The Entrepreneur Economy
While the corporate world struggles to find its footing, entrepreneurs are stepping up with new ideas.
Henrik Fisker doesn't obsess over door handles. He doesn't focus-group his designs with soccer moms or hire a layer of vice presidents to insulate him from the day-to-day functioning of his company. Instead, Fisker--former head designer for BMW, Aston Martin and Ford--broke away from the giant automakers and their way of doing business to create a streamlined, cutting-edge carmaker based in Irvine, Calif.
Fisker Automotive has only 50 people on the payroll--versus tens of thousands for other carmakers--with most of the workload outsourced to 80 suppliers around the world and final assembly in the same Finnish plant where the Porsche Boxster is made. This coming summer, after less than three years in development, the company's first car will roll off the line: A jazzy, plug-in hybrid sports car called the Karma.
It's not that Fisker, 46, is against growing big--a recent $529-million loan from the Department of Energy ensures that Fisker Automotive will expand exponentially in the next three years as it works on its new hybrid sedan. But he does want to avoid the endless hierarchies and institutional rigor mortis that has dragged down other automakers. "I realized there's got to be another way to create a successful car company," he says. "Our plan is to build our brand quickly, before there's more competition for plug-in hybrids. That's how we can go up against BMW, Mercedes and Lexus: We're faster."
When the economic sky fell last year and CEOs and workers alike were stuffing cash under their mattresses, it didn't seem like the right moment for big plans, much less a wholesale reshaping of the way entire industries operate. But during the last year, as the shock has subsided, Americans looking at the collapse of corporate culture and finance, the loss of job security, and inscrutable government solutions are coming to the same conclusion as Fisker: We don't have to do things the same way. We can take the economy in hand and drive our own destinies. And a movement that has been slowly building in the business world is finally taking hold: We're seeing the beginnings of the entrepreneurial economy, a system built on nimble, low-overhead, oftentimes small companies with fluid workforces, rather than the massive conglomerates that have upheld the economy for decades.
Oddly enough, the recession seems to be adding momentum: By choice or necessity, more people are pursuing self-employment as an alternative to an iffy corporate existence. The number of small businesses created in 2008 was still at pre-recession levels, according to the latest data from the Small Business Administration, contrary to most economic indicators. The Kauffman Index of Entrepreneurial Activity, which measures new startups, shows a slight uptick during the same time period, and that is expected to continue through 2009. Self-employment rates have been growing at an average of 4.5 percent annually most of this decade, adding roughly 1 million people per year, and they are expected to keep pace or spike when the 2008 and 2009 numbers are released. Across the country, enrollment in entrepreneurship programs at universities is booming.
Factor in new technology like cloud computing, says Michael S. Malone, author of The Future Arrived Yesterday: The Rise of the Protean Corporation and What It Means for You, and it all adds up to the world's first truly entrepreneurial society. "Suddenly, you don't have to have a large physical plant to start a company," he says. "The cost of entry is getting close to zero--now the little guys can build a business without the overhead. The best strategy is to get small and adaptable, strip things to a solid core and hire from the cloud of talent out there--then blow up like a puffer fish when you encounter a potential market."
George Solomon, co-director of the Center for Entrepreneurial Excellence at George Washington University, and other business academics share a similar vision: "In the future," he says, "the net source of new jobs will be predominately created from an entrepreneurial climate, not from revitalizing old industries."
Indeed, the idea of entrepreneurship is so powerful right now and resonates with so many American values that President Obama has repeatedly called on entrepreneurs to lift the U.S. out of the economic crisis. So key is the idea to Obama's recovery mission that he has even reached out to the Middle East by promising an entrepreneurship summit to bridge the business and cultural gap. In September, his Commerce Department launched the Office for Entrepreneurship and Innovation to bolster startup companies.
The rise of the entrepreneur economy isn't just an academic thought experiment or political buzzword--a growing number of companies such as Dell, Cisco and Facebook have used small and agile management techniques to produce breakout success. One of the best examples may be Vizio , whose meteoric rise has helped push old-guard corporations such as Fujitsu, Pioneer and Apex to exit the television business and companies like Philips to license their flat-panel units.
