June 2009 Archives

When done correctly, I am a big fan of charter schools.  Some states, like Tennessee for example, stack the odds against charter schools.  But, when the laws are fair for charter schools that are an amazing catalyst for educational change.  I wrote my book From the Ground Up as a guide to help charter schools and other innovative education start-ups navigate the business side of running independent schools.

Belmont alumnus Andy Tabar sent along a link to an article at Cleveland.com about a charter school in his home town of Cleveland, Ohio that has chosen to have an entrepreneurship theme to their curriculum:

The first eighth-graders to graduate from Cleveland's Entrepreneurship Preparatory School are true survivors.

E Prep, as the charter school is known, opened three years ago with 124 sixth-graders, but only 46 students persevered to graduate on Friday. Getting to that point was not easy. The school's regimen sends the frivolous packing.

We already know that higher tax rates decrease the rate of entrepreneurial start-ups in an economy.  My friend and colleague John Wark passed along a post from TaxProf Blog that cites a recent study by Rafael Efrat, of California State University-Northridge suggesting that taxes are also a culprit in small business failures, as well. 

TaxProf Blog offers this quote from the conclusion of the study:

Consistent with the growing tax burden on small-business owners, as well as the growing body of evidence linking higher tax burden with limited entrepreneurial growth and higher closure rates, this study has found that tax problems constitute an important reason for bankruptcy filings for a sizable number of entrepreneurs. Interestingly, those entrepreneurs that attribute their business collapse to tax problems do not come from disadvantageous background. Instead, the average entrepreneur in the bankruptcy sample that has faulted tax problems for his financial woes was typically older male, white, native-born, well-educated and an experienced business owner. Nonetheless, the typical entrepreneur with tax problem in the bankruptcy sample was facing enormously higher debt burden with more than five times as much debts as other entrepreneurs in the bankruptcy sample.

This week's topic for Forbes America's Most Promising Companies comes from Brett Nelson, Entrepreneurs Editor at Forbes.com:

A vast increase in productivity, care of staggeringly swift advances in computing technology, drove the U.S. economy to new heights in the last 20 years. Where might the next surge in productivity come from to propel us out of the economic rut we are in now? Which companies or universities are at the cutting edge?

This is an intriguing question, indeed.  Let's take a look at some possible candidates.

I know -- it has got to be something green.  Surely with all the hoopla going surrounding green energy, it must hold great economic promise for our economy.  Let's see what Jonathan Fahey discovered in an article at Forbes.com about one printer named Brian Driscoll from Connecticut who got some government help to put in a windmill:

A windmill doesn't make economic sense, even though this poor entrepreneur is gouged 19 cents per kilowatt-hour from his utility. A 121-foot, 100-kilowatt turbine from Northern Power runs $500,000, installed. The air at Driscoll's site on Long Island Sound is so still that the average output would come to only 18% of peak output, meaning that the juice would be worth $30,000 a year. It's hard to cover the interest on a $500,000 loan with a $30,000 annual payback. "If I had to borrow that kind of money for my business, it would be for printing equipment," says Driscoll.

Good thing Driscoll got most of the cost of the windmill paid for through federal and state grants. 

Well, I guess the next big thing won't come from anything that has to do with being green.  If green products were the answer to our energy problem, we would have seen them breaking through due to market demands.  Instead, the only success that we can anticipate from green companies is their ability to secure federal and state money from rent-seeking behavior like Mr. Driscoll's.

OK, health care must be the next big thing that will pull us out of this economic morass.  After all, the Obama administration is planning to spend $1 trillion just as a down payment on "fixing" healthcare. 

But wait a minute -- I don't see entrepreneurs lining up to dig into that pot of money.  Nope.  It is the likes of General Electric and others positioning themselves for some serious rent-seeking in the health care arena.  And don't forget that the goal in healthcare reform is to cut costs and ultimately ration care.  No economic leadership likely to be found in healthcare.

I know.  It must be transportation.  Darn!  I forgot about the new General Motors that is starting to look a lot like the old East German Trabant.

I guess the place not to look for the next big economic thing is with any of the rent-seeking companies in those industries lining up at the public trough.

The thing about economic breakthroughs is that we rarely see them coming, and they never come to us thanks to government policy makers picking the next economic "winner."

What is beginning to scare me is that we are doing everything wrong if we want to see our economy recover due to the good works of entrepreneurs: 

• We are increasing taxes.  Higher taxes kill people's motivation to take risk and launch ventures.  The evidence is overwhelming on this.  And not only are we increasing the marginal rates on income taxes, but we are coming closer to enacting Cap and Trade, which will add an even greater deterent to entrepreneurial activity.  The current 70,000 page federal tax code will probably soon look like the good old days in the not too distant future.
  
• We are increasing regulation.  Those in Washington who believe that capitalism has failed, or at least badly flawed, are eagerly adding new regulations that impact every aspect of commerce.  Bad news for entrepreneurs -- increased regulation also inhibits entrepreneurs.
• Property rights are eroding.  It is clear that we have evolved from our founding as an economy of private property protected by limited government to a system that views private property as something that the government bestows to us by its good graces.  Alas, not a good recipe for entrepreneurial fervor in an economy as business owners need to know that the property they hold and the wealth they create is actually theirs to keep.
  

Sadly, it may be that Mr. Nelson has asked us the wrong questions this week. 

Instead of "Where might the next surge in productivity come from..." , I think the question should have been "Will there actually be a surge in productivity any time soon?"  

