Five Steps to Secure Social Capital During a Pandemic

Image by skeeze from Pixabay

A myth about entrepreneurs is that we are just a bunch of “lone rangers.” (The Lone Ranger was a fictional former Texas Ranger who went off on his own to fight bad guys). According to the lone ranger myth, the reason we start our own businesses is that we can’t get along with others.  We can’t function in an organizational structure. So we ride off into the wilderness by ourselves to chase down our next deal.

Every myth is based on a bit of truth. Entrepreneurs do tend to have a higher need for independence. There are decades of studies of entrepreneurs that suggest we have a stronger urge to be independent than the average person.  In simple terms, psychologists define the personality trait of independence as preferring to act on one’s own thoughts rather than follow others.

Just because we have the urge to follow our own ideas does not mean we have poor social skills. To the contrary, independent thinking is recognized as an important part of healthy social skills by most psychologists.

In fact, there is a growing body of research suggesting that what is called social capital,  having a strong network of people with knowledge, experience, and wisdom to draw from, is an important determinant of entrepreneurial success.  It can be even more important for many entrepreneurs as the financial capital they need to succeed in business.

Important Sources of Social Capital

What are the sources of social capital for entrepreneurs?

It starts with their family and friends. At first glance it might seem that the social isolation we are all practicing should facilitate a stronger flow of social capital to entrepreneurs.  After all, we are quarantined 24/7 with our family. However, being forced into togetherness is challenging us to find new ways to interact as a family.  Those who have retired often talk about the initial challenges of finding a new rhythm for family life once the retiree is so much more time at home. During our adjustment to everyone being at home, it can become difficult if not impossible for family members to provide the social capital the entrepreneur needs from them.

Another critical source of social capital for entrepreneurs are their mentors, coaches, and advisors. These are the people who help keep entrepreneurs moving ahead and staying “between the rails.”  At this point in my career, one of my greatest joys is serving as a mentor for countless student and alumni entrepreneurs.  I know how important my mentors and advisors were for me when I was a full-time entrepreneur, and hope that I can pay it forward to today’s young entrepreneurs.

Entrepreneurs also receive vital social capital from their peers, that is, from other entrepreneurs.  This includes industry peers, which is why we are drawn to meet-up groups, trade shows, and industry associations.  These peers help us with the content of our businesses.  It also includes entrepreneurs outside of their industry.  The social capital we get from these entrepreneurs is more about the journey of entrepreneurship and about the challenges of being an entrepreneur, rather than the more technical aspects of building the business.

Staying Connected with Social Capital

Just as raising financial capital for a business takes time and effort, so too does securing the social capital we need.  Here are five steps to ensure that entrepreneurs get the social capital they need to keep their businesses moving ahead during these challenging times:

  1. Intentionality in working from home.  There is an old adage in family business: keep family time for family, and work time for work.  As we adjust to a work-from-home economy, we need to take this advice to heart.  There are many great articles available on how to effectively work from home.  I posted one at this site.
  2. Family support needs structure. It is imperative to create a structure that ensures you can tap into the family support you need for your business. I find that our daily neighborhood walks is when I get the advice and support from Mrs. C. that I so desperately need for my work as a professor and as an entrepreneur.
  3. Mentors reach out regularly. Those of us who have the privilege of being mentors to entrepreneurs need to be intentional about reaching out regularly to touch bases.  Even a quick text or email can go a long way to ensure the entrepreneurs we work with have a life line to us when they need it.  Many of the entrepreneurs I talk with express feeling alone in their struggle to keep their businesses alive.  Remind them that they are not alone.
  4. Set up weekly/monthly Zoom coffee or beers. I have various people who I meet with regularly over a cup of coffee or a beer.  Some are my mentors, some are peers, and others are those who I mentor.  Don’t let these important meetings stop because of the coronavirus.  Create a regular schedule of zoom coffees and/or zoom beers to keep these vital conversations alive.
  5. Peer-based Zoom meetingsWe have an amazing group of alumni entrepreneurs who all meet once a month to talk about their entrepreneurial journeys. Until we can safely meeting as a group, we are moving ahead, same time as always, on Zoom. Is it as good as meeting face-to-face?  No, but it is better than losing this source of social capital.

