September 2009 Archives

The Hitachi Foundation and the Boston College Center for Corporate Citizenship recently released a report titled "Weathering the Storm: The State of Corporate Citizenship in 2009." The survey results show that due to the recession businesses have had to rethink - both good and bad - their approach to corporate citizenship.

The survey sample included 756 executives, 36% of whom were at small businesses (1-99 employees), 24% at medium (100-999), and 40% at large companies (1000 + employees).  The survey found that large companies are responding to the recession much differently than small companies. For example, large companies significantly increased their investments and involvement in citizenship activities - but they were also more likely to lay people off. Small firms kept true to their emphasis on treating employees well by minimizing layoffs. But they significantly decreased attention to other aspects of citizenship, such as volunteering or philanthropy.

Some additional highlights of the survey:

• Despite upheaval in the economy, a majority of U.S. companies are not making major changes in their corporate citizenship practices. Of those who made changes 38% reduced philanthropy/giving, 27% increased layoffs, and 19% reduced R&D for sustainable products.
• Most U.S. senior executives believe business should be more involved than it is today in addressing major public issues including health care, product safety, education, and climate change. Surveyed in June, just as the national debate on health care began to intensify, some 65 percent said business should increase its involvement in this issue.
• Based on current economic conditions, 15% of companies are increasing R&D for new sustainable products; 11% are increasing corporate citizenship marketing and communications; and 10% are increasing local and/or domestic sourcing or manufacturing.
• Only 34 percent of executives who responded to the survey say greater regulatory oversight by the federal government is an important part of solving the current economic crisis and creating a more stable economy.

The Wall Street Journal recognized the Top Small Workplaces in its third annual report featuring some of the best small employers  in the U.S.  The Journal Report on Small Business features the 15 winners in yesterday's print and online editions.

Part of this feature was a column by Laura Lorber on web resources for small business owners, which included some recommended websites on organizing and funding your small business (all are great sites).  She also recommended two sites that offer insights on entrepreneurship.  Thanks for including The Entrepreneurial Mind as one of those two resources!

Here is the latest from the NFIB Research Foundation and their monthly 411 Small Business Facts summary of results from past polls, including their commentary:

One of the more interesting, if often less pleasant, aspects of working in Washington is a front-row seat watching government dream-up and subsequently blow-up well-intentioned ideas that could become practical nightmares for small-business owners.  In fact, if it were not for the entertainment value, the state of affairs could get downright depressing because some of these brainchilds fail to self-destruct and actually become law. This brings us to report on a real doozie, now in the works.
 
The latest entertainment is innocuously called "corporate reporting."  The good intention is to raise an estimated $1.73 billion a year in revenue, peanuts by Federal Government standards, through reducing the amount of unreported corporate taxable income.  So far, so good!   But then reality strikes?  Under the proposal, businesses would be required to send every business from which they purchase more than $600 a year worth of goods and/or services, the corporate equivalent of a 1099.  Currently, business only reports their transactions for services from unincorporated businesses.  But the proposal expands the requirement to incorporated businesses and transactions involving property (property has not been defined yet and that is probably pretty important).  Copies must also be filed with the IRS.  To paraphrase one manufacturer upon hearing of the proposal, "Oh, my gosh, I have 13,000 suppliers.'
 
So, let's see how it works.  Small Business A, an office supplies company, sends employees to two different trade shows. The employees stay at Holiday Inns and hotel bills are $1,500. Small Business A pays by credit card. At year's end, the business adds up all purchases from Holiday Inn, sends a 1099 to Holiday Inn for $1,800 and a copy to the IRS.  But wait!  One Holiday Inn was company-owned and the other was owned by a franchisee.  Holiday Inn discovers the error.  So, Small Business A must refile with the Holiday Inn (franchisor), the Holiday Inn (franchisee) and the IRS.   (How this would be handled if the employees were simply reimbursed is open to speculation.)  Of course, the purchase of gasoline for the firm's two delivery trucks would be considerably trickier considering the number and location of purchases.  A similar filing must be produced for every supplier that has sold the firm more than $600 worth of stuff, whether in increments of 600 $1 purchases or one $600 purchase.  But Small Business A also has customers, lots of them.  At the end of the year, it is inundated with 1099s from its customers which must be checked.  The IRS is inundated, too.  What happens to those 1099s?  Presumably they are stored.
 
