The Limits to Entrepreneurship: Why Innovation Won’t Solve Poverty

“Entrepreneurship” generates big buzz and the cacophony is enormously positive. Legions of leaders, organizations, and politicians promote entrepreneurship as an alternative pathway to a better life for the poor, disconnected, and left behind.  For example, Steve Case, who made a fortune with AOL, launched a multiyear “Rise of the Rest” campaign with bus tours and “grass roots” campaigns highlighting the “growth of start-up communities in pockets of the country not generally known … for producing tomorrow’s next big companies.”  With a White House sendoff, Case led well-promoted business pitch competitions in Baltimore, Buffalo, Cincinnati, Detroit, Manchester, Nashville, and Philadelphia.

House Leader Paul Ryan is mostly the opposite of Steve Case politically.  But Ryan’s economic plan is founded on the idea that growth begins with “the creativity and entrepreneurial spirit of the American people.” In response to Obama’s 2016 State of the Union Address, Ryan tweeted, “The answer to poverty lies in entrepreneurs and innovators who are actually making a difference, community by community.”

Cultural icons are held up as evidence that entrepreneurship can lead creative young people out of poverty toward the sweet life of luxurious living, fame, and fortune.  Just model yourself on Jay Z!

Can starting your own business rocket someone from the near bottom to near top of the economic pyramid?  It might work for a few lucky, hard working, dedicated, amazing individuals, maybe. Some do indeed generate new economic opportunities for themselves – and, in a very few cases, even for others in their community.  But that isn’t even half the story.  All too often, the results are much less rosy. It’s not a secret: most entrepreneurs fail.  And those with too little can ill afford more loss.

I’ve learned that lesson through years of work as a senior political advisor, campaign organizer, wonkish researcher, and philanthropy innovator. My entrepreneurship “street cred” is based in six original field research projects on entrepreneurship in harsh rural economic climates of the late 1980s and early 1990s.  We traveled light, from rural Iowa during the farm bust following a historic ag-export fueled boom to North Dakota as communities staggered through an inevitable bust after (another) drilling boom.  We visited persistent poverty areas in Arkansas’ delta counties and Aroostook County in noncoastal, northernmost Maine — places that struggled then and now without a glimpse of “boom times.” We searched for entrepreneurs using varied business models, market niches, and means.  We pioneered methods to measure their numbers and their effect on local economies. We also talked with them about their motives, means, advances, struggles, and losses. Since then, I’ve also studied business innovators at different stages of development, learning about their strategies for attending to  their business bottom line while also generating good opportunities for workers and their communities.

For the overwhelming majority of people in or near poverty, “entrepreneurship” is simply a fancy way to spell “hustle” and “bootstrap.”  Few of the great winners of the entrepreneurship derby realize that for many in the precariat, this is the ultimate flimflam in the cloak of artful words and seeming disregard of some pesky facts.

