Small Business Labs

The Explosion in Seed Round Funding

Crunchbase's How Seed Funding Has Exploded In The Past 10 Years reports that:

Fewer than 3,200 companies received seed funding in the period between 2006 and 2010. A decade later, that had ballooned to more than 23,000 startups.

Crunchbase data also shows that the average seed investment has grown from $1.7 million in 2011 to $4.6 million in 2020.

The article points to the launch of Amazon Web Services in the mid-2000s, which made it cheaper and easier to start a software company, as a driver.  

That's certainly true.  But many factors contributed, not the least of which is the broad adoption of technology across industry and society during this period.  This opened up a wide variety of new market opportunities for tech startups. 

Also contributing is the massive increase in public and private valuations for tech firms.  This is attracting more capital to seed rounds, which leads to more seed stage firms raising money.

Pitchbook's Seed market braces for an onslaught by top VC firms covers the influx of large VC to seed investing.  Key quote:

Earlier this year, Sequoia and Index Ventures each unveiled seed funds of roughly $200 million. Then, Andreessen Horowitz and Greylock Partners announced seed-focused pools of capital with $400 million and $500 million, respectively.

In the past, the large A-list VC firms did few if any seed rounds.  But getting in early means the opportunity for greater returns. It also greatly increases the VC's the ability to put more money into successful firms in later, highly competitive rounds.  

We expect seed funding to continue to grow, which is good news for entrepreneurs.

It's Time to Upgrade U.S. Economic and Labor Statistics

Sometimes we post articles on topics few people are interested in. 

This is such an article.  

But you should be interested because the economic and labor data collected by government agencies no longer provide the information we need to properly understand and manage the U.S. economy.

Over the past week several sources explained the problems with government data collection efforts and made suggestions on how to improve them.

Before we go into them, it's important to note both sources state the biggest problem is we've been cutting the budgets of our statistical agencies for years. 

This has hamstrung their efforts to develop new and better approaches to collecting and disseminating data.

Infrastructure: Upgrading the US labor statistics system is a podcast by Harvard's Future of Work program.  It features former U.S. Bureau of Labor Statistics Erica Groshen, who explains how and why we should improve our economic data gathering capabilities.  

Federal Statistical Needs for a National Advanced Industry and Technology Strategy is a report from the D.C. innovation think tank ITIF.  The key takeaways from this report are:

• The federal government has never felt the need to develop strategic economic intelligence to fully understand the competitive position of its traded sectors or to help support overall economic productivity.
• Years of budget constraints have left U.S. statistical agencies with insufficient resources to effectively measure key elements of the economy.
• There are three key areas with major statistical gaps: subnational data, international data, and data to better understand firm behavior at the enterprise and establishment level.
• As part of a national infrastructure package, Congress should make a one-time appropriation to fully modernize and expand federal statistical agency IT systems. It should then increase annual funding on an ongoing basis.

The lack of timely and complete data on the economy has become a problem for the U.S. 

We regularly see this in our work.  For example, there's still no solid government data on independent workers and most government data on small businesses are too old by the time it's released to be of use.

The economy moves too quickly and changes too often for our old data collection methods.  It's time for the U.S. to make the investment required to collect timely and relevant economic data.

Small Business Applications in May 2nd Highest Ever

May was yet another banner month for new business applications.  As the U.S. Census chart below shows (click to enlarge), 500,219 business applications were filed in May. 

This was the second highest number of applications filed since this data was first collected in 2005.

The recent surge in applications started last summer in July when a record 551,000 business applications were filed.  

The surge has, so far, continued in 2021.

See our prior posts on the business applications surge for more on this topic:

• May 18th, 2021: Led by Retail, The Surge in New Business Applications Continues
• February 12t, 2021: New Business Applications Surged Again in January
• February 9th, 2021: The Long Term Shift in Business Applications to Solopreneurs
• November 10th, 2020: The Surge in New Small Business Applications

Google Opens a Retail Store

Google opened its first retail store in the trendy Chelsea neighborhood of New York City. 