The National Small Business Poll issue, Paperwork, offers an insight into the current paperwork problem facing smaller firms.  Should corporate reporting not implode, new Poll data on paperwork may have to be collected!

1. SUPPLIERS - Do suppliers have a relatively strong or a relatively weak influence on their customers' introduction of innovative products and services?  (Vol. 6, Iss. 8, Q#33.)
 
2. CREDIT CARDS - What is the approximate average percent of total sales volume that is paid by credit or debit cards among the one-half of small businesses that accept cards?  (Vol. 8, Iss. 3, Q#2.)   
 
3. HOMES AS COLLATERAL - How many small-business owners have collateralized their homes to finance the business?  (Vol. 8, Iss. 7, Q#18d.)
 
4. H2B VISAS - Would small businesses directly benefit a lot, directly benefit a little, be damaged a little, or be damaged a lot by increasing the number of immigrant work visas available for seasonal workers, known as H2B visas? Or, would small businesses not be affected by a change in the number of H2B visas?  (Vol. 8, Iss. 2, Q#13.)
 
5. CRIME & PUNISHMENT - Do small business-owners and managers have very much, much, some, little, or very little confidence in their local police authority? (Vol. 8, Iss, 5, Q#8.)
 
6. DEPRECIATION FOR TAX PURPOSES - Do small-business owners and managers have a good understanding of depreciation, a moderate understanding, little understanding, or do they rely on your tax preparer to understand the depreciation provisions for them?.  (Vol. 6, Iss., 6, Q#4B.)
  
7. SUCCESSION - Do employee-managers of small businesses think that is it highly likely, possible, doubtful, or highly unlikely that some day they will own and operate the business they now manage?  (Vol. 8, Iss. 8, Q#17.)   
 
8. BUSINESS INCOME -What is the median total income small-business owners take from their businesses, including any salary, dividends, draw or profit taken out?  (Vol. 7, Iss. 7, Q# 10.)
 
9. PAPERWORK - After an employee leaves, how long do small businesses keep personnel records before getting rid of them? Vol. 3, Iss. 5, Q#2c.)

"Weeds, glass, bricks, pieces of pipe and shingle splinters have replaced the knot of aging homes....There are a few signs of life: Feral cats glare at visitors from a miniature jungle of Queen Anne's lace, thistle and goldenrod. Gulls swoop between the lot's towering trees and the adjacent sewage treatment plant."

Is this a description of some blighted neighborhood in need of a government solution?

Guess again.

This is Katie Nelson's description of the property made infamous in the Kelo Decision by the US Supreme Court in her AP story.  You know, that property that had those tacky little middle class homes that government seized using eminent domain.

In case you forgot here is Susette Kelo's home that was siezed to build "multimillion-dollar private development that included residential, hotel conference, research and development space and a new state park that would complement a new $350 million Pfizer pharmaceutical research facility."



Yet one more example of government's success at steering markets and picking economic winners.

But hang onto your hats.  The government is about to get a lot more involved in the economy, particularly the entrepreneurial sector of the economy.  From Bloomberg:

The U.S. Commerce Department is setting up an office intended to help entrepreneurs transform ideas into companies.

Commerce Secretary Gary Locke said his department will help fledgling business owners get training, credit and access to government research, in a bid to encourage the "right kind" of risks by business leaders....

The office for entrepreneurship and innovation will be set up under Locke's direction, and will coordinate efforts across the government to help those starting new businesses. The Commerce Department will also establish an outside advisory panel made up of company owners, investors and officials.

I am sure the lobbyists are streaming from K Street to the Commerce Department to help "shape" how the government will be "shaping" entrepreneurship in the U.S.  I can't wait to see who gets a seat at that advisory panel table....

In my column this week at the Tennessean, I offer my take on what we need to do to unlock the optimism of entrepreneurs:

Each month the National Federation of Independent Business conducts a survey of small business owners to gauge key economic trends.

The September survey shows a slight improvement in owners' optimism. Granted, the index is still very near its all-time low, but small-business owners see some hope over the longer term.

