Small Business Labs

Led by Retail, The Surge in New Business Applications Continues

The new business application surge, which started last summer, continued in April, with about 488,000 applications submitted.  

This data comes from the U.S. Census' Business Formation Statistics and based on IRS Employment Identification Numbers (EIN) applications.  

Most of the applications are what the Census calls "applications other than high propensity" (grey in the chart; click to enlarge).  These are applications from businesses that are unlikely to have employees, such as freelancers, independent contractors and other types of solopreneurs.

The industry with the highest number of applications in April was retail trade, with 96,000 applications.  This is a bit more than twice the rate of retail trade business applications prior to COVID-19.

In addition to the surge, both charts also illustrates the longer-term shift away from shift employer business applications (high propensity applications, in yellow) and towards applications from solopreneurs.

Back in 2003-2007 80% of new retail trade business applications came from firms planning on hiring traditional employees.  In April, only 33% did.  

This same shift to solopreneur firm applications is occurring in most industries.  For example, the shift is even more pronounced in professional services than it is in retail.

At this point it's clear the surge in applications is real. 

But more work needs to be done to understand who the new applicants are, what their plans are, and how many will actually form new small businesses.

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.  

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.

Braintrust - a Coop Online Freelance Talent Marketplace

Braintrust is a new entrant in the online talent marketplace space, but with a twist. 

Instead of being owned by investors and founders, Braintrust is a non-profit and the founders say it will be user-controlled by their talent.  

In other words, Braintrust is a coop, which is a business owned and controlled by the freelancers that they serve. 

Braintrust focuses on high-end IT projects and works with an impressive list of large corporations.  According to the company, their clients include Deloitte, Nestle, Netflix, Nike, Four Seasons, and Task Rabbit, NASA, Porsche, PWC, and Pacific Life. 

They also (naturally) have a blockchain and cyber token angle. 

Freelancers using the site will be issued tokens in exchange for working on the site or bringing new talent or clients to the site.  These tokens equate to voting rights on Braintrust's corporate actions and decisions.  This is how power will be distributed to the workers.  

Braintrust argues that by being a coop, their freelancers will earn more and have better control over their work than they would using a traditional for-profit marketplace.  

Establishing a coop online talent marketplace is not a new idea.  In 2014- 2015 the concept of "platform cooperatisim" was widely discussed in sharing economy circles.  

Shareable's 2016 story How Platform Coops Can Beat Death Stars Like Uber to Create a Real Sharing Economy nicely covered the topic.

It pointed out at that time a number of online talent marketplace coops existed.   These included New Zealand's Ensprial, a cooperatively owned and operated freelancer network, and Loconomics, a now-defunct (at least in the U.S.) coop version of Task Rabbit.

And, like Braintrust, the article argued that coops would provide workers with more income and control.  But 4 years later, coops haven't made a dent in the online talent marketplace industry.

But many great ideas and business concepts fail a couple of times before succeeding.  Maybe the same thing will be true with coop online labor platforms.

We hope so. Alternatives are always good, especially ones that are worker-friendly.

For those who want to learn more, Harvard Business School's Future of Work project has an excellent podcast interview with the founders of Braintrust.

MIT Economists on the Impact of COVID-19 on Labor Markets

The Hamilton Project essay The Nature of Work after the COVID Crisis: Too Few Low-Wage Jobs is authored by MIT economists David Autor and Elisabeth Reynolds. 

The essay covers four shifts being accelerated by the COVID-19 pandemic and their impact on labor markets. 

And, according to the authors, all four potentially have significant, negative consequences for low wage workers, economic inequality and overall employment. 

The four are:

1.  Telepresence: The essay points out that the shift to remote and telepresence is " is so self-evident that it might escape notice." But if there is a substantial reduction in the number of people working in offices and/or traveling to meet in offices, there will be much less need for the workers who feed, transport, clothe, entertain, and shelter people when they are not in their homes.

2.  Urban De-Densification: While stressing that "the death of cities have been greatly exaggerated over many decades," changes caused by COVID-19 will likely lead to a reversal in the growth of large urban centers due to people moving to the suburbs as well as smaller towns.  This, too, will result in less need for many workers who support those living in urban areas.

3.  Employment Concentration in Large Firms: Because of their stronger balance sheets and ability to raise capital, large firms tend to do better in economic downturns than smaller firms.  As we've pointed out, this recession is hitting small firms hard and many will likely permanently close this year.  

