Recently in Entrepreneurial Myths Category

There is another entrepreneurial myth that needs busting.  It is this one:

"Entrepreneurs are good at starting things, but cannot manage them once they begin to grow."

I have been arguing that the problem is that we don't consistently teach entrepreneurs how to manage growth.  My experience has been that once we do, their success improves considerably.  Most have never run a growing, successful business before.  They just need the knowledge and tools.  I have done this type of training with both our students and entrepreneurs in the community ever since I got back into teaching.

Now their is some empirical evidence that entrepreneurs ain't so shabby when it comes to managing larger, successful businesses.

New research from Babson College by Prof. Joel Shulman finds that publicly traded stocks led by entrepreneurs, consistently outperform non-entrepreneurs by a wide margin. Stocks of entrepreneur-led companies significantly outperform non entrepreneurs.

Shulman suggests that because entrepreneurs try to keep costs low while vigorously growing the business -- you just got to love that Bootstrapping spirit -- entrepreneurial companies are well positioned to perform better than ever in a sluggish, recovering economy.

Shulman's recent update on stocks for calendar 2009, show:

• Stocks of entrepreneur-led companies significantly outperform non entrepreneurs (YTD through 12/1/09,  650+ global entrepreneurs are up 93%).
• Stocks of "bureaucrat" companies underperform non-bureaucrats and entrepreneurs by a wide margin (these are stocks that individuals would sell or sell short).
• Stocks of Entrepreneur-led companies continue to outperform non-entrepreneurs even after adjusting by market cap size, sector, geography, or time period.

There is a growing perception that American entrepreneurship is simply about getting rich no matter how it is done and no matter what the costs. I call this "entrepreneurship on steroids."

Watch this short YouTube video about an English entrepreneur and listen carefully to what he has to say about American entrepreneurs toward the very end of the clip.

Wealth is a good thing. It can create good outcomes for the entrepreneur, his employees, his investors, his community. But it should never be viewed as the only measure of success. For many entrepreneurs it is not even the main yardstick they use to measure their success.

What we don't need in the world is a bunch of narcissistic, one-dimensional, entrepreneurs "on steroids."

(Thanks to Jeff Williams for passing this clip along).

BusinessWeek Online has a story that profiles 18 women who have left high-power corporate jobs to join the ranks of start-up entrepreneurs. The reason -- "Only 2 of the 18 women on our list mentioned making more money as their primary motivation."

Building a different kind of organizational culture seemed to be a major driving force for many of these women. While still striving for high performance, these new entrepreneurs want to create a more collaborative and team-driven culture. It appears that they also want to create cultures that are more supportive of employees.

Cecelia McCloy, the 52-year-old co-founder of Integrated Science Solutions, a Walnut Creek (Calif.) science and engineering firm with $9 million in sales, says she specifically set out to create a company that was friendly to families. Her employees also get eight hours of paid time off per year to participate in civic or charitable activities -- say, to volunteer in their children's classroom. Last year, about 20 of her 75 employees took advantage of the option. And every month, she asks managers to give her information on employees who did something exceptional for customers or their colleagues. McCloy then writes a thank-you note to those folks.

From our own research for our new book, we have found that these types of goals are also shared by many male entrepreneurs. It is heartening to see entrepreneurs of both genders pursuing such rich and well-ordered definitions of success in their businesses.

(Thanks to Ben Cunningham for passing this along).

It is time to dispel a financing myth. You will often hear that investors will put money in an "A" team with a "C" idea, but not an "A" idea with only a "C" team. The truth is that you will need straight "A's" to get angel or VC money.

Certainly you need an "A" team. The investors need to know that the entrepreneurial team can deliver on the plan. The team's collective experience is the best predictor of future success. They prefer that you have managed a start-up through its growth before, and if it was financially successful that is all the better.

But, they also want an "A" business concept. It has to have market potential that is big, I mean really big. To get the multiples of their investment that they expect, they need your business to have the clear potential to grow to many millions in sales and the probability of many millions in cash flow. They also want to see a relatively benign competitive environment. Never say there is no competitive, because then you look naive, but your plan should insulate you as much as possible from competitive threats, as that is the key to unimpeded growth.

They also want an "A" exit plan. If they can't see a clear path to get their money out of the deal within a few short years, it doesn't matter how good you are or your idea looks. Today that is most often an acquisition, since IPOs are few and far between.