"The gain in the index clearly signals that the worst is likely over, but so far there has been no surge in sentiment as many components still remain at historically low levels," said William Dunkelberg, NFIB's chief economist.

"The small-business sector has taken a real beating over the last year, but owners are seeing some upward movement in both sales and earnings."

The anecdotal evidence I can add to this from my own interactions with small-business people is that since they have "made it through the worst and survived," they see hope for the future.

One thing that should give us pause when we read surveys like this, though, is that entrepreneurs are by their very nature an optimistic lot. My father always told me, "When you look at an entrepreneur's forecast, double the costs and triple the time, and you will probably be closer to the truth."

And remember the old story of how we can spot a budding young entrepreneur -- he is the one who on Christmas morning can be found digging in a pile of manure in his backyard exclaiming, "I just know that pony I asked Santa for is in here, if I just dig deep enough."

So, how can policymakers help entrepreneurs realize their goals?

Here is a three-part plan that would help turn the optimism of American entrepreneurs into real economic growth and create jobs:

Cut tax rates. Entrepreneurs need to see that their risk-taking can lead to the opportunity for income and wealth down the road. But with talk of higher marginal tax rates, entrepreneurs are growing concerned that they will keep much less of the fruits of their labors and personal investments in their businesses. Increasing income tax rates has been shown in studies around the globe to put a damper on new business formation and growth.

Decrease regulation. The Small Business Administration estimates that when compared with large businesses, small operations must spend four and a half times more per employee to comply with environmental regulations and 67 percent more to comply with tax regulations. Governments all around the world are cutting the red tape that affects small businesses to help spur entrepreneurial activity. But in the U.S., small employers are beginning to feel the effects of expanding government regulations. This increases costs, making earning a profit that much more of a challenge.

Stop trying to steer the economy. Markets have proven to be pretty good at picking economic winners. Rather than trying to use tax policy and other forms of government incentives to support one industry over another, now is the time to let markets work. For example, there is evidence that investors are not sold on the prospects of green technology as a true growth sector in our economy even with strong government support. Instead, angel investors and venture capitalists are steering more of their investments toward other technology sectors that they believe show greater long-term promise.

Taking these three steps would help turn the entrepreneurial optimism still abundant in America into more entrepreneurial economic activity at a time when the nation needs it most.

There is a useful post for those trying to utilize Twitter as marketing tool over at MyVenturePad.  The post offers an example on using Twitter for lead generation.

When it comes to spurring entrepreneurial activity, taxes matter.  The Tax Foundation has released its latest ranking of states by tax burden.  

The top 10 for lowest taxes in this year's ranking has changed a bit from last year:

1. South Dakota
2. Wyoming
3. Alaska
4. Nevada
5. Florida
6. Montana
7. New Hampshire
8. Delaware
9. Washington
10. Utah

For more information on this year's ranking you can read the Executive Summary, the full report, or you can view a narrated slide show that offers specific explanation of some of the changes in state's rankings this year.

In a newly released study supported by the Office of Advocacy and the Ewing Marion Kauffman Foundation, the Berkley Center for Entrepreneurial Studies of New York University examined the impact of entrepreneurship education in higher education.

The study found that students who took an entrepreneurship class were more likely to have engaged in three types of "innovation":

1. offering new products or services
2. obtaining patents or copyrights
3. using production techniques that differ from those of the industry's main competitor.
   

Not surprisingly, graduates who have taken entrepreneurship courses are significantly more likely to select careers in entrepreneurship.

The results suggest that there is a strong correlation between respondents having taken an entrepreneurial course and their self-reported skill in identifying new business-related opportunities.

To me opportunity identification is the single most important skill we can teach.  It helps prevent businesses from being launched that are doomed to fail from the very start.  It is a skill that also ensures proper positioning of viable opportunities.

Think you know what a small business is?

Thanks to years of rent seeking by advocates and lobbyists for various industries and trade organizations, the SBA needs a table that runs 37 pages plus footnotes just to define small business.

Take a look.

This is just one small example why we don't need government steering our economy and making decisions about economic winners and losers.

I share a lot of information about today's entrepreneurs and those who are just beginning their entrepreneurial journey.  But what about those in the entrepreneurial pipeline? 

