April 2006 Archives

As I wrote in a post from yesterday, word of mouth must be a very active strategy for a small business. It rarely just happens. Clearly one way to motivate your customers to tell others about you is to treat them so well that they just have to tell others about you.

Guy Kawasaki has a great post from a couple weeks back on customer service. It all starts with the culture of your business, and the culture starts with you. Your employees will follow your lead on how customers should be treated. The customer relationship must be built on integrity, open and honest communication, and offering service that exceeds all of their expectations. Don't forget that you help set those expectations on the front end, so don't over-promise or "over-sell" what you can give them.

If you can follow Guy's tips with your customers, you will give them something they want to talk about.

A key aspect of success for many entrepreneurs is learning how to sell. Your product or service will rarely sell itself. Passively relying on word of mouth is too often a cop-out for entrepreneurs who are intimidated by the thought of having to sell. Cold calling on potential customers can be particularly difficult for many of us. StartupJournal has a good short overview of how to begin the process of making effective cold calls and how to use your customers to make cold calls for you. Word of mouth must be managed and cultivated and this is another tool to help spread the word about your business.

Get your customers to cold call for you, says Stephen Watson, instructor and operator of Silent Dragon Martial Arts School in Branford, Conn. The path to new customers "is through my newest, most excited customers." Their enthusiasm will lead them to talk to their friends about me, says Mr. Watson, and that is essentially doing cold calling for his business.

I wrote a post about Kelly Perdew's talk to the students at the Delta Epsilon Chi Conference (college level of DECA) the other day. Kelly (past winner of The Apprentice) has a great blog that focuses issues such as leadership. I highly recommend that you visit his site. It is quite thoughtful and well written.

I wanna thank everyone who ever told me no, Pack it up and get back home, It kept me going knowin' I would prove them wrong. Yea I knew it all along, Without 'm I might have given up a long time ago, and so, I wanna thank everyone who ever told me no.

Buddy Jewell

Because we live in Nashville, I am often reminded of how much failure goes into creating success. From the outside, it seems that music stars just suddenly appear on the scene. The truth is that for most of them it took years of hard work and many, many failures to finally find success.

The same is true for entrepreneurs. Most highly successful entrepreneurs will tell you that along the road to success in their businesses they were often on the brink of failure. But they persevered. They found a way to make payroll. They found a way to make that critical sale. They found a way to keep the wolves away from the door just long enough to make it through the tough times. They found a way to pick themselves up from a business that did not succeed and move on to the next one that might. As Thomas Edison once said, "Many of life's failures are people who did not realize how close they were to success when they gave up."

Our culture seems to be drifting into an alarming view of success and failure. We seek quick or even instant success. I see it in entrepreneurs who look at their businesses as deals to yield a quick, short-term windfall rather than as a sustainable source of income and good jobs. We seek our fortunes through lotteries and lawsuits rather than hard work.

We also try to protect ourselves from any adversity or failure. There are the "helicopter" parents who hover over their offspring trying to shield them from any chance of failure, even as these children become young adults. We have politicians who have created the illusion that government is there to protect us from any harm and to rescue us from all adversity. America has become a society of people who blame everyone and everything else for our own failures.

We seem to have forgotten that failure, in fact, builds character. And it is the fear of failure that inhibits creativity and keeps us from learning.

Don't be discouraged by a failure. It can be a positive experience. Failure is, in a sense, the highway to success, inasmuch as every discovery of what is false leads us to seek earnestly after what is true, and every fresh experience points out some form of error which we shall afterwards carefully avoid.

John Keats

You will fail. Failure is a prerequisite for success.

I am in Dallas for a few days with a group of students from Belmont. They are attending Delta Epsilon Chi (collegiate version of DECA) and competing in various business competitions.

The kick-off speaker for the entrepreneurship competition was Kelly Perdew (former winner of The Apprentice). He did a presentation based off of his book, Take Command.

Kelly is taking his fifteen minutes of fame and leveraging it to create new opportunities in business. He part of a group that has created Angel-Led Venture Partners, which specializes in early stage investing. Angel-Led Venture Partners has built a network of eight angel networks from around the country. Their model is to bring together more money and more expertise to make angel investing more efficient and more effective.