And investors want "A" intellectual property protection. They don't want to invest in deals that cannot be protected. In today's global economy they will often look at your IP both domestically and internationally.

So study hard and do your homework if you want equity financing, as you will need a perfect 4.0 grade point average to close the deal.

My friend Rhonda Abrams blogged last week about an interview she heard with a professor from a "distinguished university" (that may have been the problem right there):

I recently heard a professor from a distinguished university say on the radio that 90 percent of new businesses fail.

To me, that's like hearing fingernails scraping on a blackboard. I've looked at statistics of business births and deaths closely, and I know of no credible study showing anything close to a 90 percent failure rate.

She is correct.

Credible studies show success rates five years out (the normal time line for such studies) to be around 50% +/- 5%. And as I've said many times, smaller studies of those who have gotten trained and educated in the process of starting and growing a business find success rates as high as 80-90%.

This urban myth is perpetuated by the histrionic media who loves find evidence of doom and gloom even when it isn't real, and by ignorant and uninformed "experts" who are too lazy to do the research needed to find out the truth.

(Thanks to John Russell for passing this along).

I love to collect entrepreneurial myths that those of us who work in the world of new ventures have observed over the years. On of my former students (Chip Hayner) passed along this list of myths from the world of technology start-ups from Rondom Ramblings. It is both humorous and very much on target for many would-be entrepreneurs in any industry.

Here is a sample:

Myth #4: What you think matters.

Reality: It matters not one whit that you and all your buddies think that your idea is the greatest thing since sliced pizza (unless, of course, your buddies are rich enough to be the customer base for your business). What matters is what your customers think. It is natural to assume that if you and your buddies think your idea is cool that millions of other people out there will think it's cool too, and sometimes it works out that way, but usually not. The reason is that if you are smart enough to have a brilliant idea then you (and most likely your buddies) are different from everyone else. I don't mean to sound condescending here, but the sad fact of the matter is that compared to you, most people are pretty dumb (look at how many people vote Republican ;-) and they care about dumb things. (I just heard about a new clothing store in Pasadena that has lines around the block. A clothing store!) If you cater only to people who care about the things that you care about then your customer base will be pretty small.

From time to time I have written about myths that I see when dealing with aspiring entrepreneurs. Entrepreneur.com has put together their own Top 10 list of Small business Myths that are worth a read for anyone thinking about starting a business.

Several of their myths dealing with financing issues:

Myth No. 1: "The government has grants for startups."

Generally this is not true. There are a few instances where local governments set up programs for disadvantaged people looking to use free enterprise to improve their lives, but they are not that common.

Myth No. 2: "The SBA loans money directly to small businesses."

Another financing myth busted. You still must go to a bank. Some banks work with the SBA program to get small business loans guaranteed by the SBA.

Myth No. 3: "Venture capitalists loan money to startups."

VCs fund less than 0.5% of entrepreneurial ventures, and of those, only rarely do they fund a start-up.

Myth No. 5: "I'll be able to write everything off."

Actually you can, but you will face interest and penalties from the IRS, so I don't recommend it either.

Myth No 6: "I can pay myself whatever I want."

Again, you can, but you'll be out of business in a few weeks. You can only pay yourself what is left after everything else gets paid. You are last in line if you want to make your business work.

Myth No. 8: "I should be profitable after six months, because I'm an expert at what I do."

The article states that most businesses take 2-3 years to make a profit. That is also kind of a myth. I have owned businesses that make profit within a few months, and I have had some that took years. It all depends on the business model and the market. That is why a plan is so important to help you understand what you are getting into. Which brings us to another of their myths:

Myth No. 10: "If I'm not getting funding, I don't need a business plan."

See my comments above...

They also have a couple of marketing myths:

Myth No. 7: "If I create a website, I'll get traffic (or the more popular 'If I build it, they will come.')"

Myth No. 9: "I don't need a marketing plan or marketing materials. This product/service sells itself."

I tell entrepreneurs that they should be prepared to spend 80% of their time selling and marketing early on. Nothing sells itself and no website creates its own traffic.

Finally, one of their myths deals with lifestyle:

Myth No. 4: "I'll have more time to do what I want."

You should assume you'll have some long hours early on. But, if time is important, make sure to build that into your business plans. Plan for slower growth or less ambitious goals if you want to structure time for other things. Also understand that some businesses just demand more of our time by their very nature. For example, if you want to start a restaurant, plan on very few days off, long hours, and no vacations for a LONG time. Know what you are getting into before you start any business and make sure it fits your non-financial and lifestyle goals.

