Everyone dreams, in some capacity, of bootstrapping their way to success. “All it would take,” we tell ourselves, “is for me to get myself in order, get the resources together, and dedicate my time toward making (insert goal here) a success.” For many people, that means finally writing a book. Or learning a new skill. For others – would-be entrepreneurs, that is – it means taking the plunge and starting a business.
But anyone who has started a business will tell you that it’s not that easy.
It’s easy to get inspired by all of the success stories out there, from the founding of current behemoths like Facebook or Google, to the resilience of your local coffee shop to withstand the influx of Starbucks or Dunkin Donuts into the neighborhood. It gives us hope. It makes us think that the only thing holding us back is our laziness, or lack of a solid idea or resources.
For some, that may be true. There are talents out there that are only held back by their own inability, or unwillingness, to take a risk. But that’s not the whole story; it takes many chips falling in the right places to find success in the business world. Opening your own firm, be it a marijuana retail store or a tech startup, is a long, difficult, and often scary process. And it’s for those reasons that any would-be entrepreneurs should temper their expectations.
You shouldn’t be so easily swayed from abandoning your dreams, but you should enter the fray with a realistic set of expectations. The free market is as cutthroat as it gets, by design. It’s Darwinian competition at its finest, and the firms that don’t adapt to shifting climates and threats will be rendered extinct. You can be the new apex predator in the industry of your choice – it’s just a matter of being more innovative, creative, and productive.
But as for your expectations, here are four reasons you should enter the American Thunderdome with a sense of caution. And for regulators and political leaders, who often profess that encouraging small business and creating jobs is a top priority, these may be a sign that reform is needed.
1. Startup failure rate is climbing
First and foremost, resourceful entrepreneur, you need to know that the odds are not stacked in your favor. Businesses are failing at a higher rate now than at any time in the recent past. There are a number of reasons for that, but it’s something that has economists and policy makers on high alert. Part of the reason is that existing firms – big corporations and established brands –are as entrenched as ever. And they’re using the system to their advantage, playing a sort of ‘scorched earth’ strategy to ensure that others can’t follow their paths to success.
Not only that, but when a whiff of viable competition comes up, bigger companies are quick to acquire them – snuffing out potential threats in short order. You’re up against established interests, which have no plans on being knocked from their perch. And they’re as powerful as ever.
2. Barriers to entry are mounting
That ‘scorched earth’ strategy we just mentioned? It’s manifesting itself through a blend of tactics being used by big businesses to make it harder for competition to form. They’re using lobbyists to get rules changed, putting legal and economic barriers to entry in the way of any new firms who may pose a threat. Think about the legal troubles that companies like Uber or Airbnb are facing – there are existing interests who are using regulation to try and keep others out. Ironic, considering that many of those interests wouldn’t be where they are, had they needed to overcome similar obstacles.
This is happening in a number of ways, one of which is called ‘regulatory capture‘. It’s a manner in which business influences government, setting things up in a way in which they get preferential treatment, or friendlier laws and regulations. Those may be set up to keep you or other entrepreneurs out of the game. Keep that in mind.
3. The tax rate can be insane
The tax rate is something that is often debated between the right and left, with one side feeling that the other should be paying more. The corporate and business tax rate is brought up often, with some calling for the abolishing of corporate taxes, while closing loopholes that allow businesses to hide and stash cash in tax havens.
It’s complicated, but this much is true – the U.S. does have the highest corporate tax rate in the world. That’s not the effective rate, mind you, but it’s true nonetheless. And for small businesses, it’s really ugly. As Speaker Paul Ryan has claimed, it’s as high as 44.6%.
And that’s true. That’s a lot to give up to taxation, especially for a small business. Small companies don’t have the resources (accountants, overseas connections, shell companies) to lessen the burden. This isn’t always the case, of course, but for some businesses, this tax rate is the difference between surviving or dying. And if you want to start a firm, these are numbers that may persuade you to focus your time and money elsewhere.
4. Resources are as scarce as ever
Chances are, you’re a member of the middle or lower class. And, chances are, you’re feeling the burn in the form of stagnating wages and relative slow economic growth. As a result, you don’t have a lot of time and money to make your grand entrepreneurial experiment work. That means there’s a higher risk factor, which is probably dissuading many would-be business founders from getting started in the first place.
The middle class is falling behind, in some places more than others. Because of that, it means that entrepreneurs have less to work with in terms of their own capital (be it money, or time), and prospective customers. People have less money to spend, and that’s bad news for firms trying to get a foothold in a given industry.
Don’t abandon all hope, ye who enter American industry. But tread lightly.