Small Business Labs

Non-Profit Sector Big and Growing Faster Than Overall Employment

The Johns Hopkins Non-Profit Economic Data Project recently released its 2019 Non-Profit Employment Report. 

There are two key findings.  The first is the U.S non-profit sector is big, employing 12.3 million paid workers.  

As the study chart below shows, this makes the non-profit sector as big in terms of employment as the U.S. manufacturing sector.

The non-profit sector is also growing relatively rapidly. 

As the report chart below shows, from 2007 to 2016 (the most recently available data) employment in the non-profit sector grew nearly four times faster than the for-profit sector. 

We've long covered non-profits because the vast majority of them are small businesses. Over 80% of all non-profits spend less than $1 million per year in total expenditures.

And since there are about 1.5 million U.S. non-profits, a quick bit of math shows that the average non-profit has 8.2 employees.  

We've also long forecast that the non-profit sector would outgrow the for-profit sector of the economy. We continue to forecast this. The trends driving this growth include:

• The Internet and other technology makes is making it easier to start and operate a non-profit and especially small non-profits.
• Baby boomers, looking for encore careers and a way to give back, are starting growing numbers of non-profits.
• Millennials, who have a strong interest in social service, are starting non-profits.
• Non-profits and social service organizations are in many cases replacing governments as the key solvers of social problems.
• Revenue generating business models have become more common, which is leading to more self-sustaining non-profits. 

One issue may detract from the continued growth of non-profits is changes in tax laws. Key quote from the Johns Hopkins report:

"... the Federal Tax Cut and Jobs Act passed in December 2017 included several items that could have a negative effect on nonprofits’ ability to generate private donations. For example, by greatly expanding the standard deduction available to individuals, the tax bill will eliminate the tax incentives for giving for millions of taxpayers."

While we agree this is a risk, we believe donors will continue to provide enough support for this sector to continue to grow.

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.

Most Small Businesses Still Have Less Than $400,000 in Annual Revenue.

According to data from the U.S, Census 2016 Annual Survey of Entrepreneurs (the most recent data available), the median U.S. employer small business (those with paid traditional employees) generated less than $400k in revenue in 2016.

Our title includes the word "still" because we posted on this data back in 2016, when 2014 data was most recent available.

An alert reader asked if there was more recent data. And as the chart below shows, there is.

But it hasn't changed much in the past two years.

The median small business still had receipts of about $390,000 in 2016 and about 4 in 10 (39%) had less than $250,000.  Only about one quarter (27%) of small businesses generated more than $1 million in revenue.

More Small Businesses Turning to Online Lenders for Financing

The Federal Reserve recently released its 2019 Small Business Credit Survey.  A key finding is the use of online lending sources by small businesses is rapidly expanding. 

As the study chart below shows (click to enlarge), in 2018 32% of small businesses seeking credit applied to an online lender. This is up from just 19% in 2016.

The top reasons small businesses say they turned to online lenders is their speed of decision making and the view that they had a better chance of being funded.

According to the report, they were right. Small businesses seeking financing were approved at higher rates by online lenders than traditional lenders.

This is especially true for small businesses considered a medium to high credit risk.

Add in how much easier it is to apply for an online loan and you can see why more small businesses are turning to online lenders.

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

The Rise of "Wealth Work"

Quartz's Life coaches are the new personal trainer highlights a trend we've been tracking since 2008, the growth of personal services. 

These are what noted labor economist David Autor calls "wealth work". 

A good example is the growth are personal trainers. Back in 2000 there were so few the Bureau of Labor Statistics (BLS) didn't track them. Now there are over 300,000 in the U.S. and it continues to be a fast growing profession.

The chart below, which is from one of Autor's presentations, shows other examples of wealth work (click to enlarge).

Autor attributes the growth of wealth work to rising incomes. But in addition rising incomes and a growing group of wealthy folks, there are 4 other drivers: 

1. A Lack of Time:  Unlike the prior generations, most affluent Americans work - and work long hours.  A lack of time, coupled with high earnings, means outsourcing personal tasks makes a lot of sense.
2. Life's Growing Complexity:  Many tasks have become so complex or specialized that outside help by professionals is simply required.
3. Fear of Falling Behind:  Many wealth or well-off people are concerned about falling behind, or their children falling behind. This has led to coaching of all kinds. Think sports, academics, arts and music coaching for kids and things like life coaches, career coaches, wealth managers, etc. for adults. 
4. Wealth workers don't just cater to the wealthy. People with even modest incomes increasingly utilize personal services.

The last point is very important.

Much of what is called "the on-demand economy" and "sharing economy" falls into the personal services sector. Everything from dog walking to food delivery to running errands can now easily and cheaply be outsourced to personal services companies.

These firms have democratized the use of personal services, which means it's not just the rich driving demand.

Not everyone thinks the rise of wealth work is good. For example, Atlantic's recent article The Servant Economy is, no surprise given the title, quite negative on this trend. 

We're more positive. 

But no matter how you feel about it, the long-term outlook for high-end personal services is strong.  Life is unlikely to get easier or less complex anytime soon, so it's likely more people will utilize personal services. 

Kauffman Foundation Indicators Show U.S. Entrepreneurship Near 20 Year High

The Kauffman Foundation recently introduced the Kauffman Indicators of Early Stage Entrepreneurship. 