Back in 2002, California businessman William Wang watched as the bursting of the dot-com bubble took its toll on his computer monitor manufacturing company, Princeton Digital . But instead of cashing out, Wang and his partners decided to tack in a different direction--they realized they could use their expertise and many of the same components used in monitors to manufacture low-cost flat-screen TVs, which at the time were big-ticket luxury items.
So Wang sold Princeton and incorporated Vizio. He and his colleagues decided against vertical integration and sinking capital into a high-tech manufacturing plant and research department. Like Fisker, instead of reinventing the wheel, they searched for the cheapest, high-quality electronic components offered by suppliers and contracted with overseas manufacturers. Within five years, Vizio and its sub-$2,000 televisions had captured the top spot as the No. 1 flat-screen manufacturer in the U.S., with $1.9 billion in annual sales. For a major electronics corporation, it has an astonishingly small staff--only 162 people are on the payroll in Vizio's California offices and South Dakota call center, most dealing with marketing, sales and product development.
"Our competitors are trying to offer low price point products, but their businesses haven't seen structural change--they're still the old vertically integrated companies, with the TV unit beholden to sister divisions," says Laynie Newsome, one of Vizio's founders. "They're losing hundreds of millions of dollars supporting their TV businesses."
Without massive investments in production facilities and research, Vizio can shift its business quickly. This year, it dropped plasma televisions to focus on traditional LCD models, as well as LCDs using LED technology, which it decided had reached a quality rivaling plasma at a cheaper price point. But if a new plasma technology turns the tables, Vizio's low-inventory model means it can readjust and have a new product in the marketplace in weeks or months--the same reason it could quickly shift into making smaller 19- to 26-inch TVs when the recession hit.
"It's been fun, being more agile and faster," Newsome says. "We put a lot of thought into our product and ask, 'What does the consumer want that's better than what's out there now?' "
It's hard for smaller entrepreneurs--ones who might not be outsourcing millions in electronics overseas--to see a silver lining in the recession or imagine how "small" could be to their advantage. But the truth is, starting or reforming a business when the economy is down isn't a liability and can offer some real benefits. Research by Dane Stangler, senior analyst at the Kauffman Foundation, shows that more than half of the largest and fastest-growing companies in the country were formed during economic tough times and that starting in a down economy does not put the companies at a disadvantage. The same amount survived five years later regardless of whether they were formed under the sign of the bear or the bull.
Christopher Gergen, director of the Entrepreneurship Leadership Center at Duke University and co-author of Life Entrepreneurs , says the down economy has plenty of competitive pluses for new business owners willing to adopt smarter tactics. "There are essentially now gaps in services in cities throughout the country, and traditionally competitive companies are overly leveraged and weakened," he says. "There's really an opportunity for a company that's more nimble and offers something of real value to the community to hustle around the competition."
That strength is bolstered by factors such as the internet, cheaper office space and increased negotiating room with suppliers. Fisker Automotive, for example, is considering a factory in the United States, something that Fisker says would have been unthinkable before the recession.
The maturation of cloud computing is also taking some of the startup burden out of small business. Inventory, customer management, accounting, shipping, corporate communications and even human resources can be outsourced to the digital ether as a cluster of web-based services and applications sweep away the need for large office spaces and a large pool of employees.
The other part of the equation is talent--with national unemployment rates around 10 percent and the rate for the under-25 crowd over 50 percent, hiring employees has become easier and less expensive. Even professionals with no long-term plans to stay in the freelance business are willing to consult while they wait for big business to start hiring again. "There are so many good, creative people on the sidelines right now," Gergen says. "Many of them are willing to freelance or work for commission while they wait for a headhunter to snap them up."