Google has done pop-up retail stores in the past, and they even considered opening a store on a barge in San Francisco Bay.  But this is their first traditional, long-term retail location.

The timing is interesting in that it makes clear that Google thinks traditional retail is coming back post-pandemic. 

It's also interesting because Google is in many ways the ultimate Internet brand.  So Google following other online brands in opening a retail store shows that hybrid commerce continues to be the preferred path.

According to Fast Company's Google's First Retail Store is the Anti-Apple, Google's store:

"... ends up feeling more like an interactive museum or an exploratorium than a retail store. There’s a wall featuring every single product within the Nest family, with the name of the object underneath, like you might see at a natural history museum. In the middle, there’s furniture designed to mimic a particular room of the house, from the children’s playroom to the kitchen, interspersed with Google hardware. And along the windows, there are 18 “discovery boxes” featuring 3D animations that tell stories about a particular Google product, like the recycled materials that go into the Nest speakers."

Apple, of course, has a highly successful retail chain.  But Microsoft was less successful with their retail store effort.  Last year they announced they would close all 116 of their stores.

So the jury is out as to whether or not Google's experiential retail concept will work.

But Google going into retail shows that while ecommerce continues to grow, even the most ecommercy firms see a future in traditional retail.

The Swoosh Recovery Continues

Last year early in the recession, there was quite a debate about what shape the U.S. economy pandemic recovery would take. The two candidates that got the most support were a V-shaped recovery and a swoosh-shaped one.

A V-shaped recovery indicated a steep, but very short recession with a quick and robust recovery.

The swoosh-shaped recovery was named after the famous Nike logo. This shape indicates a steep decline followed by a gradual recovery.

As far back as last August it appeared the swoosh recovery was likely.  And the evidence now shows the swoosh is the winner.

The chart below (click to enlarge) is from the Oxford Economics Recovery Tracker, and shows the swoosh pattern.

The chart showing total U.S. non-farm employment *blow) is even more swoosh like.

It seems like one of the lessons from this recession is it's easier to shut down an economy than it is to restart it. 

But the good news is that the economy is clearly recovering.

One-Third of Businesses Surveyed Plan to Increase Their Use of Nonemployee Labor Over the Next 18-24 Months

Deloitte and the MIT Sloan Management Review recently released Workforce Ecosystems: A New Strategic Approach to the Future of Work.   

This research study found that most executives and managers today "consider employees and other workers who create value for the enterprise — including contractors, service providers, gig workers, and even software bots — to be part of their workforce."

They also found about 1/3rd (34%) of the firms surveyed plan to increase their use of external nonemployee labor (freelancers, etc.) over the next 18-24 months.

An interesting study finding is that small businesses are more likely to say they plan on increasing their use of non-employee labor than large corporations.

The chart below uses data from an interactive tool provided as part of the Workforce Ecosystem study.

While interesting, it's not surprising. The use of nonemployee contract labor by SMBs has been rapidly growing for over a decade.

SMBs tend to be more flexible and less bureaucratic around the use of nonemployee labor than bigger corporations.  And so while both large and small firms have been increasing their use of nonemployee labor, SMBs have been doing so at a faster rate.

We expect this trend to continue.

The Long Term Shift to Contract Labor by Small Businesses

Data from the IRS shows that sole proprietor small businesses spent $69.2 billion on contract labor in 2018 (the most recent data available).  Contract labor refers to nonemployee labor, such as freelancers, gig workers, etc.

This is up from $64.8 billion in 2017 and just $34.4 billion in 2010. Over the period from 2010 to 2018, contract labor spend by sole proprietors increased by an annual growth rate of 9.1%.

Spending on salaries and wages grew from $73.7 billion in 2010 to $97.9 billion in 2018, or an annual growth rate of 3.61%.