Junior Achievement just released a survey of teenagers about their hopes and dreams for their future careers.  What do they see in their future?  Entrepreneurship.

They want their schools to help them learn how to become entrepreneurs.  An amazing 92 percent believe that entrepreneurial skills should be taught in school - and 46 percent believe that during grades K-12 is the best time to learn entrepreneurial skills.

The survey also found that even in the face of uncertainty in the U.S. job market, more than half of teens - 51 percent -- are interested in starting their own companies.

Here are more highlights from this survey:

• 23 percent of teens who want to start a business said they were interested in starting a business that "helps the environment" or that "deals with the problems or challenges of our society." The growing demand for our new Social Entrepreneurship major here at Belmont is evidence of this trend.
  
• The top reason cited by teens (26 percent) for wanting to start a business was wanting "to take control of your destiny and set your own career path."
• Respondents were almost evenly split between feeling there was more job security in owning their own business (47 percent) versus working for a company (49 percent). 
  

The times they are a changin'....

I wrote a couple of posts yesterday on the resiliency of entrepreneurs and their ability to start new ventures even if venture capital is not flowing freely.  In a post by Jonathan Ortmans at Policy Forum on Entrepreneurship Blog based on what he heard during a recent discussion among investors, he offers the following observation:

There was a universal agreement, bar one person, that now is an excellent time for investors in new start-ups and that entrepreneurs should be cautious about accepting too much outside capital.  In fact, ironically, all three serious start-ups I met last week had not accepted any outside funding at all.
 
Let's hope that scarce capital means more smarts and better success rates for the entrepreneurs.

Arthur Laffer offers traces the impact that tax increases had in deepening the great depression in an op-ed in today's Wall Street Journal:

The Smoot-Hawley tariff of June 1930 was the catalyst that got the whole process going. It was the largest single increase in taxes on trade during peacetime and precipitated massive retaliation by foreign governments on U.S. products. Huge federal and state tax increases in 1932 followed the initial decline in the economy thus doubling down on the impact of Smoot-Hawley. There were additional large tax increases in 1936 and 1937 that were the proximate cause of the economy's relapse in 1937.

It seems that we do not learn our history lessons very well these days....

Forbes announced the winners of their America's Most Promising Companies competition this past week. 

It is interesting to note that only two of the twenty have gotten outside financing and that only one of these two companies have prior entrepreneurial experience. 

Thought I'd share a little smile on a rainy Monday here in Nashville.
 

In a guest post at TechCrunch, Vivek Wadhwa adds his voice to those questioning the VC industry's play for bailout money:

What we need to do is to apply the same rules to VC's which they impose on their companies - force them to make tough choices and get their business models in order. And instead of giving the tax-breaks to the middlemen, let's give these directly to the entrepreneurs who take the risks and create the innovation. It is the entrepreneurs who fuel the economy, not the venture capitalists or investment bankers.

This post is cites reputable studies that show the real impact of VC money, including Paul Kedrosky's discussed earlier at this blog. 

I have said this before, but it bears repeating -- venture capital funds a very small part of the entrepreneurial sector.  One study suggests that 99.962% of all entrepreneurial ventures in the US had NO venture capital investment.

Venture capital does have some impact on our economy, but much less that the lobbyists for VCs would like us to believe.

(Thanks to Andy Tabar for passing the TechCrunch post along).

The American economy has been, and will continue to be, built by entrepreneurs. If you believe that entrepreneurs' voices need to be heard and want to help to educate government officials about the important role entrepreneurs play in our economy, I encourage you to connect with the Build A Stronger America initiative supported by the Kauffman Foundation.  All you have to do is click on  the link above and join the Entrepreneurs' Movement.  I did!

The latest survey by American Express OPEN Small Business Monitor reports similar results to the NFIB survey I wrote about earlier this month.  Like the NFIB survey, this one also found entrepreneurs to be somewhat more optimistic, but still very cautious. 

• More than half (55%) of entrepreneurs have an optimistic outlook on near-term business prospects, up from 45% in March 2009.  Keep in mind that this is a sample of small business owner still in business.  Like I said earlier, who wouldn't be a bit more optimistic if they have survived the rash of small business closings over the past few months!
• However, only one quarter (26%) report expanding opportunities for their business
• Six in ten (63%) do not think the worst of the U.S. economic woes are over -- I agree!
• Nearly one in six (17%) say they risk going out of business in the next six months because of the economy.