4.  Automation Forcing: Due to social distancing requirements and labor lock-outs, firms are quickly adopting automation technology (such as delivery drones) to keep their businesses running. This will likely result in leaner staffing in retail stores, restaurants, factories, and other places where companies have invested in labor-saving automation systems.

The authors suggest these four shifts will reduce the demand for low wage work, which will increase income inequality and long-term unemployment while also reducing economic growth.

Not good.

The essay ends on a positive note explaining that policy interventions at the federal, state and local levels could limit the negative impacts. 

NPR's economics show The Indicator has an excellent segment on the essay.  Also, see the essay for specifics on the policies they believe will be needed.

The Economic Impact of Craft Brewing

The Brewers Association recently released their small and craft brewing economic impact report for 2018. 

The study found that the craft brewing industry contributed $79.1 Billion to the U.S. Economy in 2018 and provided directly and indirectly about 550,000 jobs. 

These numbers are based on what are called economic multipliers, which are used to measure both the direct and indirect impact of economic activity.

For example, the employment multiplier for auto factory workers is about 7. This means for every auto factory job gained or lost, 7 other jobs are gained or lost. These occur in suppliers to the plant as well as places where auto workers spend their money. 

As the chart below shows (click to enlarge), the number of actual jobs at breweries has grown quite rapidly, to 77,902 in 2018 from just 24,864 in 2010. 

This means brewing was one of the fastest-growing sources of employment during that time.

We've long used craft brewing as an example of the rise of niche businesses. We even featured the industry in a 2008 research report, The New Artisan Economy, which we did with Intuit.

And the three broad trends we laid out in the New Artisan Economy report as driving the growth of niche businesses continue to do so:

1. Growing numbers of customers are looking for unique, unusual, personalized or locally produced products.  

2. The Internet and online marketing have made it much easier to find or be found by people interested in buying niche products.  

3.  Technology is lowering the costs of serving niche markets and making artisans able to compete with even the largest of firms.  

Small Businesses Worried About Corporate Concentration - and Especially Amazon

The Institute for Local Self-Reliance recently released its 2019 Independent Business Survey. The key finding is small independent businesses see large corporations - and especially Amazon - as their main competitive threat. 

They also feel government policies have not helped. Key quote from their article on the study:

Many public policy decisions in recent years have fueled market concentration and favored their big competitors.

As the study chart below shows (click to enlarge), the survey respondents listed Amazon as their biggest challenge.

Big companies, in general, also came in 2nd and supplier mergers and concentration came in 5th.  So it's clear the respondents consider big firms and industry consolidation a major problem.

But as is shown in the study chart below, they see Amazon as the biggest threat. 91% say Amazon has hurt their business at least a little and over half say it has hurt their business significantly.

It's important to note that retail small businesses, who are in competition with Amazon, are heavily overweighted in the survey sample (it was a non-probability sample).

A sample more reflective of the overall small business sector of the economy would not be as negative on Amazon.

But these numbers are still stunning and show the power and reach of Amazon and its impact on small retailers. 

The Rise of Independent Worker Teams: Fiverr's Studios and Upwork's Agency Experience

Fiverr this week announced a new service offering called "Studios". This service gives freelancers the ability to easily join forces to sell and tackle larger and more complex client assignments than a freelancer could do on their own.

This follows last week's announcement by Upwork of what they are calling the "agency experience". Key quote from their press release:

"Upwork’s newly enhanced agency experience removes the friction that exists with the traditional agency model, making it easier for businesses to find, hire and engage specialized boutique agencies on the platform with just a few clicks."

The boutique agencies Upwork refers to are small service firms, most of which utilize freelancers as part of their project teams. 

Both services illustrate two growing trends:

1. The trend towards independent workers teaming up via online platforms and marketplaces.
2. The trend towards businesses outsourcing work to boutique firms and/or teams of independent workers.

These services also illustrate how the shift to cloud computing is creating new forms, structures and ways of doing business.

The chart below (click to enlarge) is from a 2014 study on the impact of cloud computing we conducted in partnership with Intuit. 

It illustrates how transformative technologies tend to diffuse through the economy and society in 3 broad waves.  

In the first wave, which occurs after a technology is first commercialized, the impacts are mostly efficiency gains. The new technology makes things cheaper, easier and/or faster. 

The second wave often leads to new types of businesses and new ways of doing business. The 3rd wave results in transformations of business and society.

Railroads are a good example of these waves. 

