The Entrepreneurial Mind

So what can small businesses expect for 2012? My general advise continues to be cautious!  While we are seeing some of the small business surveys showing optimism increasing and more importantly employment improving slightly, I worry that we have been lulled into a mode of thinking that the worst is over.

I believe that we are simply in the eye of the storm.  I hope that the storm is dissipating, but I fear that the back wall of the eye will hit us sometime later this year.  It may come as a result of the European debt crisis or it may come as a result of the looming Chinese credit crisis, but I fear it may hit us and his us hard.

That being said, we do need to get on with life.  Things may actually improve, but even if they don't the vast majority of small businesses will survive even if things get nasty.

Steve Strauss offers his take on trends for small businesses to watch at Business on Main.  He sees mobile mania continuing to surge this year, a continued increase in the solopreneur (a.k.a., free-lancers, independent contractors), and an improvement in how Groupon works with small businesses.

He also is keeping on eye on the economy and has some concerns about the impact of the fall election.

It is a thoughtful article that is worth a careful read as you make your plans for this year.

While entrepreneurial success is tied to careful feasibility assessment, business modeling and planning, never underestimate the role that luck plays in an entrepreneurial journey.

I am not suggesting that aspiring entrepreneurs just sit and wait for an opportunity to come to them like a bolt of lightning out of the blue. As the Roman philosopher Seneca pointed out long ago, luck is the crossroad of preparation and opportunity.

Preparation comes from the development of what I call the process skills.

Entrepreneurs have a better chance of success if they learn fundamental business skills, such as accounting, marketing and managing people.

They also benefit from learning specific process skills tied to starting and growing a business, such as how to assess opportunities and translate them into business models.

Opportunities come from the development of content skills that come from our experiences in life. The best ideas for possible businesses most often come from jobs we have held, from our hobbies and interests and from our social network.

If we pay close attention, it is out of these experiences that we'll notice customers who aren't getting what they want or who are missing the service they expect. This is what creates the gaps and pain in the market that entrepreneurs can capitalize on with a new business.

There is one important caution regarding the opportunities that come from our experiences, though. Don't become a slave to the status quo. Be ready to be surprised.

Luck is not the only element that leads to entrepreneurship. We also need to be ready for serendipity, which is when we find opportunity not by plan, but by accident.

The examples of the role of serendipity in entrepreneurial success are many.

For instance, the original plan for PayPal was to build a payment platform for the old hand-held Palm Pilot devices.

And 3M sticky notes came from an adhesive that did not work as well as it should have.

The key was that in both of these examples, while the original plan did not work, an entrepreneur was willing to pursue a surprising new direction that did work very well.

Entrepreneurial success can be the result of a path we did not expect.

While our experiences are important, we have to be careful not to get stuck in the old, traditional ways of thinking. And we must never become a slave to our original ideas.

So, the formula for success is quite often a combination of hard work and preparation, of the experiences we have in life and more than a few surprises.

Never underestimate the role of luck and serendipity in entrepreneurship.

One of the biggest mistakes I made during my days as an entrepreneur was raising too much money.

Because our business was successful, we had investors eager to offer us money. But by taking money when we really did not need it, we found that it created more problems than benefits.

When taking money from outside investors, you give up part of the control over your business.

"One of the reasons most people start a company is so they don't have a boss," says Jake Jorgovan, co-founder of Rabbit Hole Creative, a high-tech graphics and marketing firm. "If you take out funding, then you have an investor looking over your shoulder at every decision you make."

Taking outside money can also lead to building overhead and creating an infrastructure that can lock you into a specific business model as you attempt to make good on the things you have committed to in your business plan.

Michael Brody-Waite, CEO of InQuickER LLC, prefers to keep his company lean and adaptable even though it has grown to annual revenue of seven figures.

"We chose to stay agile and not lock ourselves into a rigid trajectory unnecessarily," Brody-Waite says. "The cost of taking money in terms of distraction and complexity is well-documented. Our company is built on maintaining less mass, agility and out-simplifying our competition."

Too much funding can also propel a company into a level of growth for which it is not prepared.

"Bootstrapping your growth allows you to grow at a pace that is comfortable for you," Jorgovan says. "Investors will want to see rapid returns on investment regardless of what that means for you. When you bootstrap a company, you can build it into the company that you want to work in. You can build it into a business that you enjoy going to work at every day."

Like many entrepreneurs, both Jorgovan and Brody-Waite have felt the pressure to consider taking funding from investors. It seems to be part of the entrepreneurial culture, especially in businesses that have the potential for significant growth. There seems to be an expectation that seeking investment capital is a standard part of starting such a venture.

