The Entrepreneurial Mind

The Thomson Reuters/PayNet Small Business Lending Index, which measures the overall volume of financing to U.S. small businesses, rose 2 percent in July compared to the same month last year.

My advice to entrepreneurs is to continue to be very cautious about expanding their use of debt. The use of debt brings added risks.

New debt will add to the overhead of a business. This means that additional sales and profits -- more importantly additional cash flow -- will be necessary to cover the additional monthly expense associated with repaying new loans.  Just like all small business debt, any new debt will add to the risk from having to personally guarantee business loans with personal assets, such as the owner's home.

I am still concerned with long term interest rate risk.  Higher interest rates are still one possible scenario in our intermediate future.  Be aware that this will add to the pressures on your monthly cash flow.

My advice to entrepreneurs continues to be to minimize the use of any new debt. You can do this by getting back to your startup roots and turning to your bootstrapping strategies once again.

Given the tenor of the comments here at the blog this week, I could not resist a second quote of the week before the long weekend:

"So let us begin anew - remembering on both sides that civility is not a sign of weakness, and sincerity is always subject to proof"  (John F. Kennedy). 

"Overall, the job creation picture is still bleak. Weak sales and uncertainty about the future continue to hold back any commitments to growth, hiring or capital spending. Consumer and business-owner sentiment is in the dumpster, and until this changes, small businesses will remain unwilling to spend or hire."
 
(William C. Dunkelberg, chief economist for the NFIB, on August small business employment numbers based on NFIB's monthly economic survey that will be released in a couple of weeks.)

Some polls out this week tell us that small business owners are becoming more cautious.

The latest Intuit poll on small business employment suggests that hiring in small businesses has, once again cooled off.  While there were some gains earlier this year, the modest improvement we had been seeing seems to have stalled. 

The results from a poll by Citigroup offers some insights as to why the optimism for economic improvement among small business owners has once again begun to sour.  From the Wall Street Journal:

More than 85% of small-business owners are worried about a double-dip recession, according to the latest quarterly survey by banking giant Citigroup Inc. 

But three-quarters of those polled said they are very or somewhat prepared for another downturn.

Mirroring results of previous surveys, 76% rated current business conditions as fair or poor.

So it seems that those entrepreneurs whose businesses have survived the downturn are taking a more prudent course and preparing for more difficult economic times ahead. 

Nothing coming out of Washington is helping to calm their fears.  Every group of entrepreneurs I talk asks me the same basic question: "When are the politicians going to wake up and understand that all we need from government is for them to get out of our way?"

Given that they are hearing that higher taxes and more regulation are on the way, and that policy makers trying to manage the economy do not trust free enterprise and free markets, it is no wonder that they are not very optimistic about the future.

The impact of the changes in public policy over the past decades -- increased direct government control over the direction of the economy, higher tax rates, more regulation -- are not just simple on/off switches.  Even if we were able to magically turn all of this around tomorrow, the lasting impact would remain for years to come.

What we often fail to understand is the impact of public policy decisions on our culture.  Just as on example, look at unemployment benefits.  Over the past years the tendency has been to extend government unemployment benefits during tough economic times.  While this seems on the surface a compassionate thing to do, the research into this clearly shows that such extensions actually extend the period of time that people remain unemployed.  It has also contributed to, along with many other policy decisions, an expectation in our society that the government will be there to support you.  Over the generations, this is now deeply embedded into our culture.

A direct result of increasing dependence on government is that the self-reliance that was such a fundamental aspect of the American culture for generations has been eroding.  And that value of self-reliance was a major driver of our entrepreneurial nature as Americans. 

Let's assume that we continue with the acceleration of government's role in our economy and our private lives.  Then some day in the future we wake up and realize that we have been heading in the wrong direction -- that socialism really does not work very well after all. 

So we elect an entrepreneur as President, who promises to unleash the free market to restore our economic engine of growth and prosperity.  This new leader slashes taxes and cuts through the red tape that has bogged down entrepreneurs for generations.

But then, very little changes in our behaviors.  Changes in public policy do not have the desired impact.  Is this a case where these policies are a dismal failure?  Not at all.  It means that with our years of government expansion, we have suppressed the very aspects of our culture that drive us to want to become entrepreneurs.

Want to see what this future looks like?  Take a look to our south at Chile. 

