August 2008 Archives

My column in today's Tennessean examines risk in these difficult economic times:

Risk. It seems to be at the heart of entrepreneurship. Whenever I ask a group to describe entrepreneurship, the word risk is always one of the first things people mention.

Most often people associate risk with failure. This is commonly called "sinking-the-boat risk." It is the risk of putting your money, your time and your reputation into a new business only to have it fail.

Here are the Top 9 questions from the NFIB Research Foundation for August 2008 from their searhable database 411 Small Business Facts:

1. CREDIT SCORING - How familiar are small employers with "credit scoring?" (Vol. 7, Iss. 7, Q#5).

2. INFORMATION SOURCES - What is the most important media source of business news and information for small employers? (Vol. 7, Iss. 6, Q#6).

3. EMPLOYEE OBESITY - Do small employers consider employee obesity a business issue or a personal issue? (Vol. 4, Iss. 3, Q#11).

4. ECONOMY - How many small employers have made a business decision in the prior six months directly as a result of action taken by the Federal Reserve Board? (Vol. 8, Iss. 1, Q#19a).

5. POLITICS - How interested are small employers in public affairs and politics? (Vol. 5, Iss. 4, Q#1).

6. INCOME - What portion of small employers obtain 95 percent or more of their entire personal income from owning their (primary) business? (Vol. 7, Iss7, Q#7).

7. PRIVACY - How many small employers maintain information on customers or potential customers that reasonable people would consider personal or confidential? (Vol 1, Iss. 8, Q#6).

8. INSURANCE - What do small employers think is the largest problem with business insurance? (Vol.2, Iss. 7, Q#1).

9. EMPLOYEE TRAINING - How many small employers in the prior three years sent at least one employee to a four year college to obtain or upgrade job skills? (Vol. 5, Iss 1, Q#26a).

Smaller employers seem to struggle with offering comparable benefit packages to those that larger employers can provide to employees.  An employee discount program is one benefit that has grown in popularity in recent years that can be cumbersome for smaller employers to manage.

Belmont alumnus Brian Roland and his brother launched a business called Perkline in 2006 that is a turn-key solution to help organizations and businesses, particularly smaller ones, offer corporate discounts to their employees.  

"This is a great time for a company like Perkline to advance in the market because with a slow economy, companies of all sizes are looking for cost-effective ways to provide additional compensation and benefits to their employees. Now even small companies can offer a world class employee discount program for their employees. It isn't just the Fortune 500 companies that have access to this kind of program anymore," Perkline President and CEO Brian Roland said.  "In addition, many companies are operating with a very lean staff right now.  We manage the entire employee discount program so that corporate staff can focus on day-to-day business challenges."

Perkline's national vendor network provides each participating organization and their employees with discounts from over 18,000 hotels, 9,000 florists, 5,500 car dealerships, over 6,000 restaurants, and 90,000 concerts & events in 50 countries. Perkline has partnerships with national retailers including Costco, Target.com, Brinks Home Security, PODS, LifeLock, Kaplan, DishNetwork, TiVO, Overstock.com, Brooks Brothers, Philips Consumer Electronics, and BlockBuster. The Perkline network also includes discounts to over 120 national attractions and theme parks.

What is particularly impressive is that the Roland brothers have been able to build this competitive business through bootstrapping.  They provide quality service to over 45,000 members (and counting) with very little overhead, helping to keep this benefit affordable to small employers around the country.

It can be hard for entrepreneurs to get their heads around what a strategic alliance can look like.  After all, what could a small entrepreneurial venture offer to a big corporation?

A good example can be seen in a new alliance that involves one of my former students from the University of St. Thomas.  From the New York Times:

Is it possible for a global corporation to become a local favorite?

Origins is about to find out with its new concept store here where shoppers are encouraged to linger over a mug of steaming tea, get a free chair massage and appreciate a kind of slow beauty experience a world apart from a quick jaunt at a department-store counter.

"There are so many different pieces to this store that invite you to enjoy the lifestyle, enjoy the tea and incredible organic food, wellness services and experience the new products," said Jane Lauder, the senior vice president and general manager of Origins, part of Estée Lauder Companies.

Paul Cattin's business Pekoe Sip House, which operates two retail stores in Colorado, is providing the tea shop for this new concept. 

There is a phenomenon I like to call Entrepreneurial Attention Deficit Disorder (EADD).

EADD afflicts many entrepreneurs, but is a particular problem for primarily first-timers.

What happens is this -- once the entrepreneur starts to understand all of the opportunities that are exist in the marketplace, they become easily distracted from the purpose of their intended start-up venture.

I tell entrepreneurs that EADD is the main reason I have them write and memorize a mission statement.  It is not for outsiders, such as investors and bankers.  The mission statement is for them to keep their focus!

