Small Business Labs

What is the Ownership Economy?

The VC firm Variant recently released The Ownership Economy - A primer on the state of Web3.  

Variant defines the ownership economy as:

"... the products and services that will define web3—and the next generation of the Internet—are those that transform users into owners. We call this the ownership economy."

The essay points to crypto tokens (also called social tokens) as the main method of transforming users into owners.

Crypto tokens are a form of cryptocurrency. Because of this, they have many features that make them a better choice than traditional equity for sharing ownership. Key quote from the essay:

"Tokens have a richer and more frictionless design space. They can be distributed programmatically, with the potential to reward participants versus those who buy-in; they are effectively free to deploy, and they can transfer value in the same way we transfer information—instantly, to anyone, anywhere in the world."

So, in theory, anyone who uses a digital product or service could buy, or be given, crypto tokens that provide ownership in the product or service - or at least some form of participation in the value created by the product or service.  

We've covered several examples of how this works in prior articles:

1. What are Social Tokens (also called Creator Coins) and Why You Should Care covers how creators use tokens to engage, build, reward, and monetize a community of fans and customers - and provide a way for the fans to benefit from being a fan financially.  
2. The Rise of Crypto Clubs covers how tokens are being used to create new member-owned social and business organizations. And because the members are also owners, they benefit financially if the organization has financial success.

The hope of the ownership economy - and Web 3.0 - is that the financial rewards generated by the Internet will become much more decentralized and democratized.  

In more simple terms, instead of VCs and company founders becoming billionaires while users get nothing, the wealth created by goods and services will be broadly shared with users.

This is hardly the first-time technology democratization claims like this have been made. So far, these claims have failed to materialize.

And although the four words most wrong in forecasting are "this time is different," this time could be different.

The essay's primary focus is to educate startups and founders on potential ownership economy opportunities.

The essay chart below (click to enlarge) shows the wide range of firms currently working in this area.

Many terms in addition to "the ownership economy" are used to describe how technology is empowering new ways for people to become entrepreneurs or solopreneurs.

These include the passion economy, the creator economy, the empowerment economy, the freelance economy, and - of course - the gig economy.  

But no matter what you call it, it's clear technology is creating more opportunities for people to become self-employed and owners.

The Shrinking American Middle Class

Pew Research's How the American middle class has changed in the past five decades reports that the share of adults who live in middle-class households fell from 61% in 1971 to 50% in 2021.

As the Pew chart above shows, while the middle-income share was falling, the upper-income tier increased from 14% in 1971 to 21% in 2021. Also rising was the share of those in the lower-income cohort, from 25% to 29%.

At first blush, these numbers don't look so bad. After all, increases in the upper-income cohort explain 63% of the decrease in the middle class.

But the Pew chart below tells a more troubling story.

In 1970, middle-income households accounted for 62% of U.S. aggregate income. But by 2021, their share had fallen to 42%. 

Meanwhile, upper-income households increased their share of U.S. aggregate income from 29% in 1970 to 50% in 2021.  

The main driver of the share growth is that the income of upper-income households increased by 38% more than the incomes of middle-income households - and by more than 50% faster than low-income households.

Pew didn't go deeper in this study, but a prior Pew report - Trends in Income and Wealth Inequality - reported that the top 5% of households saw the most rapid growth in household incomes.

In other words, much of the share growth in aggregate income by upper-income households is attributable to the fast-rising incomes of the top 5% of U.S. households.

Widening income inequality has a variety of social, political and economic impacts. Growing political polarization is one example. 

And an economic example is the growth of both dollar stores and luxury retail. 

Another is the rise of side gigs and the gig economy due to the increased need for supplemental income by lower income Americans.  

The trends driving inequality continue to be in place, and we expect income and wealth inequality to continue to increase.

Decision Making Lessons from Investment Biases

Fidelity's article  6 biggest pitfalls for investors covers human instincts and emotional biases that often undermine investment success.  

These include "aversion to loss and ambiguity, following the crowd, and focusing on information that's recent or confirms what we already believe."

Key quote describing the impact of these biases:

"Our brains evolved to protect us from all kinds of primal dangers—saber-toothed tigers, earthquakes, dodgy-looking strangers from the other side of the river.

Trouble is, the instincts and mental shortcuts humans developed to manage life-and-death scenarios aren't all that helpful when navigating the twists and turns of the economy or riding out a rocky stock market.