Rather than wallowing in his own celebrity, Kelly has used his success in reality television as a stepping stone to move further ahead in business. He is no overnight wonder. Kelly was a serial entrepreneur long before he met Donald Trump. He is a great example of building an entrepreneurial career one step at a time.

The SBA Office of Advocacy reports that it helped to save small business over $6.6 billion in fiscal year 2005. By
working with federal agencies to implement the Regulatory Flexibility Act, Advocacy ensured the voice of small business was heard in the regulatory process. That effort resulted in rules which met their regulatory goals while at the same time lessening the burden on small business compared with the original proposals.

Previous research has shown that the smallest of businesses annually spend $7,647 per employee to comply with all federal regulations. That is 45 percent more than the $5,282 per employee spent by firms with 500 employees
or more.

However, NFIB noted that while this report is a good first step, it's also a reminder that much more needs to be done to relieve the heavy regulatory demands that continue to disproportionately burden America's small-business community.

NFIB recently conducted an e-mail survey to gather first-hand accounts of how regulatory compliance affects its members and their businesses. NFIB member Gregory Stewart is a small-business owner who runs American Logistics, Inc a trucking business in Climax, Michigan. Stewart was recently forced to hire a third-party consultant to manage and file all of his business' U.S. Department of Transportation compliance paperwork, because it is too time-consuming and onerous for him to manage on his own.

"It costs me roughly $90 per month, per driver in paperwork and compliance costs. Right now my business is expanding and I would like to hire more drivers, but the costs and the paperwork involved with DOT compliance keeps me from doing that," said Stewart. "More than 40 pages of paperwork must be filled out to hire just one new driver."

Stewart noted that it’s often difficult for businesses to keep track of regulatory changes and new requirements. Being a small-business owner, he said it’s tough to run a business and still have time to read 40 pages a week about minor policy and compliance changes. As a result, he depends on his consultant to learn about new regulations and compliance guides.

Without continued pressure, this could be a case of one step forward and eventually two steps backward. Remember that since the time that President Reagan passed his tax simplification, the IRS code has doubled from 30,000 to 60,000 pages.

Each year our Entrepreneurship Center here at Belmont honors students who have pursued their entrepreneurial dreams while attending school here at Belmont University. This year we recognized twenty new students who had taken the entrepreneurial plunge while attending college at Belmont.

A freshman majoring in entrepreneurship won the third annual Regions Bank Outstanding Student Entrepreneur of the Year Award.

Andy Tabar, a freshman from Cleveland, Ohio, was one of four finalists and more than 50 student entrepreneurs at Belmont eligible for the award this year. He will received an award of $5,000 from Regions Bank.

Tabar operates two businesses, Andy Tabar & Associates and Nashville Creative, which offer a variety of services including marketing development, Internet communications, web site development, web site hosting, and tech services. He began both business while in high school and now has more than 50 clients including corporate and entertainment related clients.

We also honored 20 new students who are practicing entrepreneurs, making it 60 in all since we began our program just three years ago. They are all students who in the midst of exams, papers, and normal college life managed to also start a business.

Having begun my own entrepreneurial career while in college, I can assure you that being a collegiate entrepreneur is no small accomplishment. And what they are doing is what makes me so optimistic for our future.

Congratulations to all!!

One option for product based start-ups is to try to license the product to a large company for them to manufacture and distribute. This is a long, tough road. StartupJournal has a good summary of the issues you will face with this market entry strategy.

Only about 3% to 6% of patented products by independent inventors ever reach the market, either through licensing or direct selling by the innovators themselves, estimates Don Kelly, a patent agent in Alexandria, Va., and a former senior director in the U.S. Patent and Trademark Office.

You can improve your chances of success by making sure you have a strong marketing plan for your product. The more compelling this part of your story, the more likely you'll get interest. Make sure to have adequate legal protection for your product. You need to invest in the time of an experienced IP attorney.

When it is time to grow your management team it can be a frightening experience. How do we know if this person will fit in? How do we know if this person will help build the kind of culture we want to create?

There are a few tricks of the trade that have proven to be effective. You just need to create situations where people show their true character.