And rather than "Which companies or universities are at the cutting edge?", maybe we should be asking "Will there be any companies or universities that will be able to lead us to a new cutting edge?"

The Cap and Trade train is still moving along (a.k.a. "American Clean Energy and Security Act of 2009"). 

I agree with the assessment of Susan Eckerly, senior vice president, public policy for the NFIB assessment of this bill:
 

"At a time when our nation faces near 10 percent unemployment and stalled economic growth, now is not the time to impose an $846 billion energy tax on small business. Instead of investing in their businesses and creating new jobs, this cap and trade proposal will force small business owners to pay higher energy prices.
 
"According to the NFIB 2008 Small Business Problems and Priorities data, the cost of natural gas, propane, gasoline, diesel, and fuel oil ranks as the second most severe problem small business owners face. Higher energy costs mean a higher cost of doing business, and small business is especially sensitive to increases in cost.
 
"Our members believe that the free market is best suited to develop new energy efficient technologies and renewable sources of fuel, and our nation's job creators stand ready to do so without the heavy hand of government mandates.
 
"Our data shows that small business owners are growing more optimistic about the economy. For that reason, a large, unfunded government mandate and a national energy tax are the last things small business and the overall economy needs. We are strongly urging the House to defeat this bill."

To see the impact this bill will have on you personally go the Tax Foundation's Household Cap-and-Trade Burden Calculator.  Or, for a more humorous take on Cap and Trade, see their YouTube video.

Back in 2007 I had a rather spirited debate with Dr. Robert Graboyes, an economist who is a healthcare advisor to the NFIB.  You can find this discussion here, here and here.

To summarize this debate, the NFIB took the position that we need to be pragmatic about healthcare reform.  Here is what they said at the time about keeping healthcare in the private sector:

To the greatest extent possible, Americans should receive their health insurance and health care through the private sector.

And my response:

"To the greatest extend possible"??? You can drive a freight train through that loop hole! Liberty is a foundational principle in our system. It is sad that we seem to be finding more and more convenient reasons to compromise on our freedoms, particularly our economic freedoms.

Their goal was to get a "seat at the table" to help shape healthcare reform.  And how does the meal of healthcare reform taste that is being served to them now that they have a seat at that table?  This is from their press release issued this week:

Brad Close, vice president of federal public policy for the National Federation of Independent Business...released the following statement in response to the House health reform discussion draft:
 
"As the U.S. House officially begins to discuss and develop its approach to addressing the healthcare crisis, one thing is clear - small business owners need meaningful reform that increases access to quality, affordable healthcare. Sadly, many of the provisions in this draft bill fall far short of achieving those goals. In its draft form, the bill will raise rather than lower costs, decrease rather than increase competition, and eliminate rather than expand choice."

There is a term for what has happened to those who thought that compromise and pragmatism are the wise path to take -- cooptation.  Sadly, this is a term from sociology and politial science that seems to have faded from use.  

Cooptation is a term that was used to describe the process used to get people to go along with the sweeping powers given to the TVA in the 1940s.  Here is a simple description from encyclopedia.com: 

A term devised by Philip Selznick to refer to a political process found especially in formally democratic or committee-governed organizations and systems, as a way of managing opposition and so preserving stability and the organization. Non-elected outsiders are 'co-opted' by being given formal or informal power on the grounds of their élite status, specialist knowledge, or potential ability to threaten essential commitments or goals.

Cooptation is a strategy to bring your opposition to the table, giving them the illusion of power, but with the intention of controlling them by making them feel like they are part of the process.

Market capitalism, free enterprise, property rights, and even our basic liberties have been consistently eroding for decades.  Those who have assumed that bi-partisansim, pragmatism, and compromise can slow down the freight train taking us to socialism need to wake up.  You are being coopted. 

I have not written about a golf metaphor for entrepreneurship in quite a while, but the US Open from this past weekend offered an important lesson.

No matter how good you are or how well you prepare, there are certain things that can happen that are totally outside of your control.  The golfers who got the bad end of the weather this past weekend at the US Open experienced this first hand.  Some of the golfers played their early rounds in constant rain and windy weather.  Others, due to their tee times, played with little or no rain -- just a soft and receptive course awaited them after the rains ended.

Was this fair?  That is not the point.  It is, as they say, what it is.

I tell my students that we can help them manage about 80% of the causes for failure in their businesses. 

About 40% of failure happens because the entrepreneur jumped into a business that was doomed from the start.  They did not properly assess the opportunity prior to launch.  Rather, they impulsively moved ahead with little forethought. 

About 40% of failure happens because the entrepreneur is not ready for success once it happens.  Growth is a dangerous time for a small business -- just ask any banker.  If you are not prepared to properly manage and develop your business as it grows, you will soon join the legions of entrepreneurs who failed due to their own success.  They did not create the systems, grow the team, or secure the resources necessary to deal with the growing pains that sink so many promising ventures.  We try to prepare our students with the skills and knowledge to manage their growing ventures successfully.

But then there is that other 20% of business failure.  This failure comes from what you cannot predict nor plan for.  Call it uncertainty, risk, or just bad luck.  Sometimes things happen to even the most skilled and prepared entrepreneurs that are totally outside of their ability to manage. 

My favorite example of this is an old diet supplement that used to be on the market -- it was called Ayds.  The product was growing nicely until a deadly disease with the same sounding name crept into our consciousness -- AIDS.  The sales of the product plummeted.  The spread of a deadly disease with a similar sounding name is nothing that could have been predicted, and there was very little they could do to adjust in time once people stopped buying the product.

