New-Business Formation Is Clocked at a Faster Pace

A survey released yesterday suggests that the number of new-business starts is four times higher than previous estimates.

Last year, 3.5 million new businesses were started in the United States, according to a survey conducted by the Gallup Organization for Wells Fargo Bank in San Francisco and the National Federation of Independent Business (NFIB), a trade group in Washington.

The poll of 36,000 people measures American entrepreneurship more broadly than have studies by the US Department of Labor, Dun & Bradstreet Corp., and the US Small Business Administration. The results may add credence to the view of start-ups as founts of new jobs.

"It puts small business in a much more favorable light," says Murray Weidenbaum, director of the Center for the Study of American Business at Washington University in St. Louis. But he cautions: "When you get a difference in numbers of this magnitude, you need to be careful. He who controls the assumptions controls the results."

Other studies, which put start-ups at 700,000 to 900,000 a year, focus on businesses that have employees. In the new study, by contrast, three-fourths of start-ups have no employees other than the owner or owners.

"We define what counts as a business by letting the respondents define it. We include people who don't always hire three employees," says William Dennis, senior research fellow at the NFIB Education Foundation.

In fact, most of the new businesses are very small. Fewer than half list a business telephone. Two-thirds effectively employ the home as their principal business location. Many owners may hold other jobs.

The study is "very welcome," says Bruce Phillips of the US Small Business Administration. "It shows a great deal more business activity than we had previously thought existed." But "to gauge the true effect, you need to track these businesses ... over time," he says. If these businesses fold quickly, then the survey's results may not be as important as they seem on the surface.

"These businesses amount to less than 1 percent" of US economic output, says Bruce Kirchhoff, a professor of entrepreneurship at New Jersey Institute of Technology in Newark, N.J. "On the other hand, these might be important businesses in the early stages of start-up." He points to Apple Computer's humble, kitchen-counter beginnings as an example of how tiny firms can rapidly expand and become important players.

Mr. Dennis claims the survey shows a higher number of starts overall, not just for the smallest players passed over by earlier surveys.

"Even if you account for the people ... on the margins of the small-business world - that is only 27 percent of the population we are talking about." He defines these marginal operations as those where the owner works less than 40 hours a week, has no employees, no office, and no business telephone listing. Yet the study finds about the same number of new businesses with employees as other surveys have found.

Many experts say the survey's real importance is that it provides information, however scanty, on a sector of the American economy that has attracted little notice until recently. "It is part of business picture which heretofore very little was known about," Mr. Phillips says. Among the findings, for example, is that 900,000 of the start-ups had multiple owners; 2.6 million had one owner.

"What most places do in tracking business development is look for an official paper trail," says Jim Weidman of NFIB. "Well, this study found that a lot of these businesses don't have a paper trail until much farther down the road."

The survey "does give you the general parameters," says Paul Reynolds of Babson College in Wellesley, Mass. The planned follow-up surveys may, over the course of several years, make it possible for the results to be "linked to changes in the economic cycle, interest rates, and all that kind of stuff," he says. This might make the results more useful for understanding what goes on at the bottom of the business food chain, and what effect it has on the rest of the economy.

Lucille Reid, executive vice president of Wells Fargo, says the survey "makes us a lot more confident" about the potential size of the small-business loan market. "Twenty percent of the people starting business are under 30 years of age; that means a much larger market."

The study, observers say, is just the latest sign that start-up businesses are gaining respect as having a significant impact on the economy. "We cannot ignore business in its early stages," Mr. Kirchhoff says. "That's when the ideas and basic technologies form together."