A common technique that I have found to be effective is the "waiter test." You can learn a lot about how a person really treats other people by taking them out to eat and observing how he treats the waiter or waitress. USA Today credits the first official documentation of this technique to Raytheon CEO Bill Swanson in his book Swanson's Unwritten Rules of Management.

Among those 33 rules is only one that Swanson says never fails: "A person who is nice to you but rude to the waiter, or to others, is not a nice person."

I had an entrepreneur in a growth management seminar I teach offer his "bowling test" as an example of how to judge character. He and his partners in their engineering firm wanted to create a culture that was not too stuffy. They did not want a firm that was populated by engineers who were "full of themselves." So part of the interviewing process was to take prospective engineers bowling. If they had a good time and enjoyed themselves, they passed the first screen. If they seemed uncomfortable or even embarrassed, they probably would not fit in.

A local coffee shop owner has applicants fill out an application that includes two questions:

If you could have a 1-hour conversation with anyone living or dead, who would it be and what would you talk about?

If you were to write an autobiography, what would the title be? Explain.

He understands that his coffee shop is as much about the atmosphere as it is the coffee. So he wants to fill his stores with interesting people. I doubt Starbucks pays that close attention to its hourly employees.

We had our "receptionist test." I gave our receptionist veto power over all major hires who came in for an interview. If they were rude or condescending toward her, they never came back for another visit. If she gave the thumbs up, we would invite them back for the "real interview." We wanted staff who could work in a flat structure where all employees play a key role. (The receptionist was considered part of our marketing team due to her close interaction with customers day-to-day).

Know what is key to your culture and find ways to assess all hires that come into your business to assure that they will fit in. (And by the way...yes, it is legal to screen for fit with culture as long as you do not use it to discriminate against a protected class of people).

Why do small business owners need to care about our tax system? Because as this testimony by Thomas Sullivan of the Office of Advocacy of the SBA indicates, they have the "bull's eye" of IRS enforcement (i.e., audits) on their backs. Also, study after study shows that tax rates correlate with business start-up activity. That is, the higher the tax rates, the lower the number of new businesses. Also, tax complexity is shown to inhibit entrepreneurial activity in the economy. The more complex the tax system, the lower the overall rate of entrepreneurship.

While today is tax day, we do not celebrate Tax Freedom Day for a couple more weeks. Tax Freedom Day is calculated by estimating how long we work each year just to pay our taxes. Even with recent tax cuts, Tax Freedom Day has gotten several days later over the past two years -- economic growth has increased our taxes.

We spend more days each year working to pay just our federal taxes than any other expense category, as can be seen from this break-down from the Tax Foundation:

Their full study on this year's Tax Freedom Day can be found here.

The post Kelo Decision movement to restrict eminent domain continues to move ahead in several states, while in others it has lost momentum as public attention has shifted to other issues. Here is an update:

Many States Making Progress in Protecting Private Property

Alabama

After extended debate, a House committee voted Tuesday to move a proposed constitutional amendment on eminent domain within one step of final passage.

Alaska

A bill that would curb the power of government to seize private property is moving through the state Senate. The Senate Judiciary Committee Wednesday passed House Bill 318 to the next committee.

The bill restricts the use of eminent domain to acquire private property for redevelopment projects.

California

It is beginning to look as if Californians will be asked to vote later this year to reform the laws of eminent domain -- and do a lot more to protect private property rights.

Florida

Restricting government's ability to take Floridians' private property through eminent domain for economic development has become one of the few agreed-upon principles in the legislature this year.

That sentiment was evident Thursday when the House unanimously passed a bill (HB 1567) that would prohibit governments from taking homes or businesses and then handing them over to a private developer.

Georgia

Gov. Sonny Perdue signed legislation April 4 that became known as the Landowner's Bill of Rights and Private Property Protection Act (HB1313), protecting private landowners in Georgia against the abuse of eminent domain, according to a release from his office.

The governor also signed HR1306, a constitutional amendment "requiring that the condemnation of property be approved by a vote of the elected governing authority of the county or city in which the property is located."

Iowa

[T]he Senate is expected to debate a bill this week that would put limits on cities' eminent-domain powers. The bill passed the House in February.

Sen. Bob Brunkhorst, R-Waverly, said the bill will pass in some form. The bill says private-property owners cannot be forced to sell to the government to make way for economic-development projects, with few exceptions.

