Ginger Jones became an entrepreneur to care for others. Her $3 million business, Jones Therapy, based in Franklin, Tennessee, runs nine clinics for patients--mostly children--who struggle to speak, eat, or walk. So it pained her this year to curtail nonprofit sponsorships for the first time in the company's seven-year history. She has also postponed technology investments and frets about the cost of adding an employee to expedite insurance approval for her expanding caseload of kids who need help.
In the past three years, Jones Therapy has grown 583 percent. Revenue-wise, "we are rocking and rolling," says Jones. Yet the chaotic state of health care makes planning difficult. Insurance rates are rising, which leaves clients up the creek. Meanwhile, reimbursement for companies like Jones Therapy is declining by 1 to 3 percent annually. "The last two quarters have been really weird," says Jones. "It's the first time I have had uncertainty despite a growing business."
Inc.'s annual report on the state of entrepreneurship finds many company owners grappling with similar cognitive dissonance. Sales and profits are up in 2016, and the economy--while not performing at the level of a Michael Phelps--is doing better than, say, a Missy Franklin. Yet entrepreneurs grew more dispirited about their prospects as the year progressed. The segment of small and midsize companies expecting to do substantially better in 2016 than in 2015 dropped from 40 percent in the first quarter to 29 percent in the third quarter, according to research from Dun & Bradstreet and Pepperdine University. In that same period, companies extremely confident they would grow at all fell from 50 to 42 percent.
A decline in confidence is often less a reflection of facts than a function of uncertainty. For health care companies like Jones's, as well as employers seeking affordable coverage, a volatile insurance market proved unsettling. For other companies, the puzzlement was interest rates. Extreme weather. Brexit. A presidential race that the Twilight Zone's Rod Serling might have narrated.
In surveys of optimism by the National Federation of Independent Business, the number of company owners expressing uncertainty as opposed to pessimism is "way out of range," says William Dunkelberg, its chief economist. "What you have is a record-high number of people who can't give you a directional answer about the economy. They just shrug and say, 'I don't know.' "
Well, at least now they know Donald Trump is poised to become president and that the disposition of Congress is decided, even if it remains an unsettled legislative body. For better or worse, entrepreneurs know who the new management team will be. They can guess at the country's policy direction. They can pursue growth with greater confidence.
In fact, the 2017 state of entrepreneurship--from startups to Main Street to fast-growth companies--is a hash of mixed economic signals. As we close out 2016, this is where we stand.
The State of Startups
Like cholesterol, entrepreneurship comes in good and bad varieties. The good kind describes people who start companies because they spot great ways to make money. The bad kind describes people who start businesses because they can't find employment elsewhere.
By that measure, the startup landscape is a picture of fitness. Eighty-four percent of the new entrepreneurs were "opportunity" entrepreneurs as opposed to "necessity" entrepreneurs--up 10 percentage points from the dark days of the recession, according to the Kauffman Foundation's 2016 Index of Startup Activity. The overall new entrepreneur rate rose in 2014 and 2015, the last year for which the Kauffman Foundation has data, with roughly 550,000 newbies being minted per month. (The rate's trajectory was not expected to change significantly in 2016.)
Kristin Celano long dreamed of diving into entrepreneurship, but only this year did the water seem right. A 10-year veteran of companies such as Yahoo and Gilt Groupe, Celano was working for AOL when, she says, she "realized I had reached a crossroads. I thought, 'Am I really doing something that gets me excited about what happens next?' " So in May she resigned and a week later flipped the On switch at JaneHudson, a New York City-based business that designs women's apparel inspired by the bright colors of sports teams.
"I saw this trend in fashion toward making things more customizable and bespoke," says Celano, who manufactures in New York's garment district. "And it's so much easier than before to create content and put your brand in front of people."
It was also a good year for diversity. The number of women who started businesses reached its highest rate in almost 20 years, rising from 220 per 100,000 to 260. (That number still pales beside the 420 per 100,000 men who become entrepreneurs.) Minorities and immigrants gained as well. "Anecdotally, we've seen a lot of economic anxiety across a lot of different demographic groups--especially underserved minority demographics," says Kauffman senior research analyst Arnobio Morelix. "If we are concerned about that as a country, this is good news that we are seeing a more diverse entrepreneurial community."
