This Blog Has Moved!

My blog has moved. Check out my new blog at

Your Ad Here

Thursday, July 26, 2007

It's Hard to Start a Business

What are the obstacles to starting your own business? I can do productive work, probably better than most people. As an employee, most of what I produce goes to other people. Taxes and inflation take away 40-50% of my salary. I pay tax (in a sense) to my employer. Part of what I produce goes to his profit. Part of that is a tax rather than true earnings, because of the obstacles to forming a new business. It's much harder to start a software company today than 10-15 years ago; the first movers had an advantage. It's possible; it's just a lot harder.

People say "if you don't like being an employee, start your own business". It isn't as easy as it sounds. There are a lot of obstacles, put there on purpose by the government and large corporations.

One obstacle is marketing and attracting customers. It isn't enough to have a good product; people have to find out about it somehow. The problem there is that there's a information distribution monopoly by the media and newspapers. It's very hard to reach potential customers without their help. One of the roles of the red/pink market is that it matches workers and employers.

Large corporations like to buy from other large corporations. They don't like to buy from small businesses. Government regulations and the corporation's own bureaucracy are a hindrance. In the eyes of a large corporation, it isn't worth the hassle or risk to deal with a small business.

Further, if you're an independent contractor or consultant, you're still a form of employee. Your income is still limited by the amount of hours you bill. If you have only 1 or 2 customers, you have the same problems as an employee. To have a viable business, you have to be producing something and selling it to a lot of different customers.

Ideally, the customers of a small business should be other small businesses. However, regulations and the Federal Reserve's cheap monetary policy favor large businesses over small businesses. There aren't enough small businesses around. If there were lots of existing small businesses, then it'd be easier to start a small business that targeted individual owners. Selling to a large corporation, you aren't selling to the owner. You're selling to someone who may prefer to give the contract to his friends rather than buying the best product.

They say that the key to starting your own small business is "networking". In other words, if you have a contact at a large corporation who will buy your product, then you have a viable business. That isn't really a free market. That's more like nepotism-capitalism or crony-capitalism. A skilled worker without "contacts" is stuck working as an employee.

Why should the ability to do productive work and the ability to sell be completely divorced from each other? It's an intentional structural defect in the economic system. It's red market agents protecting their turf. Red market agents like to deal with other red market agents. They don't want to deal directly with white market workers, except to cheat them.

Another problem is compliance with government regulations. I'd have to spend a lot of effort making sure I'm compliant with tax laws and other regulations. I'd have to incorporate to protect my personal assets. I'd probably have to hire a lawyer and accountant to help me, but I'd still need a basic level of competence to make sure they do their jobs correctly. If my lawyer or accountant make a mistake, I'm still liable. I'd be $5000-$10,000/year in the hole just on legal fees and accountant fees, plus the time I spent making sure they did their job correctly. Plus, I still have to pay double Social Security and Medicare taxes. I have to pay income taxes, as if I were an employee.

I'd have to pay for my own health insurance, and an individual policy is way more expensive than a group policy. Going without insurance is not an option, because the face amount for medical care is typically a lot higher than what an insurance company actually pays. Some hospital bills have a face amount of $100k but your insurance company may actually pay $20k. If you were uninsured, you'd have to come up with the full $100k. Doctors, hospitals, lawyers, and accountants have a government-endorsed monopoly, so the prices are guaranteed to be high.

Another potential obstacle is patent law. Nowadays, patents tend to be frivolously issued. It's hard for a small business owner to be aware of all the patents that are out there. If you build up a business that has some success, you may find yourself in a lawsuit over a patent you never heard of. As a small business owner, being dragged into an expensive patent lawsuit is the equivalent of being forced into bankruptcy. The problem is that the patent examiner is not necessarily an expert in the subject domain. For example, Amazon's "one-click" patent is kind of frivolous. The idea that you can set up a system that makes it easy to buy things online isn't patentable. It's an idea that's intrinsically obvious to any expert programmer.

Another example is Research in Motion's Blackberry patent lawsuit. If you're going to set up a system for sending wireless E-Mail, there are only a few reasonable approaches; these systems would be obvious to any computer expert. Someone had patented one of these methods. The patent was bought out by a patent holding company who used the legal system to extort a huge settlement from Research in Motion. In the Blackberry case, the original inventor of the patent wasn't even the person who benefited. The patent lawsuit corporation benefited from the patent. The patent lawsuit corporation didn't even have a product that was competing with the Blackberry. The effect of that patent was purely destructive. In other words, as a small business owner, you may find yourself frustrated by patents you never heard about. Large corporations sign patent treaties with each other, mutually licensing their patents and squeezing out all smaller competitors.

Another obstacle is raising capital. When a large corporation borrows, it gets to borrow at slight premium to the Fed Fund rate. When an individual borrows, the individual has to pay a much higher rate. The individual might even need to pledge his home or personal assets as collateral. The owners of a large corporation are not taking much personal risk, because their shareholdings are diversified. A small business owner is typically risking all his savings on his business.

Summarizing, most of the obstacles to starting your own business are defects in the financial system, legal system, and information distribution system. Those defects are there on purpose, put in place by large corporations to discourage competition. The obstacle to starting a business isn't someone's ability to do productive work. It's the fact that an entrepreneur has to deal with lots of artificial regulatory and legal hassles, rather than just doing something productive and useful.

No comments:

This Blog Has Moved!

My blog has moved. Check out my new blog at