The Entrepreneurial Mind

American politicians are talking about higher tax rates, bigger government, and intervention by bureaucrats in markets to pick winners and losers (what I call socialized entrepreneurship). As the US drifts toward socialism, could we see our neighbors to the north passing by us heading away from such policies?

From the National Dialogue on Entrepreneurship (emphasis added):

A new study from Canada's Institute for Research and Public Policy seeks to understand why and to see whether any potential solutions are available. The author, Donald McFetridge, fingers the business sector’s lack of innovation and entrepreneurial spirit as primary cause for Canada's productivity lag. While the Canadian government has introduced multiple programs to stimulate innovation, the national innovation culture is still quite weak. McFetridge contends that new innovation policies should focus on supporting "market incentives for entrepreneurship" through reduced taxes and regulation.

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In the latest small business poll from the NFIB, entrepreneurs see an upturn toward the end of the year.

The NFIB Index of Small Business Optimism rose 1.9 points in April to 91.5 (1986=100). Half of the gain was due to an improved outlook for business conditions 6 months out, and a quarter was from improved earnings trends. Improved earnings during a slowdown seems to indicate that business owners saw this soft economy coming and took steps to cut costs.

However, the net percent of owners reporting higher average selling prices rose again this month. And the percent of owners citing inflation as their No. 1 problem was up to the highest reading since 1982. The number of those planning to raise prices also rose significantly.

Inflation is starting to hit main street.

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From MyFox Chattanooga (via Ben Cunningham):

When Larry Thomas couldn't get a bank loan for his struggling construction business, he turned to Yale University students less than half his age.

Elmseed Enterprise Program, which provides small loans and intensive technical support primarily to low income and other disadvantaged entrepreneurs, is the first micro-financing program in the country run by college students, organizers say. It sparked a similar initiative last year by Harvard University students, while Georgetown students are planning a program in Washington D.C., Rutgers in New Jersey and others such as the University of Rochester in New York are considering starting programs.

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I am in Cleveland at John Carroll University this week conducting a workshop on taking entrepreneurship across the campus.

Last night over dinner, one of my hosts told a story about a recent business event. A local business leader said that one of the problems with economy in Northeastern Ohio is that they don't have enough entrepreneurs.

Trust me. I am sure that there are plenty of aspiring entrepreneurs. Every survey shows how prevalent entrepreneurial aspirations are in America today. No, the problem is not with a shortage of entrepreneurs. The problem is that this area does not have public policy that supports entrepreneurial economic activity.

For example, one of the most important predictor of entrepreneurial activity is taxes -- Ohio ranks 46th in overall tax rank in a recent report by the Tax Foundation. Even worse, Ohio ranks 48th in individual taxes. Since most entrepreneurial ventures are pass-through entities (LLCs, S-corp, partnership or sole proprietorship), the individual tax ranking is the most important tax predictor of entrepreneurial activity.

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I encourage you to read Susan Brown's wonderful essay that challenges how we define success in our lives.

My generation has lost touch with what it means to be content. We equate contentment with home or bank account size. Are we content? I suppose we could ask the psychiatrists and counselors we regularly visit. Alternatively, maybe look at divorce statistics or observe declining church roles while noting increasing doctor visits for stress-related ailments. Maybe interview local pharmacists who increasingly fill prescriptions for sleep and stress disorders or ask a financial analyst to explain the reason behind the increasing debt ratios.

I wish I had clear-cut answers as to why our generation has taken a 180-degree turn from prior generations. Success is good, but a problem occurs when enough is not enough. Our nation is heading down a destructive road unless our values change. Bigger government is not the answer. A diamond's size does not make a lasting relationship. True beauty is not superficial. House size, career title or bank balance does not equal contentment.

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In my Tennessean column this week I write about the importance of defining our lives by more than what we do for a living.

We seem to create folk heroes out of entrepreneurs who expend Herculean efforts to achieve success in their businesses.

And while this is good to a point, if entrepreneurial success comes at the expense of our marriages, our families, our faith, and our friendships, it is a hollow victory.

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A new global study from The Global Entrepreneurship Monitor (GEM) reports that women entrepreneurs are a key contributor to economic growth in low/middle income countries, particularly in Latin America and the Caribbean.

Among the findings:

- There is no gender difference in the survival rate of women's businesses versus those of men in high-income countries.

- Women who are employed and have built a social network of entrepreneurs are more likely to become entrepreneurs. The social and economic benefits of working are driving women's entrepreneurship more than increased education or household income.

