The Entrepreneurial Mind
Dr. Cornwall argues that moving on from a failed concept is its own success. (Mark Duncan/AP/File)
Turning a failed idea into a success
A student come up to me before class the week before their business plans were due this past semester looking very dejected.
"My concept just can't work," she said. The more she tried to pivot the business model, the more she uncovered evidence that convinced her that she had reached a dead end.
This is what is known as a teachable moment.
Aspiring entrepreneurs go through an arduous process between the initial spark of an idea to the eventual launch of a business.
They start by sifting through the various ideas they have to find the one that has the most promise. Many ideas may appear promising at a first glance, but careful assessment helps to sort out those that have little promise. Eventually, the entrepreneur selects a product or service they hope will be accepted by the market.
The next step is for the entrepreneur to take the idea and begin to build a business model.
The primary goal of business modeling is not to try and rationalize starting a business based on your idea. Instead, the objective is to discover all of the challenges, flaws, and gaps that need to be addressed if you have any hope of moving from a good idea to a successful business. Business modeling is a process of finding problems and fixing them by altering and expanding the operating framework needed to launch the business and, when necessary, pivoting the concept based on what is learned about your customers and what they really want.
When developing a business model, you may reach a point where you realize that no matter what you do, it just won't work. This realization can happen very late in the process even at the point when you are developing a written business plan based on the business model. If that happens, no matter how much time and effort you have put into the project, you need to be decisive and abandon it.
But this is much easier said than done. You have spent countless hours talking about the business with friends and family. You have shared your idea with advisors and mentors. You may have even pitched the idea in business plan competitions and to investor groups. It feels like your reputation is riding on getting the business launched. There is a sense of inevitability that launching the business is what you are going to do.
But do not ignore the evidence. Have the fortitude to walk away. The fact that you have spent countless hours getting your idea to this point is not a reason to keep moving ahead.
So back to that teachable moment....
As class started that morning I asked the student to share her story with her classmates. I then looked her in the eyes and emphatically said, "You did a great job! You stayed true to the process and had the courage to acknowledge that your concept just won't work. Congratulations!"
The end of this story is that while her initial idea did not work out, the process helped her discover several new ideas and gave her the opportunity to make several new connections with people to add to her network. She learned the lesson that while her idea may have failed, she was successful.
A middle class tax increase countdown clock is seen behind White House Press Secretary Jay Carney as he briefs reporters after President Obama made a statement in the James Brady Press Briefing Room of the White House in Washington. Some politicians are suggesting a compromise to the payroll tax holiday debate that would exempt small businesses from having to pay for it. (Charles Dharapak/AP)
The lousy politics of the payroll tax cut
Politicians have been searching for a defining issue to crystallize the "us versus them" game that has been going on in Washington for the past several years.
The latest is the temporary $1,000 payroll tax cut that is set to expire at the end of this year. Both sides have their scheme to keep the cut in place. Those of the left want to "pay" for temporary renewal of the tax cut with a permanent tax increase on the wealthy.
"Don't be a Grinch," says President Obama. "Don't vote to raise taxes on working Americans during the holidays." If keeping taxes low is such a good thing, why did they make this payroll tax cut temporary? But I digress...
Those on the right want to renew the tax cut, but not tie it to any other tax increase. The right has raised concerns that many among the wealthy who would be paying higher taxes are actually the very entrepreneurs who everyone wants to get busier creating jobs and economic growth.
As always seems to happen, we now have a group of "moderates" suggesting a compromise. They are suggesting the we have a tax increase on the wealthy to "pay" for renewal of the temporary tax cut, but exempt small business owners. Sounds like a simple solution, and my guess is something like this compromise may actually pass. The problem is that such moderate compromises, while they can sound nice and reasonable, often make the waters even muddier.
This compromise is lousy policy.
Yes, tax cuts (or avoiding tax increases) help spur entrepreneurial activity according to most research on the topic. The problem with the compromise is that any exemption for small business owners is surely going to require more tax code and more regulation. We also know from research that increasing regulation and complexity of the tax code decreases entrepreneurial activity.
Let's start with what the Federal Government uses to define a small business. Under a certain number of employees? Under a certain level of revenues? Well, kind of, but years of lobbyists seeking favor for special interests for specific types of small businesses has resulted in an official definition of small business that is 45 pages long!!! You can see the entire document here.
Certifying that you are actually a small business owner eligible for exemption from the tax increase will probably end up costing you more in staff time and CPA bills than any savings in taxes.