Alysson Melo and Davi Macedo are an example of that diversity. Friends and business partners from Brazil, they moved to the United States to attend Stanford's LaunchPad, and started Back4app, a company that provides tools for developers to create standard app features. Melo says the business, based in Sunnyvale, California, will create jobs in both countries.
"The startup ecosystem is very mature in the U.S. as opposed to Brazil," says Melo. "It's easier to build partnerships and find advisers." Melo also cited lower taxes, a vibrant investment community, a vast domestic market, and the relative ease of establishing a business in the U.S. as reasons to launch here. "To open a company took us only a couple of days," he says. "In Brazil, the same process will take around two months."
The cloud shrouding all those silver linings: The rate of entrepreneurship remains below that of the 1970s, when it began a three-decade descent. "The long-term decline in entrepreneurial dynamism maintains," says Morelix. "It is not like we have reversed that."
The State of Sales
Along with the startups, long-standing businesses are also recovering from the long national hangover. Small companies (less than $10 million in sales) are boosting revenue more than 7 percent from 2015, and 45 percent over six years, according to Sageworks, a financial analysis firm. Net profit margins in 2016 have risen a little more than 8 percent over last year and 35 percent over six years.
Construction companies and those related to real estate--an economic bellwether--are doing particularly well, according to Sageworks. PSG Construction, a $30 million company in Atlanta, is making hay from the urban trend of redeveloping old industrial buildings into cool new spaces. "We are turning 100,000 square feet of old warehouse into a new, creative loft-office complex," says president Trey Edwards. "We are turning a shoe factory that was built in the early 1900s into apartments."
Sales are up 40 percent at PSG, which is substantially growing headcount as it "plans our next attack," says Edwards. "We are growing rapidly in midmarket projects that are being ignored by a lot of the bigger companies that are also growing with the economy."
Despite the growth--or because of it--small businesses continue to struggle with cash flow. The need to fund fluctuations in working capital, an indication of companies' economic health, is up 2 percent over last year, according to Dun & Bradstreet and Pepperdine.
One problem is that large companies that took their time paying during the recession--for example, by extending payment terms to 40 or 45 days from the usual 30--continue to do so "because they can," says Dun & Bradstreet vice chairman Jeff Stibel. Those corporations' small and midsize vendors, meanwhile, are eagerly racking up sales that they must then service. That means upfront investments in inventory and work force. Those smaller vendors "are business rich and cash poor," says Stibel. "It's a good problem to have, but it's a problem nonetheless."
Five Lakes Professional Services, a $2 million company in Cleveland that helps dental practices manage their insurance purchases, had a banner year, nearly doubling its client roster. "It's like the phone is ringing all the time," says founder Nicholas Partridge. "But as I'm bringing customers in, because the training process is so long, I'm hiring for 120, 150, 180 days from now. And I'm bearing that expense now." The risky alternatives: crushing his existing team or disappointing customers.
"I just got the bill for our posting on Indeed.com," says Partridge. "Oh, my god. We spent $1,000 advertising three jobs that won't be revenue-producing for another three months!"
The State of Capital
Access to capital continues to improve, up 7.8 percent over last year, with a 3.1 percent increase in demand, according to Dun & Bradstreet and Pepperdine Graziadio School of Business and Management. Banks remain by far the most commonly sought source for small companies, and businesses in the $5 million to $100 million range enjoyed approval ratings around 90 percent in the third quarter.
Birds Barbershop is a $7 million chain of funky salons in Austin that just opened its first outpost in Houston. Co-founder Jayson Rapaport asked his local bank for more than $200,000 to finance the expansion. "We are a service business," says Rapaport. "If I fail, they are going to get my barber chairs." He got everything he wanted on "pretty great" terms. "It was a little bit easier this year than I've seen it in the past," says Rapaport. "I think Texas banks [that] have become really committed to real estate in the past few years are now taking a look at their balance sheets and saying, 'We need to diversify.' "
Other small companies still go to bed hungry. Fewer than half of bank loan applications for companies with less than $5 million in revenue were approved; and more than a third of small businesses resorted to the transfer of personal assets, according to Dun & Bradstreet and Pepperdine's third-quarter findings.