Louisiana

Gov. Kathleen Blanco will support legislation to prohibit local or state governments from taking private property for the purpose of private economic development, her chief counsel said Tuesday in a key but qualified endorsement of one of the most controversial proposals of the current lawmaking session.

Minnesota

[L]ast week eminent domain reform in Minnesota took a major step ahead when a bill received overwhelming 115-17 support on the House floor. A final eminent domain bill, meshing the House and Senate versions, will now be hammered out in conference committee.

Missouri

Representative David Pearce, R-Warrensburg (121st District), believes that House Bill 1944, passed out of the House Judiciary Committee by a bi-partisan 9-1 vote, will significantly improve landowner protections against eminent domain abuse.

Nebraska

Lawmakers gave first-round approval on Monday to a bill (LB924) aimed at curbing the use of eminent domain.

South Carolina

A Senate subcommittee studying eminent domain declined Thursday to add specific rules on how to determine compensation, though the subject may come up again.

The panel is trying to refine the Senate bill that deals with concerns over a U.S. Supreme Court ruling last year, as well as review a House measure on the same topic.

States Where Efforts Have Stalled, Bogged Down, or are at Risk

Kansas

City and highway officials worry that provisions in an eminent domain bill passed by the House last month, if it survives, will significantly drive up the cost of public improvement projects.

New York

The president of the New York State Bar Association has called on the Legislature to establish a commission to study all proposed amendments to the laws regarding eminent domain in New York, and not to make any changes to existing law or amend the law regarding the purposes under which the government can take property - until the study is complete.

North Carolina

The state legislature continues to drag its feet regarding eminent domain. The likely effect of this dawdling, and, perhaps, its intent, is that the issue will drop off the public's radar with no new restraints on local governments' power to take people's private property.

Ohio

A state task force studying the use of eminent domain in Ohio will hold a subcommittee meeting April 17 in Norwood.

Sates Where the Abuse of Property Rights Rolls On

Massachusetts

A battle over a valuable chunk of property in Assembly Square went before the state Supreme Judicial Court Tuesday. Attorneys from Central Steel and the city appeared in the state's highest court in a fight over the ownership of Central Steel's property in Assembly Square. Central Steel is fighting the city's attempt to seize its property by eminent domain so it can be redeveloped as part of an urban renewal plan. Central Steel has operated a steel fabricating business out of its Assembly Square site for more than 60 years.

New Jersey

Long Branch [NJ] has designated six redevelopment zones in the city, including the Beachfront North, phase II redevelopment zone. Residents residing in that zone appeared in court on March 24 for a hearing at which their attorneys challenged what they say is an abuse of eminent domain by the city of Long Branch.

The 36 homes in the three-street neighborhood, known as MTOTSA (Marine and Ocean Terraces and Seaview Avenue) are slated to be acquired by the city through eminent domain and replaced by luxury condominiums built by a private developer.

As most of us predicted, high-growth entrepreneurial ventures moved away from IPOs in the wake of Sarbanes-Oxley and moved into high gear with acquisition strategies to satisfy investor expectations. A new report by NVCA highlights this shift in exit strategies. Free market capitalism sure is a robust system.

Dr. George Solomon, Director of the Center for Entrepreneurial Excellence at George Washington University, spoke on our campus here at Belmont last week. In both of his lectures he stressed knowledge as the most important resource any entrepreneur needs to be successful.

In his first talk, Dr. Solomon stressed the need for need for knowledge about your local market and your target customers. Dr. Solomon also illustrated how data about a market can either validate ideas as business opportunities, or in some cases, uncover needs in the market that have not yet been met. All of the data he used in his example of Nashville was from reputable sources easily available at no cost. Although Google has made searching easier in some ways, it can lead to hours of wasted time. A skilled reference librarian (most university and larger public libraries have them on staff) can help focus your data search.

His second lecture stressed the importance of knowledge about yourself in preparing you for taking the entrepreneurial plunge. The most successful entrepreneurs are best at "red sky" thinking. Psychologists tell us that "red sky" thinking involves the "Big Picture" and is concerned with the what and then the how. It is someone who enjoys starting new entrepreneurial ventures, networking with other people to accomplish big goals, and toying with global concepts and possibilities. Such thinking can be learned and developed. Creativity is a teachable skill, according to Dr. Solomon.