This is why I put the Serenity Prayer, or as I call it the Entrepreneurs' Prayer at the end of most of my syllabi for my classes:

GOD, GRANT ME THE SERENITY
TO ACCEPT THOSE I CANNOT CHANGE,
THE COURAGE TO CHANGE THE THINGS I CAN,
AND THE WISDOM TO KNOW THE DIFFERENCE

I am participating in a multi-blogger forum through Forbes magazine as part of their America's Most Promising Companies project. They will be throwing out a topic each week to several bloggers to write about.

This week's topic from Brett Nelson, Entrepreneurs Editor at Forbes.com:

There's a lot of confusion about whether we are in a deflationary or an inflationary environment. What sorts of pricing strategies should small business owners consider right now?

I have consistently been on the side of those who are worried that inflation is inevitable.  Although the recession has dampened inflationary pressures, I still believe this is only a temporary reprive.

The problem for small business during inflationary times is that they are less able to adjust prices as quickly to adjust to inflationary pressures.  There is never a smooth and orderly increase in prices for every business in the economy and small businesses often suffer the most.

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

What I worry about even more is that we may see inflation take hold long before the recession is over.  This makes keeping prices up to stay ahead of increasing costs even more difficult as demand will still be fairly weak for some time.

So what can a small business do in terms of pricing strategies to try and weather this impending inflationary storm?

The recession has made entrepreneurs leary of doing anything but cut prices to keep their businesses afloat during the recession.  While that may still be the best course over the short-run, pay very close attention to pricing from your suppliers, decreases in unemployment, increasing interest rates, and pricing moves from the big boys in your industry.  These are the elements of your inflationary dashboard.

When inflation heats up even a little, be aggressive with frequent small price increases rather than waiting and trying to catch up at some point with one big jump. Don't let yourself get behind, as small businesses can almost never play catch-up with their prices.

This can be tough to implement for some businesses, particulary if you publically list your prices.  For example, it can get very costly to print up new menus each month for a restaurant owner who wants to follow this strategy.

But customers are less likely to pay attention to price increases if they are small, so it is essential to find creative ways to communicate your pricing to allow for you to implement this strategy during inflationary times.  For a resaurant it may require using menu inserts that can inexpensively be replaced.  This was actually very commonly used in restaurants during the 1970s and 1980s when we had high inflation.

I know the question of the week is pricing, but I can't let this discussion go without a brief reminder that the income statement is also made up of costs.  Adjusting to inflation also requires careful attention to expenses, as cutting costs can at least somewhat help ease the pressure to increase prices. 

Continue the prudent management of expenses that helped you survive the recession:

- Keep overhead low.

- Build cash reserves to buffer short term price increases that precede your ability to get higher prices from your customers.

- Watch your margins carefully. Worry about growing profits, not sales.

- Don't lock into long-term contracts that have narrow margins with large customers.

- Pay down variable interest loans ASAP, especially now that interest rates are temporarily realtively low. As soon as inflation heats up, interest rates will continue to rise.

Immigrants have always played a vital role in fueling our entrepreneurial economic engine.  Given our need for help in revving up that engine right now, I wish we would take another look at our immigration policy.

The primary reason that we see so many immigrants pursue entrepreneurship is that they are opportunity focused - surveys reveal that this is what drives many of them to leave for new a new country.  I have to wonder how attractive the US will look in a few years after our mad dash to socialism is fully in force. 

When we look within specific ethnic communities in the US, recent immigrants out perform non-immigrants in economic achievements and have higher rates of self-employment than native-born in these ethnic communities.

In Internet-based ventures, immigrant entrepreneurs pursue more aggressive strategy.  One study found that 25.4% of engineering and technology companies include at least one founder who was born outside of the US.

Here are a few more quick facts:

• Immigrants represent 12.5 of all business owners.
• Immigrants are 30 percent more likely to start a business than non-immigrants are.
• Immigrant business owners are concentrated in certain states, including California, New York, New Jersey, Florida, and Hawaii.
• Mexicans represent the largest number of immigrant business owners, while Greeks, Koreans, and Iranians have the highest ownership rates

I have written in the past that our immigration process is too complex and outdated.  It is yet another example of public policy, social activism, and bureaucracy run amuck.  Immigrants have always been a major force for innovation and entrepreneurial activity in the US.  It is time to rethink how we manage this process.

Immigration Road Blog displays a flow chart of the current immigration process in the US. No wonder so many choose the route of illegal immigration.  The process is a labyrinth that inhibits people from pursuing immigration through the legal channels.    

I know this may get me an Inbox full of e-mails from traditional graphic designers out there, but my colleague Robert Dillingham has passed along an article about a great way to bootstrap your logo design using a site called LogoTournament.  From Zack Stern at PC World:

The site inverts the idea of one designer spending a lot of time; here many designers spend a little time, each submitting their ideas. The winner nets my prepaid bounty, and I get full rights to the logo.

I was a little skeptical to turn to the Internet masses versus a single designer. Anyone can upload ideas. But only a few days into my contest so far, I already have a few submissions that could work, among a dozen other attempts. As we get closer to my week-long deadline, I expect more designers to add entries. Other contests paying as little as $250 are getting 100 or more entries, but if you don't get at least 30, LogoTournament offers a refund.

What a great example of the power of the Internet to connect small businesses to work together more effectively.

