40% of California's small businesses died in the last two years | Hacker News Reader

40% of California's small businesses died in the last two years

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214 pointsjger1586 comments

Not surprising, I see so many downtown areas still closed in the SJ area. It's tough to open a business when the people in the area don't have the money to buy your products.

When 2/3rd's of the nation are paycheck to paycheck, even in an affluent area like SJ, if your business is not providing something extremely essential, then you are effectively marketing to just 1/3rd of the population with money.

This tautology that has been spread through out our society that "rich people create jobs" is absurd, demand creates jobs, and decent paychecks create demand. So when paychecks have been stagnant for 40 years, what do people expect is going to happen?

Except this is the opposite of the actual problem. There's plenty of cash floating around right now: it's why inflation is high. We're finally hitting real supply limits. It's the hottest job market in most people's lifetimes.

The fact of the matter is most small businesses are crap businesses. They also abuse their workers in ways big business can't get away with, both illegally and legally. If you work for an employer with <30 employees and they don't provide health insurance, why would you stick around right now?

Isn’t most of this due to lockdowns and shifting spending to online?

It's not that simple, and it never is that simple. Demand destruction in an economy predicated on consumer sentiment and ability to, well, consume ends poorly for us all. I don't see current trends, if they continue, going well for anyone.

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Yes, there was a comic about... hu (-;

It's exactly what the problem is. Jobs may be growing because so many were cut due to covid, that doesn't mean it's a healthy economy, because it's not by any stretch. Most created wealth is going to the top 10% of employees.

I thought this inflation was supply driven??

You also need to look at income distribution. It is true that 'plenty of cash is floating around'; however, the distribution of this floating cash matters. Yes, Starbucks baristas, some clerk at a transportation company, etc are making $24 per hour in the bay area; but most of it goes to rent (inflated rent), food (inflated food prices), etc. The people with most money floating around are buying four or five investment properties in Texas or a second home in the bay area or third home in Manteca. Someone has to pay rents for these, and the increased home prices (as a consequence, increased rents) impact how much one has to pay for a meal at some restaurant in the downtown SJ.

> The fact of the matter is most small businesses are crap businesses.

> They also abuse their workers in ways big business can't get away with, both illegally and legally.

Really? You know this to be a fact?

It appears that the only thing you know about small business comes from what you read on /r/antiwork

The fact of the matter is that 47% of Americans are employed by small businesses. That percentage keeps dropping, not because the owners are assholes, but because mega corporations keep getting larger and more monopolistic.

Most small businesses run on razor thin margins because they don't have the economies of scale that the larger corps enjoy.

My friend owns a cidery. The cost of his raw materials (juice concentrate and sugar) have gone up over 300% in the last 18 months, thanks to supply chain issues and worker shortages due to Covid. The prices are due to get even worse this year.

His total burdened cost for a case of goods has gone up 170%. But he can't just mark his stuff up 170% now can he? He has to settle for a 10% bump in price and hope his distributors don't freak out.

BTW, he has 8 employees and pays health insurance. Afaik, he didn't suffer any employee churn during Covid, cause he's not an asshole.

In most sectors except for maybe fast food, small businesses have suffered not from employee churn, but from the Covid policies over the last two years combined with ridiculous price increases.

That sounds like a crappy business that can benefit from economies of scale.

Absolutely.

All he needs to do is dig up the 100 million dollars he has buried around his yard so that he can scale to the point that taking a 300% hit on materials doesn't affect him.

Or maybe he should spend some of his billions to buy up all of the apple orchards in the region so he can better control his supply chain (and, coincidentally, that of his competitors)

Scaling has its limits, unfortunately)

Yeah: https://www.federalreserve.gov/releases/z1/dataviz/dfa/distr...

The bottom 50% of the US has 2.6% of the wealth. The 50-90% bracket has 27.6%.

And thats how monolpolisation happens. Instead of 5 or 6 moderately successful cideries meeting different market needs, we have 1 or 2 who control the entire market.

You sure have a lot of details about your friend's business. Most friends might say, "hey my cost of goods went way up" or "almost doubled". Your friend is oddly specific. And he doesn't have "a bunch of workers" but exactly 8. You must be a very close friend!

It's almost as if they're friends who talk about things that happen in each others' lives!