As someone who teaches lots of aspiring and nascent entrepreneurs from Generation Y, I was interested in the survey's findings about this group when compared to older entrepreneurs:

• They're most likely to hire (36%, vs. 25% of Gen X and 20% of Boomers )
• They're most likely to have capital investment plans (58%, vs. 41% of Gen X and 39% of Boomers)
• They're most willing to take a financial risk (67%, vs. 52% of Gen X and 47% of Boomers)
• They're least likely to have cash flow issues (53% versus 59% for Gen X and 64% of Baby Boomers)
• They're least stressed out by the economy (57% versus 72% of Gen X'ers and 71% of Boomers)
• They're most likely to implement employee-friendly policies to battle the recession. Gen Y will allow employees to maintain a flexible schedule (44%), Baby Boomers will institute a hiring freeze (41%) and Gen X entrepreneurs will institute a salary freeze (39%)

Some of this is the optimism of youth and some may be due to the fact that they have never experienced a deep recession before.  One of our learning goals in our program is to bring undergraduate students down to a more realistic understanding of the challenges and struggles they will face.  This has become a key set of assessment items for our program's effectiveness.   

Entrepreneurship can be stressful enough during good times, but during tough times we see that the uncertainty and struggles resulting from managing the finances of a small business during the recession are taking its toll:

• Nearly seven in ten entrepreneurs (68%) are "stressed out" by the economy and three in ten (31%) say that the current economy has caused them to question their decision to become an entrepreneur.
• 60% of those surveys are experiencing cash flow issues. The biggest cash flow worry for business owners is the ability to pay bills on time (26%). When cash flow concerns arise, business owners are most likely to dip into their own pockets: 32% of business owners will use personal or private funds, and one in four (25%) will put off purchases. Others will use credit or charge cards (13%), obtain and use a line of credit (12%), lease rather than purchase business equipment (4%), or get a short-term loan in order to improve cash flow (3%).
• Nearly half of entrepreneurs (45%) are looking to access capital from external sources in order to run their businesses. One out of five business owners (19%) say they are experiencing difficulty accessing capital. To secure the funds they need, business owners are tapping a variety of sources, including using a bank loan (14%), using business or personal credit cards (each 13%), tapping personal savings (10%), borrowing from a friend or family member (3%), and private equity/venture capital or home equity (each 2%).

I have been stressing the need to hunker down for some time.  Entrepreneurs are becoming more conservative:

• Concentrating on current customers. Forty-one percent of small business owners say their top priority over the next six months is maintaining current sources of revenue. By comparison, only one quarter (26%) say they are focused on growing their business, which is the lowest number for growth in Monitor history.
• Avoiding risk. Half (49%) say they are not willing to take on financial risk to grow their business, an all-time high for the Monitor.

With the growth in interest in social entrepreneurship, I am often asked about the status of the B Corporation.  B Corporations is a designation for a for-profit venture that has a social mission.

Here is the latest from Nonprofit Law Prof Blog:

The B Corp concept (B stands for social benefit) has not yet, so far as I know, been adopted by any states, but corporations can dedicate themselves to a socially responsible future by registering with B Lab, a nonprofit organization, and agreeing to comply with its dictates such as committing irrevocably to socially responsible business activities,taking cognizance of stakeholder concerns, and conducting an annual social benefit audit and report.  If the corporation complies, it receives what in essence a Good Housekeeping Seal of Approval from B Lab and can describe itself as a B Corp.

So as of now, this is not an alternative legal form of business entity like an S-Corp or LLC.  However, there is lobbying going on in Washington to set up a separate tax category or special tax break for B Corporations.  If this happens the states will surely follow and recognize this category of business as a new way to charter a corporation.

I think this would be a bad move.  Many social entrepreneurs who choose to set up their venture as an S-Corp or LLC and by-pass non-profit status do so to avoid the hassles of setting up and running non-profits.  If we turn the government and specifically the IRS loose on a new form of legal business entity called B-corps, they will become part of the morass that makes up the 70,000 pages of IRS code.  I would predict that in a few years we might see thousands of new pages of code dedicated just to B-corps.

