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Stuck in Neutral

Where is the SMB revolution?
May 1, 2006
URL: http://www.entrepreneur.com/article/159978

A few years ago, everyone from the president to pundits praised entrepreneurs as the key to economic recovery--the hardy souls who would step up to the plate, put up the numbers and revive the economy.

"The entrepreneurial spirit is strong, and that's what's going to lead this recovery," President Bush said in October 2003. "The small-business owners of America are risk-takers, bold thinkers, and love their country and are willing to expand the job base."

While love of country isn't in doubt, the SMB community's ability to rejuvenate the economy is in question, as new data suggests U.S. SMBs have gone from recovery leaders to laggards. SurePayroll, a Skokie, Illinois, payroll and staffing firm, issues a monthly SMB "scorecard" based on payroll data from 15,000 of its customers. Its data shows SMB hiring grew an anemic 0.3 percent in 2005, compared to the 2004 increase of 4.4 percent. Last year, while big companies were starting to pay more for the best workers, SMB salaries dropped 0.5 percent and have just begun to catch up, according to SurePayroll.

"I would argue 2004 was a great year to be an entrepreneur," says Michael Alter, president of SurePayroll. "In 2005, everything just stopped."

Last year saw rising interest rates, energy prices and inflation that forced firms to absorb sizable cost increases without raising prices. And health-care costs continued to rise at a breakneck pace.

Raising capital presented problems as well. U.S. venture firms raised a whopping $25.2 billion for future investments in 2005, according to Thomson Venture Economics, a New York City-based research firm. However, this money, by and large, isn't going to early-stage startups. The proposed 2007 SBA budget was cut by approximately 30 percent to a relatively miniscule $429 million. Small companies also lack lobbying power: Big companies are backing a federal bill to create a $140 billion industry-financed asbestos trust, which would protect businesses from costly asbestos-related lawsuits, but SMBs are saying the payments could bankrupt them. At press time, the bill was making its way through the senate. "A series of small successes gives you confidence," Alter says. "Small businesses aren't seeing enough small victories right now, and that's the problem."

Andrew Hartsfield is co-founder and CEO of WiLife, a 3-year-old Salt Lake City company that makes digital video surveillance systems for homes and businesses. The company has 32 employees and plans to hire 18 more this year. It recently signed a deal with Radio Shack, and Hartsfield expects 2006 revenue to surpass $10 million.

WiLife's most recent health-care quote, however, came in 52 percent higher than last year's--and that's on the heels of a 27 percent premium increase the year before. The cost differential has Hartsfield, 38, shopping around and increasing deductibles. He has also watched angel money get harder to come by as more and more of it is being invested in real estate. Despite this fact, Hartsfield was still able to raise more than $7 million in angel capital in 2005. For 2006, he's seeking more than $10 million in institutional capital.

Small companies also risk losing their innovative edge as big companies create "intrapreneurial" hot spots that let employees color outside the lines. "Large companies are spending a lot more time and effort being innovative than they did in the past," says Scott Anthony, managing director of Innosight, a Watertown, Massachusetts, innovation consulting firm. "Because of that, there just might be a little less space in the marketplace for small companies to be innovative." A Boston Consulting Group survey of 940 corporate executives last year revealed that 74 percent of them planned to boost spending on innovation, a 10 percent increase over 2004.

Entrepreneurs aren't getting lazy--they're just more cautious. An annual November survey by Houston-based professional employer organization Administaff revealed a significant drop in the number of entrepreneurs expecting their companies to grow in 2006. "What we're seeing now is a confluence of more fear and anxiety about the stability of the economy," says Debra Condren, founder of Business Psychology Solutions, an executive coaching firm with offices in New York City and San Francisco. Uncertainty, Condren says, "creates an environment for the entrepreneur where risk taking seems even more risky."

You can't rest on your laurels. You can't assume large companies aren't able to act entrepreneurially. Most important, you can't stop taking chances. The next rush of risk-takers will share the same personality traits, Condren says, including a strong stomach for uncertainty, internal motivation and a willingness to keep fighting. "They don't give up in spite of failures," she says. And if you're going to lead the fight in this economy, you'll have to kick it up a notch.