But appearance seems to always trump substance and wisdom these days. Since in a sound bite the small business exemption will appear like a reasonable compromise it will likely play well in this never-ending election cycle.
But six months from now, when those who pass the laws have moved on to other issues, small business owners will be left scratching their heads, trying to sort out how they can avoid paying the latest "wealthy" tax.
This file photo shows a "closed" sign at the drive through of a Taco Bell store in Philadelphia. Cornwall argues that the closing of a business doesn't necessarily equal failure. (Matt Rourke/AP/File)
Closing a business doesn't have to mean failure
Sometimes an entrepreneur reaches a crossroad. While the business that they have started shows potential, they may come to the realization that the only chance it has of being sustainable will require raising money to grow it to the next level. Bootstrapping is always a good path to start a business, but sometimes a certain level of funding is still needed to get to a sustainable scale that can earn the owner an acceptable income.
The first thing to determine is if the business can absorb the cost of any additional funding after it grows to the next level. Run detailed budget projections based on the growth you are considering that include the cost of the outside money, be it interest and fees with any type of debt or expected returns if the money comes from an investor.
If the cash flow of the business looks like it will be able support the cost of the outside money, the entrepreneur needs to make sure they are ready to deal with the changes that come with the funding. Debt financing will probably require personal guarantees and may also come with certain restrictions that may limit decisions you can make about how you run your business. And investors will likely expect to become involved in major decision-making about the business.
The entrepreneur must carefully consider whether getting the business to the next level is worth the added hassle and risk that comes with outside money. If it isn't, it may be time to seriously consider working toward selling the business if they can, or possibly closing it down in an orderly way.
The decision of whether to continue operating a business can be one of the most painful experiences an entrepreneur can face.
As small business owners, we often consider the people who work for us to be more like family than employees. Closing the business that has been how they have made their living can make you feel like you are abandoning them.
As entrepreneur, our identity and our egos become tied to our businesses and its success.
Ending a venture that we have spent much of our waking lives working in and worrying about creates an emptiness and sense of real personal loss.
But there are times in the career of an entrepreneur when he or she has to find a way to set these feelings aside and make a rational, clear-headed decision about the future of the business.
Remind yourself that moving on from a venture that is not sustainable can be a new beginning. While some may tell you that closing a business is a mark of failure, experts would disagree with that. For example, venture capitalists will often favor funding entrepreneurs who have had failed businesses in the past, as they know they can take what they learned from that failure and avoid repeating past mistakes.
Don't think about a business that did not make it as a personal failure. If you learned from the experience and can take those lessons into your next business -- that is success.
In this file photo, Wichita State graduates walk to the graduation ceremony for the college of liberal arts in Wichita, Kan. Cornwall argues that the millennial generation of entrepreneurs will be key in reinvigorating the US economy. (The Wichita Eagle/AP/File)
Millennials are key to rebuilding the economy
Based on the history of previous economic downturns, America's entrepreneurs will need to play a key role in helping to rebuild our economy.
So, just what is the current mindset and makeup of those in the entrepreneurial sector of the U.S. economy?
Even in a weak economy, or quite possibly because of it, there continues to be a strong interest among the millennial generation in pursuing an entrepreneurial career.
A recent survey of young Americans between the ages of 18 and 34 conducted by the Kauffman Foundation found that 54 percent of those surveyed have entrepreneurial aspirations, and about half of these have already launched a business.
An even higher percentage of young people of color -- 64 percent of Latinos and 63 percent of African-Americans -- expressed a desire to start their own companies. Although some previous studies have found an increased interest in business ownership among women, the Kauffman study found that women still lag in entrepreneurial intent (44 percent compared to 57 percent among men).
Given that there are an estimated 50 million millennials in the U.S., their interest in launching new businesses bodes well for the long-term health of the economy.
What we are finding is that not all of them are in it simply for the money.
The Global Entrepreneurship Monitor (GEM) 2010 National Entrepreneurial Assessment for the USA, conducted by Babson College and Baruch College, found that startup entrepreneurs are increasingly focused on both social and economic goals for their businesses.
Entrepreneurs no longer just want to do well financially with their ventures, but also want to use business as a means to support their commitment to their favorite social causes.
This shift in how small business owners measure their success is also evident in the results of The Hartford's recent Small Business Success Study. This survey found that only 18 percent say that profitability is the most important factor in defining success. In fact, 82 percent say they place great importance on doing something they feel passionate about and enjoy.