Even as we seek to stay safe through social isolation, it does not mean that entrepreneurs must become isolated from their critical sources of social capital.

“Mount St. Helens” Recession

Perhaps the recession we are entering into should be called the “Mount St. Helens” Recession.

Mrs. C. suggested this to me on one of our walks this past week.  When she said that the events surrounding the 1980 eruption reminded her of the current state of the world, I knew it was the perfect metaphor for our current and future economic conditions.

A History Lesson

Although us older folks remember the eruption of Mount St. Helens like it was yesterday, many of you were probably not around when this volcano erupted in Washington State forty years ago.

Scientists saw signs that Mount St. Helens was coming to life years before it erupted.  However, concerns heightened in 1980 when the mountain’s activity created thousands of small earthquakes. Then the volcano began to change shape.   The movement of magma upward created a huge bulge on the side of the mountain. As the mountain came to life, it spit out steam and ash.  As the earthquakes and small eruptions intensified, experts predicted an eruption was imminent.  They could not, however, predict the exact time and date.

On May 18, 1980, a massive earthquake from deep within Mount St. Helens caused a huge landslide on the north side of the mountain.  The landslide was followed by a lateral eruption that sent gas, rock, and ash out at over 600 mph, devastating an area of 230 square miles.

The lateral eruption was unusual, so dozens of people who were observing the volcano or just waiting it out in an area they assumed was a safe distance were killed by the blast.

After salvaging much of the lumber leveled by the blast, officials decided to let nature take its course and heal the landscape.  Over the coming years, vegetation grew back, animals returned, and the lakes and rivers that had been choked with mud and debris returned.  For a detailed history of this event, see this link to The History Channel’s website.

The Lessons for Today

As evidence showed that an eruption of the volcano could happen at any time, people were warned or given precautions to take – some listened, some chose not to.

Just as the days, weeks, and years before Mount St. Helens erupted, we had signs that we might face a crisis. Epidemiologists warned of a possible pandemic. Economists insisted that the economic boom that we faced was becoming fragile and unsustainable.  But just as with Mount St. Helens, nobody could have predicted when things would turn, nor the immediate devastation that would result.

The coronavirus pandemic seemed to come out of nowhere.  We were living our lives, planning for our spring breaks, starting new businesses, getting ready for new careers, and then suddenly everything catastrophically changed in what seemed like an instant.

The landscape after the eruption of the volcano looked like a moonscape.  How could it ever return to normal after such devastation?

And yet, it did return.  Not exactly like it was before, but it did return to a thriving ecosystem, and much more quickly that many experts predicted.  It showed the resiliency of nature.

If we let things take their natural course, our society and economy will come back.  Not quite like before.  Hopefully, through all of us working together, it will be a bit better.  Consumers will begin to spend again. Small businesses will start back up. Entrepreneurs will find new opportunities in the ashes of this recession.

A Note of Caution

One of the lessons of Mount St. Helens is that something like its 1980 eruption will come again, if not on that mountain, on one of the string of volcanoes that make up the part of the ring of fire circling the Pacific Ocean that cuts across the Western US.  It may not come for many decades or even centuries, but it will happen again.

My parents and grandparents never forgot the lessons of the Great Depression.  They tried to pass them along, but over the generations, memories faded.  None of us alive today will ever forget these challenging times. But to our grandchildren and grandchildren’s children, the events of 2020 will just be a vague part of history.

Let the wafts of steam that still come out of Mount St. Helen today act as a warning:  sometime in the future, generations to come will also face devastating events in their lives.

But just as nature is resilient, so are we.

Photo credits:  Jeff Cornwall

 

Intestinal Entrepreneurial Fortitude

Not everyone is prepared to be a successful entrepreneur.

