Pssst. Want to know a secret? Entrepreneurs are insanely confident.
Of all the data points released about the economy week after week, perhaps the least helpful nowadays is the Kauffman/LegalZoom Startup Confidence Index. With apologies in advance to the Ewing Marion Kauffman Foundation and online legal-advice company LegalZoom – both of which I have no doubt carry the best intentions and otherwise do good work – and, with an additional shout out to John Calvin, tracking startup confidence seems an exercise in predestination.
You will never, ever find a time when startup confidence, as measured by this survey, is not high. Ever. Startup owners are confident, so confident that, well, they started a company. One needn't waste human hours tallying numbers to express that.
Let's take a deeper dive into the numbers themselves, released this morning. Despite what the companies call “ceaseless uncertainties in Washington” and “mixed signals” on the economy, it turns out the confidence of owners of startups is at a new high of 86 percent.
Put aside that the “new high” isn't all that significant since the survey has only been tracking sentiment since the first quarter of last year. There are other, more significant problems with the survey and the results:
The life of the businesses surveyed is too short. In ordered to be surveyed, you had to have started a business within the past six months. This is the biggest problem with the data compiled: You are talking to people who felt optimistic enough about their own abilities to quit their jobs and start a business. It puts to mind what Reed Hastings said, that to be an entrepreneur “you have to feel like you can jump out of an airplane because you're confident that you'll catch a bird flying by.” Entrepreneurs may succeed or fail, but confidence never flags.
It asks the wrong question. The lead question is a simple one: “How confident are you that your business will be more profitable in the next 12 months than it is today?” Well, most businesses are not profitable in year one, let alone in the first six months. So, since you are asking people who are trying to turn losses into a viable business whether or not they think they will be more profitable, isn't the answer always “yes?” And, if not, does that matter? Many tech startups have multi-year business plans that call for many quarters in the red. That doesn't make them any less successful, particularly since they probably have raised a war chest of cash to burn.
The survey tracks respondents by age. According to the latest figures, 95 percent of 18-to-30-year-olds and 94 percent of 31-to-40-year-olds feel certain about near-term profitability. That the youngest group should feel more confident again shouldn't be a surprise, because they lack long-term experience in being able to judge consumer demand. There is some evidence that younger entrepreneurs are less successful than older ones.
It is not a predictor of future startup activity. One would think that entrepreneurial confidence would lead to a higher rate of startup creation among the younger demographic groups. In fact, it hasn't. Just look at Kauffman's own Index of Entrepreneurial Activity, which showed the share of startup activity by people between the ages of 20 and 34 fell from 34.8 percent in 1996 to 26.2 percent in 2012. At the same time, the share of companies started by people aged 55 to 64 rose from 14.3 percent to 23.4 percent. So, if confidence is higher among the younger entrepreneurs, why is the growth rate for new business creation so much higher among older entrepreneurs? Well, it is because the population is aging. It has little to do with changes in confidence.
It is reliant on LegalZoom's customers. This is an email survey sent only to those people who used LegalZoom products. LegalZoom has some fantastic tools for small businesses, allowing owners to save money on the reams of documents they need to file in starting or managing a business. But, as businesses grow, and the stakes get higher, businesses typically drop software for actual counsel (and curse incessantly over the concomitant billable hours). As a result, you are asking a very small subset of the overall entrepreneurial population – both in absolute terms and size of business – for opinions. Statistically and economically, that isn't a good enough sample off which to make any bolder a declaration than “LegalZoom customers agree...”
There is too much turnover in respondents. This is a quarterly survey of people within six months of starting their business. For those not good at math, that means that you are asking a lot of different people the same questions. Particularly when it comes to something as tough to measure as confidence, it is more helpful to hear how respondents' thinking evolves over time. Being a startup owner is great, but growing that business into a multinational, big-money enterprise is even better. That kind of experience is lost when you look at people's sentiment at just the starting line.
So, is looking at confidence a waste of time? Not at all. Consumer confidence is a nice way of judging potential sales. Looking at the customer – rather than your peers – has a bigger impact on business planning. And, even gauging sentiment among business owners is helpful when you are asking a wider range of questions to a bigger group of companies, as the National Federation of Independent Business does with its Small Business Optimism Index.
For its part, Kauffman, in a statement, says the report “helps illustrate the resilience of the American economy and the way in which new business creation constantly creates a new economic future, even as the surrounding economy appears stuck.”
Perhaps that is true. But it needs more than just a marketing survey to prove the point.