Thanks to the Moench family for their generous gift that has made this speaker series possible.

Optimism among small-business owners took an unexpected tumble in March. The NFIB Small-Business Optimism Index lost 3.5 points, falling to 98.0 (1986=100), two points below the 30-year average. The good news is that profit trends improved, inventory investment was up, and reported sales trends remained strong (virtually unchanged from February). However, labor market indicators sagged and capital spending plans faded along with weaker expectations for gains in real sales.

Declines in job creation plans and job openings accounted for 30 percent of the drop in the index, weaker real sales expectations 40 percent, and the decline in the outlook for overall business conditions contributed 20 percent of the drop.

"Although the first quarter will be very strong, something spooked small-business owners in March about the future course of the economy," said NFIB Chief Economist William Dunkelberg. "The decline could indicate that owners think the economy is strong, but they don't expect it to get any better, or the economy is weak and they expect growth will slow substantially. The April survey could provide the answer."

Seasonally adjusted, 13 percent of the owners reported increasing employment in March and about the same number (14 percent) reported reductions. Forty-nine percent hired or tried to hire one or more workers. Eighty percent of those owners reported few or no qualified applicants for the positions they were trying to fill. Twenty-three percent had unfilled job openings, down three points but a respectable number. Over the next three to six months, 24 percent plan to create new jobs, while only 5 percent plan workforce reductions, yielding a seasonally adjusted net 9 percent of owners planning to create new jobs, a large decline from February --one Dunkelberg called "quite surprising."

The frequency of reported capital outlays over the past six months rose three points to 66 percent of all firms -- a bit better than the February numbers. Forty-seven percent spent on new equipment, 27 percent acquired vehicles, and 14 percent improved or expanded their facilities. Eight percent obtained new buildings or land for expansion and 15 percent spent money for new fixtures and furniture.

Plans to make capital expenditures over the next few months declined four points to 31 percent of all firms, perhaps due to the increase in actual outlays made in the recent months.

When asked if the current period is a good time to expand, 19 percent of the owners said yes (a point lower than in February). A net-negative 5 percent expect business conditions to improve over the next six months, down eight points from the prior month.

Seasonally adjusted, a net 6 percent reported increasing inventories, a five-point gain over February's reading. Plans to add to inventories were exceptionally strong in February and apparently owners accomplished their objectives. A net zero percent reported inventories too low (seasonally adjusted), an even leaner posture than in February.

Sales were strong throughout most of the quarter, easing a bit in March. A net 6 percent of all respondents reported higher sales in February, down a point to 5 percent in March, both historically strong. Seasonally unadjusted, 27 percent of all owners reported higher sales. Sales trends were positive and owners consider their inventories quite low. However, owner expectations about future sales trends cast a shadow over prospects for the second quarter.

Overall, plans to add to inventories remained historically solid at a net 3 percent of all firms, but well below the exceptionally strong readings from the previous six months. If sales slow dramatically in the coming months as expected, stocks currently viewed as "lean" will become excessive and inventory investment plans will deteriorate.

Even as the percent of owners raising prices fell dramatically in March, reports of positive earnings trends improved, the result of solid sales gains and a reduction in the percent reporting higher labor compensation. Nineteen percent of owners reported higher earnings compared to the previous three months and 63 percent of them cited stronger sales (up five percentage points after a three point gain in February). Eleven percent credited higher selling prices. For the 37 percent reporting lower earnings, 27 percent blamed weaker sales, 14 percent higher materials costs, 5 percent increased labor costs, 11 percent lower selling prices and 3 percent each blamed higher taxes, insurance and regulatory costs.

Given our dependence on small business for job growth over the past decade, this downturn in the confidence of small business owners is very troublesome.

I recently wrote a post on those I call Entre-boomers, baby boomers who come into the world of entrepreneurship late in life, as a response to an article in US News and World Report. They have a follow-up on my commentary at their website.

This week is "National Small Business Week." However, words are cheap. Offering a week to acknowledge small business does little to help make our economy a better place to start and grow small businesses. It is a patronizing pat on the head by a government bureaucracy that still operates as it did during last century's industrial era.

