Small business Grinch strikes again

Professor Shane has been trying to minimize the impact of small business in our economy for the past few years. He is at it yet again in a post at Small Business Trends.

Let me address a few of his comments in this post.

"Most people forget that the majority of businesses fail within six years, leaving them with zero revenues."

The only data that shows small business survival rates five years out less that 50% included business closures due to the sale of the business. They measured "failure" by looking at firms that stopped filing income tax returns. So if I sold my small business within the first five years, even for millions of dollars, I was counted as a failure. They later adjusted this study and reported well over half survived.

"Moreover, the start-ups that survive have very skewed performance. A few surviving companies reach substantial sales - three one hundredths of one percent hit over $100 million in sales in six years, according to U.S. Census data - but most don't grow at all."

Here Professor Shane really shows his bias. So only businesses that reach $100 million have "substantial sales"? This comment made me wonder if Shane had ever been an entrepreneur. The last business I co-founded never made it to $100 million, but it sure seemed substantial to me the the hundreds of people who worked for us. So I looked at his Vita -- lots of academic work but nothing there about running a business. Wonder if a few months trying to make payroll in a business with even an "unsubstantial" $10 million in sales would change his characterization.

Professor Shane also has a strong growth bias. The truth is that growth as Shane likes to see (as in high growth, high potential firms) is just not every entrepreneur's idea of a good time. Nor should it be. Nor does it need to be for them to make an aggregate impact on economic growth. Many build health, productive, job producing companies that are engineered NOT to be high growth. They use entrepreneurship as a vehicle for more that maximizing wealth.

As Shane often does, he goes on to torture the data he presents until it tells the story he wants it to -- small businesses do not really matter and are probably a waste of time and energy. In his own words:

"Here's the rub. Starting a business takes time and money. The performance pattern that we see means that the typical entrepreneur is spending a lot to get relatively little.

"Before policy makers tell everyone that it's a good idea to be an entrepreneur, they should keep these numbers in mind. The people they encourage are more likely to have the typical outcome than the average one."

Sorry, but I know very few entrepreneurs who started their venture because some policy maker told them it was a good idea. Entrepreneurs start business for a number of reasons, only one of which is building wealth.

Shane is one of those "government knows best" folks when it comes to the economy. He honestly believes that policy makers should steer our economy and not markets. When it comes to small business he is the Grinch.

Here is a post he made at the New York Times:

"I am supportive of the argument that government policy should encourage the formation and development of venture-capital-backed start-ups. In various books, articles and blog posts, I have said that the federal government should focus more resources and attention on high-potential start-ups and less on the typical new business. Such an approach would, as the venture capital association argues, provide a greater return in terms of job and wealth creation to government investment in the creation of more typical new companies."

Me? I say let entrepreneurs do what they do best in free markets -- create real long term growth. Let entrepreneurs start and let them fail. Let them define success on their own terms. Let them build wealth and income that suits their own measure of "substantial" and "enough." They don't need an economist at Case Western University or a policy maker in Washington to encourage them or tell them what to do. That is economic liberty, and that is what this country needs right now.

Add/view comments on this post.

------------------------------

The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.