Thank the recession for busy start-ups

Marketplace Staff May 20, 2010

Thank the recession for busy start-ups

Marketplace Staff May 20, 2010


Tess Vigeland: Despite the market’s wild moves of late and signs of a possibly-faltering recovery, these are busy times for entrepreneurs. According to a report out today from the Kauffman Foundation, start-ups hit a 14-year high in the middle of last year. The rate of new business-creation is higher now than it was at the peak of the tech boom. What gives?

Well, here to help us explain is Marketplace’s Mitchell Hartman. He joins us from the Entrepreneurship Desk at Oregon Public Broadcasting. Hi, Mitchell.

Mitchell Hartman: Hi, Tess.

Vigeland: So let’s talk a little bit about the findings here.

Hartman: Well, they looked at data on self-employment from the Census Bureau and the Labor Department, and sure enough, 2009 was a banner year. More than half-a-million people started their own businesses each month. And that is up nearly 5 percent from the previous year. And what’s more, there’s some groups that haven’t been at the forefront, like African Americans, who are now increasing their start-up rate. The other group that’s really ramping up is the 55 to 64-year-old crowd. You know, we usually think of the start-up lifestyle as something best fitted to maybe 20 or 30-somethings — they don’t have family obligations, they can take risks. But you know, in fact, older workers are the people with experience, they’re the people with Rolodexes full of names and maybe a little money in the bank to invest.

Vigeland: And in fact, they are also the folks who have lost a lot of jobs in the recession, right, iddle-aged, middle-class professionals, I assume that’s a factor as well?

Hartman: There’s no doubt it’s a factor. This would be what we call “necessity entrepreneurs.” Basically, it’s someone who’s going to say to themselves, I’ve got no job, I’ve got no income, might as well put a website and sell something or become a “consultant.” I asked Bob Litan of the Kauffman Foundation if these are the kinds of start-ups that actually matter economically.

Bob Litan: Even if a good portion of these new starts are a necessity — people having no other choice, because they can’t find a job — it indicates that people are not lazy. They’re not sitting around, waiting to collect unemployment checks. They’re out there, working hard to try to start a business.

Vigeland: But But Mitchell, let’s do a little reality check here. I mean, how many of these, kind of, “no choice but to do this in a recession” start-ups are likely to succeed?

Hartman: Well, not that many. But then again, even in normal times, the failure rate for new businesses is 50 percent over five years. And you know, these start-ups, the ones that survive, are the really dynamic job engines. They’ve also got some advantages right now, actually. You know, talent’s cheap, rent is cheap, competition is also on the ropes, so you may have a better chance coming out of the gate. Bob Litan says they’ve just got one huge hurdle — and that’s money.

Litan: It’s hard to get money. Hard to get money from banks, hard to get money from angel capitalists — those are rich people — and hard to get money from venture capitalists. Most businesses get started out of people’s own funds, whether they’ve got them in savings or they’re borrowing against their house or they’re running up their credit cards. And so, clearly, the cut back in credit has made it more difficult for people to get financing.

Vigeland: You know, he mentioned credit cards, and Mitchell, I saw a report today that actually small business credit cards are costing even more than they used to.

Hartman: Right, this was reported by a website called Major credit card issuers have jacked their rates up nearly 14 percent just since last fall. But that is only on small business credit cards; consumer rates have just gone up about 2.5 percent. And keep in mind, small business credit cards don’t fall under the new consumer protection laws that Congress passed, but credit cards for regular people do.

Vigeland: And what do the companies say to that?

Hartman: Well, they deny that it’s because these credit cards aren’t regulated as heavily. They say it’s just a reflection of risk. You know, that fact I mentioned that 50 percent in new businesses fail. But you know, that 50 percent failure rate has been pretty much steady for decades, and it didn’t just go up 13.5 percent since October. Small business credit card rates did.

Vigeland: All right. Marketplace’s Mitchell Hartman, thanks a lot.

Hartman: You’re welcome.

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