The power and utility of all of the new Internet-based bootstrapping options for marketing, such as Twitter, Facebook, and other social media, continues to evolve and grow.

Many entrepreneurs are discovering the power of Twitter as a means for keeping customers up to date on daily specials and sale items, best times to avoid long customer lines, and special events. 

But Twitter is also proving to be a tool for keeping customers in the loop when a business is in a crisis.  For example, the Wall Street Journal illustrates a new use that entrepreneurs have discovered for using Twitter:

The social-media service -- where users send short "tweets" to followers who have signed up to receive the messages -- came in handy for Innovative Beverage Group Holdings Inc., whose drankbeverage.com site crashed last month after a surge in traffic following a segment on Fox News for the company's so-called relaxation beverage, which contains "calming" ingredients like valerian root and melatonin.

If customers like your product or service, they will generally be tolerant of glitches that occur as your business grows.  The most powerful message of the Twitter story above is not Twitter itself, but the importance of timely and honest communication with your customers. 

While e-mail may seem like a quick way to communicate, for many it is becoming perceived  as too slow and antiquated just as snail mail did when e-mail became more common.  Twitter can reach people immediately with just the key information they need to know delivered right to their iPod or Blackberry.

And during a crisis in your business, such instant and honest communication can ensure that you keep the loyalty of your community of customers.

One caution -- there is not one easy way to communicate.  Some people prefer Twitter, some e-mail, some phone calls, some text messages, and some Facebook.  When getting contact information from customers find out which they prefer.  You may need to maintain a multi-channel approach to customer communication.

(Thanks to Bill Hobbs for passing this idea along). 

My friend Rhonda Abrams has a new feature at USA Today.  She will be offering a six week series of free on-line articles for aspiring entrepreneurs called "Six Steps to a Successful Small Business."

In her first article, she highlights how to think like an entrepreneur:

Someone who needs an extremely high level of security might be challenged by an entrepreneurial lifestyle, yet a lot of people who don't think of themselves as embracing risk become entrepreneurs. The key is that although a successful entrepreneur takes risks, those risks are measured. Though entrepreneurs frequently go out on limbs, the ones that make it generally test that limb first to make sure it has a good chance of bearing their weight.

Her series will help aspiring entrepreneurs, even those of you who are accidental entrepreneurs due to the on-going recession, to navigate the start-up process with a little more confidence and understanding of the journey they are facing.

My column this week in the Tennessean explores how to build a bootstrap culture:

When starting a new business, most entrepreneurs have to bootstrap their business -- that is, find ways to get things done with limited resources.

But why do so many owners keep bootstrapping even when the cash starts flowing and they no longer have to bootstrap out of necessity?

Bootstrapping over the long term helps keep the business efficient, which reduces the need to secure external financing. This allows the entrepreneur to keep ownership of the business, reduces the need for taking on debt and helps strengthen the business during recession.

In addition, continuing to bootstrap helps build a stronger cash flow. And the stronger the cash flow, the higher the value of a private business. Bootstrapping, therefore, helps build wealth for the entrepreneur by increasing the value of the venture as it grows.

An entrepreneur has to get everyone in the organization to become a bootstrapper. This requires the creation of a bootstrapping culture throughout the company. Entrepreneurs should communicate a consistent message about bootstrapping. Highlight its importance in every form of communication, ranging from informal conversations with employees to formal communications such as newsletters, annual reports and policy manuals.

A consistent message reinforces the importance of bootstrapping behavior.

For example, include a feature in every company newsletter about an employee who was the "bootstrapper of the month," offering a story of how he or she accomplished a task with minimal resources. Remember, storytelling is a fundamental part of building a culture in a business.

However, remember that your actions need to reinforce your message about bootstrapping. The leaders of a business should bootstrap at every opportunity to serve as a role model and demonstrate their commitment to bootstrapping.

Building a bootstrapping culture also requires careful recruiting of new employees. When bringing new people into the business, look beyond their technical skills and experience to fill the position. So, if you want a bootstrapping culture to flourish, find out if prospective employees fit into a bootstrapping way of doing business.