Gabe Solomon got the cold shoulder when he applied to Wells Fargo for a line of credit for Solar Media Team, his $4.6 million lead-generation business, in Deerfield Beach, Florida. Solomon has been a customer at that bank for 11 years: "I've got numerous accounts. I've got good credit. All my bills are paid on time," he says. "But because I don't have a history of any large loans, they didn't approve me. It makes no sense why my risk would be that high."
Even companies that scored financing did not get all they asked for. Successful bank loan applicants received, on average, just 65 percent of the amount sought, according to a survey of growth-oriented small companies by Babson College. Across all sources of money--including credit cards, friends and family, alternative lenders, and angel and venture investment--businesses applied for a median of $100,000 and walked away with a median of $40,500.
"I think there's a lot of lending going on to businesses that can show their five C's," says Patricia Greene, a professor of entrepreneurship at Babson. (The five C's of credit analysis are capacity, capital, collateral, conditions, and character.) Less established businesses, or those not producing outstanding results, had a tougher time. Respondents to Babson's survey asked that banks be more responsive to their needs, specifically by offering more flexible terms, smaller minimum loans, and less paperwork.
That may take some doing, given the scale of the institutions that are stepping up their lending. Big is back in the game. "The past few months have been showing a constant gain by big banks, a stalling at small banks, and a fall in the credit unions," says Rohit Arora, co-founder of Biz2Credit, an online small-business-financing platform.
And it's been a tough year for alternative lenders, with Lending Club's legal stumble and calls for more regulatory scrutiny of others. In addition, "as the credit quality of [small-business applicants] improves, they are looking for higher-quality money," says Arora.
The State of the Work Force
Small-business hiring stuttered for much of the year. Toward the end of 2016, hiring was up 0.06 percent over 2015, according to Paychex, which manages HR and payroll for businesses that typically have 50 or fewer employees. But the hiring peaked in June, roughly paralleling the confidence trends. "We're seeing growth, but it's flattish, a little choppy," says Frank Fiorille, senior director of risk management at Paychex. "I think businesses are kind of frozen. They are still hesitant to add that extra one or two employees."
Others are willing to hire but--with incomes rising and the labor market tightening--are unable or struggling to find affordable help. Peter Reeburgh is co-founder of SummitCove, an $8.1 million renter of vacation homes in the Rocky Mountain ski resort town of Keystone, Colorado. In these postcard-pretty mountains, real estate is scarce and exorbitant, meaning workers often can't afford to live there and face hefty commutes. Housekeeping jobs that pay more than $25 an hour attract few takers. Reeburgh says his largest competitor brings in seasonal workers on J-1 student visas and houses them in dorms, but that's too rich for his blood. "We're still hiring for the coming season, but we can't find enough of the people we want," he says.
In fact, finding qualified candidates is the top hiring challenge for small businesses, far outstripping demands for higher salaries and benefits, according to Babson. Technical and functional skills remain in high demand. But STEM isn't everything. These days, "it's also about soft skills," says Babson's Greene. "The need to find people who understand customer service, who can relate well to their co-workers, who can work on conflict resolution--it's really amazing to me how often this comes up."
Hard and soft skills face off at Mosquito Joe, a $12.5 million provider of pest-control services, based in Virginia Beach, Virginia. CEO Kevin Wilson attracts more than 100 résumés for every position he posts. But total-package applicants are scarce. The salient factor is typically age. "We can find strong, younger people who have good technical skills," says Wilson. "But they are also required to deal with franchisees, who may get nervous or upset about something. The younger people often have not developed the skills to handle that." Older applicants, by contrast, have the people skills. "But they may not have the technical skills to keep up with our pace," says Wilson. "We ultimately find candidates who satisfy both requirements; it just takes time."