  • Entrepreneurship Is Driven by the Fortunate: According to the Kauffman 2015 Index of Start Up Activity, eight of every ten new entrepreneurs came out of another job, school, or other labor market status.  Only two of ten started their businesses while unemployed.  And those who did were more likely to start companies with lower growth potential.
  • The Poor Have Less to Invest and Can Not Afford Losses: A comprehensive survey by the Federal Reserve yields a clear snapshot of the income and wealth of American households. Less than one third of those with incomes annually under $40,000 could afford to cover an emergency expense of $400 using cash or credit card that they pay off at the end of the month.  The reasons they are so constrained are equally clear.  70% spend more than they earn, and more than half (53%) have absolutely no savings.  Starting a business or keeping one going entails myriad unexpected expenses and reversals.
  • High Failure Rate: According to Fortune, 9 out of 10 new businesses fail.  That is scary enough odds, but the “growth rate” for firms is actually negative. In one recent year, 400,000 business started in the U.S., but 470,000 firms closed. That statistic masks a good deal of human disappointment, frustration, and real personal and financial loses.  Blues singers tell that if you have nothing then you have nothing to lose.  But when it comes to the time, sweat, and funds plowed in to any enterprise startup, the rich are not like the rest of us.  Their opportunity cost calculation is markedly at odds with our experiences.  And for the precariat, this desperate road often deepens losses and dilutes opportunity.
  • Entrepreneurship Is a Declining Force: Start-up activity in the American economy has been on the decline for a good while, though it dropped further and faster when the Great Recession hit and has bounced around the bottom since then.
  • Entrepreneurship Is Mostly White and Male: The groups who have been left out the longest and furthest – women and people of color — are not reaching the “opportunity rung” of business startups. As of 2014, only 37% of entrepreneurs were women, and the gender gap has actually grown over time. While entrepreneurship rates are higher for Latinos and Asians than Whites or Blacks in the U.S., the predominance of whites in our society means that most entrepreneurs are white.
  • The Financial Fuel for Startup Growth is Geographically Concentrated: The Martin Prosperity Institute analyzed the number and value of venture capital deals in 100 metro areas for 2012.  As the map below demonstrates, venture finance concentrates in California, Northeast urban regions, and to a lesser extent the Pacific Northwest.  Venture finance is not the only way to fund entrepreneurship, but it provides key support for promising ideas and businesses to scale for growth and impact. The relative desert in the rest of the country suggests the fuel stations for developing new businesses are harder to find.  Availability is slight to none in those communities where it may be needed most.

Venture capital map

 

 

 

 

 

 

 

 

 

Finally, we need to look beyond the statistics on business startups and get real about the underlying meaning and effect.  When is an Entrepreneurial Start Up Business a Good Business? My experience with new startup owners from a broad slice of society suggests that many are pursuing intriguing ideas.  Some are skilled business managers to boot.  But most are cobbling together survival strategies. Being an entrepreneur means combining resources to support the family’s needs.  A spouse cleans houses and kids help make and sell crafts on Ebay or Etsy.  After the season ends for landscaping work, the father operates a cash-only snow plow service, collects and delivers aluminum scrap to recycling, and picks up a few jobs as a day laborer, waiting to be selected  from a long line of workers available in a Home Depot Parking lot.  Is it a way of life?  For too many, yes.  But it is hardly a living.  And it is certainly far from the security that working long and hard and playing by the rules should yield.  Does their future look bright because they’ve started four or five “new businesses? Hardly.  They barely keep from drowning financially as debt waters rise and income stagnates.

Robert Rich notes that “the dominant American myth involves two kinds of actors: entrepreneurial heroes and industrial drones – the inspired and perspired.” Steve Case and Paul Ryan believe the “inspired” entrepreneurs are the solution to poverty.  Others see hard work and sacrifice – the perspired –as the bootstrap solution for many.  Neither approach confronts the fact that the rules of our economy in this era are sharply skewed towards the wealthy and against all others.  People living in or near poverty face that reality every day.

Mark Popovich

Mark Popovich is a Vice President for Program at The Hitachi Foundation.  This commentary does not necessarily reflect the views opinions of the Foundation Board, Hitachi America, Ltd, or any Hitachi company affiliate.

 

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3 Responses to The Limits to Entrepreneurship: Why Innovation Won’t Solve Poverty