Not on this planet. This sounds like how you talk to your accountant, not your friends. You don't burden your friends with details this specific.

I could totally see a friend spending 5mn explaining that his cost has gone up 300% when venting while getting a drink together. I don't understand why you're finding this so unbelievable.

You talk to your friends about "total burdened costs"? Or something went up exactly 170%? Not "almost tripled"? Sure.

If you and your friend are both interested in how businesses work, you're definitely going to talk shop

Yes of course, in generalities. That's the whole point. Of course you talk to your friends. But you don't go over your income statement line by line with them.

My friend wants to own a brewery and was an accountant, my other friends are in finance, banking, etc. Last time we hung out we had fun going over the business plan of the brewery my friend was working for in detail down to costs. It was a fun chat. My other friend wants to start a honky tonk in his hometown, he's in construction but was also quite interested.

I don't remember all the details that's what paper is for, we got down to salary and % ownership stake while at a burger joint in rural Texas on our way to a lake.

I got to Texas 2 days early to hang out with my friend who I hadn't seen in a while. We went to 5 micro breweries in 5 meals so he could scout them out and get my feedback (just general dude) on the decor, food, beer selection, location. We talked about that interlaced with talk of families and friends.

I really don't think it's uncommon.

Lol, just what I said - accountants (plus bankers, finance guys etc). Discussing business plans, scouting locations, splitting ownership stakes... all the fun parts of starting a business. Not so cool: years later, getting deep in the weeds bitching about raw material cost increases down to the percentage point.

he was evaluating an existing business he was essentually running as the accountant to buy. 3 of the people at the table were me: software, a guy in construction, and a guy who installs gym floors and is a local politican.

but hey adjuat my narritive to fit your world view.

Typos == phone and lack of care

How did I adjust your narrative? You mentioned the bankers and finance guys, not me.

Again, plenty of people are interested and excited about starting a business. It's fun! I'm not surprised the construction guy and the politician are involved. But they aren't so interested years later when you're miserable and complaining about your cost increases and explaining it all down to the penny.

HN would be a better place without trolling like this.

I talk to random people about business details this specific. Different people interact in different ways.

Random people are not the same as your friends.

Eight is not exactly a difficult number to count up to.

You get all employees in a room and count each one individually and you'll get there in under 5 seconds.

Well, maybe not you, but...

What business owner calls all employees into a room just to be counted? Is that how you utilize your employees' valuable time?

This has nothing to do with the cidery owner. Do you know the exact headcount of any of your friends' businesses?

You may very well know that your buddy has "about 10" employees or "half a dozen". But to the exact number? And how to explain knowing the exact percentages of cost increases? Can't exactly line them up to be counted like cattle, pardon me, your employees.

Funny enough, I'm in a position to be friends with many small business owners (I've done work for them over the years, and it has involved into friendships)

The folks that are successful don't look at pennies. They produce or sell their products for a healthy price and focus on delivering a quality experience. I went to dinner with the owner of a small business last week that just closed on 30mm in revenue across 15 employees. The company has a profit-sharing plan that pays most of the profit into a pension. It has been in business for well over 15 years. They aren't the cheapest, but they have excellent customer service, sell great products, and ship those products to you in the fastest way possible.

If, as a small business owner, and your primary concern is undercutting the other guy, you are going to go out of business. That has been the rule since capitalism was basically invented. Very few businesses can make their money by undercutting the other guy. Notice the most successful companies such as Starbucks and Apple, and even nonprofit companies such as the YMCA (in the US) don't focus on the bottom dollar. Instead, they focus on standing out.

Even if you look at bottom dollar chains like McDonalds, companies have tried to do it cheaper. Shoot, you can STILL do it cheaper. The reason they don't exist anymore is because, at the end of the day, McDonalds did a better job of providing food of consistent (shit, erm, sorry, not a McDonald's fan) quality, quickly, and at an affordable price.

Nailed it.

Not rocket science; focusing on delivering VALUE in exchange for the money you charge has always been the obvious, unsexy, boring, fundamental thing that makes any economy function.

So yeah, it's not surprising your friend has closed over 30mm. Especially if he's treating his employees well (which is what it sounds like, esp. wrt. pension). And there's unsexy rule number 2: you treat the people who do the hard work really well, you pay them well, and you hire accordingly because that translates into an intangible competitive advantage that doesn't lend itself well to quantifiable measurement, but something we all have a word for anyway: OPTIMISM!