Although both businesses have seen successful growth through bootstrapping rather than fundraising, there may come a time when bringing investment money into each company makes sense.

"I expect us to take money eventually," Brody-Waite says. "However, the cost in time, agility, complexity and mass would have to be significantly lower than the tangible benefit to our company."

When it comes to seeking investor money for an entrepreneurial business, the goal should never be to raise as much as you can.

Instead, your goal should be to raise money only if you truly need it. And even then only take as much funding as is absolutely necessary to reach the goals of the business.

Jeff Wuorio shares a collection of 2011 lessons learned from various entrepreneurs that he posted at Business on Main.

Here are two of my favorites:

"The biggest lesson I learned in 2011 was for our business to question our beliefs. We all have preconceptions about what our customers want, how best to market to them, how best to support them and so on. But if we set aside those preconceptions and brainstorm new solutions, we can come up with unexpectedly good new ideas."
-- Michael Kaiser-Nyman, Impact Dialing

"I've learned this year not to take on too much work. I have an 18-month-old little boy who is taking up a lot of what used to be my 'work from home' time. Rather than stressing about all the stuff that's not getting done, this year I made it a priority to try and ignore the small stuff, understanding that, if left alone, none of these non-actions would cause the company to go down the drain anyway."
-- Adam Koos, Libertas Wealth Management Group

Both of these lessons resonated with me personally.

The first lesson reinforces what we are working on with our program here at Belmont, which has seen tremendous growth and development over the past couple of years.  We have put a lot of features into our program for our students that are based on our own "preconceptions" about what they want and need.  As we continue to improve our entrepreneurship program we need continue to co-create with our students and alumni.

The second lesson hits home as we now have two adorable little granddaughters who both live here in the Nashville area. I need to keep time for them and the rest of my family.  If I don't make an effort to do this, no one else will do it for me.  I guess I just figured out my New Year's resolution for 2012!

Don't think you can win taking on the big box retailers?  See how the Toy House in Jackson, Michigan has found a way to compete and hold off the category killer at this video clip from Business on Main.  Note that the key is finding a different value proposition than the big box retailers that customers find to be one that trumps simply slashing prices.

A student come up to me before class the week before their business plans were due this past semester looking very dejected.  

"My concept just can't work," she said.  The more she tried to pivot the business model, the more she uncovered evidence that convinced her that she had reached a dead end.

This is what is known as a teachable moment.

Aspiring entrepreneurs go through an arduous process between the initial spark of an idea to the eventual launch of a business.  

They start by sifting through the various ideas they have to find the one that has the most promise.  Many ideas may appear promising at a first glance, but careful assessment helps to sort out those that have little promise. Eventually, the entrepreneur selects a product or service they hope will be accepted by the market.

The next step is for the entrepreneur to take the idea and begin to build a business model.   

The primary goal of business modeling is not to try and rationalize starting a business based on your idea.  Instead, the objective is to discover all of the challenges, flaws, and gaps that need to be addressed if you have any hope of moving from a good idea to a successful business.  Business modeling is a process of finding problems and fixing them by altering and expanding the operating framework needed to launch the business and, when necessary, pivoting the concept based on what is learned about your customers and what they really want.   

When developing a business model, you may reach a point where you realize that no matter what you do, it just won't work.  This realization can happen very late in the process even at the point when you are developing a written business plan based on the business model.  If that happens, no matter how much time and effort you have put into the project, you need to be decisive and abandon it.  

But this is much easier said than done.  You have spent countless hours talking about the business with friends and family.  You have shared your idea with advisors and mentors.  You may have even pitched the idea in business plan competitions and to investor groups.  It feels like your reputation is riding on getting the business launched.  There is a sense of inevitability that launching the business is what you are going to do.

But do not ignore the evidence.  Have the fortitude to walk away.  The fact that you have spent countless hours getting your idea to this point is not a reason to keep moving ahead.  

So back to that teachable moment....  

As class started that morning I asked the student to share her story with her classmates. I then looked her in the eyes and emphatically said, "You did a great job!  You stayed true to the process and had the courage to acknowledge that your concept just won't work.  Congratulations!"

The end of this story is that while her initial idea did not work out, the process helped her discover several new ideas and gave her the opportunity to make several new connections with people to add to her network.  She learned the lesson that while her idea may have failed, she was successful.

Politicians have been searching for a defining issue to crystallize the "us versus them" game that has been going on in Washington for the past several years.

The latest is the temporary $1,000 payroll tax cut that is set to expire at the end of this year.  Both sides have their scheme to keep the cut in place.  Those of the left want to "pay" for temporary renewal of the tax cut with a permanent tax increase on the wealthy. 

