Small Business Labs

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. 

A Look at Non-Employer Businesses from the SBA

The U.S. Small Business Administration's (SBA) Office of Advocacy recently released A Look at Non-Employer Businesses, a one-page summary of key data on non-employers businesses.

"Non-employer" is the terms used by government agencies to describe businesses that have a business owner, but no traditional (W2) full or part-time employees.

The data is collected by the U.S. Census and comes from tax data. Most non-employers are independent workers (freelancers, independent contractors, gig workers, etc.), but some are shell companies of various kinds. 

Two charts from the one-pager jumped out at us.

The chart below shows that the number of non-employer businesses has been growing about 2% a year of the past 15 years, reaching 24,813,048 in 2016. Over the same period, the number of employer businesses has more or less stayed the same at a bit under 6 million.

Their are a number of reasons the number of non-employers has been increasing. The main ones are it's easier and cheaper to start and operate a non-employer business and more people are starting part-time non-employer businesses to supplement their income and/or pursue a passion. 

See the MBO Partners State of Independence report for much more detail on why there are more non-employer businesses. 

There's also a number of reasons why employer SMB numbers aren't increasing, but it's a longer story and we'll go into it in a later article. 

But one reason is very small businesses no longer need to hire traditional (W2) employees as much as they used to. Instead, they can use contract labor, outsourcing and automation.

So one reason the number of employer SMB's isn't growing is because the number of non-employers is growing.

The other chart we find interest cover the demographics of non-employers and the owner of employer small businesses. As you can see from the chart below, non-employers are much more diverse.

For more on non-employer businesses, see the SBA one-pager.

Social Network Support Helps Turn Knitting Hobbyists into Hobbypreneurs

A recent academic paper - Knitting Community: Human and Social Capital in the Early Transition into Entrepreneurship - covers research on the process hobby knitters go through to decide to turn their hobby into a business.

The study found that many of the hobbyists that started a knitting business had been encouraged to do so by people they knew, such as husbands, friends and other knitters.

The research was based on digging through the data at the knitting community site Ravely.com, which is known as the "Facebook for knitters".

Key quote from a Washington Post article on the study:

...analyzed almost 100 interviews and 403,168 profiles of knitters and crocheters. She found that even on one of the Internet’s great niche social networks, offline encouragement and feedback helped most talented hobbyists recognize their ability and take the first steps toward monetizing it. Success on the Internet was propelled by real-life interactions.

The in-person networking that was found to be most effective at encouraging entrepreneurship was membership in a Stitch n' Bitch group.

These are formal or informal knitters clubs where members meet, knit, socialize and share knitting advice. Again from the Washington Post:

People who joined a so-called “stitch n’ bitch” group to craft socially were 25 percent more likely than otherwise identical knitters to take the plunge into entrepreneurship. This is true even when correcting for geography, experience, skill level and productivity.

We've long studied the shift from hobbyist to hobbypreneur. It's clearly a growing source of new and especially part-time small businesses.

See the 2009 Inuit research brief Today's Hobbyists are Tomorrow's Hobbypreneurs for more on this topic. We worked with Intuit on this report and while the research is 9 years old, we think the findings are still relevant.  

BTW and not particularly relevant is yes, AI is starting to be used in knitting. See the Atlantic's SkyKnit: How an AI Took Over an Adult Knitting Community for more on this.

Small Business in the Age of AI

Intuit released a new study, Small Business in the Age of A.I., which found small businesses are bullish on automation technology and are already leveraging it to manage and grow their businesses.

A key study finding is despite all the noise about A.I. and other forms of automation technology disrupting industries and destroying jobs, most small businesses see automation technology as creating opportunities for both their businesses and employees.

As the study chart below shows (click to enlarge), very few (only about 6%) of the SMB's surveyed see automation technology, including A.I., as a threat to their business today or in the next 5 years.

Other findings include:

• Very few small businesses think that automation technology will lead to job losses. In fact, 31% say automation will allow them to add employees, while 59% say there will be no difference, and only 1% say there will be significant job loses.
• Small businesses are adopting the leading edge of automation technology. The top categories are big data (24%), natural language processing (17%), and machine learning (12%).
• Despite positive attitudes toward automation, a significant number of small business are not set up to take advantage of it. Almost 1 in 5 small business are not using the cloud to run their business, a necessary first step to taking advantage of the benefits of most automation software and systems
• The top three benefits existing users of automation technology see are: freeing up time to get more work done (79%), helping with customer service (77%), boosting innovation (74%).

Intuit partnered with Emergent Research (that's us) on this study, which is part of a deeper dive research project on how automation technologies are impacting small businesses.

We'll have more from this study in the near future.