Inevitable Change - Part 1

As originally featured in SustainableIndustries.com by BetterWorld President Matthew Bauer.

A three part series: Reading the tea leaves, accepting the inevitable and bringing focus to the most promising sector of our economy.

For eons, civilization on Earth evolved slowly, innovation and change took place over decades and centuries, until the past few hundred years. Suddenly, an explosion of invention and progress gave society airplanes, cars, global wars, computers, skyscrapers, the Internet, global movement of goods and money, beauty, opportunity and destruction on a level never imagined. For the first time since we pulled our knuckles off the ground, humanity had gotten way out ahead of itself. So who could blame us for buying into the religion of growth for growth’s sake, materialism, globalization and all the ensuing collateral damage.

As this tsunami of advancement began to hit the shore in various forms, the subsequent growing pileup has awakened many to the realities of the positives and negatives of our two-century epoch. In the movie The Matrix, Morpheus offers Neo a choice between the blue pill or the red pill – blissful ignorance of illusion (blue) or embracing the sometimes painful truth of reality (red). Neo chooses red pill and all the pain of reality that goes with it, but also opens himself up to the beauty of possibility.

Our global, one-size-fits-all economy is becoming increasingly outmoded, and with the red pill now making its way into society’s bloodstream, there’s no turning back. As we begin to awake from our hangover and face the reality of recent years, we feel a pull toward something new and different. All around us there is an undercurrent that is slowly but surely transforming the nature and structure of business. It is driven by a cultural shift that seeks greater connection and creativity, living wage jobs, more sustainable lifestyles, empowerment and ownership, and owes much to our newly installed and exponentially growing biosphere connector – the Internet.

Since we’ve taken the red pill, we need to begin by shifting our thinking. Instead of focusing on the bad news as is de rigueur these days, let’s set our sights on the positive currents of our time.

Change is occurring in so many corners of industry – across varied communities, organizations and diverse verticals – it’s everywhere you look. It is visible in the dynamics around the new Access Economy, the disintermediation occurring in every sector, and the “Buy Local – Be Local” initiatives found from Charleston toSeattle. It can also be seen in the resurgence in local banking and a growing multitude of alternative investment instruments. These changes go hand-in-hand with the new wave of creative knowledge and remote workers enabled by the Internet – our relatively new global biosphere network – where over 10 percent of the world’s population is now on broadband in less than 20 years of commercial Internet growth. The list continues to grow, as entrepreneurs find new and innovative ways around the thousand-car pileup otherwise known as our current national economy.  You can liken it to the recovery in nature, how it organizes itself and rebirths after a forest fire, volcanic eruption, or hurricane.

Kirkpatrick Sale’s seminal work, Human Scale, is now over 30 years old, but has never been more valuable in its application to the many systems that drive America, from transportation to education to business. Sale walks through almost every major human-invented system on the planet, from governments, to schools, communities, businesses and even streetscapes, and concludes that each has a breaking point, and that size does matter.

But in this case, running contrary to the big is beautiful mindset, each system has a breaking point and when that is passed, its effectiveness diminishes proportionately as it grows in size. The big box, global corporation cowboys argue that WalMart is more efficient, for example, than many local farmers serving their goods through local stores. When you add up the underlying data and impacts, the ramifications are, in fact, disastrous for communities, our health, the middle class, and on and on. The result is low-wage jobs, lack of ownership and empowerment, decreased food quality and safety, loss of community dollars and loss of Main Street. The point here is that it does not need to be an absolute, but clearly a rebalancing back towards small business is in order, and is on the way.

Small business accounts for roughly one-third of our economy. Firms with less than 100 people account for 99 percent of the companies in the US, 30 percent of the jobs, and 21 percent of the revenue [see How Important is Small Business to the U.S. infographic for details and sources].

However, the number of startups and small firms relative to the overall percentage of full time jobs has been on the decline over the past 20 years. As our economy has further transitioned from manufacturing to services [see Number of Establishments Gaining Jobschart], jobs have been flowing to firms with over 250 employees [Chart 7].

This phenomenon is proportional to the meteoric rise and over-development of big box stores throughout the 80s, 90s, and 00s – which, in turn, led to the  destruction of many Main Street businesses. We can also look to the latter part of this past decade when, during the economic collapse, funds dried up for small businesses, both startup and continuity/growth capital.

This phenomenon is proportional to the meteoric rise and over-development of big box stores throughout the 80s, 90s, and 00s – which, in turn, led to the  destruction of many Main Street businesses. We can also look to the latter part of this past decade when, during the economic collapse, funds dried up for small businesses, both startup and continuity/growth capital.

From a funding perspective, the average small business has approximately $1.3M in annual revenues, which falls into the lower end of the most inefficient funding category in the US business sector today. For companies in the $1M - $5M range, securing growth capital from either bank or equity funding is next to impossible. Even after signing over every possible asset, the financial bar keeps rising higher. This resulting squeeze is not the fault of Main Street or small businesses, but they are left holding the bag, caught in the double whammy of keeping the doors open and trying not to lay off staff, while being told that regulators have tightened the noose and banks don’t want “questionable” loans on their books.

This leaves the equity players in this category with too few assets for bank loans nowhere to go. These companies want to hire and expand but the access to capital is just not there.  This spotlights the outmoded thinking in our economy, and regulators need to wake up to the fact that we are evolving from an asset-based economy. Loans and lines of credit need to transition from houses, cars, buildings, or machines, to track records, profitability, and management teams. This trend is not going away, so laws and rules need to be adjusted.

On the horizon, though, hope springs eternal with Millenials and Gen Y’ers. A recent Inc. Magazine article, showed that of 872 people aged 18 to 34 surveyed about entrepreneurship, 54 percent said they either want to start a business or have already started one. The entrepreneurial spirit is a common theme that binds America and we need to consciously feed this spirit, adjust our thinking, laws and regulations and bolster the next generation. Think of this as the greatest opportunity for our country to stay competitive in the world. What do we have to lose?

The next part in this series will focus on a selection of facts and trends that all point to a inevitable tipping point where small business emerges to become an organizing principle of the new economy.

Also, startups (which typically begin as small businesses) create a constant and large number of new jobs in the US – new firms add a 3M jobs per year, old firms lose 1M (see Job Growth in U.S.  Driven Entirely by Startups, a study from the Kansas City-based  Kauffman Foundation).