Here is my column from today's Tennessean.  Happy Father's Day!

In its monthly surveys of small business owners, the National Federation of Independent Business found that small businesses have been feeling a bit more optimistic the past two months. The results seem to suggest that entrepreneurs are beginning to believe that the worst may be over when it comes to the recession. But just what will the recovery will look like? And what is the longer-term outlook for the economy?

The pace of the recovery will not be consistent for every business owner.  This recovery is not going to be a case of a rising tide lifting all boats.

While certain sectors of the economy and specific geographic regions are showing some signs of improvement, others seem to be mired with flat or even continued declining sales.

Within specific industries we are seeing inconsistent trends. For example, while much of real estate and construction remains almost dead in the water, those who work within the health-care segment of this industry report improving performance.

Business owners hold back

In looking deeper into the results of the NFIB survey, there are signs that this recovery may be a long, slow road. Even though entrepreneurs feel more optimistic, they do not plan to increase hiring, build inventories or resume capital spending anytime soon.

Some of their optimism may be coming from a realization that the cries in the media that this was becoming the "next Great Depression" were unsubstantiated exaggerations.

"The biggest concern on the minds of (business) owners is the weakness in spending which has now started to turn up as consumers become less concerned with proclamations of pending disaster for the economy -- it's not going to happen," said NFIB chief economist William Dunkelberg.

However, the improvement in consumer spending shows little sign of creating a strong bounce in the economy anytime soon.

And what can we expect for the long-term economic outlook? Understand that economies are not just isolated to commercial transactions. There is a strong long-term tie between our economy and our society and culture. There are some signs that we may be in a period of fundamental economic and cultural change.

Things won't be the same

The frenzied consumerism-driven economy that dominated our past decades may never return.

We may emerge from the recession into a very different economic/cultural reality. There are growing signs that consumers are becoming less concerned with keeping up with the Joneses and more focused on becoming frugal spenders.

Opportunities can still be found in such a transformed economy if it actually occurs. The key will be to understand these changes and offer new business models that respond to changing needs, preferences, attitudes and consumer behavior.

Entrepreneurs have led the way with almost every economic recovery. Let's hope that their newfound optimism will soon translate into renewed and sustainable economic growth.

There has been quite a bit of discussion lately about the role the Entre-Boomers (those of us from the Baby Boomer generation who are pursuing entrepreneurship) in the economy.  Now that we are in what looks to be a prolonged economic lull, the role of Entre-Boomers may become more important than ever.

My colleague John Wark sent along a discussion about this that was published this week at The American:

Contrary to popularly held assumptions, it turns out that over the past decade or so, the highest rate of entrepreneurial activity (a measurement of new business creation) belongs to the 55-64 age group. The 20-34 age bracket meanwhile--which we usually identify with swashbuckling and risk-taking youth (think Facebook and Google)--has the lowest. Perhaps most surprising, this disparity occurred even during the decade surrounding the dot-com boom--when the young entrepreneurial upstart became a cultural icon.

• In every single year from 1996 to 2007, Americans between the ages of 55 and 64 had a higher rate of entrepreneurial activity than those aged 20-34.
• For the entire period, the 55-64 group averaged a rate of entrepreneurial activity roughly one-third larger than their youngest counterparts.
• These trends seem likely to persist: in the Kauffman Firm Survey, a longitudinal survey of nearly 5,000 companies that began in 2004, slightly less than two-thirds of firm founders are between the ages of 35 and 54.
• Additionally, Kauffman research has revealed that the average age of the founders of technology companies in the United States is a surprisingly high 39--with twice as many over age 50 as under age 25.

So what are the implications of these trends? 

First and foremost, we better get our small business policy right to make sure these Entre-Boomers and their children in the Entrepreneurial Generation (the second most entrepreneurial age group) can be successful. 

Entrepreneur magazine has a revealing debate that gets to the heart of what needs to happen policy-wise to ignite entrepreneurial activity in our economy.  It has a debate about the so-called stimulus package between two prominent economists.  I agree with position taken by Raymond Keating, chief economist of the Small Business and Entrepreneurship Council in this article:

I'm against it because if you really want to get entrepreneurship and investment moving again, you need tax relief that's not targeted and temporary. Investors and entrepreneurs need [permanent] changes that will really improve the profitability of taking risks in the expansion or startup of businesses.

On the spending side, I think most entrepreneurs understand that these resources the government is tossing around...don't materialize from nothing. The economy would benefit from leaving those resources in the private sector rather than putting dollars in the hands of politicians and their appointees to decide where they are going to be spent.

Even economists who think this is a good idea will acknowledge that it's just an effort to throw as much money as you possibly can at the problem and hope that something good comes out of it. Is it better than nothing? Yes. Is it enough to really get our economy moving? I would say no. It falls way short.

We also need to understand that most of the ventures that Entre-Boomers are creating will be small and organic.  They will be bootstrapped by both choice and necessity.  All of this talk about the need to focus on high growth, venture-backed firms is misguided.  I hope Scott Shane and others like him will look at the entire set of data out there.  But, given his latest comments at the New York Times small business blog, I am not sure if this will ever happen, as seen by these comments:

I am supportive of the argument that government policy should encourage the formation and development of venture-capital-backed start-ups. In various books, articles and blog posts, I have said that the federal government should focus more resources and attention on high-potential start-ups and less on the typical new business. Such an approach would, as the venture capital association argues, provide a greater return in terms of job and wealth creation to government investment in the creation of more typical new companies.

