The Digital Skeptic: Small Business Will Save Us? It's a Lie

NEW YORK ( TheStreet) -- Ron Daniel's more skeptical about the digital-age prospects for small businesses than I am -- and that's saying something.

"Everybody talks about the number of small businesses increasing. But that is not true," this hard-driving Israeli-American, founder of small-business tech platform company PlanetSoho, told me from Tel Aviv. He had tracked me down, figuring I'd be about be about the only numbers nerd willing to listen to his new research.

"The time each stays in business has dropped from three and a half years to two," he said. "It's getting worse out there. Progressively worse."

Investors should know that Daniel is no neutral agent. PlanetSoho sells Internet-based word-processing, client-tracking, marketing systems and other small-biz tools to what he says is just north of a million companies worldwide. Think Google ( GOOG) Apps for Business, or Microsoft ( MSFT) Office 365, or any one of a number of other biz-apps, but tweaked for startups. And I have to say, as small-biz Web apps go, PlanetSoho works. Pretty much what every business needs to do business is there, from customer management to task tools to docs. The value add is that there's a sort of a syllabus lurking that prompts users on which system to deploy and when. The price is also right: Paid plans start at $5 per month.

Daniel is betting his mix of handholding and technology will give small firms a better chance of survival in our take-no-prisoners digital age. (And grow his business.)

"It's about managing the risk of starting on your own," he explained. "Handling that fear of failure."

What makes Daniel worthy of wider investor interest is that, unlike the seemingly endless chorus of small-biz startup shills -- let's be honest, Richard Branson and Chris Anderson are not shy about ginning up the joys of little businesshood -- Daniel is surprisingly stark about the realities of surviving in the 21st century.

"This whole idea of the trickle down, going from big companies to small, it's just not happening," he said. "Starting your own business gets progressively harder and harder."

This has dramatic market implications, particularly for investors spinning valuation multiples in the sky for such small-business-focused enterprises as Intuit ( INTU), American Express ( AXP), GE ( GE) and even Staples ( SPLS).

It's no fun being small
What's remarkable is how strong Daniel's argument is on the grim chances faced by the small-business owner, if one has the courage to look. After promising Daniel I would, among the many, many examples I found were data from the U.S. Census Bureau's Business Dynamics Statistics page.

Here, anybody -- even me -- can simply download the economywide rate of establishments that entered or left the small business arena from 1977 to 2010. Then it's easy enough to plot those trends to see what tale these numbers tell.

In spite of the total U.S. population climbing by roughly 40% from 1977 to 2010, and the number of establishments jumping 61%, to 6.6 million from 4.1 million, the businesses being established during those decades do not grow consistently. Rather, they wobble back and forth from between about 600,000 to about 800,000 entering or leaving per year, resulting in a new-business entry rate that fell from 17 points in 1977 to about 10 points in 2010.

Even more sobering: In 1977, 4% more businesses opened then closed. By 2010, 0.3% more businesses closed than opened.

Daniel has this really good question: How can small businesses really be the engine of employment and value creation in America when there are just not enough new small businesses? Is it really any surprise that the sector leading the recovering job market is not services, nor small businesses, nor even high-tech -- but mining?

"The mining, quarrying and oil and gas extraction sector led the way with a 12% increase in employment from 2010 to 2011," the Census Department said. "This year is the first since 2008 in which U.S. businesses reported an increase in employment over the prior year."

Investors get the larger point: Will Staples really be able to sell more small-business printers, or Intuit deploy more small-biz invoicing tools, or Amex pump put more small-business credit cards to a new generation of miners?

"The mistake we make is pretending starting a business is fun and easy," Daniel said. That attitude almost ensures that those who try will fail, he said. "Selling them a credit card or loan does nothing to fix that. You have to get at the heart of what overwhelms people."

"Until we do that, we're all just wasting our time."

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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