When first commercialized, most rail lines were built alongside existing canals and roads. They increased efficiency by moving goods and people faster and cheaper than canal boats and wagons.

In the second wave, railroads created new ways to connect distributed resources and producers to customers. This created new forms of businesses (distributed factories, new types of logistics businesses, etc.) and new ways of doing business.

And in the 3rd wave, railroads changed society in a variety of ways including opening up the West, helping to create suburbs and creating economic opportunities for rural areas (they also created standardized time zones).

In 2014 we suggested that cloud computing is a transformational technology that was in stage 2 and helping to create new forms and types of businesses. 

One example we used was what we called at the time "hives", which we described as:

Cloud-adapted small businesses will increasingly be made up of individuals who share talent to form a team. These businesses will operate virtually, with employees (many contractors) working in different locations, and staffing levels increasingly flexible - rising and falling to meet project needs.

Cloud computing is clearly not the only trend driving freelancer teaming and the growth of boutique consulting firms and agencies.

But it is a key enabling technology behind the growth of these types of organizations. 

We still think cloud computing is in stage 2 and will drive more change in organizations and how business is done. 

But one could easily argue stage 3 has also started, with the growing impact - good and bad - of cloud enabled social media an example of societal change.

We think it's too early to make this call, but we're not arguing with those who think otherwise.

Podcasting Entering the Mainstream

In case you hadn't heard, podcasting is booming. 

According to The Infinite Dial 2019, an annual survey conducted by Edison Research and Triton Digital, more than half of all adult Americans have listened to one.

And as the report chart below shows (click to enlarge), 32% of all Americans aged 12 and older listened to a podcast in the last month. This equals about 90 million people.

There are a number of drivers of podcasting's growth. These include:

• There's now a diverse array of interesting podcast content.
• Large audio/music firms like Spotify, Pandora and Apple have embraced podcasting.
• So have big media companies like the New York Times, the Wall Street Journal and the Washington Post.
• Smart speakers have made it easier to find and listen to podcasts.
• The use of internet audio in cars has become easier and more widespread.
• Successful business models are emerging.

Most revenue estimates for the podcast industry continue to be small - ranging from $500 - $700 million in 2018. But as the TechCrunch article Y Combinator Bets on the Booming Podcast Industry points out, revenues are expected to rapidly increase. 

Podcasting is interesting to us here at Small Business Labs because it's yet another example of small businesses and even individuals successfully competing with large corporations. 

In fact, many successful podcasts come from solopreneurs and micro-businesses. This is due in part to podcasting's low production and distribution costs.

The other part is creating compelling content, which a lot of solopreneurs and micro-businesses are capable of. This is especially true for podcasts designed to build community or used for content and/or influencer marketing. 

Medium's 10 Big Takeaways from 2019's Infinite Dial Research covers the study in more detail.

Craft Brewers Continued to Gain Share on Global Brewing Giants in 2018

The small and independent Brewers Association released their 2018 Craft Beer Growth Report. Key quote:

In 2018, small and independent brewers collectively produced 25.9 million barrels and realized 4 percent total growth, increasing craft’s overall beer market share by volume to 13.2 percent. Retail dollar value was estimated at $27.6 billion, representing 24.1 percent market share and 7 percent growth over 2017. 

We first started following the craft beer industry in 2006 because we felt the industry was a good example of the growth small, niche markets. 

It's also a good example of a barbell industry structure. These are industries comprised of 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 even solopreneur firms on the other end.

As the chart below shows (click to enlarge), craft brewers have gained significant market share versus the beer industry giants over the past decade. 

And while craft brewer share gains have slowed, the industry continues to thrive. The number of U.S. craft breweries increased from 6,490 in 2017 to 7.346 in 2018.

Share gains have gotten tougher for several reasons. It's simply harder to gain share given how a large a share the craft brewers already have. Big brewers have also been buying craft brewers as well as creating their own craft brands (Blue Moon being a good example).  

As we pointed out a long time ago, the key trends driving the growth of artisan products like craft beer are:

1. Growing numbers of customers are looking for unique, unusual, personalized and/or locally produced products.  

2. The Internet and online marketing has made it much easier to find or be found by people interested in buying niche products.  

3.  Technology is lowering the costs of serving niche markets and making artisans able to compete with even the largest of firms. 

We see no slow down in these trend and believe craft breweries will continue to be able to effectively compete with the global giants.

The same is true in many other industries. See our Industry Structure section for examples.