  1. Fred Anderson says:

    I find much to quarrel with here:
    (a) I think this discussion conflates innovation and starting a small business; Most people who enter upon a small business aren’t doing anything especially innovative; Instead they’re taking in the neighbors’ kids (a daycare center), cleaning houses (a janitorial service), painting houses, trying to run a pizza carry-out operation, etc. Nothing there that’s terribly innovative. Anyone who thinks 45 million poor Americans can escape poverty by each inventing the next iPhone is smoking something
    (b) Unemployment (U6) stands at 9%, but 20% of entrepreneurs started from that unemployed condition. Entrepreneurship is driven by the fortunate because 91% of Americans fall into what the author labels “fortunate.”
    (c) Entrepreneurs faces potential losses they can ill-afford. True. But this is true for almost all entrepreneurs — not just the ones who started from poverty. That’s one reason entrepreneurs are strongly encouraged to incorporate. One valid lawsuit can easily cost you a couple of million dollars; For 99% of us, that will mean financial ruin. (And the other 1% aren’t trying to start home daycare centers or pizza carry-outs.)
    (d) The high failure rate is commonly cited, but also something of a distortion. (A confounding factor is that we don’t know how many small business start-ups there are. All one need do to start their own business is decide they’re going to — you don’t even have to tell your spouse you’ve decided to get into business (let’s say at trying to write hit songs).) But one common measure is how many of these small businesses survive to their fifth birthday. Then here come the cited 90%, 80%, 70% failure rate citations depending on which study you’re looking at. The distortion comes in failing to note that some significant minority of start-ups (perhaps 25%?) don’t exist by birthday #5 because they got bought out earlier. If Microsoft offered you $10,000,000 for your little software company, I don’t think most people would call you a “failure”.
    (e) The author is correct that Entrepreneurship is a declining force — at least insofar as we now have small businesses dying faster than they’re being started up. But unless we just WANT a world dominated by the large corporations, I should think it would move some of us to try to find ways to support these entrepreneurs, rather than denigrate them. (Also, new businesses account for the great majority (70%?) of all new jobs. Meanwhile the older, bigger companies tend to be reducing their headcount by investing in automation; or offshoring.)
    (f) Most entrepreneurs are white & male. Because, as the author admits, most Americans are white. Other sources (Catalyst, in particular) says the majority of new businesses are started by women. And he seems to think it’s some kind of social problem that “most entrepreneurs are white and male.” Would he have harbored similar misgivings if “most entrepreneurs were women of color?” Why should race and gender matter? (Although, closely related, most immigrant populations — despite their common financial & language handicaps — are more entrepreneurial than are most native-born Americans.)

    I wish, if the author doesn’t much like self-help, he had suggested some other solution(s).

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    • Mark Popovich says:

      Fred – Some points of agreement and disagreement.
      First equating new business starts with entrepreneurship is not MY position but it is the standard statistic in the field. Check Kaufman Foundation and most pieces on entrepreneurship written for either a public and research audience. Innovation is not the same as entrepreneurial behavior and vice versa. Finding a new market is not an innovation in technology or product or service but most would agree it is innovation. The distinction you try to draw between local service businesses and “value to the economy” is common. I don’t happen to agree with it but it is common. A business that offers day care service and generates the revenues to support itself and offer a service the buyers consider worthwhile purchasing is every bit as much of equivalent value to a export oriented manufacturing firm producing the same level of revenues in my opinion.
      Second, your point misses the fact that a point in time condition is not the constant state condition. At any one point in time, 9% or so are unemployed at present. That doesn’t mean that very many people are unemployed 9% of the time. The point of the statistic is that many are arguing for a bootstrap approach where unemployed and disconnected should simply start a business enterprise rather than seek employment. If you don’t have an economic base to start, how are you supposed to float a business start up. For example, if you are receiving unemployment insurance and start a business, you will likely lose unemployment insurance as you aren’t actively looking for work. If the UI is supposed to help you get to the next opportunity and the system values efforts to start up businesses, why the cut off? I’d say because the system doesn’t really want to help people in this situation. Finally, the overall point is that entrepreneurship is too often presented as an enticing option for the economically disadvantaged and precarious. I’m arguing the real opportunity is overblown and distorts policy choices. It is usually not enticing nor an an option.

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  2. Pingback: The Limits to Entrepreneurship: Why Innovation Won’t Solve Poverty | Working-Class Perspectives | Activate! Justice: Talk about money and moral wrongs

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