In fact, these tendencies aren't just unhelpful—they can be harmful. They often prompt us to make decisions that seem rational but are self-defeating."

The same biases also can lead to bad business decisions.

The six biases in the Fidelity article are:

1. Avoiding losses at all costs: Loss Aversion
2. I am the greatest: Confirmation Bias
3. Getting stuck on the first thing you see: Anchoring Bias
4. The breaking news problem: Recency Bias
5. There's safety in numbers: Herding Bias
6. The devil you know: Ambiguity Bias

See Fidelity's article for more details.  

We spend a lot of time identifying and analyzing how our biases impact our forecasts and the advice we give our clients.  

We've also covered our advice on dealing with biases in the past. But the key points are worth repeating. These are:

• try to base critical decisions on hard data
• get multiple perspectives on key decisions.
• identify and understand how your views and beliefs may be impacting your decision making
• be open to change and accept that even strongly held business views and beliefs will need adjustments over time.  

We've written a fair amount about decision-making biases in the past. These are consistently among our least read articles.  

But this topic is simply too important not to cover.  

Etsy Sellers Going Out on Strike

Back in February, Etsy announced that in April, the site's transaction fees would be increasing from 5% to 6.5%, a 30% increase.  

Not surprisingly, many of Etsy's sellers were not pleased. And to show their displeasure, sellers have called for a strike to take place the week of April 11th.  

The sellers are not just upset about the fee increase.

They have a series of complaints against Etsy, including their mandatory marketing fees, unfair deactivations, and the growing number of sellers who aren't selling handmade products.

The Verge's Etsy sellers will go on strike in April and want customers to boycott provides more details on the demands of the sellers. Key quote on what the organizer of the strike thinks might happen:

"What would happen if on April 11th, so many sellers put their shops on vacation mode that Etsy starts shitting bricks."

We hope they'll at least be handmade bricks.

The strike's organizers hope this is the start of a broader set of collective action by sellers. Again from the Verge article:

"The strike is just action number one," she says. "What we want to really do for the future is form a solidarity support movement — peer support, artisans supporting each other."

At a minimum, the strike has caught the attention of Etsy executives. 

Key quote on Etsy's response to the strike from Gizmodo's Etsy Sellers Are Going On Strike to Prevent It From Becoming 'The Next Amazon':

"We're committed to supporting our community of 5.3 million sellers around the world by helping them grow their businesses," an Etsy spokesperson said. "Sellers have consistently told us they want us to expand our efforts around marketing, customer support, and removing listings that don't meet our policies. Our revised fee structure will enable us to increase our investments in each of these key areas so that we can better serve our community and keep Etsy a beloved, trusted, and thriving marketplace."

Collective action by independent workers is hard to organize, and successes in doing so have been rare.

But we see more and more signals that workers of all kinds are looking to band together and collectively fight for their rights. This is yet another example.

McKinsey and Bain on the Economic Impacts of the War in Ukraine

McKinsey and Bain are two of the three "big 3" strategy consulting firms. They provide business and financial advice to large corporations, governments, and non-profits across the globe.

Each firm has recently come out with its views on the likely economic impacts of the war in Ukraine.

Both firms point out that while Russia, Ukraine, and Belarus are relatively small end markets, these countries are critical sources of supply for various global commodities. 

Because of this, they both believe the broader economic impacts of the war are potentially significant.  

The chart below (click to enlarge) is from Bain's Crisis in Ukraine: Respond and Reposition and it shows the significant exports of the three courtiers involved in the war.  

Food and energy are the biggest categories, but metals and other raw materials are also on the list.

Bain highlights too many potential impacts to cover here. But the big ones are increased inflation, supply chain disruptions, lower economic growth, and geopolitical realignment.  

McKinsey's War in Ukraine: Lives and livelihoods, lost and disrupted covers much of the same ground.

One of their most interesting observations is that there will be financial system ripple effects. Key quote:

The disruption of sanctioned financial flows has the potential to ripple through the banking system and financial markets, with significant repercussions for affected bondholders, lenders, aircraft lessors, derivatives counterparties, and investors. There remains a risk of contagion with second-and third-order effects across the globe.

An example is AerCap, the world's largest aircraft leasing company, which has filed a $3.5 billion insurance claim because they have 100 jets stuck in Russia.