In the new book Heart, Smarts, Guts and Luck, two successful venture capitalists and a management consultant surveyed a large number of successful entrepreneurs to uncover what traits they have in common.  One of the traits — guts — particularly hit home with my experience as an entrepreneur and as a teacher of entrepreneurs.

The authors argue, and I agree, that guts is not a trait that you are either born with or not.  Having the guts to be an entrepreneur is something that can be nurtured and developed.  They identify three key elements to developing and nurturing guts in entrepreneurs.

Eighty percent of the successful entrepreneurs in this study said that their entrepreneurial guts were developed through experiences early in their lives.

I can cite several experiences from working in our family businesses that helped to toughen my skin.  One in particular stands out.  When I was in grade school my father partnered in a cleaning products distributorship.

Although I was only eleven, I was eager to become a part of this new venture.  So I decided to sell the product door to door.  My first sales call was to our next door neighbor, who was a good friend of our family.

Rather than pat me on the head and buy some product to be nice, she looked me in the eyes and said, “Tell me why I should spend our hard earned money on this stuff?”

I did not make the sale.  I was left speechless and devastated.  It was a hard lesson that I have carried with me the rest of my life.  Nobody owes you anything in business – it is up to you to earn it.

The second key element for developing guts is training and education that prepares entrepreneurs how to make decisions in complex situations.  We urge every student who comes into our program to start a business while they are in school because this kind of training is so important.  It helps them to gain experience, confidence and learn from their mistakes in a safe environment.  However, I am not one who thinks we should require every student to start a business as many schools are moving toward.  I think that making starting a business an assignment misses a key aspect of developing true entrepreneurial guts – the courage to make the choice and cross the threshold to start a venture.

The final element of developing and nurturing guts is becoming part of a community of entrepreneurs.  By joining an ecosystem of fellow entrepreneurs you gain peer support, wise counsel, and a group who can hold you accountable.  We need to have our entrepreneurial guts reinforced, nurtured, and checked throughout our career.

Having guts to be an entrepreneur does not imply that you take careless risks – quite the contrary.  Having guts to be an entrepreneur means that you are ready through experience to carefully and prudently manage and mitigate the risks that lie ahead.

Forecasting Revenues Key to Successful Launch

The late, legendary Silicon Valley attorney Craig Johnson used to say, “The leading cause of failure of start-ups is death, and death happens when you run out of money.”

And the leading cause of running out of money in a start-up is poor financial forecasting.

At the core of unrealistic forecasts is the undying optimism of most entrepreneurs.  Their “what could possibly go wrong?” attitude leads to many forecasting disasters.  My father used to say that when he looked at investing in an entrepreneurial venture he would always double the start-up costs and triple the time it takes to get to breakeven.

My rule of thumb is a bit different.  I believe that being overly optimistic leads to entrepreneurs making fatal mistakes in estimating revenues, which is at the heart of most forecasting errors.  So, my approach when reviewing a business is plan is to cut revenue forecasts in half.

Here are the four most common revenue foresting mistakes I see:

  • Assuming an “instant on” button for a new business.  Most business plans I read show significant revenues from the beginning of the business, sometimes even for the very first month that they open their doors.  The reality is that it takes time to build a customer base for any business.  That is why an entrepreneur should have at least six months personal living expenses available to make it through the startup in addition to the money the new business needs.
  • The magic of the hockey stick.  A common pattern in business plans is to show a relatively slow initial start to revenues, and then assume some that unexplained breakthrough will occur that leads to a sudden and dramatic increase in sales.  When you graph this type of revenue forecast it looks just like a hockey stick.  The reality is that such sudden growth is just not that common and usually results from specific actions.
  • Assuming enough sales to make the business model look successful.  In this mistake entrepreneurs forecast their expenses and then they plug in enough revenues to make the business become profitable.  When I press these entrepreneurs, their explanation of revenues is “well, these are the revenues I need to make the business work.”  The truth is that the market will not give you the sales you need, it will only give you the sales you earn through a well-executed business model.
  • The marketing plan tells a different story than revenue forecasts.  The marketing plan should specifically explain what you are going to do to achieve the revenues you forecast.  Why will customers want what you are selling?  Who are these customers?  How are you going to communicate to them about your business?  The marketing plan should explain in words the numbers shown in the revenue forecast.  Most plans just do not make this connection.