The indicators cover:

• Rate of new entrepreneurs: The broadest measure possible for business creation by population.
• Opportunity share of new entrepreneurs: The percentage of new entrepreneurs who created a business out of choice instead of necessity.
• Startup early job creation: The number of jobs created in the first year of business.
• Startup early survival rate: The rate of survival in the first year of business.

The indicators cover the time frame from 1996 to 2017 and will be updated annually. They replace the Kauffman Index, which was also on entrepreneurial activity but not as data intense.

We first reported on the old Kauffman Index back in 2007 and have followed it every since. We will, of course, continue to follow the new indicators.

The most interesting finding from the new indicators is that early stage entrepreneurship was near a 20 year high in 2017. 

As the study chart below (click to enlarge) shows, the rate of new entrepreneurs is fairly stable.

But after peaking in 2010, it declined until 2013 and then started to increase again. 

The Kauffman Indicators use a somewhat unusual entrepreneurship measure - the percent of the adult U.S. population who create a new business each month. 

In 2017 this worked out to be .33% of the adult population, or 330 out of 100,000 adults. This is just shy of the .34 in the peak years of 2009 and 2010.

There have been a number of reports on the decline of entrepreneurship in the U.S. over the past few years. See this Brookings Study or the Washington Post's The decline of American entrepreneurship — in five charts for examples.

The Kauffman data shows otherwise.

We agree with Kauffman that entrepreneurship is alive and well in America. We'll explain why in a future article. 

Accountants Save Small Businesses Time, Money and Stress at Tax Time

According to a recent Intuit survey, about 60% of small businesses with fewer than 20 employees use outside accountants to help them with their taxes. 

And as the study chart below shows, this saves the vast majority of them time, money and stress.

This raises the question why don't the other 40% use outside accountants?  The study chart below shows the answers given by the survey respondents.

There have been multiple studies showing accountants add value relative to the cost for their small business clients.  We think the SMB's not using them should reconsider.

After all, we could use a bit less stress.

Disclosure: Intuit is an Emergent Research client but we didn't contribute to this study.

Does It Pay to Be a Freelance Writer? Yes, But Not Well For Most

Several recent surveys focused on the pay rates on income of independent and freelance writers.

The Authors Guild’s 2018 Author Income Survey collected pay data from over 5,000 published book authors. They found that the median pay for full-time book authors was $20,300 in 2017, and that number decreased to $6,080 when part-time writers were included. 

They report this is a 42% decline in authors earnings over the past decade.

The Authors Guild cites the growing dominance of Amazon, lower royalties and advances for all but best selling books and extremely low royalties paid on the increasing number of deeply discounted books and ebooks for the decline.  

However, if an author can get in the top 10% of earners things are pretty good. 

Among the top 10%, those who self-publish earned a median income of $154,000 and those who are traditionally published earned a median of $305,000. 

The second survey comes from The Make a Living Writing blog. The Pay Survey 2019: What 1,400+ Freelancers Get Paid to Write study surveyed writers of all types, with most writing articles and blog posts.

As the study chart below shows (click to enlarge) nearly one-third of writers report they earn under $20 an hour for their work. 

But again there is good news. 10% report they earn more than $76 an hour, and another 17% earn $50-$75 per hour. 

The article has a number of suggestions on how writers can increase their earnings. These are beyond the scope of this post, but if you're a writer you should visit The Make a Living Writing blog for this information.

32 Million Americans Say They Will Start a Business in 2019. Most Won't.

According to a recent Job Creators Network Foundation survey, "Sixteen-percent of Americans say they are likely to start a new business in 2019 ...".  This works out to about 32 million Americans.

Most won't. 

Over the past couple of years about 400,000 to 500,000 employer small businesses and about 2.5 million solopreneur businesses have been started each year.

So it's much more likely that about 1.6% of Americans will start a small business in 2019 instead of 16%.

This is an example of the false positive problem with survey data. 

When you ask people aspirational survey questions about what they will do in the future, many more people will say they are going to do something than will actually do it.  

And starting a small business is aspirational. According to the same survey and shown in their chart below (click to enlarge), 62% of those surveyed said they'd like to run their own business.

Given this data, it's not surprising 16% would say they will do so in 2019, even though relatively few will. 

We've asked a similar question in the annual MBO Partners State of Independence study for the past 8 years.

Consistently 13%-15% of those surveyed over this study period have said they will start a small business over the next 2-3 years. And again, we estimate only about 8%-10% of those who say they will have actually done so.  

An important point is despite the false positive problem, this data is still quite useful. Tracking this data over time provides insight into the interest in starting a business by Americans.

But, and this is a big but, if you don't adjust the results for the false positive problem you end up with unrealistic numbers.

BTW, the JCN survey had another example of the false positive problem on a topic unrelated to small business.

Their survey found "Thirty-four percent of Americans said they are likely to buy a new car next year". This translates to about 70 million or so Americans.

The peak U.S. car and light truck sales year was 2016 when 17.6 million cars and trucks were sold. 

It seems fairly certain that 2019 will not beat 2016 in terms of auto sales. So it seems even more certain no where close to 70 million Americans will buy a new car. 

The false positive problem crops up in many surveys (including ours). Users of survey data need to be aware of this issue and take it into account when reviewing survey results.