This is one of the first of what will likely be a barrage of losses and legal claims caused by the war and related sanctions.  

Both McKinsey and Bain point out that the war has created a high level of uncertainty in the global business environment. 

We certainly agree and think small businesses should:

1. evaluate how exposed they are to the direct impacts of the war. Energy and food-related companies will be likely be directly impacted. But supply chain disruptions due to raw material shortages will also impact a variety of SMBs. And almost everyone will need to deal with higher inflation.  

2. have a plan in case the war and its effects push the U.S. economy into recession. The good news is that most economists are not currently forecasting a recession. But many economists are cutting their economic growth forecasts and suggesting a slowdown in global economic growth will happen.

3. the pandemic forced many firms to become more agile and resilient. War impacts may mean SMBs will need to redouble these efforts.

The Bain and McKinsey articles are an excellent places to start in terms of thinking about how the war may impact small businesses. They're well worth reviewing.

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

Book Review: Tiny Business Big Money

In Tiny Business Book Money, small business expert Elaine Pofeldt offers solid advice on starting and operating a microbusiness, which she defines as a business with fewer than 20 employees.

This is a follow-up to Elaine's first book on solopreneur businesses - Million-Dollar, One-Person Businesses. 

While researching that book, she discovered that many solopreneur businesses turned into highly successful employer small businesses. 

So she decided to chronicle how these firms scaled and reached high levels of sales and profitability.

In this book, Pofeldt profiles nearly 60 microbusinesses that have reached $1 million in annual revenue and describes the tools, techniques, and methods they used to succeed.

Our favorite section of the book is chapter two, Mindset Makeover.

It's our favorite because our research shows that an entrepreneur's mindset is crucial to success. And Pofeldt does a great job describing the kinds of mindsets successful entrepreneurs have.

We also liked chapter 6 - Set Yourself Up for Success - and its description of the lean way most very small businesses run.  

In particular, Pofeldt describes five basic models tiny businesses use to run their businesses. These are:

1. The automated approach
2. The freelancer/contractor model
3. The outsourced model
4. The traditional employee model
5. The partner model

A key goal of all these models is to run lean and stay flexible. 

The book points out that most microbusinesses use several of these models, and our microbusiness is no exception.

We decided early on not to have traditional employees and instead rely on contractors, business partners and outsourcing. We chose this for lifestyle reasons and to help us achieve our work/life balance goals. And in our case, it worked.

See the book for more details on each of the models and "real-life" examples of their use.

Certainly, anyone thinking of starting a solopreneur business or microbusiness will find the advice and information in Tiny Business Big Money of great value.  

Existing solopreneurs and microbusiness owners will also find useful advice.

For example, our firm plans to implement some of the automation ideas we found in this book.  

As the book points out, the pandemic has led to a surge of interest in starting microbusinesses.  And Tiny Business Big Money provides a guidebook for successfully doing so.  

5 Biggest 2022 Tech Trends According to Adobe's Chief Product Officer

Business Insiders' Adobe's chief product officer predicts the 5 biggest tech trends of 2022.  What caught our eye about this list is 3 out of the 5 trends relate to self-employment and independent work.  These are:

1. The next generation of top talent will have "Polygamous Careers," transforming the corporate world as we know it:  The article describes this as "One's profession will be a portfolio of projects, whether you're a designer, engineer, salesperson, or investor. The idea of "exclusivity" in an offer letter will be laughable faster than we think."

2. "The Stakeholder Economy" will turn customers (and employees) of businesses into owners: This trend is on the use of tokens and Web 3.0 to make it easier to share ownership in small businesses and/or create new forms of SMBs.  

3. The next generation will have a nomadic decade of life and work, and will love it: This prediction is that "... young adults in their twenties increasingly choose to spend a decade of their lives living between a set of rented or swapped spaces around the world, working remotely, and immersing themselves in communities and cultures."  In other words, there will be more digital nomads.

The final two trends are on specific technologies.  These trends are The rise of immersive experiences will mainstream 3D creation and Artificial Intelligence will make personalization too good to opt-out

That 3 out of the 5 trends relate to self-employment shows how mainstream the shift to independent work has become.  

See the article for more on the trends.

