The Entrepreneurial Mind

Need a little inspiration in these uncertain times?  Brett Nelson has written a great piece at Forbes titled "The Greatest Risks They Ever Took." 

Here is one of my favorite quotes that hits entrepreneurial risk taking at its most personal level:

"The biggest risk was telling my fiancé one month before our wedding that I was going to quit my high-paying job to gamble on a 'big idea' with my old college roommate,"

So said Michael Chasen, co-founder of Blackboard.  The outcome of this risk?  Their business is now listed on NASDAQ and his fiancé agreed to tie the knot.

Here is what Nelson took away from his interviews he conducted while writing this story:

The best results come to those willing to take a chance--an important reminder for entrepreneurs, financiers and political leaders as the global economy braces for even rougher weather.

Indeed. 

My hat is off to those financiers who did not pursue the short-cuts created by greed.  Our economic system will need their strength more than ever over the coming months.

My hats off to the politicians who did not panic and vote for the soon-to-be ill-fated bailout.  History will show their courage to be well-founded.  I am proud to count my own Representative Marsha Blackburn among this group.

My hat is off to those entrepreneurs who continue to forge ahead in uncertain times -- buying new buildings, adding new staff, investing in increased inventory -- because they are confident in their ventures.  They are the ones who we will rely on to rebuild a strong economy.

The notion that VCs back the riskiest of ventures that are creating entirely new industries is not true.  VCs are cherry pickers.

A post at Tim Berry's blog Up and Running, which reviews an interview with investor Naval Ravikant, highlights the conservative nature of VCs:

"I look for two things that are paramount above all:

1. Great team. It's obvious. It's a tautology. Everybody says it. You have to be working with some of the best people in the industry you're in.
2. Huge market. Niche markets just don't work because the first idea never works. You always have to change the idea, so you need room to maneuver in a big market.

Berry rightly took exception with the comment about niche markets:

Ravikant has more authority on this than I do, but his reference to niche markets bothers me a bit. I like niche markets in a world that is constantly splintering and dividing itself into finer and finer pieces. Some of the biggest markets there are started as niches: Facebook, for example, focused first on a few university campuses. Yahoo was a niche-the Internet-when it started. Starbucks was once a niche (gourmet coffee, affordable luxury) in the Northwest.

I also like innovative niches.  But generally VCs do not.  The truth is that VCs generally want proven people in proven markets -- and really big markets, at that.  This is neither good nor bad.  It is just how VCs go about their business.

I just hate to see when entrepreneurs who do not meet these criteria waste time and energy chasing money that is probably out of their reach.

(Thanks to James Shewmaker for passing this along).

From the Wall Street Journal:

Small businesses are turning to angel investors, suppliers and personal credit cards as the financial crisis spreads to Main Street and access to commercial bank loans becomes more restricted.

After being rejected last month at two commercial banks, Education 4 Kids Inc. owner J.M. Ivler is back to financing his 5-year-old online retailer with personal credit cards. "I can't get the banks to give me a loan," complains Mr. Ivler, whose Las Vegas company is profitable and produced $350,000 in sales last year.

I have been warning about tightening credit for the past several months. More than ever entrepreneurs will have to rely on their bootstrapping prowess to keep moving forward. 

William C. Dunkelberg, chief economist for the National Federation of Independent Business, issued the following statement on September job numbers based on NFIB's monthly economic survey that will be released on Tuesday, October 14:

"Seasonally adjusted, small business owners reported basically no new job creation over the past few months. The September NFIB survey showed an average loss of -0.34 workers per firm, a decline in private sector employment. Eight percent of the owners increased employment by an average of 3.4 workers per firm, but 18 percent reduced employment at average of 3.1 workers per firm. Not a great performance, unfortunately. 

 

"Forty-nine percent of the owners hired or tried to hire, and 78 percent of those trying to hire reported few or no qualified applicants for the job openings they were trying to fill. Seasonally adjusted 18 percent reported unfilled job openings, a 3 point gain (but still below the thirty-four year average of 22), suggesting that the unemployment rate won't change much, if at all. Nine percent of the owners reported that the availability of qualified labor was their top business problem, well below last September's reading of 17 percent.

 

"Over the next three months, 12 percent plan to create new jobs, and 10 percent plan workforce reductions yielding a seasonally adjusted net 7 percent of owners planning to create new jobs, down two points from August, historically weak but not a real recession number. The September survey shows that small business owners are still muddling along in this economy."

These findings indicate a gloomier picture than the ADP survey issued earlier this week.

Although not completely immune from our financial mess, VCs are flush with cash and still doing deals.  FastCompany has an analysis of the current state of the VC backed part of the economy, which seems to be somewhat insulated from the economic storm:

It may seem sanguine to use the word "haven," since no corner of the economy is impervious to larger trends. But because venture capitalists work on long fundraising timetables and deal in liquid money, faltering banks and crises of credit don't effect VC funds as acutely as they do other institutions. That means startups can continue be free to innovate and grow, with money in the bank.

Anecdotal evidence seems to indicate that angel money is still flowing, as well, although many angels seem to be getting more cautious and putting more of their investments into cash.

(Thanks to Jim Stefansic for passing this along). 

Two surveys released this week paint a very interesting economic picture.

Entrepreneurs are still creating new jobs.  ADP's Small Business Report for September shows that small businesses (fewer than 50 workers) created 28,000 new jobs last month while corporate America is hemorrhaging jobs, losing more than 170,000 over the past six months.

