Entrepreneurs

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 Project, 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.