The Sobering Reality of Entrepreneurship in the U.S.

Many of us harbor a somewhat romantic idea of being an entrepreneur. Yes, you work hard and possibly around the clock, but the gratification of being your own boss is something few people get at their 9-to-5 jobs. And, of course, if your business makes it big, you could rake in the millions, retire early, become an angel investor… or pursue any other of your life’s dreams. Right?

Not necessarily. There are many common misconceptions to what we believe an entrepreneur’s life is like, how they come to be, or even where the United States stands in the world of entrepreneurship.

In his book, The Illusions of Entrepreneurship, economist Scott A. Shane addresses these misconceptions and identifies the realities of starting one’s own business.

Here are some of his main points:

The United States is Not  # 1 in Self-Employment Rates

Contrary to popular belief, the United States has fewer self-employed workers than many other countries. In 2008, we placed 35th out of 36 countries ranked by self-employment rates as a percentage of total employment in the Organization for Economics Cooperation and Development’s (OECD) 2010 Factbook. Turkey, Greece and Mexico had the highest self-employment rates as a percentage of total employment.

In a survey on entrepreneurship activity in 54 countries published in its GEM 2009 Global Report, the Global Entrepreneurship Monitor, a nonprofit academic research group, found that the new business ownership rate is much lower in the United States than that in countries like Guatemala, Greece and Argentina. The established business ownership rate is also lower in the United States than that in the Republic of Korea, Finland and Colombia.

The survey also found that each country has different economic and social conditions affecting the rate of entrepreneurial activity. In Saudi Arabia for example, few Saudis engage in starting their own business because of the country’s high reliance on income from oil extraction. On the other hand, countries in Latin America have a higher rate of business ownership because they have to be more self sufficient in order to make money.

Why are there such variations in self-employment rates? “It really depends on the opportunity cost,” says Shane. Consider this example: let’s say the medium annual income in the U.S. is $30,000 and your business idea will bring in $2,000 per year, at least in the beginning. Unless you have a comfortable nest egg to dip in while your business is in start-up mode, you will probably choose to work for someone else for $30,000 rathan than starve with $2,000, right? “However, if you are in a country like Peru where the per-capita income is probably a couple of thousand dollars and the idea you have will bring in a couple of thousand, then that idea will be easier to generate,” Shane says.

Another factor is choice. In many of the countries with high entrepreneurship rates, there are typically not enough jobs or anyone hiring. Unemployed people there typically have no choice but to start their own business.

More Hours, More Stress

We tend to believe that working for ourselves will make us happy — and that is generally the main reason why entrepreneurs opt to work for themselves, writes Shane.

The typical entrepreneur, however, works more hours than a person who works for someone else. And contrary to popular belief, he or she isn’t happy about it.  According to Shane, entrepreneurs often work more hours because they have to, not necessarily because they want to or because it makes them happier.

According to a 2009 Gallup survey, almost half of self-employed Americans (49%) report working more than 44 hours in a typical work week, compared to 39% of American workers overall. A typical work week for a wage employed American ranges between 35 and 44 hours.

It’s important to understand the realities and responsibilities that come with entrepreneurship. Handling them well is not impossible: just look at the long list of entrepreneurs who have made it. But it’s important to know what you are up against.

During this recession, we have witnessed a rise in entrepreneurship — but not necessarily in the numbers of successful entrepreneurs. “The number of people that are transitioning into self-employment has been higher in 2008 and 2009 than in 2007,” Shane says.  “But at the same time, people who are working for themselves are finding it harder to find customers, sell products, finance their business and keep going. The number of people that have been exiting their business has gone way up.”

The U.S. Small Business Administration says that 50% of small businesses fail within five years — but look on the bright side: your business could be in the 50% that succeed.

Draw up a business plan and approach self-employment with caution and preparedness.  Work hard and aim to succeed — but always have a plan B, just in case.