A growing number of entrepreneurs are interested in keeping balance in their lives. The Hartford survey reported that for 79 percent of the entrepreneurs they surveyed, achieving a comfortable lifestyle from their business is most important to them.
There is a growing chorus of experts who are worried that entrepreneurs do not seem ready or willing to step forward and provide the economic push we need to begin a real economic recovery.
However, the good news is that the generation now coming into the workforce has a strong entrepreneurial spirit. That should help to eventually create long-term, sustainable growth for America.
A money changer shows some one-hundred U.S. dollar bills at an exchange booth in Tokyo in this file photo. Traditional equity and debt financing options have become much more difficult to secure, but Cornwall argues that there are other options, like joining a community bank or applying for a micro-loan. (Issei Kato/Reuters/File)
The best options for small business financing
The state of small business financing is a bit uncertain these days in terms of both supply and demand.
To get the full picture, we need to frame this discussion by understanding how unimportant securing new financing is to small businesses in the current economic conditions. The most recent survey from the NFIB survey released this week suggests just how much small business owners are retrenching right now.
The NFIB survey reports that only four percent of owners they surveyed reported financing as their most important business problem. Ninety-one percent reported that all their credit needs were met or that they were not interested in borrowing. Only nine percent reported that not all of their credit needs were satisfied.
But even if demand for credit is not strong right now, finding financing can be a challenge for those businesses seeking new funding.
The Hartford Small Business Success Survey, which surveyed 2,000 small business owners, found that 34 percent of respondents say that obtaining a loan or other capital is difficult.
Traditional equity and debt financing options have become much more difficult to secure. Banks are very slow and cautious to lend and equity financing has become almost timid.
For those few small business owners seeking new funding, Joanna Krotz offers some non-traditional alternatives in her article at Business on Main:
- Tap community banks. If you are going to have any luck with bank loans, your best shot is with a community bank with a strong SBA lending track record.
- Leverage your social media network. Krotz suggests that you should look to Facebook to broaden your "friend network" for funding. I would caution to approach any funding from family and friends with formal agreements supported with a complete and honest set of information about your business conditions.
- Apply for a microloan.There are more micro-lenders popping up across the U.S.
- Join a credit union, which can offer up to a $50,000 business loan to its members.
- Hire a loan hunter. New ventures, such as MultiFunding which was founded by my friend Ami Kassar, are having good success sourcing loans for small businesses. They charge a small fee only when a loan is secured.
- Look for local lenders. Local angel groups are becoming more active with smaller levels of funding for emerging businesses.
As I have said before, piling more debt onto small businesses is not the solution to our economic woes. That being said, some small business owners do need funding and are good risks. While finding new funds is definitely a much greater challenge, there are some new options on the financing landscape.
Demonstrators protest against job cuts in central London. Many of the demonstrators had marched from Jarrow in north east England, recreating a 1936 protest march against unemployment. While the official unemployment figures in some European countries are higher than in the US, the actual unemployment numbers are much lower because of the region's thriving black market economy. (Luke MacGregor/Reuters)
The real unemployment rate and Europe's underground economy
While the official unemployment figures continue to hover around 9% in the U.S., the real unemployment is rate is closer to 16% when you factor in all those who are unemployed or significantly underemployed.
So when we heard while I was in Spain last last week with my graduate students that the official unemployment rate there was 20% my immediate question was, "So high is the actual unemployment rate?"
I was expecting to hear that it was 25% or even 30%.
"Oh, it is much lower than 20%," was the answer we heard.
What? Lower?
"Yes. We have a large black market that does not get factored in with our employment data. Many who are officially unemployed as working in the underground economy for cash," the economic expert we heard from explained to us.
The underground economy is, in fact, flourishing around the globe.
In a recent article in Foreign Policy, Robert Neuwirth investigates the $10 trillion global underground economy, which is also becoming known as System D. Neuwirth writes:
"By 2020, the OECD projects, two-thirds of the workers of the world will be employed in System D. There's no multinational, no Daddy Warbucks or Bill Gates, no government that can rival that level of job creation. Given its size, it makes no sense to talk of development, growth, sustainability, or globalization without reckoning with System D."
So the fastest growing part of the world economy is that which is outside the reach of the measurement and the control of central governments.
We have been told time and time again that it will be entrepreneurs who will pull us out of this ongoing recession. And many of us have argued that for them to succeed at this, we need government to get out of their way.