However, a new survey of 500 US small business owners conducted by Harris Interactive for ING DIRECT found that entrepreneurs are very worried about their current situation and about the future.  Specifically the survey found that:

• 63 percent say are either very- or extremely-concerned about the future of the economy

• 57 percent see developing new business as their number-one challenge through the remainder of the year and "access to cash" ranked number-two at 18 percent

• 56 percent are now saving less money for personal and 53 percent are saving less for retirement savings compared to a year ago

• 40 percent see the current financial state of their business as worse than a year ago

Carol Dawson sent along a link to an article in the New York Times about some entrepreneurs who think they have found a loop hole in the tax code that let's let use their 401k to fund their start-up business without actually withdrawing funds.

These business owners are effectively treating their start-up ventures as any other stock in their 401(k) portfolio, and in the process they are providing seed capital for their own budding enterprises.

But, it sounds like this might be news to the IRS.  From the NY Times:

The I.R.S. said it could not comment about retirement financing. But a spokesman, Dean Patterson, said in an e-mail message: "We are looking at these types of transactions because they raise complex tax and benefit issues. Before entering into any tax arrangement, the I.R.S. always reminds taxpayers that they should discuss it with a trusted tax professional."

Two major rules that every entrepreneur should always follow:  1) never end up on 60 Minutes, and 2) never get a tax court case named after you or your business.

From the sounds of e-mail from the IRS, these entrepreneurs may be about to break rule number two.

Call me overly cautious, but I would not go anywhere near this approach to funding a start-up venture until the IRS gets it all sorted out.

I will not be at the Presidential Debate next week when it is held at Belmont University.  We have no better chance of getting a ticket than anyone else.  It is a random selection of undecided voters.

But if I was there, I would ask the following question:  "Which of your policies will help entrepreneurs revive the American economy?"

It is not that I would expect an answer that would sway my vote.  Neither candidate has a platform that supports what is really needed to spur entrepreneurial activity.  They both are in favor of an activist government that lays a heavy hand on the economy.  Both favor big government solutions to any and every problem.  That is the last thing we need to spur entrepreneurial economic development.

The voters clearly understand that entrepreneurs are the best hope for our economy, as seen in a recent survey by the Kauffman Foundation.

"Americans in big numbers are looking to entrepreneurs to rally the economy," said Carl Schramm, president and chief executive officer of the Kauffman Foundation. "More than 70 percent of voters say the health of the economy depends on the success of entrepreneurs, and a full 80 percent want to see the government use its resources to actively encourage entrepreneurship in America."

Unfortunately, Americans don't seem to vote in favor of candidates who would act in ways to support our emerging entrepreneurial economy.  They continue to vote for candidates that expand the tax code, expand regulation, and expand government intervention.

I hope that sometime soon, very soon, they will begin to understand what entrepreneurs really need and vote accordingly.  Let's vote in people who will get government out of our way.

The generation just entering the work force has many names  -- Generation Y, the Entrepreneurial Generation.

In her book RenGen: The Rise of the Cultural Consumer and What It Means to Your Business Patricia Martin labels them the Renaissance Generation, or "RenGen" for short.

She makes some fascinating observations about this generation. 

From a recent interview with the New York Times:

First of all, I predict that what we will see out of the younger RenGen is the largest class of entrepreneurs the United States has seen in a long time. Not only are they driven to do original work, but they are going to want to live that out in originally designed careers.

In order to do that, they'll work hard to create their own enterprises because that is where they can realize their dreams. Boomers are noted workaholics and appreciate the pluck of the young RenGen. But Gen X, often characterized as Dilbert-style middle managers, will struggle to lead these spirited young workers.

This is right on target with my observations of this generation.  They are eager to chart their own courses in life and see an entrepreneurial career as the best path to pursue their dreams.

She calls them the Renaissance Generation because she believes they will be a truly transformation generation. Again from the New York Times interview:

Two things are going on simultaneously, and they live in creative tension. One is that we are ending one civilization and we are creating a new one. Witness what is happening on Wall Street. The second is the outpouring of creativity facilitated by the Internet. There is a generation that will lead us into what will literally be a second renaissance.

I certainly see them as leading the transformation of our economy.   This is already underway.  That is why it is so important to break out of our 1900s paradigms.

We can only do this with less regulation and taxes, not more.  We are witnessing this week what happens when politicians muddle in markets.

It is time to turn the entrepreneurial spirit loose around the globe. 

(Thanks to Jennie Bowman for passing this along). 

Setting the price for a new product or service can be an agonizing process for new entrepreneurs.  If they set them too high they risk turning off new customers.  If they set it too low, they risk leaving money on the table and locking their businesses into low prices.

Diana Ransom writes about the challenges of pricing at SmartMoney. 

Newbie entrepreneurs often miss the mark on pricing, says Laura E. Willett, a small business advisor and finance professor at Bentley College in Waltham, Mass. Entrepreneurs either blindly place a price tag on their product or service without taking a proper reading of the market or, perhaps more commonly, they underprice their offerings on purpose - effectively apologizing to the market for being new and inexperienced.

Ransom interviewed Belmont alum Cameron Powell for her story:

When Cameron Powell launched River Rock Media Group, a Nashville, Tenn., photography and media production company in 2005, he charged just $75 an hour for his photography service. Considering that similarly equipped photographers can earn between $1,500 and $2,500 for a full day's work, he's certain he underpriced himself.

"It got me gigs and it gave me experience working with people. But it didn't help me gain a whole lot of footing with the market I wanted," says Powell who now earns the going rate. Instead, he adds, "I was attracting people who didn't have any money."

If you have to offer low prices to enter a market, make it clear that they are introductory discounted prices.  Don't start with a low price and hope that you can increase it down the line.