His myopic brand of socialized entrepreneurship is not enough to get things going.  These folks need to stop the false debate of small business versus venture-backed firms.  We need both right now!  The data shows that we need the high growth firms for their breakthroughs and we need small businesses for their job creation power.  And neither type of  business gets any long-term benefit from government meddling. 

Finally, we need to find a way to socially and culturally harness the entrepreneurial energy of the Entre-Boomers.  The economy does not operate in some sort of vaccum where only the exchange of goods and services takes place.  The economy is shaped by culture, and culture shapes the economy.  The current dramatic rush toward socialism is reinforcing a passive, dependent society.  My students and I saw first hand during our trip to Eastern Europe where this will take us. 

The sheer numbers and assertive nature of the Boomers shaped our culture in the 1960s and 1970s.  It is now time for them to help lead us again.  Their growing emphasis on economic self-reliance can translate into a renewed celebration of the power of free enterprise in our society and culture.  At least I hope it can -- as that may be our only chance to turn this mess around. 

As I tell my students time and time again -- Word of mouth never just happens.  Although it is a great way to bootstrap your marketing efforts, it does take, well, some effort.

The folks at Yodle.com passed along to me some good tips on how to effectively use referrals to help increase word of mouth.

Four Myths about Word of Mouth through Referrals

1.  Great customer service alone will make your clients refer people to you. Unfortunately, most people expect great customer service these days (and you always provide great service) so they are not necessarily inclined to mention good service to others.  In actuality, people are more likely to mention bad service to their friends than any good service they've had.

2.  People who are close to you are great people to refer business to you.  You would assume that this would be the case, and it certainly can be, but you must always educate those close to you on how to look for referral opportunities so that they refer the type of customers you want.

3.  You should always ask for the referral at the end of a transaction with your client.  You should constantly be asking for referrals!  There is no set time to ask for a referral.  You should ask any time the opportunity presents itself.

4.  Looking for referrals in an indirect manner reduces stress and is normally the best way to get referrals. Though this may work every once in a while, typically, if you don't ask for it, you won't get.

Steps to use Referrals as part of Word of Mouth plan

1.  Ask!  Don't be afraid to be direct about asking for referrals.  Also, ask regularly to maximize the amount of referrals you can generate.  A great technique is to view every client you work with as though your sole purpose is to get a referral.  This will not only keep you cognizant about getting them, but it will make you more service-oriented as well.

2.  Create a referral program -- Offer service credits as an incentive to your clients who send you new business.  It can be as a discount on their next service or a credit to their account, or any other trigger that will help entice people to refer new customers to you.

3.  Spread the word by sending a description of your referral program to all of your satisfied clients.  It also doesn't hurt to send it to all past clients; it's not only a great way to get referrals, but you can also rekindle old relationships!

4.  A few other dos and don'ts:

• Don't ask for a referral when presenting a bill.
• When asking for a referral, also ask for a testimonial from the client.  It's great for websites!
• Ask people who perform complementary services to you for referrals.  (i.e. If you are a contractor, why not ask an electrician or plumber who may be on the same site?)
• Have some type of printed marketing material handy to provide clients with that describes everything you do-- and give them a few copies to spread around
  

Loren Feldman has helped to launch a new small business and entrepreneurship blog at the New York Times called You're the Boss.

Although the Times may not be the first source you think about for entrepreneurship articles, and New York may not be what you think of as a small business town, give this blog a look.  It has the potential of becoming quite a good blog!

Jeremy Quittner at Business Week has some great ideas for entrepreneurs from entrepreneurs on creative ways to bootstrap during tight times like these.

Nothing revolutionary here, but lots of good suggestions.  Here is one sample related to equipment:

Printers, desks, telephones, and monitors are the lifeblood of your business, and they can be costly. For big-ticket items, head to the "free" section on craigslist or freecycle listings. If you're willing to pick through offers for floral love seats, Star Wars figurines, and '70s-era shag rugs, you'll also likely stumble on Epson printers, Ikea desks, file cabinets, and shelving, and they won't cost you a penny. You can list your needs there as well. Gary Cassera, owner of Balanced Dog, a Marlton (N.J.) dog walking and training business with about $100,000 in sales, says he found three free kennel cages by posting on craigslist. "Most times these things just sit in people's garages," Cassera explains.

Then there are yard sales, the Salvation Army, Goodwill, and your local thrift store. Companies going out of business often donate what they can't otherwise get rid of, says Jeff Yeager, author of The Ultimate Cheapskate's Road Map to True Riches. "A week does not go by when I don't go to a thrift store," he says.

When you go to the site in the link above, click on the little picture icons on the bottom for ideas on phone service, getting professional services, postage, meals, etc., etc., etc.

For all of you entrepreneurs who have been whining "Where's our bailout?" your time at the public trough has now arrived.  It is not the rent seeking entrepreneurial welfare that was the topic of conversation at this blog a few days ago, but it is darn close.

From the Tennessean:

The U.S. Small Business Administration made a new loan program for struggling businesses available Monday. The ARC loans, which were funded by the American Recovery Act, are interest-free loans of up to $35,000 with no SBA fees for existing businesses that were profitable at one point, but need extra help now.

The program is unusual in that most small-business loans are for businesses trying to expand to fund profitable operations.

Thus my label of "bailout."  This are not sound loans -- these are handouts.

