From the Advocate

By Tara Lynn Gray 

May 2022

Every Month is Small Business Month in California

May is always extra, extra busy in the California Office of the Small Business Advocate.

First, May is the month that the Governor updates his budget proposal for the next fiscal year, and, as usual for Governor Newsom, small business proposals are front and center. If you follow my column, you’ve been reading about some of those new leading-edge proposals for entrepreneurship support.

My team and I are appearing at as many events as possible to celebrate our small business owners and applaud our small business technical assistance centers. This year, we get to mostly do that in person and masks are optional – which means, every event starts with a moment of gratitude. Between our research and talking to you, the small business owner, we try to use this month to evaluate the State of the California small business economy.

So far, I want to report, that we still can’t precisely evaluate the ongoing damage of COVID-19 to our small business economy other than it is clear that the COVID-19 crisis is still not in the rear-view yet.

It’s hard to measure because of a lag in many of our go-to data sources (i.e. the U.S. Census Bureau, the U.S. Small Business Administration Office of Advocacy, the California t). Plus, small business stats are just generally made confusing by differing definitions and counting methods – just try Googling “small business statistics” And, right now in particular, the economic impact of COVID-19 is hard to unravel from other economic disruptions like worker shortages, supply-chain interruptions, inflation, etcetera.

Here’s what we know is true about the California small business economy as we reflect on this Small Business Month of 2022.

FACT: Small business is more important to the California For All economy than ever before.

California has more small businesses than any other state – 4.2 million of them according to the Small Business Administration Office of Advocacy’s 2021 Small Business Profile. That’s 1,200,000 more than the next state on the list, Texas. That is 99.8 percent of all businesses in California, therefore, small businesses now, as always, account for the lion’s share of new job creation. If you count the number of businesses per 100,000 residents, we’re outranked only by Florida and New York. Nonetheless, the sheer scale of our small business economy outshines every other state with small businesses remaining a driving force in California’s overall economic performance.

We can also link entrepreneurship to economic equity in our state.

First, California has a higher rate of minority ownership than the national average. Racial minorities make up 24.8% of workers and owned 19% of businesses nationwide but in California, they make up 37% of workers and own 26.9% of businesses.

Second, small business owners earn more than the national average. According to the American Community Survey’s most recent data, the average 12-month earnings in California was $39,811 in 2020. The average base salary for a California business owner, the person who owns a portion or the entirety of a business, in 2022 was $152,538, 8% above the national average, according to a survey by Indeed.

Granted this is a little bit apples and oranges as it doesn’t take owner distributions or assets into account. At the same time, small business owners are also statistically more likely to work nights, weekends, and much longer hours in general than the average employee but, still, the link between self-employment and financial stability is there.

While most small business statistics define a small business as up to 500 employees, only about 2% of small businesses in California have more than 19 employees.

FACT: California has consistently invested more in small business health than other states…and will continue to do so.

I will provide more detail about the May revisions of the budget next month. For now, I’ll just remind us all that Governor Newsom’s $4.2 billion allocation for small business relief grants in the wake of COVID-19 remains the largest such program in the country.

This coming year’s budget also includes $23 million in ongoing General Fund allocations to permanently support technical assistance as well as $3 million in ongoing General Fund dollars to support the continuation of the Capital Infusion Program.

Despite the affordability and climate challenges that Governor Newsom is addressing with other elements of his program, this support for the small business ecosystem means that California is ranked #3 in best states to start a small business and #1 in Access to Resources, according to WalletHub’s annual survey.

FACT: Business starts increased over the past two years in California; one of the top priorities for my office is to make sure their survival rate beats the historical state average.

According to U.S. Census Business Formation Statistics, total business starts in California increased year over year by 19.6% in 2020 and 37.3% in 2021 compared to 0.3% in 2019. This boom in business starts is tapering off now although it’s still way above the historical average. This trend was apparent across the country in 2020-21…but it was most powerful in California, Texas, Florida, and Georgia.

To explain this chart, you’ll notice that the navy-blue line represents the sum of the other three: the turquoise line is arguably the most important, however, because it represents “high-propensity” businesses, those that have a higher likelihood of becoming businesses with employees and payroll capabilities.

The state’s investment in small business, which I described in Fact #2 above, is about converting as many new businesses as possible into high-propensity businesses.

Famously, only 50% of small businesses make it past five years. I take it as my personal 5-year challenge to beat that number in California by the year 2027 for the new businesses launched over the past two years.

FACT: Despite new economic and workforce challenges and the residual public health risks, small business owners are feeling cautiously optimistic.

Guidant Financial does a nationwide Small Business Trends survey every year. The past two have, obviously, been focused on measuring the impact of COVID-19.

The 2021 survey asked business owners if they expected to survive; 78% said Yes. That number is up to 85.4% in the 2022 survey that was just released. At the same time, 54.6% think the pandemic is still impacting their business in some way.

Just as interesting were the responses to the “Motivation to Open a Business” question. In 2021, the top answer was “Ready to Be Your Own Boss” at 29% followed by “Dissatisfied w/ Corporate USA” at 17%. “Laid Off’ was only 7%. In 2022, responses to this same question completely flipped: 60.9% reported “Dissatisfied w/ Corporate USA” while 47.6% reporting “Be Your Own Boss” and 23.4% reporting “Laid Off”.

Other sources are also quantifying this commitment to entrepreneurialism. In a separate survey from FreshBooks, 95% of self-employed Americans say they plan to stay that way. Amongst owners of business launched within the past two years, the survey said that 2 in 5 point to COVID as a factor in their choice and nearly two–thirds still believe that self-employment remains the best career choice in uncertain times…such as a global pandemic.