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Why Fewer Americans Are Starting New Businesses

Small Business Owner
Ryan McVay | Photodisc | Getty Images
Small Business Owner

America may be going out of business when it comes to starting new businesses, according to a recent report.

The study—from the non-profit New America Foundation—argues the U.S. is seriously in danger of losing its entrepreneurial spirit because the number of small business created has been declining since the 1970s.

"Most numbers collected on entrepreneurship haven't reflected the increase in population," says Lina Khan, co-author of the report and a policy analyst for the New America Foundation.

"We see entrepreneurship declining per person and what figures there are may have over-counted the number of small businesses," Khan says.

What the report reveals is that—beyond the impact of the Great Recession—small businesses declined by 53 percent between 1977 and 2010. Meanwhile, the reports says, the share of self-employed Americans has been declining since 1991—dropping more than 20 percent by 2010.

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The survey contends that the U.S. government has largely "failed to adjust how it gathers data to reflect the outsourcing revolution of the last two decades" and counts as small businesses independent contractors who actually depend on one big company for work.

The Small Business Administration says there are more than 27 million small businesses—with 500 employees or less— according to its latest figures. But the number is anything but accurate, says Khan.

"Wal-mart used to run its own warehouses, but now it contracts them out," Khan explains. "Firms that now exist for serving one client are counted as independent. The government has not adjusted its data collection to reflect fundamental changes in our political economy.”

So is the American entrepreneurial spirit dying? Analyst reaction to the New America Foundation survey is mixed, but some experts admit there's a long-standing difference between what makes an entrepreneur and someone who is self-employed.

"We confuse the two for historical reasons because it is difficult to measure one without the other," says Daniel Isenberg, a professor of management practice at Babson Global and executive director of the Babson Entrepreneurship Ecosystem Project.

"But entrepreneurship is inherently growth oriented, whereas self-employment may or may not be," Isenberg adds. "And so the conclusion that small businesses create the large percentage of jobs is almost inaccurate."

A sea change for entrepreneurs

If there are fewer entrepreneurs than the government counts, one expert says that's because bigger businesses have come at the cost of smaller ones.

"The entrepreneurial businesses of 30-40 years ago have been consolidated specifically in the retail space," says Jeff Stark, audit partner at Sensiba San Filippo,a Silicon Valley CPA and consulting firm.

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"With the advent of the big box retailers like Wal-mart, Costco and Walgreens, and internet operations like Amazon, it's very difficult to start a new retail business selling toasters and appliances," Stark adds.

And there's always the issue of money that keeps some entrepreneurs from even starting, says Jennifer Kluge, president of the Michigan Business and Professional Association. "

"Compared to previous years, it's tough to get funding from the big banks these days. It's even tough to get money from private investors," Kluge says.

Any shortage of small business growth comes because the U.S. has cut down its traditional source of entrepreneurs, says Michael Wildes, managing partner for immigration at the law firm Wildes and Weinberg.

"The global economy demands a new sort of competitiveness, and immigrants tend to be big risk-takers," Wildes argues. "We have to examine the limits on visa availability that we have. America is a great experiment in capitalism, and immigrants appreciate this opportunity."

Besides usual complaints of over regulation, high taxes, and employee health care costs, one analyst says just trying to develop a business trade is difficult.

"The training necessary to become a beautician in many states is far greater than the training to become an EMT technician," says Bob Zadek, a finance attorney and manager of Lenders Funding LLC, which makes loans to small business. "Licensing requirements have little to do with the protection of the public, but rather are imposed simply to keep out competition."

No reason to worry?

Still, even with these issues, others see encouraging signs for entrepreneurs.

"There has been a significant increase in the number of women entrepreneurs in the last 20 to 30 years," says Christine Janseen- Selvadurai, director of the entrepreneurship program at Fordham University. "Technology has really made things easier."

"Thirty years ago you had to save for storefront or office space. Now all you need is a chair and your laptop and you're ready to go," says Michelle Patterson, executive director of the California Women's Conference and CEO of Event Complete, an event management company.

So who qualifies to be an entrepreneur these days? Is it as simple as plugging in your PC?

Lauren Berger
Source: Lauren Berger
Lauren Berger

Lauren Berger is a 28-year-old college graduate who runs her own web site InternQueen.com. Business Week Magazine once named her number five on its annual list of Young Entrepreneurs aged 25 or under.

Set up in 2009, Berger's site helps students find and apply for internships with major firms.

"I was excited about my business but I didn't have the financial resources," says Berger, who operates out of her Los Angeles home and lists herself as CEO.

"I eventually had $5,000 saved and used that. I didn't get a lot of support," Berger explains.

She gets her revenue from advertising and companies listing internships, while college students have free access to postings. She's just taken on a full-time worker and says she makes more than six figures but supplements her income.

"I am a top college speaker, I have a book coming out, and I do endorsement deals," adds Berger. "I'm focusing on expanding my reach."

For Jeff Platt, CEO of Sky Zone Indoor Trampoline Park, his reach now includes three theme parks, nine full-time managers, and some 100 or so part time workers, as well as several franchised parks.

But getting up and running wasn't easy. The 28-year-old started his business from Los Angeles in 2004 with his father, and used funds from family and friends, after graduating from business school.

"We had to create the product organically. We had some growing pains," Platt says. "We had to learn how to operate and promote our parks through trial and error."

Platt typically takes over industrial buildings for his parks and often faces issues over zoning laws.

Jeff Platt Sky Zone
Source: Sky Zone
Jeff Platt Sky Zone

"It's not so much the taxes I pay, but the regulations on zoning have been a huge challenge," Platt says. "It takes a significant amount of time and money, but we get through them."

Despite the difficulties, Platt say revenues from 2011 were $15.7 million—up from $3.4 million in 2010.

"My advice to anyone starting a business is surround yourself with people smarter than you," Platt adds.

The current business atmosphere needs to improve

Whether there are fewer entrepreneurs in the U.S. than officially counted, it's clear to some experts that the current atmosphere must improve. But agreement on change seems as difficult as counting small business owners.

"Government at all levels can do more to support entrepreneurs and innovators," says Christine Janseen-Selvadurai. "They should provide incentives and tax breaks, not hurdles and unnecessary rules."

"I'm not sure the government has to or can do more than they already do," argues Jeff Stark. "What there is, is a lack of appetite from investors to continue to fund struggling companies."

As for determining who is an entrepreneur, the business world has evolved, says Caroline Daniels, a professor in entrepreneurship at Babson College.

"It's too broad a mix to say who is or isn't one," says Daniels, who runs a property company and a small children's publishing firm. "Many people are holding down their days jobs while being an entrepreneur. I think we have to redefine what we're talking about."

In the end, whether there's a new definition of entrepreneurism or not, Lina Khan says there's enough evidence of a fall-off in the small business community for a serious wake-up call.

"People used to start a business with the idea of building wealth and passing it on to their kids," Khan says. "But now what's considered a small business is someone working on a contract for a company that may have laid them off. We need to acknowledge the decline as a problem."

Email us at SmallBiz@cnbc.com and follow us on Twitter @SmallBizCNBC.

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