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The State of Small Business: Washington

The State of Small Business: Washington

As part of our yearlong project "The State of Small Business," Business News Daily plans to report on the small business environment in every state in America. In this installment, we asked a few of Washington's more than 550,000 small business owners about the challenges and opportunities of operating in their state. Here's what they had to say.

The business atmosphere in Washington state is best described as young and healthy. According to the Small Business Administration, the state's economy grew by 3.1 percent in 2014 — faster than the nation's overall economy, which grew by 2.2 percent in 2014 — and entrepreneurs report that the growth of the technology industry is spilling over to boost small business as a whole. Small business owners say they're encouraged by a strong talent pool, a robust support network and opportunities to do business with larger companies, like Amazon, Facebook or Microsoft.

Still, it can also be difficult for entrepreneurs to compete with big businesses based in Washington, and all of the economic activity is pushing up the costs of real estate and labor. And while there is a lot of wealth to be had, many entrepreneurs report difficulty in accessing that capital; investors are present, entrepreneurs said, but they aren't necessarily looking to invest heavily in startups. But that hasn't stopped Washington's small business owners from moving forward with a happy eye to the future.

[See Business News Daily's complete coverage of the State of Small Business in the U.S.]

A burgeoning technology industry in Seattle has driven the state's economy forward and attracted new talent to Washington. That trend is a boon to not only those in the tech industry, but also entrepreneurs who indirectly benefit from the growth in that sector. As profits rise, startups open and more people flood into the state to seek jobs, entrepreneurs in other industries see their customer base expand and their clientele's disposable income rise.

"We're seeing massive growth right now driven by the tech industry," said Nipul Patel, co-founder and chief operating officer of entrepreneurial network Townsquared. "It's accompanied by population changes to the younger side and higher incomes, which is having a huge impact in many ways. People have more discretionary income. They have more income to spend on products and services small businesses carry."

Another residual benefit of the tech boom is the support network that comes along with it. A number of accelerators and development centers have opened their doors in Washington in recent years, offering entrepreneurs the opportunity to refine their ideas and access experienced mentorship, not to mention pitch their products and services to potential investors.

"If you look at the landscape five years ago, there wasn't a lot of startup activity, but now we're seeing more local businesses," said Katya Constantine, founder and owner of small business marketing company Digishop Girl Media. "On the startup scene, we actually have a vibrant and growing community. There's a real estate infrastructure, a ton of co-working spaces and a lot of accelerators. Also, there's a lot of tech talent and education with a focus on entrepreneurship. We've seen amazing growth in the startup community in the last couple of years."

9 Mile Labs is a startup accelerator that specializes in helping B2B companies grow, with a focus on the tech industry. Sanjay Puri, co-founder of 9 Mile Labs, said the reason the accelerator opened its doors three years ago is that he and his partners saw great promise in the entrepreneurial community of Washington.

"We believe the region has a lot of promise," Puri said. "If we could help address these issues of [starting up and finding investors,] we believe that there is a lot of opportunity."

Patel added that the state's culture encourages support for local, independent businesses, which helps small business owners succeed.

"I think Washington state is in a place where people very much value local economies by shopping local and supporting local businesses," Patel said. "So many new small businesses and independent stores are succeeding because people value the character and uniqueness."

Washington's entrepreneurs report a robust pool of talent from which to draw employees. Many attribute the wealth of knowledge and skills to local and regional universities, as well as high turnover within the large companies based in the state. As experienced employees leave big businesses to either start their own companies or work in a more intimate setting, entrepreneurs benefit from the skills coming out of the corporate world.

"Training and networking are big opportunities [in Washington,]" said Joan Woodward, president of the small business advocacy organization Travelers Institute and executive vice president of public policy at Travelers. "The employee pool is strong and skilled. Silicon Valley has the opposite problem, where they have to steal people from each other."

