The Curse of Involuntary Entrepreneurship
Policy + Politics

The Curse of Involuntary Entrepreneurship

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Nick Linebaugh, 65, is an involuntary entrepreneur. Two years after losing steady work with a home remodeling firm, he continues scouring the far-flung suburbs of Washington, D.C. for carpentry jobs, picking up an average of 20 hours of work a week.

Though self-employment generates sufficient income to keep him off the unemployment rolls, it is not enough to support his two daughters’ educational aspirations, one of whom is already in college and the other a year away. Since the recession forced him to draw down his 401(k) retirement savings to maintain his family’s standard of living, he plans to continue self-employment while looking for full-time work after he starts collecting Social Security later this year.

“I anticipate no retirement,” he said. “Fortunately, I’m still physically fit and I enjoy most of it, so it’s not too bad.”

Linebaugh is one of a growing number of involuntary entrepreneurs working alone to pay the bills. A new survey from the Kauffman Foundation shows that entrepreneurs earning money through self-employment has grown over the past two years at its fastest pace in the 15 years since the data’s been tracked. Since nearly half the Baby Boom generation is living without pensions or has minimal retirement savings – the latest survey from the Employee Benefits Research Institute shows 42 percent of workers 45 and older have less than $25,000 in retirement assets – it’s likely this swollen army of self-employed workers will become a permanent fixture of the U.S. workforce.

At the same time, the start-up of new firms that employ someone other than the sole proprietor is at a 15-year low, according to the survey. “The increase in entrepreneurship is mostly in people struggling to find work,” said Robert Fairlie, a professor of economics at the University of California at Santa Cruz, who compiled the foundation’s latest report from government survey data. “This is a risky time to be starting a business where you’re hiring employees.”

Source of Most New Jobs?

The Obama administration is touting entrepreneurship as one way to help pull the U.S. out of the deepest economic downturn since the Great Depression. It recently launched Startup America , headed by Steve Case, who helped build AOL into the temporary kingpin of the Internet in the 1990s, and Carl Schramm of the Kauffman Foundation, to spur on formation of new small businesses, which proponents of the strategy claim are the source of most new jobs.

But the latest government data indicates that most people traveling the start-up road are doing so out of necessity – not because they have a great idea or have been moved by the entrepreneurial spirit. The economic landscape is littered with consultants, freelancers and one-person contractors earning less on their own than they made as full-time employees before the 2008 financial collapse. The number of part-time self-employed rose from 33 percent to 41 percent of all self-employed workers between 2007 and 2009, with virtually all of that increase from people reporting they were working part-time because they couldn’t find enough work, according to Steven Hipple, a labor economist at the Bureau of Labor Statistics.

A rush to launch true new business start-ups, which usually takes place once an economic recovery takes off, has yet to materialize . The Kauffman Foundation survey showed the rate of firm formation dropped 23 percent between 2007 and 2010. Just one in 1,000 American adults started a business last year, down from 1.3 per 1,000 in 2003, which was the first year of recovery after the last recession.

There are as many explanations for the start-up dearth as there are economists and experts who track the trends. They range from lack of access to capital to declining home values to borrow against to a lack of economic security like pensions or guaranteed health care that could cushion the fall should a small business start-up fail, as most do. But most observers say the far more important factor is sluggish economic growth in the wake of a financial crisis that has encouraged both households and businesses to spend a lot of their free cash on liquidating debt, not on goods and services.

“It’s just too tough out there right now,” said Steve King, a partner at Emergent Research, a small business consulting firm in Silicon Valley, and co-author of the SmallBizLabs blog. “People aren’t seeing the demand.”

One marker of the entrepreneurial downturn is the continuing sluggishness in venture capital funding for fast-growing small businesses and start-ups. The latest report from PricewaterhouseCoopers for the National Venture Capital Association showed venture capitalists invested just $5.0 billion in 765 deals in the fourth quarter of last year, which was less than the $5.4 billion invested in 864 deals in 2009 and down significantly from the $7.8 billion poured into 1,076 deals in the fourth quarter of 2007.

Drilling down into the data reveals a major shift in entrepreneurial activity. While clean energy firms and media and entertainment start-ups are finally seeing a rebound, venture capital funding for biotechnology and medical device firms is in freefall, off 30 to 40 percent from a year ago, which itself was significantly below its pre-recession peaks.

“It can take at least ten years for something to get through clinical trials and win regulatory approval,” said Emily Mendell, vice president for strategic affairs at the NVCA. “A lot of VC firms are rethinking whether they want to invest in this area.”

The Silicon Valley view, which focuses more on clean energy, software and social media, is decidedly more upbeat. “Oddly, it’s kind of a frothy time in the Valley,” said Emergent Research’s King. “The social web is unbelievable and start-ups related to financial services and clean tech are in bidding wars for engineering talent.”

While more than a quarter of the Small Business Administration’s loan guarantees are awarded to start-up firms, the sector isn’t independently tracked by the government. But the average size of small business loans is up sharply, suggesting that larger, already established firms are more likely to take advantage of the program now rather than start-ups.

The agency guaranteed about 1,100 loans for $473 million last week compared to a weekly average during the year before the recession of nearly 1,800 loans for $361 million. “We were seeing a lot smaller businesses in those days,” a spokesman said.

Economic insecurity cuts both ways when it comes to going out on one’s own or starting a new firm. On the one hand, many established private companies have cut benefits, raised health care premiums and eliminated defined benefit pension plans, which reward longevity. That makes it easier for workers to take a chance out on their own since the allure of returning to the “good benefits” that came with a full-time job no longer exist. But some analysts say the security of having a guaranteed pension in late mid-career encouraged entrepreneurship in the past, since that is when a person has the skills and energy to explore entrepreneurship. The disappearance of that economic security may be contributing to the dearth of new businesses.

“Having that sense that there’s something to fall back on allows one to take risk,” said Ken Goldstein, a labor economist at The Conference Board, a business research outfit in New York best known for its monthly consumer confidence survey. “At least half of all people who try to start a new business for the first time fail, and 60 percent of those who fail try again.”

Yet most of the current shortfall in entrepreneurship is probably connected to the nature of this downturn. The collapse of the real estate market and construction, which in the last decade accounted for 40 percent of all business start-ups, slammed a wrecking ball into that industry’s entrepreneurial side. That means there will be continued tough times for craftsmen like Linebaugh who take the forced entrepreneurship route.

“Maybe before you could grab a hammer and nails and make a job for yourself,” said Ellen Rissman, a senior policy analyst at the Federal Reserve Bank of Chicago. “Now, that’s much less true.”

Laid Off and Launching (WSJ): 
An Incubator That Turns Laid Off Workers Into Entrepreneurs (NY Times):