel once the pandemic over.  The interest in travel and experiencing new places and cultures is simply too strong for this not to happen.

We'll have more on digital nomads and the findings from this study in the near future.

3D Printing 2.0

Desktop Metal, a leader in 3D printing with printers than can build metal parts, is going public. 

Supporters of the company claim this is the beginning of a much more successful era for 3D printing, which they're calling 3D printing 2.0.

As the Crunchbase article 3D Printing Investment Going Vertical As Big Exit Looms points out, 3D printing has been around a long time and, so far, has not lived up to its hype.  Key quote:

Transformative technologies often get massively overhyped at the early stage. In the case of 3D printing, the breakout moment was supposed to be 2012, when a new generation of desktop 3D machines hit shelves. Soon, they were to be nearly as commonplace as smartphones.

Needless to say, that futuristic vision didn’t pan out.

But as we pointed out in our 2017 article 3D Printing Moving Past Prototyping to Large Batch Manufacturing, even in 2017 3D printing had become an important vertical market manufacturing technology. 

The reasons supporter of 3D printing claim it's turned the corner and will quickly expand are fairly straight forward.  They say the technology has reached the point where it can effectively compete with traditional large scale manufacturing systems.  And systems like Desktop Metal's that allow the printing of metal parts greatly expands the market.

3D printing is actively used in a lot of industries to manufacture things.  Again, from the Crunchbase article:

From jet engine parts to teeth straighteners to lab-grown chicken nuggets, startups and established manufacturers alike rely on the technology to create new products and add efficiency and customization to production of existing ones.

And everyone is forecasting that 3D printing will continue to grow rapidly.

The phrase "this time it's different" is well known as the phrase most likely to be wrong when used in forecasting.  

But sometimes this time really is different.  And after many false starts, this appears to be true for 3D printing.

Work is Going Hybrid and it Will Have Major Economic and Societal Impacts

CNBC's JPMorgan will have staff cycle between office and remote work in a move that may remake Wall Street covers a plan by the bank to institute a rotational work location model that includes in-person and remote work. 

Key quote:

“We are going to start implementing the model that I believe will be more or less permanent, which is this rotational model,” Pinto told CNBC in a Zoom call from London, where he is based. “Depending on the type of business, you may be working one week a month from home, or two days a week from home, or two weeks a month.”JP Morgan isn't the only company planning on this.

According to a survey by the HR consulting firm Mercer, 73% of the firms surveyed plan to implement a hybrid work environment that includes both in-office and remote work.

And a Gartner study found that 82% of executives surveyed plan on allowing employees to work remotely at least some of the time. 

They are doing this, at least in part, because although most employees don't want to return to the office full-time, most want to return to the office at least some of the time.

Most companies also want employees to show up at the office at least some of the time.  They think it improves cultural, social cohesion, teamwork and innovation.  

So both employees and employers are saying they prefer the hybrid model.  

Axios also covers this topic in their article Remote Work Won't Kill Your Office.  Key quote:

The big picture: Since the onset of pandemic-induced telework, companies have oscillated between can't-wait-to-go-back and work-from-home-forever. Now, it's becoming increasingly clear that the future of work will land somewhere in the middle — a remote/in-person hybrid.

Surveys conducted in the six months since most people started working from home show that less than 10% of Americans actually want to work remotely all the time, according to a new Barclays analysis.

So it looks like the hybrid model is going to be the winner, at least over the next few years.  

If this happens, it will have major economic and societal impacts due to dislocations caused by changing commuter patterns and shifts in where people choose to live.

Urban centers will most likely be impacted the most due to the decreased number of workers commuting to city center offices. They will also see residents leave for cheaper places with more space.  

Suburbs will benefit due to existing suburbanites spending more time and money in their communities. 

Suburbs will also see an increase in new residents, due to people leaving the cities in search of lower costs and more space. But many of these workers will still need to be in commuting distance since a hybrid model means going to the office on a somewhat regular basis.

Smaller cities will also likely benefit because a large number of people will likely have enough flexibility to move even farther away from the office. 

The chart below, from LinkedIn's article So long big city! Handling a pandemic often means calling the movers shows these shifts are already happening.  

We're not at all suggesting the death of urban centers.  Many will still find them attractive places to live and a lot of people will continue to work in them.

But the remote work shift is going to have major social and economic impacts and we're still a long way from understanding what these will be.