Risks and Benefits of Starting a New Business

Unfortunately, the record shows that two out of three new businesses fail within their first four years. According to a 1982 President's report, The State of Small Business, the share of small business output has been declining since the early 1960's. Large companies, in part due to their efficiency, have taken over markets that previously belonged to small businesses. Nevertheless, estimates for 1976 showed that small businesses, defined by the Internal Revenue Service as businesses having fewer than 500 employees, accounted for 39 percent of all the goods arid services produced in America.

According to the report, small businesses face many other problems. Bad economic times affect small business more than they do big business. In addition, small business profits tend to fall faster, and small businesses are more likely to fail. According to the President's report, "The larger the firm, the better chance it has of surviving." The report also said, "A firm, with 21-50 employees has a 54 percent chance of surviving four years. A firm of under 20 employees has a 37 percent chance of surviving four years.

What problems face small business now? In January 1985 the National Federation of Independent business reported that the four top problems facing small business at that time were taxes, slow sales, the high cost of borrowing money and competition from other businesses. On the bright side, the innovativeness of entrepreneurs in small businesses is likely to enable a small business to react quickly and successfully to changing times. The report points out that 80 percent of new jobs are provided by businesses with 100 or fewer employees. Small businesses produce twice as many innovations per employee as larger firms. Those innovations are the source of new jobs and new opportunities for entrepreneurs.

Where is entrepreneurship most likely to be welcomed? The answer is in small business. In fact, (he word "entrepreneur" is frequently used to define a small business owner, since the owners of small businesses usually carry out many of the functions of those businesses themselves. In a large business the tasks of organizing and operating are done by many hired managers.

Large and small businesses organize in different ways to meet their objectives. Risk is diffused in corporations. Corporate leaders may risk their own jobs when they make major decisions that affect the future of the corporation negatively. But even if they lose their jobs, they have not lost personal investments. Because of the tremendous resources available to big business, a major failure in a large corporation is less likely to close that business than a similar disaster in a small business. But risk and size are only part of the story.

The very nature of the corporate business environment may not be suited to the independent personality and motivation of the typical entrepreneur: Large corporations may want bright and creative entrepreneurial talent to develop new or improved products or services. But large corporations with their established procedures and layers of management authority, are seen as limiting innovation and the freedom the independent entrepreneur seeks.