- Women tend to be less optimistic and self-confident than men about starting a business. But once involved in entrepreneurial activity, women's confidence builds, and they are more likely to know other entrepreneurs, and exploit viable opportunities just like their male counterparts. Given difference in how various cultures around the globe view economic independence among women, the initial lack of confidence is not surprising. The good news is that once they take the entrepreneurial plunge, they gain confidence. Entrepreneurship has not only economic implications, but social implications for women as well.

- Fear of failure is also higher for women in all country groups compared to their male counterparts. Women in Europe and Asia low/middle income countries had the highest fear of failure rates (40.3%) compared to women in Latin America and the Caribbean (34.2%), and women in high-income countries (27.1%).

A good way to help women entrepreneurs is to join with those of us who give micro-loans through Kiva. I just made eight micro-loans to aspiring women entrepreneurs around the globe.

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I remain somewhat concerned about the current slow down and/or recession. I remain very concerned about inflation. If you are an entrepreneurs, it is time to prepare for the worst. Here is a summary of a talk I gave to a group of printing company owners yesterday.

To get prepared for any economic downturn, it is best to think in terms of getting your financial statements in order.

First let's look at the Income Statement.

Revenues

Even though budget cutting is part of getting ready, do not cut back on marketing efforts. Now more than ever you need to stay front and center in the minds of your customers. Competition is going to get even tougher, so you need to keep your competitive edge by reminding the customers that you want their business. Many of your competitors will slash marketing budgets to save money. That will give you an advantage if you keep getting your message out there.

As part of this effort, take special care of your best customers. Make a personal sales call on them to let them know their business matters. Pay particular attention to those customers who are loyal, as their loyalty could get tested during difficult times.

As soon as you observe any increases in your costs of doing business, begin an aggressive campaign to increase prices. Frequent small price increases usually work best.

Focus on revenues that generate good margins. The goal should be to grow profits, not sales. Get rid of business that is not making good margins. When inflation heats up these accounts can quickly become money losers for you.

Expenses

Cut your overhead expenses. This will lower your break even and help buffer your profit margins from sudden price increases from your suppliers or if a major customer suddenly is forced to cut or even cancel orders from you. Overhead is your enemy right now.

Get back to basics. Look around your business to see what could be cut without having a drastic impact on your business. This may involve staff. This is painful, but may be necessary to protect the jobs of those that remain. Cut any fluff that you have allowed to creep into your expenses.

I even go so far as to tell folks to get back into your start-up mentality. Bootstrap, bootstrap, bootstrap!! This may be particularly effective in marketing. I said earlier that marketing should not be cut back. But it can almost always be done more efficiently.

Now let's turn to the Balance Sheet.

Cash

Cash is King.

Improve your cash flow. The steps outline above can help. Also pay attention to accounts receivable. During difficult times your customers will begin to slow down payments to take care of their own financial strains. Stay aggressive on collections. Use carrots and use sticks to keep their payments coming in a timely basis.

Build your cash reserves. The larger the cash war chest you have the better you can make it through sudden price increases from suppliers and sudden losses of key customers. It provides a shock absorber that you will definitely need more than once in the coming months.

Debt

In addition to building cash reserves, pay down debt as aggressively as you can. There are two reasons for this.

First, as inflation heats up interest rates may go up even faster than they have recently come down. This will effect your new loans and all of your existing debt, such as lines of credit, that have variable rates.

Second, banks will become much more strict when it comes to the covenants and performance requirements built into your loans. If you miss these numbers, the odds have increased that you will feel pressure from your bank to get in compliance. They can call in a note even if you make every payment on time if you start to fall below some of the financial ratios that are part of your loan agreement.

If I sound urgent, it is because many of these things will take some time to get in order. If I am right about the economy, you need to take action now. If I am wrong, the worst that happens is that you have significantly improved your financial conditions. That is not a bad thing even in good economic times.

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According to the 2008 American Express OPEN Spring Monitor, small business owners have made the following changes since the 2007 American Express OPEN Fall Monitor, released in September.

- 34% do not offer healthcare coverage to employees; 29% didn’t offer coverage in September 2007

- 6% have reduced coverage in the last six months; 4% reduced coverage in the six months preceding September 2007

- 6% have eliminated coverage altogether in the last six months; 2% eliminated coverage in the six months preceding September 2007

- 9% have required employees to pay a larger share of healthcare costs over the last six months; 5% required employees to pay a larger share in the six months preceding September 2007

- 20% have been shopping for a new healthcare carrier in the last six months; 15% were shopping for a new carrier in the six months preceding September 2007

The healthcare solutions will not address the underlying problem behind much of this -- the cost of healthcare is a main contributor of inflation. If people had to pay for their own healthcare out of pocket (we all pay for it, but this gets hidden in lower net pay, taxes, and in the cost of goods and services) and if we tracked the cost of healthcare like we pay attention to the cost o gas the outrage would deafening.