Thankfully, bankers are hesitant to join in this give-away.  From CNN Money:

Before the details were released on Monday, lenders were hesitant to commit, concerned that there wasn't enough economic incentive for them. Now, with key details about how the program will work finally available from the SBA, many haven't retreated from their initial wariness.

"While we have received a few requests from our customers, we are still leaning against it," says John Handmaker, president of Quadrant Financial, a small business lender based in Louisville. "The guidance from the SBA indicated rates and terms, which have provided some clarity, but we're not 100% certain about what we need to be careful of. We don't feel we have a solid grasp of the standard operating procedures and rules, and we're not going to jump in until we really understand it."

Well, at least the government is consistent.  It is ready to rush to enact another program without worrying about the details.  I am sure we will soon hear that bankers are being pressured to get on board with this program. 

Please, just say no to this latest bailout.  If you believe in free enterprise do not become part of the rush to socialism.

 

I continue to be concerned about the inordinate amount of attention that Washington is giving to venture capital.  There seems to be an assumption that VC investment is a White Knight that will help spur entrepreneurship in America and pull us out of our recession.

Remember, venture capital only funding a small part of the entrepreneurial sector.  In fact, one study found that 99.962% of entrepreneurial ventures in the US had NO venture capital investment.

Rather than pour money into venture capital markets, as we now see talk of in Great Britain, we need to heed the words of Paul Kedrosky in his recently released study funded by the Kauffman foundation:

It seems inevitable that venture capital must shrink considerably. While there is no question that venture capital can facilitate some forms of high-growth entrepreneurial firms, its poor returns make the asset class uncompetitive and at risk of very large declines in capital commitments as investors flee this underperforming asset. While any estimate is subject to much uncertainty, it seems reasonable--based on returns, GDP, and exits--to expect the pace of investing to shrink by half in the coming years. We should also expect a continuing sharp decline in the amount of money invested in information technology, a maturing sector with declining capital requirements in its remaining innovative segments. Capital will continue to grow in other areas, including clean technology, but the sector must shrink its way back to health if venture capital is to provide competitive returns and secure its own future as a credible asset class and economic force.

These days many entrepreneurs are struggling to find enough customers just to keep the doors open.  While survival is the key right now, be careful not to set the stage for a business model that won't be sustainable when the good times return.

Understanding who our target market is and what they want from us as customers, are the keys to developing a brand that customers will remain loyal to over time.  It help to create what marketing folks like to call our product positioning.  A strong market position can help protect sales over the long-term, even during economic downturns.

Steve McKee reminds us of the importance of a clear target market in our businesses in his recent article in Business Week:

That underscores an important principle: The further removed your brand is from your core target, the less relevant you should expect it to be--and to some people, perceptions about your brand may even tip into the negative column.

So in the race to find enough sales to keep afloat, we can run the risk of alienating our core group of customers.

Scott Austin, a blogger for the Wall Street Journal, reminded us once again that industry defining businesses often come out of the depths of economic downturns:

The week of Oct. 6, 2008, is often referred to as "Black Week," when the Dow Jones Industrial Average fell 18% in its worst-ever weekly decline.

In the aftermath, venture capitalists tightened their purse strings to reflect the new reality. Sequoia Capital held a now-famous meeting on Oct. 7 for portfolio companies in which a PowerPoint presentation titled "RIP: Good Times" underscored the importance of cutting costs. Young start-ups struggled to attract new investors as investment levels plummeted in the coming weeks.

But some venture firms continued on fueling new companies, perhaps mindful that Cisco Systems Inc. raised money from Sequoia about two months after the 1987 stock-market crash.

He identifies eighteen emerging firms that got financing within 30 days of "Black Week".

Hat's off to Belmont MBA alumnus Dr. Jim Stefansic and his co-founders.  Their company, Pathfinder Therapeutics, made this list!

Want to see the logical conclusion that one reaches when one buys into the notion that the government is the answer to every problem we face?  Go to this blog post at Yu-Kai Chou to see the "logical" conclusion one reaches when one assumes that the government knows best when it comes to fixing our economy.  Here is an excerpt:

The government can give entrepreneurs a VERY low amount of survival money, like $20,000 a year, as a salary to do entrepreneurial work. This is useful because there are lots and lots of people who would be entrepreneurs but they couldn't pursue their dreams due to realistic survival issues. This plan allows them to pursue the innovation work they want without the fear of dying on the streets.

That's right...it is a call for an entrepreneurial welfare program.  I kid you not.  Read the entire post and the comments, but make sure you do it before you have had too much caffeine. Your blood pressure may go off the charts.

I have been warning you that there is a movement to push for socialized entrepreneurship in America.

There are some signs that the recession may be bottoming out.  The NFIB Index of Small Business Optimism rose again in May for the second straight month.  But just what will the recovery will look like? And what is the longer term outlook for the economy?

The recovery will be quite lumpy.  This is not going to be a case of a rising tide lifting all boats.  Certain sectors in the economy and geographic regions are improving, while others seem to be mired with flat or even continued declining sales.  And even within industries we are seeing inconsistent trends.

For example, while much of real estate and construction remains almost dead in the water, those who work within the healthcare segment of this industry report improving performance..

We have to be careful not to assume that this recovery will behave like others.  Economists will try to predict the recovery's behavior based on historic data from past recessions.  My concern continues to be that this recession and its recovery may last for some time - a so-called "L" shaped recovery that could drag on for years rather than the "V" shaped robust recovery that we have often seen after deep, steep drops in the past.  That is, this time of "bottoming out" may go on for months or even years.