It seems that a growing number of entrepreneurs around the globe are not waiting for the government to enact some major policy to assist them, or even for the government to get out of their way. They are building an economic force outside of the controlled economy that is fast becoming the economic super power, according to Neuwirth's analysis.
Ben Cunningham, who sent the Foreign Policy article to me, reminded me that Milton Friedman always said the one saving grace of government is its incompetence at regulating.
So perhaps help is already on its way for our economy.
Let's just hope that as government tries to do more and more to "fix" the economy that their level of incompetence grows with each new economic initiative they throw at us.
In this file photo, candidates for graduation from Wichita State University clap during the 109th Fall Commencement ceremony held at Koch Arena in Wichita, Kan. Will dropping out of school help or hurt the chance to become a successful entrepreneur? (Jaime Green/AP/The Witchita Eagle/File)
Dropping out to become an entrepreneur: A good idea?
In May of this year, Peter Thiel, a co-founder of PayPal and an early investor in Facebook, awarded 24 young, aspiring entrepreneurs $100,000 to "drop out of school and become world-changing visionaries."
Now that the publicity has settled down, I thought it would be a good time to offer the perspective of three entrepreneurs who dropped out of Belmont's entrepreneurship program.
None of them was part of Thiel's program, but each dropped out to chase his entrepreneurial dreams. However, all three eventually decided to return to school to finish their degrees.
John Price and Sam Dryden dropped out of the entrepreneurship program to pursue their photography and video-related businesses.
"I have never been a typical student, and I often found myself frustrated with classwork," Dryden said. "When it looked like my business was going to be a success, I jumped at the opportunity to pursue something that at the time I decided was more important than a degree.
"We are told to study hard so you can get a degree and then a job. Hey, I already had income, so why waste time in school, right?"
Both of them saw a choice: stay in school and be a student, or pursue their careers as entrepreneurs.
"I knew that I wouldn't be able to reach my business goals while attending a university and splitting the time," Price said.
Timothy Weber left the Belmont entrepreneurship program to pursue his Web-based business, GoodMusicAllDay, full time. However, it wasn't long before he decided leaving school might not have been a wise choice.
"After just one year out of college, I realized how little of a business background I had and how many 'lessons' I could have learned in a classroom instead of after they had already negatively impacted my business," Weber said.
All three entrepreneurs believe the business experience they gained while out of school enhanced their learning curve when they returned.
"Leaving school gave me crucial experience that in my opinion made the return to Belmont more valuable than if I had never left," Dryden said. "My experiences out in the 'real world' gave my professors leverage to turn class time into very meaningful time for me. It was no longer homework, and it was instead a focused business workshop that had actual repercussions in life."
At Belmont, as in many other entrepreneurship programs across the country, professors encourage students to start ventures while in school to enhance what the course work offers them.
"The entrepreneurship program allowed me to understand my business before spending all my money and time pursuing it," Price said. "The time in college provided me with the opportunity to focus on the bones of my business before I applied it to the real world.
"The time I would spend talking through my business ideas with other students was some of best feedback I could have gathered."
These three entrepreneurs learned an important lesson when they dropped out of college. It does not have to become a choice between pursuing your dreams and advancing your education, as both work better when pursued hand in hand.
In this file photo, an artist's impression released by the European Space Agency shows a Galileo satellite in orbit. Demios Space, a company based in Madrid, is an impressive startup that launched its first satellite into space with money out of pocket. (ESA/Handout/Reuters/File)
Small business in space
I am in Madrid, Spain this week with a group of MBA students on a one week intensive study abroad.
Yesterday we visited an impressive company, Deimos Space, headquartered here in Madrid.
The founders were able to build a high growth company that launched their own satellite into space using only self-funding of $250K from the founders. An amazing story of what bootstrapping and building the right team can accomplish.
They started, grew to a global presence in the space market, and exited their venture all within a ten year period.
Most of the founders are still with the company helping to take the core technologies they developed in Deimos into other markets and other applications. There is a great description of how far they have taken their business model on their website.
Entrepreneurs need clear and accurate records to help manage the challenges of their startups, Dr. Cornwall argues. (Sigrid Olsson/Altopress/Newscom/File)
Small business and the importance of paperwork
In the rush to start a new business, the simple act of keeping records often gets put on the back burner. But poor record keeping has been the demise of many otherwise successful businesses.
The entrepreneur needs clear and accurate records to help manage the challenges of the startup. These records can help manage cash flow and will provide financial statements that can help monitor the progress of the new venture.
