By Taras Polischuk and Andrew Gershfeld
Since 2000, small businesses have created over 10.5 million jobs in the US alone, and the current estimate of the number of small businesses worldwide is around 400 million.
Self-employment has also almost reached an eight-year high 5.4 million new business applications submitted this year. The pandemic has made remote work the “new normal” and this has had a significant impact on how people perceive entrepreneurship. The shift in perception surrounding the idea of monetizing a hobby or skill, particularly in digital spaces, has evolved from a pipe dream to something that seems far more achievable.
The passion economy market is currently worth over $38 billion globally and it is estimated that by 2030 the passion economy will account for 85 percent of new jobs that currently do not exist in 2022. This will have a huge impact on both traditional employment and the VC market.
What drives the Passion Economy
There are several factors that have increased the popularity of passion economics.
First, it aligns perfectly with the remote and hybrid workstyles that have become the “new normal” for the global workforce. It also enables broader diversity and inclusivity, a critical requirement for today’s businesses.
Second, the market downturn offers new go-to-market opportunities. When the economy faces challenges, this is often when entrepreneurs “try their luck”. In fact, according to a study, more than half of the companies are on the 2009 Fortune 500 list started during a bear market or recession.
Businesses should take note: The passion economy will change the way we work
We are in the middle of a recession, which means the macro economy will have a significant impact on employment. People tend to either play it safe and find a job with a stable company, or they decide to take a risk and start their own business.
There are two notable ideas here. The first is that most people are unwilling to take on the traditional “9-5 cabin drone” jobs after experiencing remote and hybrid work. Even in an economic downturn, companies will struggle to fill these positions unless they overhaul their hiring and work processes.
The second idea is this: Many of the people who turn down jobs at big companies instead take the plunge and start their own businesses. If these entrepreneurs can raise funds during a recession, they will be armed with an ideal product-market fit by the end of the recession, and their businesses will soar.
This is how the passion economy will affect the VC market
The passion economy has always been a source of enormous potential on an international scale. Harley-Davidson, Disney and Patagonia are all globally recognized brands that all started as a talent or hobby and grew into a small business.
Investors are always looking for the best ideas that have the potential to become unicorns. In a passion economy, the top of the “idea funnel” increases dramatically, requiring investors to spend more time carefully evaluating each business idea. Investors may be overwhelmed by the influx of companies seeking funding, but ultimately, the ideas with real potential typically account for a minimal portion of overall demand.
This means that aspiring startups must recognize that they are in a highly competitive market when it comes to raising VC funding. The best startups get funded and thrive while their competitors stay small and eventually die. It may sound daunting, but this is good for the industry because it lifts all companies that have the potential to become internationally successful.
Venture capital firms should also pay close attention to the companies serving the infrastructure of the passion economy. As mentioned, the industry is worth $38 billion and growing, so it needs tools to keep growing, moving forward, and scaling. The startups that offer solutions to these problems have excellent unicorn potential.
Finally, current VC tactics will likely need to change in order to invest effectively in the right small companies in the future. Rather than using traditional VC strategies, investing in the startups that are representative of the current passion economy requires different skills and expertise that are closer to small business banking processes.
Because of this, it’s possible that tactics for using low-fi venture capital will change. In this case, small checks from backers to help start a business would be replaced or supplemented by larger venture capital institutions that base their investment thesis on passion economics. These institutions have extensive financial resources, which are accompanied by education, marketing support and recruitment help for founders.
The Passion Economy is the future
The pandemic has created a desire among the workforce to separate work and gainful employment. More than ever, people are interested in finding ways to monetize their skills and hobbies through entrepreneurship.
The passion economy is thriving and will continue to grow, meaning traditional corporations and VC firms will need to change tactics to continue to thrive.
About the authors:
Taras Polischuk, Co-founder of Oneday, a platform to educate aspiring entrepreneurs and support them in starting a business,
Andreas Gerschfeld, Partner at the international VC fund Flint Capital