During the depths of the recession following the 2008 financial crisis, Americans who were frustrated with not being able to find work took the bold step of opening their own small businesses. It was a bittersweet accomplishment for many new moms and pops, who became known as necessity entrepreneurs.
Now 5 years later as the recovery gains traction, new data shows the tables have turned. Instead of necessity-driven new businesses, more U.S. entrepreneurs are launching ventures based on perceived opportunities, growth ambitions and a broad optimistic outlook—a group sometimes called opportunity entrepreneurs.
“The opportunity entrepreneur has come back,” said Donna J. Kelley, associate professor of entrepreneurship at Babson College, located outside Boston. “People are just jumping in,” said Kelley, who authored the 2012 Global Entrepreneurship Monitor.
Rise of Opportunity Entrepreneurs
While necessity-driven entrepreneurs have not disappeared, opportunity seekers returned in 2012. Research found that nearly 78 percent of entrepreneurs last year started ventures to pursue opportunities. That is up from 71 percent of total entrepreneurship in 2010. Before the financial collapse unraveled, about 87.3 percent were opportunity entrepreneurs in 2008.
“People are now seeing a positive environment and jumping in,” Kelley said.
Based on a survey of about 5,500 entrepreneurs across the country, the annual report offers an in-depth analysis of American entrepreneurship. It also offers a peek into what’s happening on Main Street, a traditional driver of past economic recoveries. The latest, annual report was released Wednesday, May 22.
New Business: Off the Cob
Cameron Sheldrake, founder and president of Off the Cob, an Ithaca, N.Y.-based maker of sweet corn tortilla chips, is among the new business owners who opened shop last year.
Sheldrake launched his company after spotting an opening in the crowded specialty-food market. Off the Cob chips feature sweet, organic corn with no genetically-modified organisms or GMOs. “I wanted to pursue a niche,” said Sheldrake, who graduated in 2012 from Babson College, which focuses on entrepreneurship.
The chips at $3.99 a bag are available in about 70 stores, most of them independently-owned and in New England. “Something that’s unique and tastes great, it’s going to sell itself regardless of the greater economic climate,” Sheldrake said. “It’s a good bet that people buy snacks even in a recession.”
Like Off the Cob, most of the new ventures launched last year straddle consumer businesses—about 41 percent. Examples include retail stores or websites, restaurants and hair salons.
Highest Level in More Than a Decade
It’s enthusiasm like Sheldrake’s that’s a big theme in the 2012 report. More Americans are feeling hopeful about business prospects, and subsequently pushing entrepreneurship activity to the highest level in 14 years. Last year, the average total, early-stage entrepreneurial rate increased to nearly 13 percent, an all-time high since the survey began tracking such activity in 1999.
Such high entrepreneurial activity suggests business owners are opening up smaller shops—and chasing larger opportunities such as restaurant chains, Kelley said.
The report, conducted with Baruch College in New York City, also found many entrepreneurs had just opened businesses and paid salaries for less than 3 months in 2012. That data suggests future small-business owners had been poised—and just waiting for economic headwinds to shift before taking the plunge, Kelley said.
Not only has traditional bank lending been static since the 2008 meltdown, entrepreneurs have been wary about a broad pickup in consumer demand for goods and services. The entrepreneur report mirrors the National Federation of Independent Business’s widely watched Index of Small Business Optimism. The index rose 2.6 points to 92.1 in April, erasing a drop of 1.3 during March.
Don’t Mess With Texas
The 2012 report also revealed Texas boasts a high level of opportunities for entrepreneurs, compared to other states. For would-be entrepreneurs, the state has a lot to offer.
There’s no state income tax. Capital and grants to the local startup community are abundant. Strict mortgage rules prevented Texas from experiencing many foreclosures, keeping the local housing market stable. And the public school system is highly regarded and growing, according to the report.
Amid such a business-friendly environment, younger innovators and women are especially active in Texas compared to the national average, according to the report. “Texas is such star,” Kelley said.
Austin is a particular draw for early-stage high-tech startups, said Patricia Greene, entrepreneurial studies chair at Babson College. The annual South by Southwest (SXSW) conference has helped bring entrepreneurs to the region, she said.
Houston is drawing more female entrepreneurs to fields not usually associated with women, including construction and waste management, said Greene. Female business leaders may be making a mark in a sector, and subsequently persuading other women to follow in their footsteps. “I do wonder about the impact of role models” in Houston, said Greene, also academic director of the Goldman Sachs10,000 Small Businesses program.
All Is Not Rosy
But for all the enthusiasm to start a new venture, staying afloat remains challenging. For those who shut down a business last year, 18 percent said they closed shop because they couldn’t get financing. The closings occurred broadly between mid 2011 and mid-2012. That compares to 11 percent for startups closing in other wealthy economies, such as western Europe and developed Asia. That gap may suggest a disparity in lending environments and access to capital.
And when it comes to accumulating money to open a business from the get go, forget banks and crowdfunding apps. Many upstarts still turn to traditional sources of funding.
The median amount of capital to start a business is around $15,000. And 82 percent came from family and friends, according to the U.S. report. It’s otherwise known as good old-fashioned bootstrappin’ and beggin’ for money.