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                                                                                BUSINESS, Page 62

ENTREPRENEURS

Starting Over


More and more jobless Americans, some of them dropouts and some
castoffs, are launching small businesses -- 1.3 million in 1991
alone

By THOMAS MCCARROLL


    Before he lost his job at Citicorp four months ago,
Harvey Lewis had been dutifully climbing the corporate ladder
for 25 years. He had joined the bank at 18 as a backroom clerk
and worked his way up to assistant vice president, picking up
his M.B.A. along the way. But his dream of reaching the top
ranks was dashed when Citicorp closed his New Jersey
mortgage-banking office. "They even offered me a gold watch,"
says the father of five-year-old twins. "But I wasn't ready to
retire." Instead he used part of his $65,000 severance to start
his own business: a computer school for children, which he runs
with his wife Denise. "At first I was afraid of failing and
going hungry," he says. "Now I wonder why I didn't try this
sooner. It's a new life."

    Lewis is in good company. Despite a deepening economic
recession and a high failure rate for start-ups, more and more
out-of-work Americans are striking out on their own. To be sure,
starting a business is not a realistic option for most of the
9 million jobless workers in the U.S. But in the bleak
employment market, entrepreneurship is suddenly looking
attractive to an increasing number of people who have the
necessary skills, drive and ideas -- in short, everything but
a job.

    An estimated 1.3 million new businesses opened their doors
in 1991, up nearly 9% from 1980, when 1.2 million start-ups
were launched. More than half the new enterprises are sole
proprietorships or microbusinesses with no more than two
employees, typically operating out of a garage, basement or
spare room. In most cases the entrepreneurs made the choice to
drop out of corporate America to become their own boss. But with
companies slashing their payrolls in relentless rounds of
layoffs, the innovators are more and more likely to be corporate
castoffs like Lewis.

    For the same reasons they put big-company people out of
work, recessions typically present unique opportunities for
small-time ventures, contends Gerald Hills, director of
entrepreneurial studies at the University of Illinois at
Chicago. Cost-conscious corporations, which want to reduce the
number of full-time employees, often replace them with
free-lancers, consultants and other outside contractors to
perform such services as payroll and maintenance. Large
companies also tend to abandon markets that may be unprofitable
for them but a feast for small firms.

    Even so, the road to successful self-employment can be a
tortuous one. Not everyone is cut out for its uncertainties and
do-it-yourself nature. Nearly 2 out of every 3 new businesses
fail within five years. The biggest roadblock is financing.
According to Venture Economics, a market-research firm, an
entrepreneur needs at least $8,000 to start a home-based
business, which includes office supplies and equipment but not
rent. Starting the same business in prime office space would
take at least $50,000 in start-up capital. To launch a retail
establishment, such as a bakery shop or a video store, could
require as much as $200,000 in financing. A manufacturing
concern would need much more: $1 million just to get off the
ground.

    Raising that kind of money is difficult for someone
without a track record, let alone a job. The challenge has
become especially acute because the flow of venture capital, so
abundant in the 1980s, has dried up as investors have become
more cautious. The amount of venture capital raised by start-up
companies during 1990 fell 53% from the previous year, to $202
million. When the numbers for 1991 are in, they are expected to
show an even steeper decline.

    For hell-bent entrepreneurs, that just calls for more
persistence. When former AT&T sales executive Mary Poldruhi
wanted to open a restaurant serving East European fare in Parma,
Ohio, a Cleveland suburb, she turned to the telemarketing skills
she had acquired at the telephone company. Poldruhi, who is of
Polish descent, made cold calls to all the doctors and lawyers
listed in the phone book whose surnames ended with such suffixes
as -ski and -cz. She raised $240,000. "I would have called every
-ski in the U.S. and Poland if I had to," she says. Her new
restaurant is called Parma Pierogies, named for the filled
pastries she sells.

    Some potential entrepreneurs are getting financial backing
from new and surprising sources. While the Tennessee Valley
Authority, the government-owned power utility, is paring its
payroll of 27,000 by 14% this year, it is also offering 10-year
loans to laid-off workers who want to go into business. Since
the program began last January, the TVA has reviewed 22
applications and approved three: a dry-cleaning operation, a
Christian bookshop and a home-improvement store. Cathy and
Malcolm Phillips, a married couple who both worked as nuclear
technicians until they were laid off last month, took out a
$49,000 loan to open the home center, using its inventory as
collateral. Says Cathy: "It's a come-around-once opportunity to
start a second life."

    Another unusual source: the unemployment office. In an
adventurous experiment, the states of Massachusetts and
Washington are letting the jobless use their unemployment
benefits as startup capital. Instead of paying the participants
the usual biweekly unemployment checks for six months,
Washington State gives them one lump sum. In its Self-Employment
and Enterprise Development project, 450 jobless workers since
1989 have collected lump-sum payments averaging $4,200. Among
the SEED startups: a plumbing business, a money-management firm,
a landscaping company and a tanning salon. Ronald Wilmoth, 43,
used his $7,000 check as part of his financing to buy the
Olympia, Wash., electronics store where he had worked for 21
years before being laid off in 1990 when the chain that owned
the store went bankrupt. Says Wilmoth, who employs six workers:
"I would have never tried this before. I was too comfortable to
take chances."

    The Massachusetts Enterprise Proj ect, which began last
year, differs slightly. Rather than issuing lump-sum payments,
MEP gave participants regular unemployment checks for 24 weeks.
It also offered 10 weeks of small-business instruction and
financing at MEP's partner bank, Shawmut. So far, Shawmut has
provided $165,000 in loans for such ventures as a catering
service, a photography studio and a billiard hall. James
O'Neill, who lost his $55,000-a-year job as a plant manager in
August 1990, launched a worker's compensation consulting firm
based in Westfield. "There was a period of doubt," he recalls.
"Money was only coming in in dribs and drabs." Now O'Neill has
a client base of 70 firms and earns twice as much as he did in
his previous job.

    The programs, however, cannot guarantee success. About 9%
of the SEED companies failed after only two months. Nearly 1
out of 5 MEP start-ups folded in the first year. Alfred Raulet
of Fairhaven, Mass., lost $5,000 of his personal savings and
$6,500 in unemployment benefits when his new wholesale seafood
business went under for lack of customer orders, which the
50-year-old attributes to the slowdown in the economy. He is
currently unemployed.

    Such programs are also taking flak from labor and business
interests. "You can't start a serious business with an
unemployment check," says Lawrence Kenney, president of the
AFL-CIO's Washington State Labor Council. "If you do, you're
talking about a bunch of poorly capitalized businesses that
hardly stand a chance of surviving." Eldred Hill, head of UBA
Inc., a pro-business lobby, charges that programs like MEP and
SEED are unfair to employers who pay into the
unemployment-insurance pool. "By letting people use unemployment
benefits to start a business, we're forcing employers to finance
enterprises that may turn out to be their competitors."

    Officials of the Massachusetts and Washington programs see
such criticism as unfounded. The programs, they say, are
designed only to create jobs. If new competition is the
by-product, the officials contend, what right-thinking
capitalist can argue with that? And while starting a business
cannot be a cure-all for U.S. joblessness, it offers at least
some out-of-work Americans an opportunity to trade an
unemployment check for a paycheck.