The local talent has helped contribute to the wealth of startups in the state, Puri said. He believes skilled employees are one of the key attributes of a successful startup. In Washington, he said, entrepreneurs have every opportunity to put together a well-rounded team.

While the big companies sometimes generate stiff competition for small and medium-size businesses, most entrepreneurs that spoke with Business News Daily reported that the large companies based in Washington offer a net positive for their enterprises.

For one, many entrepreneurs in Washington, particularly in the Seattle area, take advantage of the opportunities presented by large companies such as Amazon and Microsoft. Many small businesses offer B2B services, which many of the state's larger companies need. This provides a reliable and deep-pocketed customer base for small B2B businesses.

Small business owners also reported that they benefit indirectly from big businesses' out-of-state recruitment efforts. By bringing in talent from elsewhere, large companies attract skilled labor to Washington, and many times, those employees will eventually find their way to small businesses.

"Companies like Amazon and others are pushing up the job market so much that it's great for the city," said Dave Parker, CEO of developer training center Code Fellows. "We're starting with something that drives market growth."

Michael Schutzler, CEO of the Washington Technology Industry Association, said Washington's universities cannot meet the growing demand for skilled employees. He added that big businesses boast the resources to better recruit from all over the nation, and even the world. High turnover in the corporate world means a lot of those new Washingtonians will be employees of small businesses in just a few years' time, Schutzler said.

"The biggest issue for us from a growth standpoint is, we don't produce talent fast enough locally to keep up with the demand we're generating," Schutzler said. "It makes us the No. 1 importer of tech talent in the country. The local talent pool is fabulous, but if you need to attract new talent, you'll be fighting for a limited number of people. Startups tend to recruit from large companies because they're the ones that fight to bring in the talent. Most of the startups are beneficiaries of the powerhouses of big business."

Entrepreneurs in Washington reported a friendly business environment and relatively low taxes. In particular, they cited the absence of personal or business income tax as beneficial. Instead, the Washington Department of Revenue levies about 60 different taxes and fees, such as a business and occupation (B&O) tax, sales and use taxes, property taxes, and a variety of industry-specific taxes.

However, sometimes, the lack of a corporate or personal income tax can also present a problem for early-stage companies. While established small and medium-size businesses report benefiting from the B&O tax, which essentially levies a tax on volume of revenue rather than profits, startups can have difficulty in managing at a time when they want to reinvest as much revenue as possible.

"Washington doesn't do a personal or corporate tax off of your profit; it does it off of the top line of sales," said Jeremy Ames, president and co-founder of Guidant Financial. "It's not based on profitability; it's just based on volume. For a business of our size [about 90 employees], it ends up being quite favorable. For your really small businesses, as they're getting up off the ground, it's probably more of a negative than it is positive for a business that's something under $600,000 in revenue."

Schutzler described the B&O tax as regressive.

"As soon as you generate revenues, you pay a tax, and filing is quite simple," Schutzler said. "It's also, by extension, a very regressive tax policy. It kicks in at a very low level … but we still have one of the lowest effective tax rates in the country."

As it does in any growing economy, the cost of real estate is rising rapidly, particularly in cities. This can present a problem for startups working with a tight budget, but the high demand has also led to an increase in the number of co-working spaces available throughout the state. Still, when a small business decides to expand into a larger space, it can be tough to find the proper location at a reasonable price.

"The real estate market for commercial real estate is superhot," Parker said. "If you want to be downtown [in Seattle] … real estate prices continue to be somewhat crazy."

The same is true for the cost of living in general. As the economy expands and housing demand increases, so does the price of real estate. Tija Petrovich, owner of Seattle Fitness, cited the cost of living as another challenge she has to factor into her business plan.

Another byproduct of the state's economic gains and the rebounding real estate market is the need to better compensate employees, both through salary and benefits. The challenge is compounded by nearby large companies' ability to offer more attractive compensation, making it easier for them to recruit and putting the pressure on small business owners to offer their employees something extra to retain them. And even though the labor pool is vast and skilled, the demand is also high, making it extremely competitive to recruit new employees, particularly in the tech space.