In other words, spending on contract labor increased at 2.5x the spending on traditional employee salaries and wages from 2010 to 2018.

In 2003, contract labor was about 20% of total labor costs of sole proprietors. By 2010 it had risen to 31%, and in 2018 it reached 41%.

We expect the trend towards contract labor use by small businesses to continue.

The Rising Net Worth of the Less Affluent

Bloomberg's The Comeback of the Bottom Half covers Federal Reserve data showing that the less-affluent 50% of Americans saw their net worth rise the fastest over the past decade.

Key quote:

The rich had a great run, but they didn’t even come close to the percentage gains in real wealth seen by the bottom 50%. These amounted to 21.9% over the past year, 125.6% over five years and 526.2% over 10 years, compared with the one-percenters’ 10.3%, 33.8% and 83.9%.

The article chart below shows the dramatic increase in the bottom 50%'s wealth since the Great Recession.

While very good news, the article points out there is still long way to go.  The strong decade of growth only gets the lower 50%'s share of household wealth back to about half of where it was in 1992.

The rise in wealth for the lower 50% over the past decade is certainly good news and, hopefully, it will continue.

JungleScout's State of the Amazon Seller

JungleScout provides a platform that helps small businesses find, launch, and sell products on Amazon.  They recently released their 2021 State of the Amazon Seller Report.

This report covers who Amazon's small business sellers are, what and how they’re selling, how they are responding to the pandemic induced increase in ecommerce and their future plans.

Amazon has about 2.4 million active global sellers on their platform and they generate roughly $208 billion in revenue, which is about 54% of Amazon's total revenue.  Of the 2.4 million sellers, almost half (49%) are based in the U.S.

And according to the report, most sellers (73%) are solopreneurs.  Only 27% report having one or more traditional employees.  

Also interesting is 36% of sellers report having a full-time job in addition to their Amazon activities.  In other words, over one-third of small business sellers selling on Amazon are side giggers.

Over half of the sellers report selling their goods on other platforms (eBay, Etsy, etc.), in stores, or on their own ecommerce site.

We found the data on how they plan to expand quite interesting.  

As the report chart below shows, Walmart is the top platform they plan to expand to.

   

Roughly 1 in 5 (21%) also reported they plan to start their own ecommerce site.  

Having a proprietary ecommerce site and not being beholden to the large platform companies is an increasingly popular option.  

This is one reason why Shopify has become so successful.

Shopify gives merchants access to services such as payments and fulfillment, but lets them maintain more control of their branding and customer relationships.  Shopify's fees are also generally lower than Amazon's.

Having your own site is too valuable not to do it - if you can make it work.  And increasingly, small businesses are making it work.

The Demographics of Nonemployer Business Owners

The U.S. Census has released new demographic data on nonemployer businesses.  

Nonemployers are businesses that have an owner but don't have paid traditional full or part-time employees (W2 employees). The data comes from tax records, and you can think of nonemployers as solopreneur businesses (freelancers, independent contractors. gig workers, etc.)

The new data provides information by owner demographics such as sex, race, ethnicity and veteran status, geography, industry, receipt size class, and legal form of organization.

The Census chart below (click to enlarge) illustrates some of the demographics of nonemployers for 2017.  Census is planning on updating this for 2018 (the most recent year the non-demographic data is available) in the near future.

The nonemployer dataset gets less attention than other government data on self-employment. There have been two reasons for this.

The first is until fairly recently, there was little interest in self-employment data.  The rise of the gig economy has changed this.

And second, the nonemployer dataset is messy and includes a hodgepodge of business entities - passive businesses, firms no longer in business, LLCs owned by major corporations, etc. - that aren't active solopreneur businesses. 

But despite these issues, we find the nonemployer data to be a useful indicator of the overall size and growth - and now, also the demographics - of U.S. self-employment.  

Because this dataset is getting more attention, the Census is working to make it more complete and timely.  The addition of demographic data is an example of these efforts.