Whither Entrepreneurship?

By Marc Tracy

We examined this question earlier this week: comparing a pessimistic post by Scott Shane of You're The Boss and a more optimistic one by John Tozzi of The New Entrepreneur, we concluded that while traditional small business owners may be genuinely pessimistic, and not without legitimate reasons, the dynamics of the recession are actually likely to encourage the rise of non-employee--that is, single-person--businesses.

Well, we have another post in us on The State of Entrepreneurship, and it once again results from the dialectic between a pessimistic Scott Shane and a less-pessimistic John Tozzi.

Shane writes: "Most Americans would like to believe that this country is getting more entrepreneurial over time. While I wish this were true, the data don’t agree. Policy makers need to take a look at these data and acknowledge the pattern." And Shane has the charts to prove it. We don't want to rip them off; but go to his post and see for yourself. Disheartening stuff.

What's to blame? Shane fingers Wal-Mart and the like: "Large, efficient companies are able to out-compete small start-ups, replacing the independent businesses in many markets. Multiply across the entire economy the effect of a Wal-Mart replacing the independent restaurant, grocery store, clothing store, florist, etc., in a town, and you can see how we end up with a downward trend in entrepreneurship over time." Indeed, Shane has literally written the book on this phenomenon. It's a compelling explanation.

But Tozzi takes a different view.

Without denying the Wal-Mart effect, Tozzi points to the "emergence of niche markets where many small players compete, without the dominance of a Wal-Mart-like giant, or even mass markets where niche players are gaining a foothold." This is straight out of Chris Anderson's famed book The Long Tail, in which Anderson--the editor of Wired--predicts an infinitely fractured marketplace increasingly shifting away from a select few blockbuster goods and towards many, many, many more smaller-selling niche goods.

How does Tozzi rebut Shane's convincing graphs? He notes that they all start twenty years ago, and, arguing that "there could be an inflection point around the beginning of this decade," he predicts that the data we get in the coming years could show that things turned around for entrepreneurship in America thanks to the long tail/increased prevalence of niche markets. Again, compelling.

We took Tozzi's side last time; this time, we're a little more bearish. Tozzi's point certainly carries during boom times, especially the middle of this past decade: increased consumer spending really did prove a boon both the Wal-Marts and the tiny businesses of the world, which benefited from increased profitability of niche markets. The rising tide truly did lift both the big and little boats. However, the past two years (and especially the past year) have not been so kind to consumer spending, and while that ultimately hurts everyone, it's going to hurt the little guys, operating in their little niche-markets, far, far more than it is going to hurt the Wal-Marts (indeed, Wal-Mart is still managing to turn profits).

So on the one hand, we think that Shane's numbers might be a little misleading (although we don't doubt their integrity), and that his "Wal-Mart effect" explanation might be a little oversimplified (though we don't doubt its ultimate validity). However, recessions have the effect of simplification, and we'd suspect that entrepreneurship indeed is taking a disproportionate hit as of late.

Comments (0)

July 2, 2009 1:42 PM