The IRS expects even the smallest of businesses to document deductible expenses and support all items reported on tax returns.
Also, bankers monitor the progress of their business customers using financial information. If you cannot supply timely and accurate financial statements and other required information to your banker, it will hurt your ability to get loans when your business is at the stage where it could otherwise qualify.
The first step in establishing a record keeping system is setting up a separate checking account for the business. The deposits into this account should include any initial investment you make to start your business, the proceeds from any startup loans or investments, and all revenue from customers.
This checking account should be used to pay all expenses for the business, but not any personal expenses. As an owner you can draw money from this account, which can be deposited into a personal checking account to pay personal bills and living expenses.
Carefully document every expense paid from the business account. If paid by check, make careful notation of the check number, date of the check and purpose of the expense for each purchase. If paying with business debit or credit cards, keep detailed notes on each expense. Writing this on the back of each receipt is a good habit.
Set up a filing system, which can be either hard paper copies or scanned records, to track all documentation on receipts and expenses. Think ahead when setting up the filing system so it can accommodate the business as it grows. Use separate files for each vendor and customer and organize these files by type of expense or receipt.
Accounting software, such as QuickBooks, can help organize financial information. But remember that no system runs itself. Any system for record keeping relies on proper and timely input of information from you.
One lesson that many entrepreneurs learn the hard way is that you should not delegate financial record keeping to employees too quickly. Sadly, fraud is common in small startup businesses, and it often leads to the failure of an otherwise healthy business. Keep a close eye on financial records and put in systems of checks and balances. For example, never let the same person who handles revenues from customers also pay the bills, as this makes stealing money easier to cover up.
Record keeping may seem mundane compared with the other aspects of starting a business, but it is a critical step to ensure a healthy business. Record keeping systems should be simple to use. The job of the entrepreneur is to use this system to keep accurate, timely, consistent and compete records of all activity in the business.
Finding employment for former offenders significantly reduces the probability that they will return to prison in the future. Small business can play a key role in this process, the author argues. (Frances M. Roberts/Newscom/File)
Small businesses: Building community through hiring
Owning a business gives entrepreneurs the freedom to pursue more than simply income and wealth from their businesses. Many choose to use their businesses to become building blocks to help improve their community.
Several students at Belmont University are participating in a program addressing one challenge faced by every community: Inmates are released from prison every day back into the community and face a difficult transition back into society. TRIO, which stands for Transformation Reconciliation from the Inside Out, uses education as a tool to help build a path for successful reintegration of former offenders from prison back into the community.
One important partner in this process is local employers. Finding employment for former offenders significantly reduces the probability that they will return to prison in the future.
In the first phase of this program, TRIO brings together college students and inmate students in classes that are offered at the Charles Bass Correctional Complex Annex in Nashville. The goal of the classes is to engage the inmates jointly with college students in education to help foster understanding and reconciliation through community support.
Some of the students are trying to help with the next step in this program by identifying employers who are willing to hire the offenders. This is not always an easy task.
"I am especially discouraged when employers see only a crime rather than an individual working toward reconciliation," said Lindsey Ricker, an entrepreneurship major at Belmont who is participating in TRIO. "Many employers take one glance at a checked felony box and throw a job application in the trash."
"I have confidence in our guys," added Eliza Hemmings, a sociology and French double major from Belmont. "I have confidence that given support and the right opportunity that they will be successful in their re-entry process. It is not possible to change the past -- what's done is done. But what we can do as a larger community is support their will to change, their will to contribute to society in a positive way and rebuild their lives. We as community members have a choice as well, and I choose to support my inside friends on their journey toward success."
Employers who are participating find benefits from hiring men from this program.
"Which Wich (a sandwich shop franchise) has found the employees re-entering society to be hard-working, determined and bringing a positive attitude to the other employees and customers," said Tracie Maybaum, a Which Wich general manager. "One of the most beneficial assets they bring to work is their attitude. Theirs positivity influences other employees, and their gratitude is motivating."
The government can assist employers who are willing to hire former offenders. The U.S. Department of Labor insures qualified former offenders bonding for a range of $5,000-$25,000 for six months. And those who hire a qualified former offender within a year of release may be eligible for up to $9,000 in tax credits.
Hiring former offenders certainly brings with it some risks. But accepting these risks can help contribute toward building a stronger community. And after all, isn't entrepreneurship all about taking risks?
Previous
Become part of the Monitor community
36K on Facebook | 12K on Twitter | 2,250 on YouTube