If you want to help small business get government out the way and replace our antiquated tax system. Speaking of taxes, isn't it a bit ironic that Small Business Week ends on April 15th!!??

Two of my books have looked at how entrepreneurship can help improve K-12 education. In a new paper titled "Why is Educational Entrepreneurship so Difficult? 2006," Henry M. Levin looks at barriers to badly needed innovation in how we approach education.

Much of the recent literature on improving education in the United States seeks to promote entrepreneurship as the solution to raising educational quality and equity. But, the historical record documenting substantial and sustained departure from conventional educational practices is scant despite numerous attempts at entrepreneurial innovation. This paper contends that the challenge of entrepreneurially induced change is not due to a deficit of ideas or lack of volition on the part of those who seek change. Rather it is due to intrinsic features of the educational system which defy modification. These include not only such matters as a stubborn school culture, but also the very role of schools as organizations that must serve other organizations and depend upon them for resources. The paper evaluates the record of new forms of organization such as charter schools and educational management organizations as well as other well-intentioned strategies for transforming American education. It concludes that successful educational entrepreneurship must overcome a deeply-rooted institutional conservatism that is largely explained by modern institutional theory.

We see this here in Tennessee. When we moved here, I had hoped that I could continue to support charter schools as a means to raise the bar for all schools in terms of increased financial and outcomes accountability. Alas, the public school lobby in this state has made sure that the charter school law makes any attempt at setting up a charter school doomed to fail from the very beginning. When I gave a talk to leaders of our public schools, it fell on deaf ears.

Thanks to Paras Dagli for passing this along.

Colorado Governor Bill Owens has extended help for Colorado’s over 493,000 small businesses by signing into law a bill that continues the requirement that state agencies prepare a cost-benefit analysis of proposed rules that may affect small businesses when requested by the Colorado Department of Regulatory Agencies (DORA).

In Colorado, each state agency, its functions, and its boards are reviewed according to a statutory review schedule and statutory criteria. A sunset review discusses whether the agency, its functions, or board should be
continued without changes, continued with changes, or terminated. Provisions in the Colorado Administrative Procedure Act governing the preparation of a cost-benefit analysis were set to terminate on July 1, 2006, unless extended by legislative action. This bill extended the cost-benefit analysis requirement until July 1, 2013.

The small business community, led by the National Federation of Independent Business/Colorado (NFIB) and the Colorado Association of Commerce and Industry, supported the passage and signing of the bill.

"Duplicative, unnecessary and overly complicated regulations hit small business the hardest. By continuing these cost-benefit provisions state agencies can better see when they need to provide flexibility in their rules," said Tony Gagliard, NFIB/Colorado State Director. "For small business, having the ability to participate and help shape the rules they have to comply with is important. The bill's passage helps to maintain Colorado’s small business friendly environment."

Angel investors have been slowly changing the types of deals that they like to invest in. As Business Week pointed out a few months ago, they seem to be "moving up the food chain."

One aspect of this change is that more angels are banding together into informal and even more formal networks for their deal making. In a talk this week at Belmont, Sid Chambless, Executive Director of the Nashville Capital Network, described how these angel networks work.

Traditionally, entrepreneurs have to find an interested angel through their own network of contacts. An intermediary, often an attorney or CPA, will usually make the introduction. Once introduced the angel will usually assess the entrepreneur and eventually evaluate the plan.

With an Angel network, the business plan first goes to the network staff. This makes the angel network more like a VC firm in how it evaluates deals. The staff will reject about 50% of business plans as soon as they arrive. They can usually tell quickly if a deal is just not suited for angel money or if the concept is just not viable.

For the remaining 50%, the network staff provide consultation and advice on how to prepare the plan and the pitch for the deal process. They help the entrepreneur get the presentation and the written plan up to standards that an experienced investor will expect to see.

About 50% of these deals get to the point that they are ready to go before an investment screening committee. This is a group of experts and angels who evaluate the deal for funding. The angels make their own individual decisions on whether or not they want in on the deal.

Only about 20% of these actually receive funding. The money normally comes from several sources, including one or more of the angels in the network. One investor usually serves as the lead or "champion" investor for the deal.