Like the ghost of Christmas yet to come in A Christmas Carol, Jonathan Ortmans offers a glimpse of this possible future.  One that we can avoid, but only if we change our ways.

Ortmans' writes a post at Policy Forum Blog in which he examines the fact that, while an economic success story in South America, Chile has not been able to unleash entrepreneurial growth in its economy. Its answer to this shortfall?  Put government in change of creating entrepreneurship.  Chile shows what happens when we have relied so long on government to fix things, to fix everything, that we wrongly assume that only government can create entrepreneurship.

Unfortunately, Chile is not yet a startup culture, and innovation still plays a minor role in the creation of new enterprises, according to the infoDev Incubator Support Center (iDisc) service from the World Bank. This may come as surprise since the Chilean government's investment in R&D has increased 70% since 2005 and much of it has flown into universities. It has also created the InnovaChile program to support innovation in various sectors, including biotechnology, energy and ITC.

This is what can happen in America if we do not change course very soon.  For you see when assumptions get ingrained into our culture, we do not consciously know they are our assumptions.  They are simply taken as a given.  The leaders of Chile cannot comprehend any solution but the government for their economic challenges.

The self-reliance that made America an entrepreneurial powerhouse is still evident.  I see it burning in the generation now in college.  But with each step toward socialism in our economic policy, the entrepreneurial flame fades a bit more in our culture.

With a growing number of people seeking entrepreneurship as an alternative path in this rough economy, there is increasing competition for the key resources that can make or break the startup venture.

New entrepreneurs are competing for essential resources, such as the funding, the customers and the staff they need to build a successful business. Attracting these resources often relies on how well the entrepreneur can deliver "the pitch" for his new business.

An effective pitch starts with a hook -- something that grabs the attention of the person one is talking to about a business. The most effective hook lays the groundwork to show the underlying need in the market for what the new business aims to offer.

A common mistake we see in pitches is that the entrepreneur waits much too long to tell what the business does. I had my students watch some examples of pitches the other night in class. You can find lots of good ones and bad ones on YouTube.

We were amazed that some of the people making a pitch waited more than halfway through their pitch to tell what their product or service is and what it does.
Answer key questions

Remember this: Early in a pitch the entrepreneur should present a clear mission statement. Who are you? What do you offer? Who is it for? What makes you unique?

The pitch must also show that there is "pain in the market" -- that there are people who are in need of what you are offering and are willing to give you their hard-earned money to pay for it.

Who needs your product? Why do they need it? How many of them need it? What are you doing differently from your competitors?

The pitch needs to be presented clearly. It should be an unambiguous answer to some key questions that a skeptical listener is likely to have about the business. How will you make money?

The presentation of the pitch needs to be compelling. The entrepreneur should show his enthusiasm. Make it a personal message to those listening, and make eye contact. Never use note cards -- this tells the world that you are not confident and that you don't know what you are talking about.

While it is important to be enthusiastic, you still must be authentic. Putting on an act rarely gets an entrepreneur very far. Be yourself in how you talk, in how you dress and in how you interact with others.

Finally, a strong pitch always ends with a clear message. What is the one thing that you want them to remember? What do you need from them? What do you want your target audience to do for you?

In this economy, entrepreneurs face competition on every front as they launch a new business. An effective pitch can help distinguish you from all the others trying to grab the attention of investors and customers.

On Monday, Scott Shane wrote a post at Small Business Trends titled "Do Small Businesses Matter in High Tech?"

As in most of Shane's writing he comes out swinging at small businesses in our economy.  In his opening sentence, he proclaims: "Small Businesses are much less important in technology-intensive industries than in the rest of the economy."

In a conversation with Aron S. Spencer, Ph.D., who is an Assistant Professor, School of Management at New Jersey Institute of Technology, I found yet another kindred spirit in those who continue to be dismayed at Shane's antagonism toward small business.

Spencer asserts that Shane's premise "flies in the face of the conventional wisdom -- and common sense -- about high-tech entrepreneurship. It's also completely wrong."

As in past writings, Shane selectively uses and interprets data to make his case.  "Shane begins his argument based on revenue share," said Professor Spencer, "citing evidence that small businesses generate small proportions of sales compared to overall high-tech sales. While this may be true, sales are only a small portion of the picture."

