The Entrepreneurial Mind
President Barack Obama pauses as he speaks at the election night party at McCormick Place Wednesday in Chicago. Small-business owners can expect a continued increase in regulation of businesses and the economy, Cornwall writes. (Carolyn Kaster/AP)
The future of small businesses in Obama's second term
I have been relatively quiet about this past election. Why? I really did not believe that the outcome would be that different on its impact on small business no matter which of the two parties won.
While there may have been some differences in the pace of policy change and in how it is implemented, both major parties in this country fundamentally believe that an activist approach to the economy is the proper approach. Both parties talk about “managing” and “fixing” the economy, and “helping” business owners.
A free market works when investors and consumers — both individuals and businesses — are allowed to make choices that are not constrained by heavy regulation and influenced by differential tax policy. Economic freedom does not need “managing”, “fixing”, nor “helping.”
That being said, now what can entrepreneurs expect? ( Continue… )
Former Senator Blanche Lincoln, chair of Small Businesses for Sensible Regulations, speaks at forum sponsored by National Federation of Independent Business (NFIB) and Politico in this November 2011 file photo in Washington. (Kevin Wolf/AP Images for NFIB/File)
For small business owners, the recession continues
September was another month of low expectations and pessimism for the small-business community, with the NFIB Small Business Optimism Index losing 0.1 points and falling to 92.8. The recession-level reading was pulled down by a deterioration in labor market indicators, with job creation plans plunging 6 points, job openings falling one point and more firms reporting decreases in employment than those reporting increases in employment.
The survey shows that key elements that will be needed for small businesses to, once again, help pull us out of a recession are just not improving:
- Capital spending is clearly in a “maintenance mode.” Business owners are keeping things running and replacing things when absolutely necessary, but they are not rushing out to expand space and equipment. The continue to be in a hunker down frame of mind, which is a good way to be for the foreseeable future.
- Sales continue to be sluggish. The source of cash we need to pull us out of a recession is not more access to debt. That is absolutely the worst approach. The economy is fragile and small businesses are financially on the edge in many cases. Debt issued to small businesses may feel good for a very short period of time as it might fix immediate cash flow concerns, but it only makes things worse if sales do not improve. Debt payments increase the company’s overhead which makes operational cash flow even more strained.
- Spending by consumers will only improve when their employment improves and their confidence in continued employment is strengthened. Right now these things are nowhere in sight.
Cornwall advises that small business owners step away from the computer and start finding some real live customers. (Business Wire)
Turn off the computer and start your business
Here is a sampling of quotes from first-time entrepreneurs that I hear in my office.
“I am trying to get my business card just right – does it look better with a horizontal layout or a vertical one? And do you think this font is OK?”
“We think that after working on it for the past six months that our business plan is just about finished.”
“I’ve been tweaking my logo for the past couple of weeks and I think it is getting close to what I want.”
“This is my latest mission statement – I moved a couple of words around so I hope it sounds better now.”
It is as like they are planning a dinner party where they spent all of their time worrying about getting the centerpiece and place settings just right, but forgot that they need to plan a meal to serve their guests!
Entrepreneurs who own growing ventures will inevitably hear that they need to stop working “in the business” and start working “on the business.” With many first time entrepreneurs, I see them making the opposite mistake.
Even before they generate their first dollar of revenue many seem to become obsessed with working “on the business.”
It often seems as if they aren’t able to pull the trigger and actually launch the business.
Here are a few tips I share with first time entrepreneurs who suffer from this common condition:
- While a well-designed business card is nice to have, it is you and your product or service that will convince the customer to spend their hard-earned money on what you have to offer them.
- Your actual product will rarely look anything like what you may envision in a business plan. In fact, unless you are looking to raise a large amount of capital from outside investors or bankers, writing a formal business plan is not even necessary. Customers will provide feedback that should inform and shape the new business in its early growth. Real information from actual customers is much more important than guesses you might make in a formal business plan.
- A cool looking logo may be nice to have at some point, but a logo is just a symbol that represents a business. Get the business going and then worry about a logo to help people remember who you are.
- Most mission statements I read are ambiguous and tell very little about what a business really does. Work on a simple, memorable pitch that will help customers know exactly what you can offer them.
Unless you are able to muster the courage and get out and “work in” your new business, things like business cards, logos, and business plans have no value. While getting a new business going, your job is not to design the perfect image and develop the perfect business plan. It is to find customers and sell them your product. For without customers to generate revenues, there really is no business to “work on.”