I have often suffered from this condition.  It becomes a compulsive reaction to perceived needs in the market.

I learned over the years (usually the hard way) to control my impulses.  But I am not always successful.

Case in point.  While Mike Naughton and I were working away on our book Bringing Your Business to Life I was approached by the editors of a new series of entrepreneurship texts being developed by Prentice-Hall to write a textbook on Bootstrapping.   How could I say "no" to that??!!  After all, I write and teach about bootstrapping all of the time.  I rationalized to myself that all would go smoothly with the book with Mike and then I could dive into the new book.

Well, as they say in the world of entrepreneurship "stuff happens."  Mike and I got delayed a bit in our new book due to the decision to make one more major revision (a good decision).  I forgot that entrepreneurs always underestimate the time and cost to get things launched.

And then we got the opportunity to do a second edition of our book Entrepreneurial Financial Management.  How could I resist that opportunity??

And then my good friend Dr. George Solomon at George Washington University approached me about writing another new textbook.  I have never had the chance to write with George, so again, I could not control my impulses and said "yes."

And so it goes....

I guess I have a chronic and incurable case of EADD....

If you haven't been to ideablob.com lately, you should take a visit.  In addition to many new great ideas, they have two new links you should check out.  One is to the Kiva B4B project that allows you the priviledge of helping out aspiring entrepreneurs in developing economies (have my Kiva card and use it proudly!).  The other is to their Social Entrepreneurship Forum.

This is the best time of year to be a professor!

Students are back on campus and classes are getting ready to start this week.

Belmont University is a case in point for the power of publicity.  At the University level, we are coming off our third straight year in the NCAA basketball tournament (we are the team that almost beat Duke last spring).  This fall we will be hosting the third Presidential Debate.  Both of these have given us so much added name recognition.  We have record enrollments this fall.

In our Entrepreneurship program, we have also gotten some wonderful attention in the press, which has added to interest in our growing program.

I am teaching a grad and an undergrad class in business planning.  I try to tweak my classes every semester.  This fall I intend to focus much more heavily on planning for tough economic times.  Bootstrapping will certainly get more attention.  Also, I will be getting them to think more clearly about the upside and downside risks that current economic conditions create.

Should be a great fall!

The Stanford Technology Ventures Program (STVP) in the School of Engineering at Stanford University offers over 1,200 free, high-quality podcasts and video clips of entrepreneurial thought leaders from Silicon Valley and beyond at its Entrepreneurship Corner (ECorner) web site. The content is great for classroom instruction, research, and general enrichment. They report heavy traffic from entrepreneurs looking for insight from other entrepreneurs. 

The site was formerly called Educators Corner, but with the new site and name they have added many new features.  (Make sure to see the Creative Commons license under Terms of Use for guidelines at the bottom of their website).

Risk.  It seems to be at the heart of entrepreneurship.  Whenever I ask a group to describe entrepreneurship, the word risk is always one of the first things people mention.

Most often people associate risk with failure -- we call it "sinking-the-boat risk."  We know that only about half of entrepreneurial ventures make it five years (for the record, the 10-20% figures most people cite are urban myths).  The complex and uncertain economic times that we now face only heighten the risk of failure in people's minds.

The other type of risk is one that is not always given its due.  There is a corresponding risk associate with not pursuing an alternative -- we call this "missing-the-boat risk."  Entrepreneur Charles Hagood, co-founder of TAG and HPP, describes this type of risk in our book Bringing Your Business to Life, "We weren't as aggressive in the very early days as we probably could have been.  I think we didn't realize all we had to offer. I think we lost a lot of opportunities in the very early days, not recognizing what was there."

Just as the risk of failure can increase during tough times, so can the risk that we miss viable opportunities.  People seem to get too cautious during times like these.  But, a slow economy and inflation do not shut down new opportunities.  There are still many great markets that are untapped or underserved and probably fewer competitors willing to take the risk to serve them.

Clearly we need to be more vigilant in assessing opportunities due to the enhanced risk of failure that is a result of these tough economic times.  But there are still many opportunities out there, and those who pursue them prudently can still find great success.   

The news yesterday was that inflation is heating up faster than expected.  What adds even more concern is that inflation is now getting much broader than just energy and food.

I know many of you who are a bit younger believe that inflation is manageable -- I get your e-mails and comments that wonder why I am so worried about it.  I just raise my prices to reflect my higher costs and everything will be OK.  Right?

The problem is that smaller businesses are less able to adjust to inflationary pressures.  It is not a smooth and orderly increase in prices for every business in the economy. 

If you have big suppliers or customers they can tie your hands.  Your costs go up, but you are unable to pass along these costs with higher prices.

