Wonder how startup entrepreneurs can afford to give up their steady jobs to run new businesses? The answer is many can't.
Nearly a third of people who own microbusinesses — those companies with fewer than five employees — depend more on a second job as their main source of personal income than they do on their business, according to new research from Gallup and Sam's Club.
The study shows the dependence on outside work decreases as businesses grow more established over time. More than half of the first-year microbusiness owners surveyed said they relied on a second job for their personal income. That number drops to 44 percent for businesses that have been in operation for between two and five years.
The research found that among microbusiness owners who have been open for 20 years or more, just 19 percent depend on outside work as their main source of personal income, with 71 percent relying primarily on their business.
Researchers say that low revenues in the first years of operations are a big reason so many new microbusiness owners get most of their personal income from a second job. Nearly half of the first-year microbusiness owners surveyed brought in less than $10,000 in their first 12 months of operation.
"The likelihood that microbusiness owners depend on a second job to support themselves decreases as their business revenues increase," the study's authors wrote.
The research discovered that of those with business revenues of less than $50,000 last year, 53 percent depended on another job for most of their income. Just 15 percent of those whose businesses earned $50,000 or more needed another job.
While a second job may pay the bills, microbusiness owners say moonlighting does put them at a disadvantage. The study revealed that those who rely another job for most of their income are less confident in their ability to attract new customers and in their understanding of what their customers want both now and in the future.
"Understandably, in light of their heightened concern over attracting customers, they are more concerned about having the right kind of marketing than are business owners who primarily sustain themselves on the revenues of their business," the researchers wrote. "They are also less likely to feel confident in the cash reserves of their business."
The study's authors said the results show that starting a new business is a major undertaking, and doing so while holding down another job makes for a doubly tough endeavor.
"These businesses operate with very small margins of error and are easily threatened by changing market conditions," the researchers wrote. "Knowing that most microbusiness owners cannot support themselves from their business within the first year or two of operations could deter many would-be entrepreneurs from even attempting to start a new business."
The study was based on 864 interviews with U.S. microbusiness owners.