In addition, Seattle's city council adopted a mandatory $15-per-hour minimum wage for employees, which began to phase in at $11 per hour as of April 1, 2015. Small business owners like Petrovich said the added expenses are reflected in their prices.

"It's a high cost to do business here," Petrovich said. "And we have the $15 minimum wage. I get to ramp up because I'm a small business owner, but I'm at $13 per hour right now. Next year, I'm at $14, then at $15 the following year."

Although capital is available in Washington, entrepreneurs report having a tougher time finding investors than entrepreneurs would in other tech hotspots like Massachusetts or San Francisco. Accelerators help connect small businesses to venture capitalists and angel investors, but acceptance into those programs is limited and investments are not guaranteed. Further, because of the competitive atmosphere, investors have a multitude of options when deciding whether to invest in a new company.

"We found that early-stage companies out here lack capital," Puri said. "That's kind of surprising because there is a lot of wealth accumulated over generations. But because of the way it has been accumulated, that's how it's also being invested — low-risk types of investments, rather than high-risk areas like entrepreneurship."

"Here are some nuances we see: Overall lending volumes to small businesses have grown," Ames added. "But in reality, for most of our clients who are in the sub-$1 million range of annual revenue, lending has actually dropped significantly and sort of flatlined. It's much more difficult for smaller businesses to get capital."

But there is reason to be optimistic for the future. Schutzler said there's an abundance of capital in the state and, while there may be fewer angel investors and venture capitalists in Washington than in some other states, money often pours in from outside sources, like VC firms from Chicago, and the community is quickly catching up with more established regions.

"Historically, this area is still young compared to the two biggest tech clusters in the country —  San Francisco and the cluster around the Boston, Cambridge area," Schutzler said. "Those tech centers are several decades older, so, sure, they have more angel investors. But the angel investors and capital here are very active and growing dramatically. We're a decade or two behind in scale, but we have a much higher growth rate than any other region."

If you're a small business owner in Washington looking for resources to help you move forward, here are a few organizations you might want to learn more about.

Washington SCORE

SCORE's volunteer business professionals and expert "mentors" give counsel and guidance to entrepreneurs looking to start or expand their businesses. The services are entirely free and volunteer-driven. Here are some of the chapters in Washington. 

Central Washington SCORE

Greater Seattle SCORE

Yakima Valley SCORE

South Sound/Tacoma SCORE

Bellingham SCORE

Mid-Columbia Tri-Cities SCORE

U.S. Small Business Administration District Offices

The U.S. Small Business Administration (SBA) offers financing and grants, as well as consultations and counseling services. There are also opportunities to apply for federal government contracts through the SBA and avenues for obtaining assistance in the wake of natural disasters.

U.S. SBA District Offices

9 Mile Labs Startup Accelerator

9 Mile Labs, featured in the article above, is an accelerator in the Greater Seattle area that focuses on startups, particularly in the tech space. After a four-month program, participating entrepreneurs will have the opportunity to pitch their idea to hundreds of investors, as well as tap into the mentorship network 9 Mile Labs has cultivated. Learn more at the link below.

9 Mile Labs

Washington Small Business Development Centers

Washington hosts SBA-affiliated development centers for small business. Each is dedicated to supporting the development and retention of small business, helping entrepreneurs do everything from craft business plans to navigate the state's tax code. You can find your region's small business development center at the link below.

Washington SBDC Network

Startup Washington

Startup Washington is a program run by the state Department of Commerce that helps connect entrepreneurs to useful resources, data, funding sources, VCs, accelerators, workspaces and more.You can find out more about Startup Washington at the link below.

Startup Washington

Adam C. Uzialko

Adam received his Bachelor's degree in Political Science and Journalism & Media Studies at Rutgers University. He worked for a local newspaper and freelanced for several publications after graduating college. He can be reached by email, or follow him on Twitter.