Make sure to go the the Entrepreneur.com article, as it has some great links to more information on all of these topics.

Findings from a new study on start-up businesses released by Wells Fargo indicate that you really don't need a lot of money to start most businesses.

The Wells Fargo report found that the average start-up financing for the new businesses they surveyed was $10,000. The study also finds that 73% of start-ups were fully self-funded. These findings are consistent with previous surveys that generally find that start-ups began with about $7,000 - $10,000, and that self-financing was used by 70-85% of all start-ups.

There are a couple of web sites out there that are marketing to entrepreneurs who need money. They are creating what are known as peer lending networks. It is an attempt to hook up those who need money with those who have money.

The basic concept behind the business model is nothing new. They found what seems to be an inefficient market and tried to link it together with a better process. The notion is that there are markets out there where there is supply and demand, but not a good way to connect the two sides. A good example of this business model is a job placement agency. There are workers seeking jobs and there are companies looking to hire. But, for some reason they have a hard time connecting. The business model of an employment agency is to bring the two sides to the table so they can connect on a transaction -- in this example, hiring a needed employee who needs the job. For this service, the employment agency gets a fee.

Prosper.com in the US and Zopa.com in the UK both work on this type of business model, but in this case it is to connect those who need money (often, but not always, start-up entrepreneurs) with those who have some money. The sources of money are really not the lenders in this business model. A company like Prosper.com actually makes the loan, and then turns around and sells it to an individual or a group of individuals who are brought together at their site. The borrower tells how much they need (prosper.com has a $25K max), why they need it, and what the maximum interest is they are willing to pay. It then enters a bidding process like other web sites do for hotels, airline tickets, etc., etc. Sometimes you get a hit, but if often takes several tries. From inc.com:

If a loan isn't fully funded within the auction time frame, the borrower is free to try again. Townshend, who had an A credit rating despite $15,000 in credit card debt, struck out twice before landing a loan. Initially she offered an attractive interest rate, 12.5 percent, but asked for too much money: $25,000. On her second try, she requested $9,900, but at a less appealing rate of 11 percent. Finally, she struck the right balance, asking for $9,500 at 13 percent interest. She also made her loan description more appealing by arranging key ideas into bullet points and providing a detailed breakdown of how she planned to use the money. In three days, she received 77 bids from an array of lenders, including an engineer and a Web entrepreneur, and the loan was fully funded.

A common problem that entrepreneurs suffer from is the "If I only had the money" myth. They are sure that if they just get some money, everything will be OK. Sometimes that don't exactly know if they really need it, or how much they need. Sometimes they really aren't sure what they need it for. Often they have no clue how they will pay it back. But, if they just got a loan or an investment, all their problems would be solved. As the example from inc.com shows, this is no magic bullet. You still have to be realistic and have a good proposal to get money. And even with the help of sites like these, it still takes time.

The truth is that most deals are just not ready for financing, and many never will be. But, when they are, or should I say if they ever are, there is plenty of money out there these days. All that sites like these can offer is the possibility of a more efficient way to find that money.

(Thanks to Sigrid Catanzaro for passing this post idea along).

I saw this article in our local paper yesterday and it made me think about my post from the other day about entrepreneurs starting younger and younger.

Ephren W. Taylor II has a success story like no other.

Not many people can claim at the age of 23 that they have "come out of retirement" to become one of the youngest CEOs of a publicly owned corporation, but that's exactly what he has done.

And I thought that having a large numbers of 22 and 23 year olds coming out of college to begin their careers as entrepreneurs was an amazing. This young man makes them look middle-aged.

When he was 12, Taylor's first company designed 3-D computer games. Later, at the age of 17, he created a dot.com job search business for teens and college students. At the time it had a value of $3.2 million.

Taylor now splits his time between running two corporations, taking a third one public, extensive community and charitable work, and spending time with his wife and two children.

One of his companies is Amoro Corporation, which he took public in this past spring.

Its mission:

Amoro Corporation is a publicly-held investment development group dedicated to "Empowering Communities With Socially Conscious Development." Our focus is to create affordable housing for homeowners, especially in urban environments.

And the secret to his success?

"You have to visualize success. You have to see it coming."