It's no secret why these shit-for-pay businesses all over the country are having a hard time filling open hiring reqs; because the pay sucks! And that's usually a fair indicator of how your employer's going to treat you if you join them, too. If they're not willing to pay a reasonable living wage, you can be pretty sure they're also not going to bother making the working environment anything even marginally better than the law requires as an absolute minimum. And frankly that legal bar is far, far too low to begin with (and we're not even talking minimum wage here, just basic human decency is lacking most of the time).

So yeah, kudos to your buddy there. If small businesses want to compete with the big guys, this is how you do it. You don't undercut, you charge fair, you pay better, and you over-deliver.

It's called "hard work", and that's precisely why it's so damn rare.

As someone who's worked between big corporations and family owned businesses, I'd say the family owned and small businesses are worse, especially in entry level jobs, than working for a big corporation. At least with a big corporation, they're more likely to leave your branch or location alone if you at least hit their targets for revenue. There's not much in the way of micro management in a job at the bottom rung with respect to big corporations whereas I've had 'the owners' of family owned businesses always pestering folks when most times they have no clue what they're doing, especially their kids who they think they can trust with running day-to-day operations.

You may or may not be right but I wouldn't want to live in a world where we did not have small business.

That combined with the fact that the reason they probably struggle so much to provide for their workers is because they are competing with global multi-nationals that can use tactics to eliminate them.

We really need small businesses. I would hate to see them go extinct and only be left with a few mega corporations. It would be a shame to lose the local pizzeria serving up authentic, quality food and only be left with Little Caesar's and Domino's. They both have their place.

People don’t like to hear this but a lot of small businesses (especially restaurants) are barely profitable and basically dead men walking. They can barely make payroll and can’t weather even a month of closure, let alone a pandemic. They are “shitty” businesses not because their owners are shitty or that they are doing shitty things, but simply because they just don’t make enough money consistently to be viable.

Warren Buffet said “Only when the tide goes out do you discover who's been swimming naked.” Well, the tide went out in 2020 and we saw which companies were not solvent enough to survive even brief closures. They aren’t bad people but their companies unfortunately were only economically viable in a sustained bull market.

There's a difference between a bear market and having your business shut down by the government.

That's a worthy topic too, but no, the result of the temporary closure is the same — closed is closed, regardless of the reasoning.

This is the biggest issue - many small businesses are small margin businesses. Force a shutdown for a month or two and you've wiped out profit for an entire year.

Not surprising in the least that after two years of uncertainty, business owners just hung up their hat and decided to do something else.

They are often small margin businesses -- but not necessarily small-margin opportunities. Lots of small business owners make slim profits due to their own lack of business sense or fundamentals. Go watch any episode of Shark Tank to see how little most people know about their own finances.

Shark Tank is not a representative sample of people running small businesses. It’s a series of cherry-picked people, selected for entertainment value, like American Idol.

Yes, I'm aware. But it is on television, so you can watch it, whereas your local SBA meetings are not. And they get peppered with specific, relevant questions, whereas that rarely happens unless a business owner is talking with a bank or investor. If you think most small business people are great with finances, we can just agree to disagree.

That does ignore the PPP loads available to many small businesses. There was a forced shutdown, you could get funding during some of that shutdown with this and used correctly it did not need to be paid back. We can look back and say what should have been done, if restrictions went on too long but there wasn't a crystal ball - and there certainly were deaths happening due to covid. Business's with razor thin margins that couldn't operate during shutdowns certainly couldn't stay around once PPP went out. As far as cali and any of its excessive fees for business, that is a different story.

For $7 I used to get 15 good apples now only 5.. feels like a bad joke

> Not surprising, I see so many downtown areas still closed in the SJ area.

It depends. The Mexican restaurants did really well. (They went to outside seating in tents that was much larger than what they had before and are packed.) The Asian restaurants, not so much.

It might be a downtown thing more than an Asian/Mexican thing.

San Jose has spent hundreds of millions of dollars over the decades trying to create a downtown that is barely self-sustaining during the best of times. It was limping (which is about as good as it gets) before Covid and then, wham.

