Entrepreneurs Starting Up With Fewer Employees

The following is an excerpt from an article in:


The New York Times
Friday, October 05, 2012

Entrepreneurs Starting Up With Fewer Employees

By CATHERINE RAMPELL

KANSAS CITY, Kan. — When Mike Farmer started a digital search company in 2004, he had a staff of 10.

Today, in his third start-up, he has one employee: himself, aided by seven contractors working more or less part time. His budget, like his head count, is smaller, and by his account the new model is much more sustainable.

“I think we’re all headed toward an agent economy, where everyone becomes an agent or a service provider instead of an employee at some big corporation,” said Mr. Farmer, whose mobile search app, Leap2, now has 10,000 users. “That’s just how the world is evolving. It’s like telecommuting, but it’s taken to the level of telecompanies.”

For more than a decade, start-ups have been getting leaner and meaner. In 1999, the typical new business had 7.7 employees; its counterpart in 2011 had 4.7, according to an analysis of Labor Department data by E. J. Reedy at the Kauffman Foundation, a research organization focused on entrepreneurship.

The lean model bodes well for companies like Leap2 that hope to become power players with much less manpower. With a work force of contractors, Mr. Farmer said Leap2 could “dial it up and dial it down” as business demanded without having to spend money unless it was necessary, improving the company’s chances of survival.

But the implications for the American work force are worrisome, and may help explain why economic output is growing much faster than employers are adding jobs. On Friday, two days after the issue dominated the first presidential debate, the Labor Department will release the unemployment rate for September along with payroll gains, which economists predict will barely keep pace with new people joining the labor force.

For decades, new companies have produced most of the country’s job growth. Without start-ups, the country would have had a net increase in jobs in only seven years since 1977. The number of people employed by new businesses peaked in 1999, the height of the tech bubble, and has fallen by 46 percent since then, to 2.5 million in 2011, creating a slow leak in job creation that has proved difficult to plug.

“There’s this idea that we can somehow rely on entrepreneurship to get us out of the job crisis,” said Scott Shane, an economics professor at Case Western Reserve University. “That’s getting harder and harder, considering there are fewer and fewer of them, and they’re each employing fewer people.”

The decrease in start-up size is probably driven by some combination of technology, changes in management philosophy and tighter financing.

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