To avoid running out of cash before your business model has time to work requires an accurate assessment of how much money you will really need to get the business off the ground. While knowing your costs is important, accurately forecasting your revenues is critical.

It is so sad to see a business model that has real potential fail simply because the entrepreneur was unrealistic about how much money it would take to get to the point of success.

Key Partners Support Success

Entrepreneurs cannot achieve success alone.

They need the help and support of a whole host of people who are directly involved in the business, including employees, partners, family members and investors.

Entrepreneurs also need to develop key “partnerships” with people and organizations that are not a direct part of the daily operation.  These partners work closely with an entrepreneur in some way that is important or possibly even critical for the operation of the business.  Even though they are not as directly involved day-to-day as employees and customers, the support of these key partners can be at least as important for a business’s success.

Let’s look at an example of key partnerships for a simple business model.  My students all know that I have one more business start-up in me.  I plan to open a bait shop when I retire from teaching.  Why a bait shop?  My first significant small business experience was running the bait shop for the marina that our family owned in Wisconsin when I was fifteen years old.  So it seems appropriate to me that my last business venture should also be a bait shop!

An entrepreneur can use key partners to help reduce risk by sharing that risk with partners.  In Dr. C’s Bait Shop, I will seek out suppliers who will help reduce the risk associated with my inventory.  Minnows and worms are perishable, so I will work with suppliers that are willing to deliver inventory often and only deliver it when I need it.  That reduces the risk that my inventory will go bad if I have a stormy week that would lead to a significant drop in sales.

Dr. C’s Bait Shop will need a space to operate in a good location.  I will try to find a landlord who will rent me the right building and offer good service at a fair price even though my business is new.  I may even be able to get the landlord to pay to fix up the space I need and add that cost into my rent.  So, key partners can help entrepreneurs secure needed resources without actually spending their precious start-up cash to acquire them.

I will seek out counsel from people with more experience in the industry to help serve as advisors.  I will talk with bait shop owners in other markets and connect with old timers in the Tennessee fishing community.

Finally, I will build legitimacy for my bait shop among angling enthusiasts by volunteering in local hunting and fishing organizations.

Good networking with key partners is much more than just introducing myself and giving them a business card.  I need to earn their support by making the relationships between us mutually beneficial.

So as simple as my bait shop business is to operate, its success depends on building a network of key partnerships.  While being an entrepreneur means you do not work for anyone, it does not mean you don’t work with anyone.

 

Smallness Offers Advantages: Don’t Rush being a Big Business

Something that always gives me pause is when I hear entrepreneurs and their managers refer to their small business as “the company”, or even worse, “the corporation.”

I was talking with an entrepreneur who has two partners and no employees.  Their business seemed to be kind of “stuck.”  They were not getting some important, and yet basic things done to market their business and take better care of their customers.  He kept saying things like “the corporation needs to do this” and “the corporation should do that.”  They were spending most of their time trying to determine who should have what title and how to create a well-defined structure.

I finally said, “Wait a minute!  There are just three of you!  Sit down, make a list of what needs to get done, and divide up the work.  You are ‘the corporation’ so get busy!”

In fairness, the entrepreneur and his partners have big dreams and have a business model that could become a big business someday.  But they will never reach their dreams if they don’t start running their small business the way it needs to be run.

A key advantage that small businesses have is that they are not big businesses.

Small businesses can be nimble and can react quickly to customer needs and changes in the market.  Small businesses can continue to be entrepreneurial and seek opportunity.

As the business grows you will need to add some structure, increase the clarity of people’s roles, and put in some processes and procedures.  But all of this should be done judiciously and slowly.

Small businesses that try to act “big” too quickly run the risk of losing their entrepreneurial culture.  I can tell you from my own experience that once you lose the entrepreneurial spirit in a business, it is very difficult, if not impossible to get it back.

