Entrepreneurs may not be going the way of the dodo -- not yet -- but they should probably be considered an endangered species.
Research by World Bank economist Camilo Mondragón-Vélez shows a significant drop in the number of entrepreneurs. Mondragón-Vélez warns that entrepreneurship has become a “viable option only for those with higher income and wealth levels.” Considering how vital entrepreneurship is to the world economy, this trend is somewhat disturbing.
There are clear indications of a shrinking U.S. middle class, which is particularly problematic in the world of entrepreneurship. A Pew Research Center analysis of government data found that the number of adults living in middle-income homes decreased in 203 of 229 metropolitan areas between 2000 and 2014. The same study reported a 4 percent drop in the middle class nationally during that 14-year span, with a decrease of 6 percent or more in 53 metropolitan areas.
This shift is bad news for the entrepreneurial community. Members of the middle class generally have a high enough standard of living to support their children, relatives or friends during the startup phase; they also may have savings to cover expenses for a while as they test the entrepreneurial waters. But a disappearing middle class? That could mean fewer entrepreneurs.
On top of this dwindling pool of potential entrepreneurs consider the credit crunch that has been in place since the Great Recession. The Federal Reserve has printed loads of money for a long time, but those funds haven’t reached businesses in need of capital. People often blame banks for sitting on cash, which is true, but also an oversimplification.
In any case, financing is lacking for people eager to start businesses. Entrepreneurs either struggle to secure financing while they hone in on a profitable niche for their businesses, or they are altogether unable to pursue their dreams. Those lucky few who have the wherewithal to bootstrap their ventures or manage to drum up enough money to launch end up facing incredible pressure to revolutionize the world.
How to ensure your startup doesn’t flop
The middle class is withering away and financing is difficult to secure, but that doesn’t mean entrepreneurs should abandon their dreams and stick to safer routes. By taking a cautious approach and exercising a healthy level of prudence, these impresarios can navigate the economic headwinds to succeed in the face of harsh conditions.
1. Identify and build from your core.
You have something unique and valuable that competitors cannot easily copy. It’s your job to figure out that differentiator. Many entrepreneurs don’t know their unique advantage, so they don’t build their businesses around it. They become vulnerable because they don’t do anything that is particularly valuable. They might offer valuable goods or services, but those same items are often available from other vendors.
How will you react when Walmart moves into town or Amazon begins to sell your product? Direct competition with these giants is a losing proposition. You can’t match their efficient logistics, so you must offer something else. That differentiator could be as simple as local knowledge or high-trust relationships in your community. Those core strengths are something even Amazon cannot offer.
2. Grow slowly and organically.
When sales take off, entrepreneurs can hurt their fledgling startups by not quickly spending money to buy machinery, hire new workers, establish partnerships or do anything else that might increase production. Timely investments are necessary to grow your business, but this also means you’re taking on expenses that you might not be able to shed, should anything change. Many startups try to scale as quickly as possible, but it’s better to grow naturally.
It takes a lot of time and money to train new workers to the point that they’re productive. Don’t expand unless that's part of your plan or relatively risk-free. You shouldn’t buy a house that is the maximum you can afford, and you shouldn’t grow your business to the point where you struggle to break even.
If you’re unable to satisfy all of your customers, using your existing resources, raise your price. Good entrepreneurship is less about maximizing and more about being flexible and making a satisfactory profit.
3. Get creative with funding.
Traditional lending routes may be harder to navigate, but that doesn’t mean it’s impossible to raise the capital you need to launch your startup. Crowdfunding has generated a lot of buzz over the past few years, allowing entrepreneurs to skip the middleman and directly ask consumers to chip in some money to help them create a product.
It’s a lot easier to ask 1,000 people to chip in $150 each than it is to get $150,000 from a banker -- the banker wants a return, whereas people who support a crowdfunding project are happy to have an early version of your product.
Crowdfunding is a tremendous opportunity now, but I suspect it will become more difficult over time. Most consumers don’t realize how common failure is among entrepreneurs, and crowdfunding could become a harder sell if a few high-profile projects end in failure. Projects such as the CST-01 watch and the ZANO autonomous drone collected millions of dollars from backers, though the companies behind both creations filed for bankruptcy without delivering anything.
If all else fails, you can always fall back on the three Fs of the fundraising world -- friends, family and fools.
While there is no guarantee of success, there are plenty of ways for entrepreneurs to fail. The best tactics to safeguard your startup include building from a strong core, growing organically and seeking nontraditional fundraising avenues. With a little creativity and a lot of effort, your startup can keep your name off the endangered species list.