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How Small-Business Owners Really Feel About the Future

With entrepreneurship hotter than ever, Inc. 5000 business owners are betting on a very strong 2015. And who wants to argue with optimism?

Editor-at-large, Inc. magazine

Entrepreneurs, optimistic by nature, are particularly–indeed, almost giddily–enthusiastic as 2015 approaches. Our second annual State of Small Business survey finds their collective confidence up sharply from last year. While they do have concerns–about health care costs, political gridlock, and regulation–most seem to share the sentiments of J Schwan, CEO of Solstice Mobile in Chicago, who says, “It would take something pretty significant to inhibit the growth we’ve been experiencing.”

The percentage of respondents who describe themselves as “very confident” about the economy’s prospects over the next 12 months has almost tripled, from just under 10 percent last year to 26 percent this year. The number who say they have little confidence that the economy will be strong has dropped by more than half.

Survey respondents, drawn from the Inc. 5000 universe of America’s fastest-growing companies, were even more upbeat about the prospects for their own companies, with 57 percent rating them as “excellent,” versus 38 percent in 2013. The percentage who see their company’s 12-month outlook as average or poor fell from 16 percent to just 8 percent.

Large majorities anticipate investing in head count, new products and services, capital improvements, and new domestic markets. And far more were positive about banks’ willingness to lend (69 percent versus 51 percent in 2013), although the number actually planning to borrow was smaller.

To some degree, that rosy outlook mirrors the state of the overall economy: Unemployment is at a six-year low, the stock market was flirting with all-time highs as the survey was conducted, and the availability of credit has broadly improved–Ben Bernanke’s personal mortgage woes notwithstanding.

Entrepreneurs aren’t naive, however. Even as they anticipate solid growth, they say there is plenty of room for improvement. And they generally agree on where that improvement needs to take place: Washington, D.C. “It’s getting harder and harder to do business in this world,” says Royce Cornelison, president and CEO of Chattanooga, Tennessee–based P&C Construction. “Our health care costs have been going up an average of 20 percent over the past four or five years, and regulations from EPA and OSHA are getting more stringent.”

Uncertainty–about regulatory issues and the political scene in general–has become a defining characteristic of the “new normal” that all companies now face, but it seems that entrepreneurs are learning to adapt. “They think that the level of uncertainty remains the same,” says William Dunkelberg, chief economist at the National Federation of Independent Business, “but they are more confident in their own ability to deal with it. That won’t be resolved between now and the 2016 election.”

While respondents were generally divided on specific issues, there was one exception: health care reform. After another year girding for the Affordable Care Act, entrepreneurs expressed virtually the same attitudes toward it as they did in 2013. The majority oppose the ACA and view it as a bane of the economy. But they understand it, and they are ready for 2016, when the employer mandate (with its $100-per-day-per-employee penalty) is scheduled to kick in.

Several CEOs have adopted a self-insurance model, hoping to recoup some expenses if their work forces stay healthy. Douglas Pelletier, president and CEO of Trifecta Technologies, in Allentown, Pennsylvania, began self-insuring early this year. He says his health care costs have risen 19 percent since 2011, and would have risen by more than 40 percent if the company hadn’t moved to a self-insured model. Employees have begun asking for raises to offset their costs. “Several people said to me, ‘I love the company, but let me tell you how this translates,’ ” says Pelletier. “‘My wife had surgery,’ they say, ‘and it is costing me $3,000, $4,000, $5,000 out of pocket that I wouldn’t have had to pay before.'”

The Inc. 5000 are more likely than typical small businesses to already offer coverage (92 percent do so). And though 20 percent have had to change their plans, not everyone considers that a bad thing. Kansas City, Missouri-based Brownmed, which has provided insurance since 1992, lowered the cost of employee premiums by 50 percent to meet the ACA cap. “That allowed at least 10 individuals who had previously been exposed to the risk of no insurance to get into our plan affordably,” says CEO Ivan E. Brown. As the company expands the pool to more people, its own risks are down, and per-employee costs dropped 26 percent by the end of the second quarter (though the overall expense is higher, because more employees are enrolled).

Other instances of public-sector involvement in private enterprise were less hackle-raising than the ACA. More than half of respondents support a hike in the minimum wage, with nearly a quarter saying it should rise by $2 or more. While that support is softer than in the general population, it’s still significant considering the potential effect on labor costs, and may reflect enduring concerns over consumer confidence, which fell sharply in September, when the survey was conducted.

On immigration, 45 percent of respondents want government to concentrate on tightening borders, while a third thought creating amnesty or a path to citizenship should be the priority. Those opinions, however, were more likely expressions of personal belief than business imperative: Fewer than 15 percent said immigration had strong positive or negative effects on their companies; and 64 percent said it had no effect at all.

Tech companies, not surprisingly, expressed greater interest in the skilled, educated, and entrepreneurial than in the tired, poor, and huddled. More than 40 percent of respondents were in favor of more visas for skilled workers. One exception is Chase Norlin, executive director of San Francisco-based Transmosis. “If there are two million unemployed people in California, and 50 million-plus in America, you are telling me there is not 5 percent of that population that is employable and willing to go the extra mile to work at American businesses and fast-growing high-tech companies?” he says. “Of course there are. There are tons of them.”

Entrepreneurs, then, are mostly confident, somewhat cautious, and broadly annoyed with the leaders and systems that make them less confident and more cautious than they’d like to be. What about the state of entrepreneurship itself? It’s a glorious Shark Tank world out there, according to our respondents, two-thirds of whom say that the popularity of entrepreneurship is at an all-time high. More than half salute the boom in incubators, accelerators, and business-plan competitions, while a somewhat smaller number applaud the proliferation of entrepreneurship programs in colleges.

But the glamour is not evenly distributed. A majority of respondents decry the popular media for obsessing over Silicon Valley inspiration at the expense of Main Street perspiration. Where the spotlight goes, some fear, so goes the money.

Another effect of the marquee status of tech entrepreneurs goes unremarked on: It masks, to some extent, the troubling falloff in new business formation. Business starts have been declining since 1978, and in the past few years the rate of business failures has, for the first time, exceeded the rate of starts.

No one knows exactly why business formation has lost steam–contributing factors may include everything from tight credit to rising student debt to large corporations’ big-pocketed exploitation of internet opportunities. “The cost of starting a business has gone down,” says E.J. Reedy, a director in research and policy at the Ewing Marion Kauffman Foundation. “But the competition to reach customers is quite fierce, and large businesses can swoop in and conquer a market more quickly than ever.”

With challenges so daunting, it’s possible that many aspirants, recognizing an Everest, simply turn away at the foothills. When we asked survey participants to respond to the statement “Most Americans don’t understand how hard it is to start and build a successful company,” 95 percent agreed, making that by far the most commonly held opinion on the survey.

Yet those who took the survey not only have accepted the challenge but have also made impressive ascents. What advice do they have for those who would follow? “People seem to focus too much on looking for certain signals,” be they political or economic, one respondent said. “This search seems to paralyze them. If all you do is concentrate on what’s wrong, where does that get you?”

Certainly not onto the Inc. 5000, which, judging by the optimism shown in this year’s survey, will be an even more impressive force for economic growth come this time next year.

How Small-Business Owners Really Feel About the Future