If you are keeping track, that mean for every 100 plans, 50 make it past first review, 25 get to the committee and about 5 might get funding.

On average, about 10% of the funded deals make it big, while about 45% muddle along and 45% fail. That means that an angel network may need to see 200 deals to find one that hits it big. The success rate of funded deals is about the same as we see with VCs, but venture capital funds only provide money for about 1% of the plans they see.

The changes in angel investing has also corresponded to more deal flow. Last year there was more money invested by angels that venture capitalists. Given that angle investments are often much smaller than those made by VCs, this means an significant increase in the number of entrepreneurs receiving angel financing over the past few years.

Part of the reason that angels have moved up in their criteria is that venture capitalists have also moved up. VCs continue to favor later stage financing. This has created a gap in smaller deals that need seed funding. As a result of this, more people are having to rely on their own money and investments from friends and family to get their businesses off the ground.

One of my regular visitors asked me to write a post on multi-level marketing (MLM). His question: Is it a legitimate business?

Multi-level marketing is a system where people make money by getting other people to become "distributors" for a product. While some money may be made by actually selling the product, most money is made by creating layers and layers of people who are distributors working under your distributorship. You make the most money by the inventory and fees these folks pay as they sign up. The deeper the layers go beneath you, the more you can make. Some have called this a pyramid. Laws have been passed to limit the pyramid-ness of these businesses, but as always, businesses adapt to the new restrictions.

In a strict sense I guess you could say your distributorship is a business. It takes in money and spends money, and often the distributor incorporates to capture this activity.

In my definition of what makes up an entrepreneurial business, I think this is not a legitimate business.

First, it does not create real economic value. In this sense, it is not unlike the dot.com's. Their only purpose was to raise money and cash in before that system fell apart. If you get in early you may be OK, but the late comers rarely do very well.

Second, for most of the participants it does not create wealth or even income in any significant way. I know there are exceptions, and even a few MLM companies that have found models that seem to last. But so many have come and gone, leaving people with garages full of product that will never sell.

Third, although each distributor is called "an entrepreneur" in many MLM models, they never have the chance to grow a real business that satisfies real customers by selling them a product over time that has value as their primary source of revenues. They also add no economic good through building employment. The distributorships never grow, evolve, and take form like a traditional business can and usually does.

OK, I know I have just opened a Pandora's Box with post, but you asked.....

As a business grows it will often need more sales staff. Kauffman eVenturing has a great new collection of articles on this topic.

Sales folks march to a different drummer. One needs to take great care in crafting a compensation plan that motivates these folks while at the same time makes sure they are pursuing your goals and not just their own.

A new poll conducted by Harris Interactive for the National Tax Foundation finds that 80% of Americans recognize the need for real and fundamental tax reform.

Support for federal tax reform rose among adults in 2006. A majority report they are willing to give up some tax deductions to make the tax system simpler. Only about one in ten adults are willing to pay additional taxes to eliminate the deficit and balance the budget. A majority report the amount of federal income taxes they have to pay are "too high," and rate the value they receive from the taxes they pay to the federal government as only fair or poor.

Sadly, any movement that had been evident for real tax reform seems to be stalled in Congress.

There seems to be a common belief that businesses, particularly small businesses, benefit from illegal immigration and therefore want to see the government turn the other way.

A new survey released by NFIB seems to prove this is not the case.

More than 90 percent of NFIB small-business owners surveyed believe illegal immigration is a problem. Seventy percent rank it as a "very serious" or "serious" problem, and 86 percent say it should have a "very high" or "high" priority for Congress and the Bush administration.

While a few small businesses may gain some economic benefit from hiring illegals, clearly the vast majority of entrepreneurs care deeply about this issue and want to see it addressed in a real and meaningful way. This concern stems from issues that go well beyond their business interests.

According to the small-business owners surveyed, 47 percent said the single most important reason illegal immigration constitutes a problem is the cost of illegal immigrants to taxpayers. Other reasons receiving significant support were national security and threat of terrorism (23 percent), disrespect for the law (13 percent), and job loss/depressed wages for Americans (10 percent).

Impact Lab has a post that offers sound advice for any small business.