I suspect that downtown SJ redevelopment actually a pay-off to developers.

Yeah, I lived there in the 90's and visited occasionally after and it was struggling then - they opened up a big outdoor mall with a large movie theater... that failed.

It was much easier to build a fake downtown a few miles out (Santana Row) than gentrify^Wdevelop the real one into something successful. And in the noughts it had a Borders while pretty much all that was left of the mall was office space and a Waldenbooks, IIRC...

San Jose's malls are far more successful than its downtown. (San Jose has a range of malls, from high-end to strip malls with actual strippers.)

I don't know whether it's the business selection (a many of the customers will be San Jose state students), the crappy parking (which means that much of the rest of the customers are the relatively few not-students who live downtown and the lunch crowd, which are relatively few because there aren't that many jobs downtown), or what, but downtown SJ is never going to be what the redevelopment district has 100s of millions to try to make.

However, I am confident that they'll spend even more in the decades to come.

For whatever reason, it's one of the things that makes San Jose far more common to Los Angeles and general SoCal urban topography, compared to San Francisco.

I think going along the lines here: The rent prices for commercial properties are absurd. For business loan reasons, most real estate firms would rather leave lots of commercial property empty, than to rent it "below market value".

I don't know that this video explains it all (no time to watch right now), but I did watch something similar in the past that did. https://www.reddit.com/r/Burryology/comments/oiiqif/videogra...

So if you want to start a small direct-to-consumer business, just getting a space to perform the business may be so expensive it's not profitable.

I just tried to look at the tweet to see where this data's coming from, but "[...] quoth the server: '404'".

But really, forty percent!? For a statistical study that's an unusually convenient/round number, and for a state with the population of California, the chances of that statistic being accurate for any measurement methodology are astronomically small. Sure the dude could've been rounding it, which is totally fine of course, but I also question the validity of that statement because that's nearly half the entire small business segment for the most populous state in the nation!

And that just doesn't sound right, fundamentally. It's possible, sure, but c'mon, really? Near half?! I don't buy it, not without data from well-respected sources to back it up.

So I go to click the link, only to find it no longer exists. Which further casts doubt on this statement.

(18 hours after tweet linked on HN is when I checked Twitter; or in my world, "just now".)

I saw that yesterday and it said the data was produced by Womply. I can't find the source though.

BUMP: could this be it?

https://tracktherecovery.org/

Marc Andreessen spouting off at the mouth about things he doesn't understand?? I can't believe it! /sarcasm

Andreessen has never been associated with "spouting off at the mouth about things he doesn't understand".

What exactly does he not understand, that his betters do?

That 40% of California businesses failing is right on track with the normal failure rate of businesses pre-pandemic.

This is older news, but it notes that the permanent “closure rate” in California was 9.3/1,000 businesses. I’m guessing that’s a monthly rate but it’s not entirely clear to me. It also notes that LA had seen 15,000 businesses closing with half of those being permanent.

https://www.cnbc.com/2020/09/16/yelp-data-shows-60percent-of...

One can't even judge if 40% is unusual. Most businesses fail. It could a healthy sign that a bunch of businesses were started. It could be a normal amount, or it could be really terrible.

Without more context, it isn't really informative.

Probably more a sad state of professional contractoritis as small business

40% in 2 years is 20% a year. Considering the definition of small businesses, that’s relatively unsurprising. You’d actually imagine more than 1 in 5 giving up in a year.

In any case, 20% a year for first two years, compare SBA data from 2018:

> “According to the Small Business Administration (SBA) Office of Advocacy’s 2018 Frequently Asked Questions, roughly 80% of small businesses survive the first year.“

So, right on track?

> 40% in 2 years is 20% a year.

40% failing over 2 years is 22-23% failing per year—√(0.6) = 0.7745966...—but close enough.

This feels very wrong. ~40% of new small businesses will fail in 2 years. If 40% of all small businesses fail, that's completely different. If I model a small business surviving for 15 years on average, conditional on surviving the bumpy start, that would imply the equilibrium is

- small businesses started each year ~10% of all small businesses

- ~40% of those fail within the first two years; that's ~4% of the total

- looking at the more mature/stable small businesses, ~12% will churn over that same period

- total expected: 16% of all small businesses failing over a two year period

- therefore the pandemic represents a 250% jump

If you model a startup living for 10 years on average, conditional on surviving the first two years, the pandemic would cause a ~200% jump.

