Is Starting a Small Business a Cure for Unemployment?

There is a myth we have in America, one that grows out of a kernel of truth, that anyone can start a small business and prosper. If you have trouble finding a job, the thinking goes, you can start a small business to replace that job. A recent article by James Altucher (“10 Reasons to Quit Your Job This Year“) even suggests this course of action as a way to get out of a job you don’t like.

The article is worth reading, because his take on the state of the work-a-day world for the average employee is dead on target. It’s also good summary of why the job market is so lousy right now. Where he loses me is on Reason number 7, “Excuses,” in which he rather snidely replies to what are, frankly, legitimate concerns of a potential small business owner:

But some people say, “I can’t just go out there and consult. What does that even mean?”

And to that I answer, “Ok, I agree with you.” Who am I to argue? If someone insists they need to be in prison even though the door is unlocked then I am not going to argue. They are free to stay in prison.

Now, to be fair, he is talking mostly about changing jobs, not going from unemployed to being a small business mogul. If you are already employed, you probably have some resources to plow into a small business. But you will hear the same cavalier attitude directed towards those who hesitate to address their unemployment by starting a business.

Not everyone is an entrepreneur. This should be obvious. If you’ve been unemployed for a long time, chances are you have a growing distrust of the market’s ability to reward hard work and initiative. This is also known as “perspective.”

When I was an undergraduate, I took one of those aptitude/interest tests that supposedly tell you what you are good at or interested in doing. I scored quite high on arts and science, but on business I was off the scale–the low end of the scale. The theoretical lowest score for any given category was 5 points out of 100. My business score was 3. That said, I have started three businesses. My talent for entrepreneurship is roughly equivalent to a falling rock’s talent for gravitational acceleration. I know enough by practical experience that I am not enthralled by the myth that starting a business is the way out of unemployment.

Here is the problem: the same forces that make the job market so ugly also make this a bad time to start a business. Most new small businesses fail. Businesses fail for one primary reason: lack of sales. If no one’s spending money (the basic definition of a recession), sales will be a problem. Can you last long enough to build a clientele? If ¬†you’ve been out of work for a while, will you be able to get a loan to start your business? Probably not from a bank.

This leads us to another issue: corporate excesses make it hard on small businesses. Of my three businesses, one went down partly under the force of the 2001-2004 recession, but mostly because of a deal with a major corporation that went sour. The corporation in question basically held all the cards, because they were big enough to set the terms of the agreement. They stuck us with expenses we couldn’t cover, and the business died. Another business I co-founded is still going strong, but the investors gradually gained control when the economy went south in 2008. I was laid off the following year.

The simple fact is that small-scale businesses are a low-odds proposition. But it is also quite true that the impact of major companies are responsible for creating such a difficult situation in which to do business. Workers coops probably provide a good alternative, but this is something our society is still struggling to figure out how to do well.

If you want to try setting up a business, give it careful thought. Weigh the risks. Do obsessive amounts of research into your market. Take advantage of free services for small businesses. If there is a SCORE chapter in your area, contact them through you local Chamber of Commerce to get some excellent nuts-and-bolts help. But understand that it may not work out. I wish I could be more optimistic, but such are the times we live in.

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