So how do you start to build an organization while still keeping an entrepreneurial culture?

When you delegate, make sure that you don’t just delegate tasks.  You need to delegate the responsibility and the authority to manage the tasks.  Give your employees the ability to make improvements and to react quickly to the market.  Everyone needs to have a sense of “ownership” of what they do.

When you start to create organizational structure for your business, don’t just create positions and reporting relationships to deal with immediate problems and challenges.  Be intentional about the kind of structure you are building and how it will impact your ability to remain entrepreneurial as a business.  Too much bureaucracy can kill innovation very quickly.

When you start to create processes and procedures ask yourself one question:  Is it critical?  While standardized processes and procedures are important to support a growing business, if overdone they can actually inhibit your ability to grow.

When you own a small business don’t be in such a rush act like a “big” business.  Your smallness is part of your competitive advantage.  Find the balance between building an organization and maintaining your entrepreneurial culture.

 

Putting a Crowd Around the Board Table

Crowdfunding, which uses the Internet to generate small contributions of funding from a large number of people, has been getting a lot of attention lately among entrepreneurs.

Crowdfunding primarily has been used to help raise money to support social causes and to help fund struggling artists.  The money received from crowdfunding has to be considered a contribution or a donation.  In most cases, something nominal is usually offered in return for financial support, such as a free download from a musician.

Historically, because of securities laws, small businesses have been unable to use crowdfunding. Until recently, entrepreneurs had only been able to seek funding from a limited number of people who meet specific income and wealth criteria.

A few creative entrepreneurs have used a loophole in the rules to raise money through crowdfunding.  Rather than treat money raised through a crowdfunding campaign as investments, they offer people something of value in return.  For example, a person opening a new brewpub may get people to “donate” to support the start-up by offering free admission to a special opening night event.  The contributions would be motivated by the desire of local beer enthusiasts to support a new local brewery.  The most commonly used websites that promote traditional crowdfunding are Kickstarter and IndieGoGo.

One instantly legendary crowdfunding campaign was implemented by Eric Migicovsky.  He was raising money for his new wrist watch, called Pebble, which pairs with smartphones via Bluetooth.  Contributors were promised they would get preference to buy a Pebble when the watches were introduced to the market.  Although his initial goal was to raise $100,000, Migicovsky was able to raise over $10 million to help launch Pebble.

The recently enacted Jumpstart Our Business Startups (JOBS) Act of 2012 significantly expands the use of crowdfunding for entrepreneurs.  Under the provisions of this bill, those who provide funding through crowdfunding can now become equity investors with ownership in the business.  The JOBS Act opens up the funding of start-ups to allow almost anyone to invest in entrepreneurial ventures.  Several efforts to create crowdfunding platforms under the JOBS Act are being developed, including one in Nashville called InCrowd Capital, being led by Phil Shmerling.

Attracting investors through crowdfunding requires a different approach than when pursuing funding from angels and venture capitalists, who tend to invest more in the entrepreneurs leading the team than in their ideas.

Crowdfunding investors, on the other hand, are attracted to compelling stories and business ideas they can see themselves using.  What led to the success of the Pebble crowdfunding campaign was that people were excited about a completely new technology that they wanted to be the first to own.  Not every product can create that kind of passion and excitement.

The JOBS Act certainly broadens the pool of people who can invest in small businesses and offers an exciting new avenue for raising money for start-ups.

However, using crowdfunding also may make the entrepreneur’s work more challenging.  If adding just one new partner increases the complexity of running a business, imagine what a crowd of partners can do to complicate an entrepreneur’s life!

A Long Journey

In May of 2005 Jason Duncan walked across the stage at Belmont’s graduation.  At that moment he became the first alumnus of our new entrepreneurship program.

Like many who have followed him, Jason had worked on a business he wanted to launch while studying in our program.  His plan was to move to Montana and open a coffee shop.  He even had a name for his coffee shop – EVOKE.

However, as is often the case, nothing went according to plan.