For workers with the requisite combination of skills, that translates to better wages. And better wages aren't a good thing just for employees. Rising household income (the noninflationary kind) is vital to overall economic growth--people have more money to buy what entrepreneurial companies sell. Paychex recently began computing average hourly wages, and though final data for 2016 isn't available, salaries in companies with fewer than 50 employees "are definitely up nicely year over year and month over month," says Fiorille. "And it's rising."
The State of Regulation
The Affordable Care Act continues to agitate business owners already torn between competing market forces. On one side, "health care costs and premiums are going up," says Joe Laurin, president of Fidelity Health Marketplace, which serves the small-to-midsize-business market. "ACA doesn't help matters, because it increases complexity and reporting that add to the cost."
On the other side, declining unemployment is "telling employers they need to be more competitive in their benefits to attract and retain good employees," says Laurin. As a result, some small companies that earlier pushed employees to the public market and paid subsidies are bringing coverage back in-house. "Employers want to offer more competitive--and that means slightly richer--plans," says Laurin.
More than three-quarters of small-business owners say their highest priority is ensuring that employees see the value of benefits offered, according to a recent Fidelity Investments online survey. Unfortunately, employees aren't getting the message. "They are disengaged," says Laurin. "They are confused."
That's been the experience of Jeremiah Rivers, CEO of Rivers' Edge Countertops, a $4.3 million Newcastle, Oklahoma, company that manufactures and installs granite, marble, and quartz countertops. Rivers says that some "re-education needs to be done" so employees recognize the value of health care coverage. "They don't see it. They don't understand the expense," he says. To correct that, Rivers' Edge is going open book, sharing financials with the company's mostly blue-collar work force. "We are working to be more transparent so they appreciate it a little bit more," says Rivers.
Opinions on the federal minimum wage predictably vary with company size and industry. More than half of respondents to the Babson study, which range in revenue from $150,000 to $4 million, stated that a rise would have a very negative or moderately negative effect on their companies.
Ticket Chocolate, a Loomis, California-based business with less than $1 million in revenue, employs many women who affix labels and package artisanal chocolates while their kids are at school. As the state's minimum hourly wage climbs toward $15, "I either take less of a margin or I have to raise my prices," says owner Tyler Geertsen. "The domino effect is [that] my employees who are higher on the pay scale ask, 'Are you going to increase my wages, too?' "
And small companies across the country have been scrambling to cope with changes to the Fair Labor Standards Act, which was scheduled to take effect on December 1, 2016. [Editor's note: On November 22, after this article went to press, a federal judge issued an injunction against the Act, halting its implementation.] The new overtime rule roughly doubles the salary threshold at which companies can avoid paying overtime to salaried workers. "They must decide whether to increase salaries [so they exceed the new threshold] or move employees to hourly," says Jacqueline Breslin, director of human capital services at TriNet, an HR outsourcing company. Compared with minimum-wage increases, says Breslin, "percentage-wise this is a much bigger change."
Mod Pizza, based in Seattle, has been on a tear this year, expecting to double revenue to roughly $130 million. But preparing for the overtime rule has taken a slice out of profits, as the company bumped managers' salaries roughly 20 percent to maintain their exempt status. Those managers typically have been promoted from the ranks, and include some people struggling back from lives hobbled by drug abuse, incarceration, and other problems. That leaves co-founder Scott Svenson "trying to find that balance between making a difference in people's lives and having a business that justifies the investment because it can generate a full return."
There's a multiplication factor at work in labor and health regs too. "If you take the overtime rule in isolation, that's fine," says Svenson. "If you take the minimum wage changes in isolation, that's fine. If you take the increasing burden in health care, that's fine. If you take paid time off--all these things independently are appropriate. It's the combined effect that's going to have a big economic impact on operators."
It would be asking a lot of the new administration to make headway against such burdens, given the partisanship that now permeates Washington. Entrepreneurs are a resourceful bunch, though, and will power through whatever 2017 holds. "The thing I'm optimistic about," says the NFIB's Dunkelberg, "is that the private sector always pulls us through."