McKinsey: Almost One Third of Those Quitting Their Jobs Left to Start a New Business

McKinsey's The brave new (business) world covers research that found that the Great Resignation is leading to a lot of new businesses.  Key quote:

"Our research into the Great Attrition found that 31 percent of employees who left their job in the past six months did so to start a new business. Additionally, parents and minority women were comparatively more likely to leave to start a new business or to join the gig economy."

The article points out that their finding is supported by the surge in new business tax I.D. applications, something we've covered quite a bit.  

McKinsey suggests three ways companies can potentially engage and retain employees who are thinking of turning to entrepreneurship:

1. Value workers and ensure they feel a sense of belonging. 
2. Empower employees with greater levels of autonomy and flexibility
3. Encourage setting work-life boundaries

Regular readers know work flexibility, autonomy and control are key reasons people choose and are happy with self-employment.  The self-employed also often point out they weren't valued by their prior employer.  

So this is a pretty good list.

See the article for more details.  

Tax ID Applications are not the Same as New Business Starts

The U.S. Census Business Formation Statistics have gotten a lot of attention since the start of the COVID pandemic.

The Census Bureau chart below (click to enlarge) shows why.

Since early in the pandemic, applications for business tax I.D.s (which is what the business formation statistics track) have dramatically increased.

This is has resulted in many sources saying that the number of small business starts has dramatically increased - and increased by the same number as applications for tax I.D.s.

While it's correct to say the number of small business starts has increased, it's incorrect to say they've increased as much as tax I.D. applications have.  

The reason is that only a small share of tax I.D. applications result in a new small business starting.

That's because applying for a tax I.D. is quick and easy.  But actually starting a business is hard.  So many who apply for a tax I.D. don't end up starting a new business.

For example, the Census reported 418,000 business applications filed in December of 2021.

Of the 418,000 applications, 137,000 were from what the Census calls "high propensity applications." These are the applications the Census thinks will result in the formation of an employer small business.

But the Census only expects a subset of applications will lead to the formation of an employer business.  Key quote from the Census business formation release:

"... the Census Bureau is projecting that 30,201 new business startups with payroll tax liabilities will form within 4 quarters of application from all the business applications filed during December 2021."

In other words, the Census thinks about 22% of high propensity applications will result in a new small business starting within the following year.

The Census doesn't estimate how many solopreneur businesses ("other than high propensity" in Census speak) will likely be formed.

But we do, based on asking about tax I.D. applications for over a decade as part of the MBO Partners State of Independence study.

We've found that about 18% - 20% of solopreneurs who file for a tax I.D. follow through and start a business that generates revenue and lasts at least one year.

This means probably around 56,000 new solopreneur businesses will be formed based on December's data.

So in total, we would expect that the 418,000 tax I.D. applications filed in December of 2021 will result in about 86,000 new businesses over the following 12 months.

The good news is that 86,000 new small businesses are still, by historical standards, a lot of new small businesses from just one month's filings. It's just not 418,000.

Top Rural and Small Town Trends for 2022

One of our favorite sources of information on small businesses in small towns and rural America, Small Biz Survival, released their 2022 Top 5 Rural and small town trends list recently.

Despite around 60 million Americans living in rural areas (that's about 1 in 5 Americans), there's limited coverage and information on the trends and shifts impacting rural areas of the U.S.

This is why information sources like Small Biz Survival are so important and valuable.

Two of the five trends really jumped out at us because they're related and the pandemic has accelerated them:

1.  New Residents are Arriving:  Small Biz Survival points out, "this isn’t an explosive exodus from major tech and population centers, but the more subtle diffusion of opportunities to a broader swath of places."  The shift started years ago as remote work became possible.  But Covid has resulted in what's being called "Zoom towns" as remote workers seek more space, lower costs and access to the many amenities of small town life.  

5. Economic Barriers are Falling: The expansion of rural broadband and remote work, coupled with the Internet making it easier and cheaper to start and operate a small business, has made rural and small town businesses more viable and competitive.

The combination of these two trends means small towns and rural areas are much more attractive places to start a business than they were even a few years ago.  

This creates a positive cycle of greater economic vibrancy in small towns and rural America, leading to more people wanting to move and start businesses in small towns.

Thanks to these trends, the next decade is looking to be very positive for rural America. 

See the article for the other trends and more details on the ones covered above.

Below is an overview of the trends by the authors.  Register here (it's free) to see a more detailed presentation of the trends and related materials.

2022 Rural Trends from SaveYour.Town