If you model a startup living for 25 years on average, conditional on surviving the first two years, the pandemic would cause a ~500% jump.

I closed mine down in December. Got sick of arguing with the Sf assessors office over some shit they made up. They’re not available on the phone (my accountant tried to call half a dozen times), didn’t respond to 5 letters, Oh and they hit me with 10,000% fines/fees while I attempted to contest the made up thing. It was literally easier to shut down and start over someplace else.

That chart is as of June 2, 2021. California didn't lift its COVID restrictions until June 15, 2021. The numbers started increasing soon after. Here is the current version of the same chart:

https://tracktherecovery.org/?zy41m

> In California, as of January 16 2022, the number of small businesses open increased by 1.1% compared to January 2020.

It looks like you’re looking at a different chart, which is weird because they look like they’re from the same source. The tweeted pic of the chart shows -40% but the chart you linked never shows a value that low for the date mentioned.

They changed their methodology in March (the tweeted screenshot was taken before then). If you hover over the little triangle next to the title, it says: "We improved the data quality of the Small Business Revenue & Openings series using panel data: our previously posted data relied on a repeated cross-section." And there's a link to this document:

https://github.com/OpportunityInsights/EconomicTracker/blob/...

The normal rate for small business failure is 20% in the first year. Does 40% in two years seem out of line?

Without some normal value, '40% died' is just clickbait.

It's higher than that depending on the industry, but you are assuming that 100% of small businesses started right as the lockdowns hit. Most small businesses that make it past the first couple years last a long time.

{citation}

How does this relate to any other to year period. AFAIK, most small businesses fail in 2 years. So is this number abnormally high or abnormally low or average? don't see any context.

(Of course, the tweet seems to be down. Maybe context existed at one point?)

I was wondering that too. I found this article:

https://advisorsmith.com/data/small-business-failure-rate/

AdvisorSmith found that 22% of small businesses fail within the first year, 32% fail within the first two years, and 40% fail within the first three years of business. Half (50%) of small businesses fail within the first five years, and two-thirds (66%) fail within ten years.

What's the definition of "fail"? For example, I had a business that closed because profit dried up, but overall it earned pretty good coin for me, while it worked. I wouldn't say it was a "fail".

The whole profit drying up is the failure that is being referred to.

According to that definition every person is a failure, because everyone eventually dies.

Then it's a good thing that a successful person is not defined only by their work output.

I get the Twitter "hmm... this page does not exist" error as of 5:35 PM PDT.

2/3 of small businesses last two years, 1/2 make it to five years. This has not changed much over the last 20+ years. See the link below.

https://www.sba.gov/sites/default/files/Business-Survival.pd...

And yet they still have a $800/year LLC fee, the highest of any state.

Many restaurants, bars and coffee shops did not survive the pandemic. In some cases, the owners were already quite old and were trying to sell but when business went downhill during the pandemic, they simply walked away since they didn't own the property.

Are these actually real businesses closing, or are they people opening and closing small 'on paper' businesses for tax purposes?

There are lots of tax breaks and incentives to open a business... And when it's a few years old and those are gone, it makes sense to wind up the business and do the same again.

There’s a corollary to Betteridge's law of headlines that states “A headline is Clickbait if it contains the word California”.

Tweet deleted

I interpret the heading of the graph (not Marc Andreessen's tweet) to say there were 40% fewer small businesses opened on June 2, 2021 compared to Jan 2020. I assume that now we are exiting the pandemic the number is much higher than June 2021.

Small businesses tend to fail in the first two years regardless of circumstance. So let's look at the actual report to get some idea of whether CA's pandemic response played an outsized part:

https://eig.org/news/more-physical-places-of-businesses-open...

In that we see that there are more businesses in CA now than before the pandemic. We see Boise getting a huge influx in workers as people can more easily work remotely now.

maybe they should lower the $800 annual tax of starting an LLC here, and chill out on threatening that a Wyoming LLC will get you in deep trouble

isn't the normal (non pandemic) number something like 60%?

Looks like he deleted the tweet. Might not be the best idea to repost screenshots from right wing political accounts.

Was the information accurate or was it not?

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