Ask the right questions

One approach to evaluating the fit of prospective employees is to develop open-ended interview questions that assess their bootstrapping temperament. For example, you can ask all the applicants the following: "Tell me about a time when you had to accomplish a task when limited resources were available."

If the interviewee answers by saying that she always had more than enough budgetary support in her old job, it might be difficult for her to adapt to a bootstrapping environment. Or, if she answers by complaining about the lack of resources in her old job, or about how her old boss was always a cheapskate, it's a sure sign that this person will not have bootstrapping in her blood.

On the other hand, if she speaks with enthusiasm and pride about how she got the job done within the limited resources available, the candidate is a perfect fit.

To keep bootstrapping alive as a company grows, entrepreneurs must create a culture in which bootstrapping is simply "how we do business around here."

I quick follow-up on my post from yesterday about small business employment trends....

Denny Dennis with the NFIB Research Foundation pointed out to me that the data from the Bureau of Labor's Business Employment Dynamics (BED) report adds additional worrisome clues into the state of job creation among entrepreneurial firms.

Typically, small business creates modest employment growth during recessions, while big businesses have massive job losses.  However, the BED data indicates that this recession is seeing small business is creating fewer jobs than large businesses.

The SBA Office of Advocacy has issued an update of their Small Business FAQ.  There are some worrisome changes in some of the statistics.

The small business job engine is sputtering.  For several years the SBA has estimated that about 78% of new jobs in the U.S. have been created by small businesses over the past several years.  They now estimate this figure to be about 64%.  I would predict an even further plummet over the next two years.  These are running averages, so it takes time for the numbers to shift.  However, I must admit that this sudden drop took my breath away when I read it.

The small business foundation of the economy is weakening.  The SBA estimates that in 2007 the small business birth rate is about 627,200, which is the lowest level in the past five years.  I am worried what the 2009 figures will show, although this number includes self-employed.  That number may be up due to the high unemployment rate.  But, for the first time in the past several years, business closure rates and business bankruptcy rates exceed the business birth rate.  This is alarming.  We also need to keep our eye on the Census estimate of the number of small business that have employees.  It was at 6.0 million as of 2007 estimates (if the future estimates really will have any credibility with the new policy that is moving the Census Bureau directly under the control of the White House).

And what about survival rates?  The jury is out on this.  We will have to wait until 2011 to have any meaningful data on business survival rates.  The baseline going into this economic downturn -- that may be turning into a full fledged small business collapse thanks to the policies of the current President and his predecessor -- is 69% survival rate two years out and 51% survival rate five years out.  Again, we have to rely on the Census for these estimates, so not sure how they will spin the future statistics.

This month's NFIB survey of small business owners shows a slight improvement in their overall optimism.  Granted, the index is still very near its all time low, but small business owners see some hope for their businesses over the longer term.

"The gain in the Index clearly signals that the worst is likely over, but so far there has been no 'surge' in sentiment as many components still remain at historically low levels," said William Dunkelberg, NFIB's chief economist.  "The small business sector has taken a real beating over the last year, but owners are seeing some upward movement in both sales and earnings."

The anecdotal evidence I can add to this from my own interactions with small business owners is that since they have "made it through the worst and survived", they see hope for the future. 

Let's hope their optimism and that voiced by Dunkelberg is correct. 

One thing that should give us pause when we read surveys like this is that entrepreneurs are by their very nature an optimistic lot.

My father always told me, "When you look at an entrepreneur's forecast, double the costs and triple the time and you will probably be closer to the truth."

And remember how we can spot a budding young entrepreneur -- he is the one who on Christmas morning can be found digging in a pile of manure in his back yard exclaiming, I just know there is a pony in here if I just dig deep enough."

When I try to interpret surveys like this the entrepreneur in me is ready to assume that we are on the road to recovery.  But, the realist in me knows that we won't see any real improvement anytime soon unless we wake up and reverse course on a myriad of policies enacted over the past several decades that have expanded role of government, weakened the free enterprise system, and led to a steady increase in the tax burden.  These are all policies that have been proven to stifle entrepreneurial activity.