Try as they might, he and his wife Jenni were never able to open their coffee shop in Montana.  But they did find a way to get into the coffee business.  Since every attempt to open a store seemed to meet a roadblock, they adjusted their business model and opened EVOKE as a mobile coffee catering business.

“EVOKE did not set out to be a mobile coffee catering company,” said Jason.  “But what we found out is that we grew up doing this, made money, and knew that we now had a foundation to stand up on.”

Although they had success with their mobile coffee catering business in Montana, in 2008 they decided that their best chance for long term success was to move EVOKE to Jason’s home town of Oklahoma City.

“When we moved EVOKE to Oklahoma City, we knew we had two options:  to work our tails off and learn from our mistakes in Montana or shut EVOKE down and move on,” said Jason.  “We knew we could be better.  We took the first option and worked tirelessly to run a solid company based on what we had planned years ago.”

Jason and Jenni realized they would have to adapt their business model once again in this new market.

“Oklahoma was very different than Montana,” explained Jason.  “We had competition, which we did not have in Montana.  So, we focused on a key part of coffee:  The relationship.”

The customer relationship part of the business model is the one that most often gets misunderstood.  There is not one best way for all businesses to interact with customers.  But there is one best way for your business model to build a relationship with your customers.

The large national coffee chains are built on a relationship with their customers that supports the core of their business model, which is efficiency.  They are good at getting a large volume of people through their stores each day.

EVOKE’s business model was based on a different relationship with their customers.  They chronicled their ups and downs openly and honestly in a blog to allow their customers to get to know them on a more personal level.  They worked hard to become part of the fabric of their community. By following this model, EVOKE has become one of the top coffee catering businesses in the country.

But they never lost sight of their original plan.

“We did not change our vision as we grew and kept our eyes on the ‘final’ goal — if there is one in business,” said Jason.

So on the first of May this year, their plan to open a coffee shop finally became a reality.  They opened the first brick and mortar EVOKE coffee shop in Oklahoma City.

All it Takes is Five Slides

Making a pitch for investment is one of the most important steps that many new business owners can make.  It can also be one of the most intimidating.  First impressions matter with investors, so the pressure is on to make your pitch to them a winner.

For many years the rule of thumb was to limit your initial pitch to investors to no more than ten slides in your PowerPoint deck.

But now there is a push to get entrepreneurs to consolidate their pitches even more.  The latest recommendation for pitches to initial investors is to limit the presentation to five slides.

“I am an advocate for communication in a clear, crisp way,” explains Mark Montgomery, founder of the Nashville consulting firm FLO Thinkery.  “Great ideas at the core should be simple.  If you require pages and pages to explain the concept, then perhaps the concept is not fully baked.”

Here is what I would recommend you put on five slides for an initial pitch to potential investors.

Slide One — Who are you?  When it comes down to it, investments are primarily made in people, not in business plans, concepts, or ideas.  The best idea in the world has no value to an investor if they don’t think the entrepreneur can successfully implement it.

Slide Two — What is your concept?  What problem does it solve or need does it take care of for your target customers?  This slide conveys your target market and the value proposition you offer them.

Slide Three — What is your “proof of concept”?   The more real and tangible this evidence is, the better.  Conduct market experiments and, if appropriate, develop prototypes that you can test on real customers.  A great way to get real data from customers is to give the first versions away for free.  The information you get from these first customers will be worth much more that what they might pay for the product.  And, you will have real live customers to talk about with investors.

Slide Four — What is the growth potential for this business?  Tell them what the business can become and what you will need to reach that potential.  Investors want to see growth – significant growth.  They want to opportunity to make their investment back several times over, which means you need to show how the business can grow into new markets or expand into new products.

Slide Five — What is the exit plan?   Investors want a path to get a return on their investment.  Demonstrate that there will be someone willing to buy the business to get them that return.  Find examples from your industry of other startups that have sold to larger companies as evidence.

Your presentation during these five slides should be genuine and passionate.  Show them you are committed, knowledgeable, and prepared.

If you can keep your initial pitch clear and concise, you have a much better chance of moving into more serious discussions with investors.