An additional worry this time around is that we have a weak economy with inflation -- this is called stagflation.  In this scenario, customers begin to sit on their hands.  When you raise prices they either buy less from you or even decide not to buy at all.  We go out to eat less often and when we do we buy less expensive meals.  We travel less and choose cheaper options.  We postpone buying new goods.  But, we also postpone taking care of old things.

As I have been saying for many months, it is time for entrepreneurs to hunker down.  Build up cash, cut overhead, and reduce debt (interest rates will soon spike).  Position your business to meet the new economic reality.  Focus on value to your customers.  While doing all of this, you still need to treat your customers well and keep communicating with them through marketing.  Bootstrap your marketing efforts, but stay in front of your customers.

My column in this week's Tennessean is about the changing nature of marketing as a business grows and evolves:

Entrepreneurs face the need to change their approaches to promotion and advertising to keep their businesses moving ahead. A good example of this can be seen in Evans Glass Co., a family-owned business in Nashville.

For years, Bill Evans Sr. relied on three methods of promoting the business. First, those pink trucks helped to make the business stand out as they drove around town. Second, he relied on word of mouth by actively building strong loyalty of employees and customers. And third, like most businesses in years past, he used Yellow Pages ads.

When Bill Evans Jr. took over, he decided that he wanted to expand the business. That required a change in advertising strategy.

Bruce Schierstedt called my attention to a post at Small Business Trends written by Scott Shane.  Scott, who is a professor of entrepreneurship at Case Western Reserve in Cleveland, suggests that support for entrepreneurship education is being made for the wrong reasons:

To me, the right reason to support entrepreneurship programs at universities is because educating students about this topic is valuable to them in the same way that teaching them physics or art history benefits them. The wrong reason to support university entrepreneurship programs is the belief that these programs will enhance economic growth in a region.

There is little evidence to suggest that either the quality or quantity of university entrepreneurship programs in an area does much to affect high growth start-up activity.

His post goes on to offer data about venture capital backed firms vis-a-vis universities and university students.

He clearly is looking at this issue too narrowly. 

First, university programs at many schools have taken a hard shift away from only focusing on venture capital backed firms.  While academics like the complexity of these deals, there has been an awakening -- too late in my mind -- to the fact that VC backed firms are only a very small part of entrepreneurial activity.  VC backed firms are only s small fraction of a percent of start-ups in the US.

Second, economic growth does not only come from VC backed firms.  This is a mistaken assumption not only made by universities, but by chambers of commerce and local governments across the country.  Data from the SBA show that about 78% of all new jobs created in the US over the past two decades come from small businesses.

Third, the worst thing we can do as professors of entrepreneurship is to only look at entrepreneurs as interesting subjects to study and ponder about.  We need to create runways in our universities to help students launch and accelerate their businesses while in school. These runways are made up of experiential education both inside and outside of the classroom. 

Finally, we need to focus on batting for average and stop swinging only for homeruns.  I love to see my students and alumni create businesses that add two, five, or twenty good new jobs.  With hundreds going through our program over a few years this kind of activity will create real economic growth.  And every once in a while we will connect with a homerun business that creates hundreds of jobs.  But our focus should be on the breadth of our economic impact. 

One of my partners used to always assume that competition from one of our big national healthcare competitors was always a bad thing for our business.  Sometimes he was right, but often our business would actually improve in the face of that competition.

The competition would bring more attention to us.  If we had a new service, the competitor was able to bring attention to that new product or service for all of us in that market space.

The large company also gave us something to compare our offering to when selling to potential customers.  We could differentiate the benefits we could offer when compared to that competitor. 

Having the large competitor in our market also kept us on our toes.  I know we all performed better knowing that we had to compete for each and every customer.

Andy Tabar sent along a story about how Starbucks seems to have the same positive effects on independent coffee shops in some markets.  From CoolCleveland.com:

"Having Starbucks around seems to make local businesses more unique," she says. "After they opened on Lee Road, that's when we started turning a profit."

Independent coffee shops benefit from being close to Starbucks, Wilson-Jones says - the chain gives the local shops something to compete against, and much like a neighborhood densely packed with good restaurants, consumers flock there for coffee. She knows that Starbucks helped to create a market for her product.

The National Federation of Independent Business Index of Small Business Optimism fell again in July, establishing one of the longest strings of recession-level readings in the history of the survey.  Half of the decline was due to weaker capital spending plans--the lowest reading since 1975.  Lower earnings, fewer job openings and lower inventory satisfaction also posted substantial declines.

On the upside the survey found gains in expected real sales, business conditions, and the percent of owners saying this is a good time to expand.

I had the pleasure of talking with Ralph Williams, founder of Franchild.  Franchild helps parents harness the entrepreneurial energy in their children.

How does it work?  From their website:

It only takes 4 simple steps. Step 1: Pick a business model: beeswax candles, organic soap , jewelry or apparel. Step 2: Fill out a FranChild application. Step 3: Order your inventory. Step 4: Create custom business cards, product packaging and marketing materials.  Congratulations...you are on your way to starting your first business! 