"Don't be a Grinch," says President Obama. "Don't vote to raise taxes on working Americans during the holidays."  If keeping taxes low is such a good thing, why did they make this payroll tax cut temporary?  But I digress...

Those on the right want to renew the tax cut, but not tie it to any other tax increase.  The right has raised concerns that many among the wealthy who would be paying higher taxes are actually the very entrepreneurs who everyone wants to get busier creating jobs and economic growth.

As always seems to happen, we now have a group of "moderates" suggesting a compromise.  They are suggesting the we have a tax increase on the wealthy to "pay" for renewal of the temporary tax cut, but exempt small business owners.  Sounds like a simple solution, and my guess is something like this compromise may actually pass.  The problem is that such moderate compromises, while they can sound nice and reasonable, often make the waters even muddier.

This compromise is lousy policy. 

Yes, tax cuts (or avoiding tax increases) help spur entrepreneurial activity according to most research on the topic.  The problem with the compromise is that any exemption for small business owners is surely going to require more tax code and more regulation.  We also know from research that increasing regulation and complexity of the tax code decreases entrepreneurial activity.

Let's start with what the Federal Government uses to define a small business.  Under a certain number of employees?  Under a certain level of revenues?  Well, kind of, but years of lobbyists seeking favor for special interests for specific types of small businesses has resulted in an official definition of small business that is 45 pages long!!!  You can see the entire document here.

Certifying that you are actually a small business owner eligible for exemption from the tax increase will probably end up costing you more in staff time and CPA bills than any savings in taxes.

But appearance seems to always trump substance and wisdom these days.  Since in a sound bite the small business exemption will appear like a reasonable compromise it will likely play well in this never-ending election cycle.

But six months from now, when those who pass the laws have moved on to other issues, small business owners will be left scratching their heads, trying to sort out how they can avoid paying the latest "wealthy" tax.

One of our recent alums, Gabe Simon, is a member of the Kopecky Family Band.

The key to their business model, which Gabe worked on in our program, is to build a strong, loyal following that has a sense of community with the band.  A key aspect of delivering that value is through live performance.

I ran into Gabe yesterday at Bongo Java (my favorite local coffee shop).  It seems they are executing on their business model.  Paste Magazine named them as 18th on the 25 Best Live Acts of 2011.

Check out "Howlin' at the Moon" in the clip below (Gabe is singing the lead in this song):

Sometimes an entrepreneur reaches a crossroad.  While the business that they have started shows potential, they may come to the realization that the only chance it has of being sustainable will require raising money to grow it to the next level.  Bootstrapping is always a good path to start a business, but sometimes a certain level of funding is still needed to get to a sustainable scale that can earn the owner an acceptable income.  

The first thing to determine is if the business can absorb the cost of any additional funding after it grows to the next level.  Run detailed budget projections based on the growth you are considering that include the cost of the outside money, be it interest and fees with any type of debt or expected returns if the money comes from an investor.  

If the cash flow of the business looks like it will be able support the cost of the outside money, the entrepreneur needs to make sure they are ready to deal with the changes that come with the funding.  Debt financing will probably require personal guarantees and may also come with certain restrictions that may limit decisions you can make about how you run your business.  And investors will likely expect to become involved in major decision-making about the business.  

The entrepreneur must carefully consider whether getting the business to the next level is worth the added hassle and risk that comes with outside money.  If it isn't, it may be time to seriously consider working toward selling the business if they can, or possibly closing it down in an orderly way.

The decision of whether to continue operating a business can be one of the most painful experiences an entrepreneur can face.

As small business owners, we often consider the people who work for us to be more like family than employees.  Closing the business that has been how they have made their living can make you feel like you are abandoning them.

As entrepreneur, our identity and our egos become tied to our businesses and its success. 
Ending a venture that we have spent much of our waking lives working in and worrying about creates an emptiness and sense of real personal loss.

But there are times in the career of an entrepreneur when he or she has to find a way to set these feelings aside and make a rational, clear-headed decision about the future of the business.

Remind yourself that moving on from a venture that is not sustainable can be a new beginning.  While some may tell you that closing a business is a mark of failure, experts would disagree with that.  For example, venture capitalists will often favor funding entrepreneurs who have had failed businesses in the past, as they know they can take what they learned from that failure and avoid repeating past mistakes.   

Don't think about a business that did not make it as a personal failure.  If you learned from the experience and can take those lessons into your next business -- that is success.

I wrote a post back in October about a program that is encouraging small businesses to hire released inmates who have participated in an educational program.

Fox News picked up on my post and contacted us about running a story on the program I wrote about.  They ran a story that highlights inmates who have had success with this program.  Well worth a view, which can see here.