Entrepreneurs drive jobs, wealth, and innovation in America. Yet, despite their importance, most of the published data on entrepreneurship lags by a year or more. To close the gap and tap the pulse of American entrepreneurship in real time, Inc. asked me to develop the quarterly Inc. Entrepreneurship Index -- a benchmarked score representing the health of the startup ecosystem. 

The sources behind the index are broad in scope. They include government data on 60,000 households, payroll records from more than 350,000 businesses via Paychex, and stats on the way thousands of companies are accessing capital, courtesy of Biz2Credit.

At 88 out of 100, the Inc. Entrepreneurship Index is stable now, though it's at its lowest point from the origination of our data in 2012. One factor in particular is weighing things down: job growth.

While small businesses were accessing capital and owners were optimistic, job growth in the second half of 2017 was meaningfully slower than it had been in the previous five years.

Many small businesses want to hire, but it's become harder for them to find the talent as bigger firms grow during the bull market. The National Federation of Independent Business's Small Business Economic Trends survey shows that nearly 35 percent of small businesses have unfilled job openings. This is three times as high as the levels following the Great Recession.

This tightening labor market led to an increase in the number of hours worked by small-business employees in every month of 2017 and also an increase in wages paid by small businesses, as tracked by our index. The American West led the charge here, with the biggest growth coming out of Phoenix, San Diego, Riverside, California, and Los Angeles.

In general, job market variables have a cyclical component. However, for more than two decades, business formation and growth have been undergoing what seems to be a more permanent change: Companies in the U.S. are starting smaller and staying smaller, according to research by the Kauffman Foundation -- including research I conducted in my previous role there. In the early 1990s, 16 out of every 1,000 businesses in the U.S. started small and grew to have 50 employees or more in their first 10 years of operation. Today, that number has dropped more than 30 percent, and only 11 of every 1,000 businesses start small and grow to be medium size or larger. 

There are at least three key reasons for this shift.

  1. Technology has enabled companies to scale their revenue today without scaling employment at the same pace. Studies covering millions of companies and nearly 20 years of data have concluded this repeatedly. High-growth companies by revenue do not create as many jobs as they used to.
  2. Work arrangements have become more flexible. Companies no longer need to hire full-time, benefited staff to have more human input; they can now rely on the rising gig and freelance economies.
  3. More generally, entrepreneurial dynamism is down in the U.S. This means that, in aggregate, firms are less dynamic than they used to be in terms of employment -- a broad trend described in the work of economists Ryan Decker, John Haltiwanger, Ron S. Jarmin, and Javier Miranda.

Ian Hathaway, research director at the Center for American Entrepreneurship, describes one aspect of this phenomenon: "Companies aren't hiring in accordance with productivity gains as they did in the past, nor shedding jobs when productivity declines."

All of these factors, but most especially the decline in jobs added, have given rise to solopreneurs -- people who work for themselves and have no employees.

After a post-recession lull, the percentage of adults who are entrepreneurs in the U.S. has risen steadily since 2015. Today, 6.4 percent of professionals are doing their own thing; that's the highest percentage since 2010. The Inc. Entrepreneurship Index counts 15.8 million self-employed workers, and the vast majority of those are solopreneurs. According to the U.S. Census Survey of Business Owners, 80 percent of businesses do not have any employees, up 7.8 percent since 1997. Other recently released Census Bureau data shows a steady increase in people starting businesses, but a plateau in the number of companies planning to take on employees.

While there is a clear downside for the economy to this slower job growth by small businesses, the solopreneur trend also has an upside. As Elaine Pofeldt explains in her book, The Million-Dollar, One-Person Business, solopreneur businesses with more than $1 million in annual revenue are on the rise, having grown 21 percent since 2012. As Pofeldt says, new free and low-cost technologies "are making it easier to generate high revenue and healthy profits with each passing year."

It's now more than possible, as a one-person business, to enjoy economic independence and a meaningful work life.

About the Inc. Entrepreneurship Index

The Inc. Entrepreneurship Index measures American entrepreneurship from a variety of sources -- from traditional government data covering 60,000 households every month to big data from businesses, such as real-time payroll records from more than 350,000 businesses, courtesy of Paychex, and capital data from Biz2Credit covering thousands of companies every quarter.

The index uses three key indicators to track the health of American small-business entrepreneurship on a quarterly basis:

  • Entrepreneurship rate: the percentage of U.S. adults who own their own businesses, regardless of size
  • Access to capital: the percentage of loan applications by businesses that get approved, from sources including big banks, credit unions, and alternative lenders (Powered by Biz2Credit)
  • Small-business job growth: the percentage growth of average employment in existing small businesses (Powered by Paychex)

In addition to the core metrics above, Inc.'s ongoing coverage will include other metrics for context, including wage growth, labor market tightness, and sources of capital.

The index will be updated and changed as more and better sources of data become available.

Founded in 2007, Biz2Credit matches entrepreneurs with credit solutions in a safe and price-transparent environment. With more than $1 billion in funding and over 150,000 small- and medium-size- business users in the U.S., it is a leading online small-business lending platform. Its patented technology works for more than 100 major banks in the U.S., credit rating agencies like Dun & Bradstreet, and major SMB service providers including Dell. Learn more about Biz2Credit by visiting biz2credit.com.

Combining innovative technology and dedicated, personal service, Paychex is a preeminent provider of human capital management solutions for payroll, HR, retirement, and insurance services. Backed by 45 years of industry expertise, Paychex serves approximately 605,000 payroll clients across more than 100 locations, paying one out of every 12 American private sector employees. Learn more about Paychex by visiting paychex.com, and stay connected on Twitter and LinkedIn.

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Thank you to Inara Sunan Tareque for her research analysis and contributions in the creation of the metrics presented here and to the researchers who provided advice and review around this work: Andrew Reamer (George Washington University), Carl Bialik (Yelp), Dane Stangler (Startup Genome and Progressive Policy Institute), E.J. Reedy (University of Chicago), Javier Miranda (Census Bureau), John Lettieri (Economic Innovation Group), Kenan Fikri (Economic Innovation Group), and Michael Hendrix (Manhattan Institute).
 

From the March/April 2018 issue of Inc. Magazine