In looking deeper in to the most recent NFIB survey we can also see signs that this recovery may be a long, slow road.  Even though entrepreneurs feel more optimistic, they do not plan to increase hiring anytime soon.  It seems that some of their optimism may be coming from a realization that the cries that the next great depression was on its way were unfounded.

"The biggest concern on the minds of owners is the weakness in spending which has now started to turn up as consumers become less concerned with proclamations of pending disaster for the economy - it's not going to happen," said NFIB Chief Economist William Dunkelberg.

However, the improvement in consumer spending shows little sign of a strong bounce anytime soon.

And what can we expect for the long-term economic outlook?  Understand that economies are not just isolated to commercial transactions.  There is a strong long-term tie between our economy and our society and culture.  There are signs that we may be in a period of fundamental economic and cultural change.

The frenzied consumerism-driven economy that dominated our past decades may never return.  Because the changes we are seeing in economic behavior may last for a long time due to a slow recovery, we may emerge from the recession into a very different economic/cultural reality.

For example, entrepreneurs whose business models are tied to luxury goods are holding their breaths hoping that their sectors will be the lagging ones we have seen in the past..  From Reuters:

Sales of luxury goods, which are expected to drop 10 percent this year, will not recover fully until 2012, according to a new report by Bain & Co, as austerity and understatement remain the "must-have" items of the rich and fabulous.

But this understatement of the rich may become culturally reinforced.  A Washington Post story from earlier this week examined the shift in consumer behavior from being obsessed with "keeping up with the Joneses" to consumers seeking to be perceived by those around them as being a frugal spender:

The recession has changed the conversation in America. People are clamoring for caps on executive pay and recoiling at the idea of bosses cavorting at expensive spas. Friends are swapping recipes instead of making restaurant reservations.

Instead of feeling self-conscious about spending less, people are flaunting frugality.

"Something very deep has changed in the American psyche," said Dan Ariely, a professor of behavioral economics at Duke. "The recession basically woke us up."

Over the coming decades, this may translate into a fundamental shift to a more tempered society in which people are no longer seeking to find value from their economic behaviors, but instead are looking to non-commercial definitions 0f success and self-worth in their lives.

Opportunities can still be found in such a transformed economy if it actually occurs.  The key will be to understand these changes and offer new business models that respond to changing needs, preferences, attitudes, and consumer behavior.  

My good friend Dr. George Solomon of George Washington University and I developed a small business threat index to help entrepreneurs assess their susceptibility to the recession. 

It has been published at entrepreneur.com.  You can assess the financial vulnerability of your business here.

In my column this week at the Tennessean I offer some final reflections on our trip to Eastern Europe:

I have been in Eastern Europe with a group of students from Belmont University for the past three weeks.

Although the entrepreneurial climate in this part of the world is much weaker than in the United States, the entrepreneurs we have met have tended to have a global view for their small businesses.

For example, while shopping in a small antiques store in Prague, Czech Republic, we found items that originated from all over Europe.

One item caught the interest of one of my colleagues. But when he inquired about its price, the store owner told him that it had been sold over the Internet to a buyer from overseas.

During our travels, we took our students on a tour of the Ruckl crystal factory, which is a small business in a rural part of the Czech Republic that had been taken private after the fall of communism.

Their craftsmen make fine, handmade leaded crystal using age-old techniques. Although they compete with mass-produced products from China and Poland, Ruckl has been able to compete effectively in the global market. They sell 80 percent of their products outside of their country in outlets throughout the world.

Minimize risks

American small businesses are not keeping up with the global strategies of entrepreneurs from other countries. A 2007 survey sponsored by UPS found that most of America's small businesses have failed to explore the opportunities offered by an increasingly global economy.

Specifically, 67 percent of the U.S. small enterprises are still relying solely on the U.S. economy. This is due to their perception that international trade is too risky, an admitted lack of knowledge about international markets, and their unfamiliarity with regulations related to expanding a business beyond U.S. borders.

While the risks associated with international trade are real, they can be overcome.

The financial risks of engaging in foreign transactions have resulted in many entrepreneurs not getting the products they had paid for or not getting paid at all. Banks generally offer several ways to reduce the financial risks of trade, but the payment procedure ultimately depends on finding partners whom you can trust.

While banks can help -- often for a sizable fee -- there is still some relative degree of risk taken by both sides of the transaction. There is almost always a trade-off in these things. And when thinking about the savings from outsourcing, make sure to be clear on all expenses, including shipping, the cost of transactions gone bad, and bank fees for international transactions.

Entrepreneurs who plan to sell or buy in the global marketplace need to have access to an attorney who knows international trade law. Make sure to get a clear understanding of the cost of regulatory compliance and figure that into your expenses.

The recession is forcing entrepreneurs to think about new sources of materials to keep costs down and new markets to sell products. The global marketplace offers many opportunities for today's entrepreneurs -- just take care to learn the ins and outs.

Forbes is currently conducting a search for "America's Most Promising Companies". Forbes is using a free comprehensive self-assessment survey to determine how fundable an emerging company really is. All companies receive a free, 12-category qualitative assessment upon completion of the survey. Select companies however, will receive a spot on the list to be printed in Forbes, fast-track status for a funding term sheet with TVA Capital and its funding partners, along with other benefits.

The companies that Forbes is looking for are:

      Less then 5 years old (Incorporation date)

      Have sales less then $10M per year

      Have less than 50 employees

      Have assets less than $1,000,000

 

The survey ends June 30, 2009.