It all started with a beeswax candle business started by his young kids, Patrick and Joe, to supplement their allowance. 

"So one day, Patrick says, 'Hey, Dad, wouldn't it be great if other friends around the country could have a business like ours so they could earn more allowance, too?' With that question - FranChild was born."

I like the model because it offers the advantage of any franchise -- a turnkey business with all of the basic structure and systems already in place.  Parents and kids are busy enough as it is.  FranChild allows kids to get right to work learning the power of free enterprise.

The gap between the US state with the top state and local taxes and the bottom is 5% of income according to a new report from the Tax Foundation.  For an entrepreneur, such a gap can mean the difference between success and failure. 

A start-up is a race between cash burn and breakeven.  Higher tax rates mean a longer run to breakeven.  A longer run to breakeven means more cash needed to launch the venture.   Higher tax rates also means the entrepreneur earns lower returns on both cash investment in the deal and on sweat equity required to get to breakeven.

The Tax Foundation report finds that the nation as a whole paid 9.7% of its income in state-local taxes in 2008. New Jersey residents paid 11.8%, topping the charts. New Yorkers were close behind, paying 11.7%, and Connecticut was third at 11.1%. The top ten were rounded out by Maryland (10.8%), Hawaii (10.6%), California (10.5%), Ohio (10.4%), Vermont (10.3%), Wisconsin (10.2%) and Rhode Island (10.2%). Alaskans pay the least, 6.4 percent in 2008, but Nevada is close at 6.6 percent. In four states the residents pay between 7 and 8 percent of their income in state-local taxes: Wyoming (7.0%), Florida (7.4%), New Hampshire (7.6%) and South Dakota (7.9%). Four other states round out the bottom ten: Tennessee (8.3%), Texas (8.4%), Louisiana (8.4%) and Arizona (8.5%).

States should pay attention to tax rates right now.  Entrepreneurship is tough enough without the state adding to the entrepreneur's costs by taking away a precious percentage points off of profit margins through higher taxes. Five percent extra costs in the heavily taxes states can be the difference between surviving to breakeven or not; to making the decision to pull the trigger and launch a new business or to sit on the sidelines.

When planning for the financing of a new venture, the reality is that as much at 90% of all funding for start-ups comes from the entrepreneur, family and friends.  However, many entrepreneurs seem to balk at the idea of relying too much on their own money. Beyond just the fact that for many new businesses this may be the only choice, there are clear advantages and disadvantages for the entrepreneur to rely on their own funding.

First the pros:

1. It is the easiest and quickest money to secure.  Nobody has to be convinced and no approval process is required.
2. It eliminates the complexity of adding more partners or shareholders.  Many experienced entrepreneurs will tell you that if they do another deal they will do a deal that they can create without partners.  It seems at times that managing partners can be as much of a challenge as managing the actual business!
3. Only the entrepreneur's aspirations need to be considered.  For example, if the entrepreneur wants to keep the business small to fit her lifestyle, she can without anyone second guessing her.
4. All of the profits and wealth go to the entrepreneur.  There is no dilution effect.  With more partners the entrepreneur has to grow a business larger to meet his personal goals for income and wealth plus those of the other partners.
5. When the time comes to exit the venture, the process is relatively simple.  There are not competing interests to negotiate.

There are also cons to self-financing:

1. Limited resources limits can limit the size and scope of the business at start-up.
2. Limited resources can also limit the growth of the venture into the future.
3. The entrepreneur is the only one at risk.  If the venture fails, all of the consequences are the entrepreneur's to deal with.
4. The entrepreneur may not have all of the skills, knowledge and experience needed to successful launch and grow the venture.

Twenty entrepreneurs out of nearly 1,500 entrants have advanced to the second stage of Forbes.com's $100,000 "Boost Your Business" contest, sponsored by HP.  

This contest now has open voting, so go to the Forbes.com contest site to see the entrepreneur's submissions and their self-recorded 30-second "elevator pitch" videos.  In fact, even if you don't really want to vote it is worth going there to watch the pitches.  We all can stand to improve our pitch, and watching others give theirs can offer some eye-opening insights.

Voting for the second round runs through the end of September.

Contestants represent an array of industries - from data protection and eco-friendly board games to accessory products and highway safety - and are headquartered around the country.

From my column in this week's Tennesean:

When we were in the process of selling our health- care business back in the 1990s, our attorney did a wonderful job of preparing us for much of what was ahead of us. One of the things he mentioned more than once was that we should be prepared for seller's remorse.

Seller's remorse is a feeling of second thoughts about selling a business. It can strike the entrepreneur at any time during the selling process -- before the sale, during the sale and especially after the sale.