However, before I get to his advice, I need to offer a critique. The premise of the advice is that 80% of small businesses fail. Guess what? That is an urban myth. There has never been a study that shows this high a failure rate -- ever. Some studies using flawed data showed as high as 60%, but they count a business that is sold as a "failure". If the company no longer existed, it was counted in the failure column. Now with better data the studies indicate 40-50%. And remember, with training and education these failure rates drop to 15-25% in other surveys.

Now back to his advice.....

The title of the post, "Your Baby's Ugly..and You've Got Bad Breath," really tells the whole story. Entrepreneurs and small business owners tend to surround themselves with too many cheerleaders, too many "Yes-men" and Yes-women." That is a recipe for bad decisions that could have been avoided.

You need to have someone, (preferably more than one person) who will tell you when you are wrong. Someone who is not afraid to take your most prized idea and tear it apart. Someone who will tell you that your decision is dead wrong, when it is dead wrong.

If this person is an insider, all the better. For some entrepreneurs their spouse or some outside adviser plays this role.

Just find someone who is wise enough to know when you when you are wrong, and brave enough to say it.

COTC can be visited this week at Jotzel.

We seem to be a little late at everything. Many Baby Boomers took a long time to grow up. Many were late to start families. Now US News & World Report reports that many of my generation are discovering the world of entrepreneurship just as they are about to enter their retirement years.

There are echoes of the 1960s in some of the profiles in this story.

"I just decided if it was my last day on Earth, is this really what I wanted to be doing?" [Franny Martin] recalls. "I mean, I lived it, and being in corporate was great, but that's not how I would want to be spending my last day on Earth. A really good friend of mine had taken ill--she has passed away now--and I just realized that life is really too short to be doing something that I didn't want to be doing anymore."

Some Boomers are looking to entrepreneurship to satisfy their inner self. Some are trying to build additional wealth that they need to live out their twilight years in the manner they've grown accustomed to. Others just need the income. Whatever is driving their move into free enterprise, they are doing it in large numbers. Several studies suggest that Boomers are one of the fastest growing group of entrepreneurs. (Interestingly, their children--today's college aged kids and young adults--are another of the fastest growing groups of entrepreneurs).

Many Boomers are choosing a self-employment, consulting route to entrepreneurship. They gained significant expertise within some specific area, and they become a "free agent" selling their service to a variety of clients. While this can create an income flow, it is not a business model that generally creates a path to wealth.

There is often nothing to "sell" when the boomer entrepreneur really wants or needs to retire. A consulting business is tied to the activity of the owner and has no residual value that someone will be able to buy. A business has value to a buyer if it creates on-going cash flow into the future. If the boomer entrepreneur/consultant retires, the cash flow from his/her consulting activities ends.

Speaking of selling, that is a skill that Entre-Boomers seem to lack. Years of corporate life have taken the hustle out of their skill set, which John Challenger, CEO of outplacement firm Challenger, Gray & Christmas, reminds us is key to entrepreneurial success.

My experience with working with late-in-life entrepreneurs is an alarming over-confidence. They seem to think, "How hard can it really be to run my own small business?"

Trust me, it is a lot harder than most of them realize. And their corporate experience provides little knowledge and experience that helps with the day-to-day challenges of running a small business.

There seems to be a myth that entrepreneurship and self-employment are secret paths to wealth. If these Entre-Boomers didn't prepare in their working years, they believe that they can start a business when they reach retirement age and it will magically create wealth. It just doesn't work that way.

Wealth takes time, effort and careful planning to build, whether it be through a job or through your own business. Creating wealth from an entrepreneurial venture is something that has to be engineered into the business model. That is why many experts recommend having your exit plan in mind from the very beginning of the business.

You need be able to build a business that will generate cash flow into the future long after you leave the scene. That is what has value to a buyer more than anything else. They don't care about assets or reputation unless these things can continue to generate income after they buy your business.

The story in US News cites a study by Merrill Lynch that seems to get to the heart of this entrepreneurial stampede among Boomers.

A 2005 Merrill Lynch survey found that the unpredictable cost of illness and healthcare is by far boomers' biggest fear. They are about three times as worried about a major illness (48 percent), their ability to pay for healthcare (53 percent), or winding up in a nursing home (48 percent) as about dying (17 percent).

That's right, we are more afraid of living than dying. We Boomers sure are a curious group.....