 Click here for more information

Those who have been reading my blog for a while know my mantra when it comes to effective bootstrap marketing -- Think like your customer!

For example, since not every type of customer looks to the web for information, not every business necessarily needs a web page.  The same limitation holds true for social media.  It only works if it is where your customers go for information.

Even if websites or any of the new media sources out there are the right way to reach your customers, you still need to be clear about your intention with any form of promotion.  What do you want your customers to do at your website?  What do you want them to do with your use of social media as promotion?  Bootstrappers can't just throw a bunch of marketing stuff to the wall with their promotion and hope something sticks.  You have to be intentional in what you do with any form of promotion.

And finally, keep in mind that their are probably a billion websites out there and almost as many people trying to use social media to get business.  You can't just build it and they will come.  You need a strategy to get people to notice your message and push them to act.

Gene Marks offers his thoughts on using social media in a new article at Business Week:

We've been misled as to the benefits of social networking sites. Many of us are finding that these tools do not live up to the hype, especially for small business. Once we start digging deeper, we're finding a lot of challenges.

Marks discusses five myths about the use and effectiveness of social media for promotion.  This is a good read for anyone currently trying to use social media or thinking about using it.

Social media can be an effective tool.  But, you need to understand if it works for your customers.  If it does make sense as a tool for your target market, the next step is to determine how best to make social media a productive part of your promotional mix.

Marks is not out to prove that the new media does not work as promotional tools.  There are many examples of successful promotion through social media, such as the effective use of Twitter for marketing and businesses that were built through sites like Facebook. 

In fact, I can guarantee that he understands that the new media can be effective if used properly.  After all, his public relations person nagged me long enough to get me to blog about his article!

If you have spent any time here in the former East Germany, you undoubtedly know about the Trabant.  I took the picture above on the streets of Dresden this morning.  It got me thinking...  Is this a glimpse of the future for GM?

Here is how Time described this ill-fated, government conceived automobile when naming it one of the 50 worst cars of all time:

This is the car that gave Communism a bad name. Powered by a two-stroke pollution generator that maxed out at an ear-splitting 18 hp, the Trabant was a hollow lie of a car constructed of recycled worthlessness (actually, the body was made of a fiberglass-like Duroplast, reinforced with recycled fibers like cotton and wood). A virtual antique when it was designed in the 1950s, the Trabant was East Germany's answer to the VW Beetle -- a "people's car," as if the people didn't have enough to worry about. Trabants smoked like an Iraqi oil fire, when they ran at all, and often lacked even the most basic of amenities, like brake lights or turn signals. But history has been kind to the Trabi. Thousands of East Germans drove their Trabants over the border when the Wall fell, which made it a kind of automotive liberator. Once across the border, the none-too-sentimental Ostdeutschlanders immediately abandoned their cars. Ich bin Junk!

I think I have to agree with Glenn Beck's assessment of the future for GM under government control:

What kind of innovation can we expect from "Government Motors"? With people who've never run a business, like Barney Frank, in charge, we may be setting ourselves up to repeat another part of history: We could all be driving the same car, kind of like East Germany's Trabant or the old Soviet Union's Lada.

I have been offering some of my thoughts on entrepreneurship in Eastern Europe during our travels here the past three weeks.

One of my students, John Price, made the following observation about the entrepreneurial brain drain that seems to be taking place in many countries in this part of the world:

We've been able to travel through five different countries while learning about the history and culture along the way. While studying in Europe, I was able to research the economic and entrepreneurial activity in each country we visited. I focused my attention on Hungary, specifically the city of Budapest.  I found that the younger generation of entrepreneurs was nearly non-existent. Many of the younger people in the city have decided to move away to pursue other means of work around Europe. The majority of the entrepreneurs are in Budapest are in their late 60's, which happens to be the average life expectancy of Hungarians.  What will happen when this older generation are no longer able to be active in their businesses? My hope is that Hungary will be able to encourage the younger generation to stay in Hungary and pursue entrepreneurship

One of the realities of running a small company is that there are just so many places one can cut costs during times like these.  For many, salaries and rent are the two big categories.

Many entrepreneurs I work with are already taking steps to cut payroll costs through cutting back on the number of employees, using more independent contractors, skipping their own paychecks when cash is tight, and asking everyone to take a pay cut.

But, how do you help cut the cost of your space?

One option is to try and renegotiate your lease with your landlord.  Since times are getting tougher in the commercial real estate market, you may find the landlord willing to take less rather than risk having empty space.

Another option for some is to do what so many college graduates seem to be doing right now -- when times get tough, move back home.

Just as running a business from home is a great way to keep overhead low when starting a business, it can also be a way to keep a business alive during the recession.

Raymund Flandez has an article at the Wall Street Journal about this growing trend:

In February, after 12 years in a downtown La Jolla, Calif., storefront, Brett and Kimberly Buffington packed up their children's clothing boutique, Eurochild LLC, and moved it into their home.

"Business just stopped on a dime" 18 months ago, Mr. Buffington says, and he and his wife were unable to renegotiate their $7,000-a-month rent.

Working at home allows the couple to save $12,000 a month in rent and other overhead costs and focus on revamping EuroChild's Web site to attract new customers. "You don't have overhead, you don't have to manage employees, you don't have to keep the store clean -- all the stuff that comes along with running a retail business," Mr. Buffington says.

If you do decide to homesource your business, keep in mind some of the tips I offered in a recent post about home-based businesses.