But many of those freelancers won't head back into mainstream corporate employment. That's partly because, besides the perks of being their own boss and controlling their financial future, entrepreneurship has gained status as a legitimate career path. Thirty years ago, the term "entrepreneur" conjured up images of men selling shrimp out of the back of trucks or get-rich-quick schemes preying on seniors. Now tech entrepreneurs like Steve Jobs, Bill Gates and Mark Zuckerberg are rock stars, and there's been a cultural shift as the public grasped the economic potential of highly motivated, idea-driven individuals.
For Gen Yers, more than any other group, entrepreneurs have become heroes. Entrepreneurship programs at accredited universities have jumped from just a handful 10 years ago to more than 200 entrepreneurship centers today, and more than 500 higher-ed institutions offer certificates, minors, or majors in entrepreneurial studies. According to one recent poll, 51 percent of teens hope to one day start their own business, and see it as a way to take greater control of their lives.
Of course, the big elephant in the economy of 2010 is still financing. The credit crunch has eased only slightly in the last year, and has been especially stubborn in the small-business sector. According to Scott Shane, a professor of economics at Case Western Reserve University and a writer for The New York Times website, the promised $730 million in SBA loans included in the stimulus bill for 2009 and 2010 is only a drop in the bucket and is unlikely to crack open the system. But historically, more than 50 percent of entrepreneurs have launched their businesses without loans, relying instead on the informal "friends, family and fools" formula for startup cash.
"People are assuming the ability to raise capital is more difficult and are approaching the process differently. It's a changing model," Shane says. "They are using more and more of their own money, so it's about redesigning a business.
"When an entrepreneur sees they need half a million to buy all the equipment and hire people to launch a business, they start thinking, 'What if I leased my equipment and paid employees on commission?' The percentage of people reporting that they don't need outside financing to start a business is higher now than before the recession."
Robert Fairlie, who tracks the demographics of entrepreneurs at University of California, Santa Cruz says the numbers bear that idea out. In 2008, more low-overhead, low-revenue businesses were launched than in previous years, and he expects the same when 2009 numbers are released.
Mike Michaud thinks his business wouldn't have gotten off the ground if he had started in a brighter economy.
In 2007, Michaud was fired from his job as a clerk at the Darien, Ill., Circuit City, for "making too much money." So, with two 20-something friends, he decided to take a chance on an idea he'd batted around the break room for more than a year. Funded by a $5,000 loan from a friend's father and part-time jobs, Michaud, Doug Walker and Mike Ellis started work on Channel Awesome, a web-based TV network that would host all original content.
Then one of their first sites, That Guy With the Glasses, featuring snarky movie reviews and question-and-answer bits starring Walker, went viral on YouTube. So they switched gears and tried to capitalize on the popularity of the character. A little more than a year after launching thatguywiththeglasses.com , they're averaging 16.5 million page views a month and making $150,000 in revenue.
"If I was working a job in commission retail, I don't know if I would have had the time or desire to do this--I know we wouldn't be making decent money already," Michaud says. But the economy also forced them to be smarter about the way they structured their business and approached advertisers. And Michaud thinks their small budget and frugal beginnings have given "That Guy With the Glasses" a competitive advantage in the fast-growing field of web video. "We've been cheap all the way through," he says, "and we'll be coming through as the economy picks up."
They're slowly diversifying their website too and circling back to the idea of a web-based TV channel. Already, they've launched shows dedicated to video games and bar reviews, and they're prepping sports and sketch comedy shows. In total, they plan to host 300 original content series.
Whatever curveballs the next year, or years, throws at the economy, it's clear that the landscape has changed. Instead of sitting by and watching their futures grow bleaker, companies and workers are harnessing impressive changes in business culture and technology to create a grass-roots economy--a broad swath of many small businesses that can bend with the changing winds.
"The entrepreneurial spirit is there," author Malone says, and it's going to be even stronger when the economy recovers. "There are certain things you can't change, and one of them is the zeitgeist that has developed around entrepreneurship over the last 100 years. America is populated by ambitious mavericks. The news events of today aren't going to change that."
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