This case has been made that government attempts to manage economies through regulation, laws, and taxes discourage entrepreneurs entering into the marketplace. I recently asked Michael, a young entrepreneur in his 20s, what were some of his fears about being a entrepreneur in America. We’re not using his full name to protect his identity but this is what he had to say:
AB: How did you develop an entrepreneurial spirit and what worries you about the future?
Michael: For as long as I can remember, I’ve always wanted to start a business of some sort. I frequently see businesses and think, “That could be done better” or run into a personal frustration in life and think, “I wish there was a company out there to build this product or provide this service.” Surely most of my ideas wouldn’t work out in reality, but I have a few business ideas up my sleeve that I’m fairly confident could be successful. There’s just one problem…I’m mildly terrified of starting a business.
Many would-be entrepreneurs are held back by the fact that 75% of startups fail. That’s certainly a truth to be concerned about, but after a finance and economics BA, a couple years of experience in supply chain, marketing, and finance along with an MBA, that’s not the reason I’m hesitant to start a business. Rather, my fear is of employment law, health regulations and litigation.
AB: How are lawyers muddying the waters?
Michael: It seems to me that businesses are run by lawyers now as much as they are run by business executives. A significant amount of business decisions are made in order to minimize legal risks instead of maximizing value creation. For example, a lot of corporations spend extensive time training their managers how to interview…not as much to be able to recognize great candidates but to make sure no questions are asked in the interview that could lead to a lawsuit for “wrongful non-hiring.” I don’t want to start a business if I’m forced to choose between interviewing in such a way that will bring out the best candidates and interviewing in such a way that will minimize the chance of a lawsuit.
I mean, we live in a world where McDonalds has to put “Caution: This Cup Is Hot” on its coffee cups because someone burned themself and an idiot judge awarded damages because there wasn’t a proper warning on the cup. As if ordering a cup of coffee wasn’t a tip off that the ensuing cup would be hot. It may sound overblown, but the reality is that people bring frivolous lawsuits against businesses all the time and make money doing so because it’s normally just cheaper for firms to settle instead of incurring excessive legal fees.
The thing is, corporations don’t enjoy getting sued but they can ultimately survive because of their deep pockets. But small businesses are often frivolously sued as well and many of them can’t handle the cost even if they have insurance to help cover potential legal costs. When you’re only making a few hundred thousand or few million dollars of revenue each year, there’s little cash available to fight a lawsuit.
I’ve worked for two major corporations now and have yet to hear of a single person getting fired for poor performance. Corporations do the cost-benefit analysis and recognize that it’s cheaper to move a poor performer into a low-impact part of the company than it is to fire them and risk a wrongful termination or discrimination lawsuit. If managers want to fire an employee, they pretty much have to make a court-worthy case to HR that the person should be let go. Instead, executives find a bit of relief when hard times come and they have an excuse to cull the ranks via mass layoffs. It’s the only way to safely get rid of bad employees. And if you consider that corporations with deep pockets choose this strategy, then what does it say for a small business that is making less than $250k in profit?
AB: How would something like Obamacare affect entrepreneurs?
Michael: Beyond the risk of civil suits from potential, current, or former employees, small businesses face enormous cost increases from health regulation. If I started a business that was nearing 50 full time workers, I’d be forced to choose between subsidizing the soaring cost of health coverage for employees or paying a smaller (but still exorbitant) penalty and pushing the cost of health care onto my employees, either option making my business less competitive in the marketplace. And shoot, the Obamacare bill was so ridiculously long and complicated that Nancy Pelosi famously voted for it saying that she’d take time to read it after it was turned into law. Now that’s just the original law and doesn’t even include the extraordinary amount of additional rules that are being added by regulatory bodies. If the people who created and voted for this law don’t have the time to read and understand it, how am I or any other business owner without a law degree supposed to feel confident that we’re abiding by it??
AB: In light of this, how are you thinking about the future?
Michael: In the end, President, Congress, and the court system are making it exceedingly complex and risky to start, run, or own a small business. And when complexity and risk increase, the payoff for risking my career and savings takes a nosedive and the danger of a failed business, civil penalties, or even criminal penalties shoots up. A simple cost-benefit analysis shows that it’s increasingly a smarter play for me and many other potential entrepreneurs to take a job with someone else’s company instead of attempting to create new, innovative value in the marketplace.
Michael is a native of St. Louis and hopes to someday put his business degree from the University of Missouri and his M.B.A. to good use by starting a business or three.