Spencer offers some specific evidence of his own.  "Take, for instance Shane's discussion of R&D. Small business, he says, account for only about 1/5 of R&D spending (other studies I've seen indicate it may be as low as half that), whereas businesses with more than 25,000 employees account for 42% of the spending. Yet he fails to mention that about half of all patents awarded go to small businesses. That means that small business are 5-10 times as efficient with their research dollars. Patents awarded to small business are also more than twice as likely than those awarded to large businesses to be important patents, based on their impact on future R&D and patenting."

Spencer also takes exception, as I have in previous posts, to Shane's use of employment data. Shane argues that "small business also accounts for a smaller portion of technical employment than its share of overall hiring."

Spencer makes the following rebuttal to this:  "The statistics he cites primarily indicate indicate that there are a lot of non-high-tech small businesses. The more interesting statistic is that small high-tech firms generate jobs at a rate over 5x their share of current employment (compared to just over 3x for non-high-tech small businesses), and therefor are among the most important drivers of employment growth."

Spencer also argues that Shane minimizes the importance of small high tech companies to the growth of the big ones.  "Many of today's large tech firms drive substantial portions of their revenue growth via acquisitions. Cisco, for instance, has a reputation for 'growth by acquisition'.  Harvard even wrote a case study about it. Google, in addition to their internal R&D efforts, has also shown a great appetite for purchasing outside technologies. Where do these acquisitions come from? Small high-tech business."

And that's why, once again, Professor Spencer and I both assert that Professor Shane is wrong.  Small business does matter.

Those who side with Scott Shane's view that entrepreneurship is generally an economically irrational act (i.e., why start a business when you could make more money working for someone else) really don't understand what makes entrepreneurs tick.

One of my undergraduate students sent along this video that sheds some light on why entrepreneurs do what we do.  While profits matter, there is something much stronger that drives us to start new ventures....

Today is the first day of classes for me here at Belmont University.  I love the rhythm of the academic calendar.   The start of a new academic year offers a sense of renewal.  But, there is something special about this one.

As those of you who are regulars readers know, 2010 has not been the best of years for me personally.  Early in the year, my wife and I lost our oldest dog Keb, who died much too young at the age of eight.  Soon came the loss of my father to a stroke, which happened at the same time as our daughter and her husband had been flooded out of their home in the Great Nashville Flood of 2010.

While life seems to be getting back to normal, we can't help but being haunted by the ghost of "what's next?"

So the fresh start that comes with every fall semester is particularly welcomed this year.

The fresh start is also exciting to me as after many years of teaching entrepreneurs, I am in the middle of a renaissance in how I help my students learn about planning for their entrepreneurial ventures.

Unlike many of my colleague around the country, I have not completely abandoned the good old business plan.  I am simply in the process of relegating it to its rightful place.  Business plans are certainly useful tools for certain situations, such as raising funds or selling a business.

Business planning is a critical activity for any entrepreneur, but we seem to have gotten lazy and assumed that learning the process of writing business plans is the be all and end all of planning.

This laziness has included entrepreneurs, investors, and those of us who teach entrepreneurship.  We are all guilty of a misguided understanding of what is essential about planning for a new and growing venture.

Enter a small, but growing body of work on business modeling.

Business modeling is a way of conceptualizing and planning for a venture that looks at it as a whole.  Business plans, on the other hand, are much more like a series of short stories that may or may not loosely hold together.

Business modeling is all about the integrity of the planning process and the importance in internal consistency among the moving parts that make up a successful venture.

As with any new way of thinking in business, there is no clean and simple text for us to teach from.  What we are learning about effective business modeling comes from a variety of places and disciplines, each of which is shedding a little more light on what makes a successful business model.

Some of the best work out there so far includes:

Johnson - Seizing the White Space: Business Model Innovation for Growth and Renewal 
Osterwalder et al - Business Model Generation
Mullins & Komisar -- Getting to Plan B

None of these works offer a complete view of business modeling, but each offers insights on part of the process.

Well, it is time to get ready to head for campus.  More than most years, I am truly thankful for the fresh start this new semester offers.

Well, summer classes are over and August graduation has come and gone.  Time for a short break before the start of the fall semester.  I plan to spend the week getting caught up on some chores around the house and playing lots of golf.  See you next week!