What The Data Tells Us About New Businesses
Over the decade prior to the pandemic, the United States had experienced growth while the rate of new business creation declined. This was part of a pattern that has been there for decades. The pandemic did what countless economic programs could not, and spurred a surge in new business formation. One category of business that has taken prominence is what the Census Bureau refers to as nonemployer firms. There has been a rise of zero-employer businesses attaining million dollar valuations.
How Important are Nonemployer Firms?
Nonemployer businesses are the main source of income for 40% of their owners, and an additional source of income for the remaining 60%. About half of nonemployer business owners work on their businesses for fewer than 20 hours a week, whereas 30% work on them for at least 40 hours per week, with 20% spending 20 to 40 hours a week on these businesses.
Although they are less talked about than venture capital-backed startups, and big corporations, nonemployer businesses are a big part of the American economy. Four in five American businesses are nonemployer firms. Since 1997, the number of nonemployer firms has risen by 58%, from 15.4 million in 1997 to 24.3 million in 2015. Employer firms, on the other hand, have grown by 6% in that period. These nonemployer firms earn 3% of revenue generated by American businesses. The average nonemployer firm earns $47,000 per year, compared to employer firms who earn almost $6 million a year.
How Do They Operate?
Many nonemployer firms use automation, contractors and outsourcing to compensate for their lack of employers. Many nonemployer firms are owned by a single individual, but in many cases, they are run by a team of founders or as partnerships. For instance, Vital Pet Life, an ecommerce pet store that specializes in Alaskan salmon oil supplements , is led by Donnie and Kyle Yamamoto. Other examples of successful nonemployer firms are Nomad Lane, the travel gear and handbags maker, and Rich Girl Collective, a business that trains women to be entrepreneurs.
What Does the Data Tell Us About their Demographics?
Changes to how the Census Bureau collects data enable us to see the demographics behind the creation of nonemployer firms. Looking at the changes, it becomes clear that this sector of the economy is much more inclusive than sectors such as venture capital backed startups. Whereas only a fraction of venture capital backed startups fund women-led or minority-owned firms, nonemployer businesses are much more equitable.
According to the latest data, 40,000 nonemployer firms earned $1 million in revenue in 2017. Of course, considering that there are 23.5 million nonemployer firms, this is a relatively small number. Yet, this does tell us that nonemployer businesses can have a level of success that is often thought to be beyond them. Not only that, they are engines of equitable growth. 6,900 of those 40,000 firms were owned by minorities and 5,100 were owned by women. You won’t get that level of equitability in the venture capital world.
In terms of ethnic groups, the data breaks down like this:
|American indian/Native Alaskan||60|
|African American or Black||1,100|
|Native Hawaiian and other Pacific Islanders||40|
|Veterans (overlapping with other demographic groups||1,800|
As we said, the data is not the biggest in the world, but it does show that the potential of nonemployer firms is underappreciated. Like sports records, which tend to look ordinary once the first person has broken them, it may be possible to get a larger proportion of nonemployer businesses to become $1 million revenue earners, if the right support structures are created for them.
What is unclear as yet is why these million dollar earners become so. The secret ingredients that go into making them are as yet unknown to us. We don;t know if they have greater access to much-needed capital than their less-successful peers, or what other factors differentiate them.
At a time when diversity is a big part of the conversation around how we can make businesses work for communities, nonemployer firms are an often neglected solution.
In 2017, the country’s 8.2 million minority-owned nonemployer firms earned $279.3 billion in revenue. Between 2014 and 2017, the number of nonminority-owned nonemployer businesses grew by 16.7%, to 8.17 million. Of these 8.17 million firms, 3.6 million (44.5%) were Hispanic-owned; 2.95 million (36.1%) were black of African-American owned; 1.96 million (24%) were Asian-owned; and 38,500 (0.5%) were Native Hawaiian and other Pacific Islander-owned. You look at those numbers and the diversity is unbelievable. Clearly nonemployer firms are a sector where minorities are thriving in ways that they do not in the world of venture capital.
There were 3.779 million (46.3% of minority nonemployer firms) minority women-owned nonemployer firms in 2017, earning $83.7 billion as a group.
Minority veteran-owned nonemployer firms totalled 312,000 (3.8% of minority nonemployer firms), earning $9.3 billion as a group.
Where Do They Get Capital From?
Women and minorities often face challenges accessing capital. What is unique about nonemployer firms is that a third of their owners say they did not need capital to seed their businesses. Of the owners who do need capital, 79% are able to make do with the personal or family savings. They also use a combination of credit cards, home equity loans, business loans and even venture capital, but they use these alternative sources of income at a lower rate than employer firms.
What Do They Do?
Nonemployer firms tend to be involved in passenger transportation and the performing arts, but they exist in practically every industry in the country and make up 80% of industry subsectors. They operate hobby shops and museums; provide dating services and pet care; manufacture electrical equipment, clothing and machinery; process data; sell real estate; and much more.
So, if you want to start America;s next great nonemployer firm, click here and learn more about how you can get started.