So step away from your computer and go find some real live customers!
Online donation services like Kickstarter allow entrepreneurs to fund their ideas from many small donations. Now some believe the crowdfunding method can be applied to equity investments, Cornwall writes. (Business Wire)
The future of crowdfunding: Crowd-investing?
Looks like I have a new example to use in class for legal changes that create new business opportunities. There are several new entities popping up due to the the growing interest in crowdfunding and the passage of the JOBS Act that will allow crowdfunding to be used for equity investments rather than just donations (the Kickstarter model). We are also seeing growth in microfinancing, which is another segment of this industry.
One entry into the wild west of crowdfunding is a Nashville-based company InCrowd Capital, founded by Phil Shmerling. Phil has started writing a blog on crowdfunding that should become a valuable resource for those interested in this budding new industry and those hoping to learn how to become an effective crowdfunder. Phil is a sharp guy who will surely offer all of us useful information through his blog.
Another site was recently launched is called Seeds. Seeds is not taking an equity approach to crowdfunding. Instead, they have established a “game” site that links participants to real entrepreneurs seeking micro loans. They describe Seeds as “Farmville meets Kiva.”
Here is how they describe how Seeds works:
The Seeds revenue model is three-pronged:
1) We monetize impatience. As you rebuild a citadel in the game, you can either wait hours in real time to complete a level, or use virtual currency to expedite the process. Virtual currency can be purchased with real dollars. Proceeds will be microlent to borrowers.
2) The sale of virtual goods: Within the Seeds virtual world, you can purchase limited edition virtual goods using in-game currency to decorate your world. Proceeds will be reinvested in for-profit microloans.
3) Actively asking players to make microloans to the businesses of their choice.
Thus, we’re merging two multi-billion dollar industries – social gaming and microfinance. We’re taking the profits social games make, and reinvesting it in entrepreneurs for a profit, empowering women and buoying economies (including our own!).
While some are beginning to worry that crowdfunding is just one big train wreck, I think that the evolution of the crowdfunding industry is going to be a fascinating combination of a series of little train wrecks and some amazing successful innovations.
Who is going to win? Nobody knows, but the market will begin to give us some insights very soon.
In this July file photo, Dwayne Durant and Joshua Smith hold a lemonade and popcorn sale in Detroit as Smith's mother, father, and brother look on. Many of the qualities it takes to be a great entrepreneur are developed from early experiences. (Kathleen Galligan/Detroit Free Press/AP/File)
Being an entrepreneur takes guts
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.
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.
This 2010 commercial file photo shows an empty 215-person lecture hall at San Diego State University. As a new school year approaches, Cornwall reflects on the lessons business school professors must teach budding entrepreneurs to prepare them for today's economic realities. (Zack Benson/Business Wire/File)
Back to business school: How to teach to today's economy?
I still look forward to the beginning of classes each fall. I am excited to see the new groups of faces in each of my classes. I am excited to try out the new materials and new pedagogical approaches I worked on over the summer. I still get a few butterflies in my stomach when I first step in the classroom the first day of classes.
This fall I am teaching two undergraduate classes here at Belmont.
Venture Planning is a class that I teach at least one section every semester. It is the final course that our entrepreneurship majors, minors, and social entrepreneurship majors all have to take before they graduate.
A couple of years ago I made a fundamental shift to make this more of a business modeling class than a traditional business plan class. Although I continue to refine and tweak the new approach, the results of the change to business modeling have been remarkable. The final reports in the class are much stronger and we have more students feeling ready to move ahead with their businesses when they graduate.
Even in the face of what seems to most of them as a permanent recession — it has been the economic reality since this group first entered college in 2008 — this group is excited about the future.
My other class this year is somewhat of a new class for me. I have taught International Entrepreneurship to students studying abroad, but I never have taught it in a classroom on campus before.
We are not just looking at the nuts and bolts of internationalizing an entrepreneurial venture, although that is where we will end up at the end of the term. Instead, we are beginning looking at some big questions and issues.
Our first topic is quite fundamental, yet profoundly important in today’s world. Is market capitalism moral? Does engaging in capitalism corrupt one’s character?
We will then focus on what drives entrepreneurial activity — or in many cases what inhibits it — around the globe. We will explore the role of culture and public policy issues such as taxation, regulation and property rights. We will also look at the role of entrepreneurs in shaping culture through how they conduct themselves in their work.