I fear that the situation facing small business owners is only getting worse.  Hear is how Sam Graves (R-MO) of the House Small Business Committee put it:

"It is abundantly clear that the Obama Administration has no understanding of small business owners or what they need.  Last week the SBA fell short of the mandatory allocation of government contracts to small businesses, and only 1% of the "economic stimulus" package was provided to small companies.  This Administration continues to push record spending and proposes paying for it on the backs of small businesses.  Congress should focus on helping our job creators, not treating them as enemies."

If we want to turn this budding optimism among entrepreneurs to work for us to start our economic recovery, we need to turn them lose -- and quickly.

Sadly, only the entrepreneur in me thinks that might happen.  But I'll keep digging, looking for that pony..... 

If I hear one more report about a jobless economic recovery I think my head will explode.  There is not real economic recovery without job creation.  Talking about a "jobless recovery" is a classic spin that politicians from both parties use when the economy gets stuck in a long-term slump.

The latest from William Dunkelberg, chief economist for the National Federation of Independent Business, indicates that the slump is, indeed, going to be with us for quite a while:

"Small business owners in August reported a decline in average employment per firm of 0.8 workers (seasonally adjusted) during the last three months.  August's figure was unchanged from July, but a big improvement from the record loss of 1.26 workers posted in May. 

"Six percent of the owners increased employment by an average of 2.5 workers per firm while 22 percent reduced employment an average of 3.9 workers per firm (seasonally adjusted).  The job generating machine is still in reverse.  The BLS recently reported unusually high job losses in the small business sector, due in part to terminations and failures.  As can be seen in the chart below, the reduction in labor costs (e.g., jobs) has been huge.  This explains the recently announced impressive productivity numbers; if employees are fired faster than sales fall, output (sales) per hour will rise.  Hopefully, this job cutting has been overdone and will produce a faster than expected recovery in employment (once consumers start spending - retailers and restaurants are in tough shape).  Manufacturing is improving, but that will not budge the employment numbers."

"Eight percent (seasonally adjusted) of small business owners reported unfilled job openings, down 1 point from July.  Over the next three months, 13 percent plan to reduce employment (down 1 point), and 7 percent plan to create new jobs (down 1 point), yielding a seasonally adjusted net 0 percent of owners planning to create new jobs, a 3 point improvement over July.  Not seasonally adjusted, net job creation plans were negative in all industry groups except the professional services and the wholesale trades."

If you have not seen the Jeff Bezos video at youtube, you need to.  He boils down what he has learned from Amazon into eight simple principles. (Thanks to MyVenturePad for passing this along).

BNET.com has a list of seven types of businesses that they suggest you may want to think twice about before starting during the current economy.

(Thanks to Belmont alum Joe Ormont for passing this along).

This week's question for Forbes magazine's America's Most Promising Companies initiative is as follows:

What is the single most important element of any business partnership?

You will most likely spend more time with your business partners than with anyone else - even your family.  And it will be a relationship that can be even more complicated to get out of than a marriage. Who you choose to be business partners with should be given as much consideration in a deal as what products you make or what markets you enter into. 

Dysfunctional partnerships are a major source of business failure. They suck energy and time away from building the business. They can often lead to the break-up of perfectly good businesses.

That being said, I think that if I have to pick one element as the most important it would be that you and your partner(s) share the same values, aspirations, and vision for the new venture.  This requires a careful and thoughtful discussion of critical business issues BEFORE the business is ever launched.

Work with your attorney to create a shareholder agreement before you officially incorporate. Just as marriages can fall apart on the honeymoon, business partnerships can fall apart before the first sale is ever made. 

Here is just a sample of some of the issues you should discuss with potential business partners:
•    Do you share the same vision for the business? 
•    Do you share the same aspirations for the business in terms of its size?
•    Are you all going to make the same level of commitment of time to the business?
•    What are your work habits and work ethic?
•    How much time off to you plan to take each day, each week, each year?
•    How much money will you put into the business? And how much do you expect to get out of it?
•    Who will be the President of the company? What roles will the other partners play?
•    How strong is everyone's credit rating? Can all partners help to guarantee a loan, if necessary?
•    What if one of you gets married and the new spouse gets a job offer in another city? Would you move away?
•    How will employees, customers, suppliers, etc. all be treated?

Business partnerships can be a successful experience for everyone involved.  But it takes open and honest communication and careful planning.