These are incredibly timely issues given the debate not only here in the U.S., but around the globe.
We will be exploring these issues not from a political viewpoint, but at a policy and cultural level examining what empirical research tells us about each of these issues.
I am so glad to be back in the classroom again this fall. I guess someday this may no longer be the case — I may no longer feel the magic of that first day of classes each year. I have seen this day come for many a colleague over the years.
And when that day comes I know it will be time to walk away from the whiteboard and hang up the shingle for my bait shop!
A money changer shows some one-hundred US dollar bills at an exchange booth in Tokyo in this 2010 file photo. According to Cornwall, overestimating the amount of money a start-up will make is the biggest mistake an entrepreneur can make. (Issei Kato/Reuters/FIle)
Small business revenues are the most important predictions you can make
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 break even.
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.
Guests sign-in at the reception desk of the Boatel located in a bait and tackle shop in New York in this June 2012 file photo. Cornwall uses the example of the bait shop he plans to open after retirement to illustrate how small businesses rely on many outside helpers to succeed. (Allison Joyce/Reuters/File)
For small businesses, partnership is key
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.
Job seekers line up to speak to a recruiter during a job fair in Irving, Texas in this July 2012 file photo. For small business, the jobs picture continues to show weak improvement. (LM Otero/AP/File)
Jobs outlook still bleak for small businesses
The economy continues to languish while the politicians blame each other and business owners continue to wait for signs that things are really going to improve.
The big word for many entrepreneurs is uncertainty. It is not only uncertainty about when a true recovery will begin, but also uncertainty about things such as tax rates, regulation, and global economic instability.
While the Intuit Small Business Index shows continued weak improvement, other surveys show business owners to be more cautious.
The latest report from the NFIB is more of the same.
“July looked a lot like June in terms of job growth—namely, it was negative”. said chief economist for the NFIB William C. Dunkelberg. “On balance, July looks like a repeat of June, few jobs and no change in the unemployment rate. So far, it has turned out to be a cruel summer of dashed hopes for meaningful job creation.”
SurePayroll’s Small Business Scorecard shows that month-over-month, hiring remains flat and the average paycheck is down.
“Small business owners are optimistic by nature and they know that if you have a good idea you can take advantage of the lower costs in this economy and be successful,” said SurePayroll CEO and President Michael Alter. “Still, we need more incentives for investors to back startups and less tax burdens on small businesses.”
A money changer shows some one-hundred US dollar bills at an exchange booth in this November 2010 file photo. Cornwall argues that tax credits geared towards investing in small businesses do nothing to help create jobs or kicksttart the market. (Issei Kato/Reuters/File)
Can tax credits help small businesses grow?
Lee Schafer of the Minneapolis Star Tribune called me the other day to see if I had any information on the effectiveness of angel investment tax credits for a story he was writing.
I told him that all that the tax credit programs do is speed up or slow down investments (to take advantage of their timing). There is no evidence that they increase angel investment whatsoever. They are not the job creator politicians claim when enacting these programs. (See my arguments in my editorial at the WSJ).
In his investigation of the program in Minnesota he found strong support among politicians for the program, but very little support from entrepreneurs.
Plymouth-based start-up MetaModix Inc. raised about $1 million earlier in 2012, and its investors got about $254,000 in credits. Co-founder and CEO Kedar Belhe said “most of my investors did not look at it as a requirement, they looked at it as a bonus.” He said any real investor commits to a deal only after first carefully considering the odds of losing everything vs. winning big.
One stated that because the Minnesota program was about to run out, he would have to wait until additional credits were approved to fund raise, since angels will sit on their hands until credits become available. They will invest, but will wait until they can qualify for another check from the government.
Angel investment tax credit are yet another misguided program that may be based on good intentions, but that has none of the desired impact on business formation or on job creation. We just can’t afford ineffective programs like angel tax credits during a time when we don’t have the luxury to give away tax revenues.
Schafer puts it this way:
The Minnesota program is a straightforward, get-a-check-from-the-taxpayers subsidy for purely private business activity, so it’s remarkable that the allocation has lasted this deep into the year. It’s remarkable as well that angel credits have such broad bipartisan support when the economic case remains mostly unproven.
If we are going to use the tax code to help entrepreneurs, just cut taxes and let the market do what it does best.
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