While they may address the issue of access, all of the "reform" proposals on the table right now will only increase the total cost of healthcare. Access and cost are both fundamental problems that need to be addressed.

Employees are not the only ones feeling the effects of -- small business owners' health is also suffering.

- 71% of small business owners said being an entrepreneur meant they were so busy that they took their health for granted.

- 90% said there are aspects of their life that suffer as they seek to maintain work/life balance

- 20% indicated maintaining their health/fitness was the area that suffered the most.

This is also alarming to me. Poor health is a major cause of people leaving the world of entrepreneurship.

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The federal reserve announced that bank credit has tightened. Not startling news, but the implications might catch small business owners by surprise.

The first impact is on new loans. Tighter credit standards means that banks will be even more conservative on business lending. Higher standards for cash flow, personal credit history, collateral requirements, and performance standards. Business loans that might have been approved a year ago, might no longer meet this new standards.

The second impact is on existing loans. This is where the surprise might hit hard on many small businesses. Many entrepreneurs assume that business loans work like personal loans -- you make your payments on time and the bank leaves you alone. Not true. Making payments on time is only one of several criteria that bankers will be watching. They will look hard at all of those loan covenants and performance expectations that many of us gloss over the the excitement of getting a loan for a new project.

During tight credit times, these restrictions become much more important for a bank to watch -- they are judged on how well they meet performance standards by the federal regulators. For example, a common condition is to maintain a certain debt coverage ratio, which measures how comfortably your cash flow covers your loan obligations. If you dip below the agreed upon ratio, the bank may step in and require you to improve your performance. If you don't, the bank can call your loan even if you never missed or were late with a payment.

The bank's portfolio of loans comes under tighter scrutiny during tough times like this, and they will pass that scrutiny along to their business loans.

Once a bank asks you to move your loan, you have to find another bank that will take on your loan. During good economic times, this is somewhat easier. But during times like these, all banks are under the gun to improve, so this becomes a much more difficult task.

Yet another reason to get back to basics during tough economic times. It becomes even more critical to improve cash flow and bring down debt.

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If the dot.com era taught us anything it should have been the difference between a financing scheme and starting a real business. A real business has legs. A real business lasts, endures, grows, adapts and prospers.

Sadly, I still see countless examples of people confusing simply raising a bunch of money and launching a business that creates real economic development.

Andy Tabar sent along this link to a posting from the blog written by the company 37signals.

Suggesting startups -- specifically tech startups -- don't need to look for revenue opportunities now is akin to spoiling a child and shielding them from the outside world: They're far less prepared when they eventually have to leave the house for the first time.

A poorly run startup is a poorly run business. A wonderfully run startup is a wonderfully run business. I don't believe there are many great startups that are bad businesses. Maybe less than 1%. If the business is bad the startup is bad. A great idea, maybe, but a great business, no.

So if you start something up, start a business, don't start a startup.

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I've been told that I have a face for radio and a voice for newspaper......

That being said, you can hear an interview I did for the podcast Patrons of Change here.

For those of you who are technology challenged just click the "play" button directly under the title. I say this only because it took this Luddite blogger about 10 minutes to figure out how to make it play....

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Last evening we went to hear a group of songwriters at the Bluebird Cafe here in Nashville as part of the Folk Alliance (their website is folk.org, which seems to be down this morning as I write this post). One of them performing last night, James Lee Stanley, is one we first heard over thirty years ago -- I blogged about him a couple of months ago.

What a wonderful evening of music and an affirmation that the music industry is alive and well. The three featured songwriters had all been writing and performing since the 1970s. Are they rich and famous? No. Have they been making a living pursuing what gives them passion? Absolutely.

There is a good lesson here for entrepreneurs in any industry.

Too much attention is given to celebrity and fame. We see it in entertainment and more and more we see it in the world of entrepreneurship. The vast majority of our economic growth is coming from entrepreneurs working in small businesses across the country. It is hard work. It is not very glamorous. But, it has created economic independence for these entrepreneurs and the people working with them.

The same is true in music. There are thousands of songwriters and performers toiling away out there. Many are fortunate and have become successful enough to make a living at it.

The vast majority of entrepreneurs will not reach the heights of Gates, Dell, Jobs, and others whose little ventures grew into empires. In fact, most won't even make their local list of "leading entrepreneurs" in their community.

But, most entrepreneurs don't really care about fame and recognition. That is not what drives them. That is not how they measure their success.

What a blessing it is to be able to share in real success -- the songwriters who continue to hone their craft -- the entrepreneurs who pursue their passion and find fulfillment in the businesses they create.

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The New York Times has a story that shows just how far entrepreneurship has come in the past twenty-five years.

Undergraduate courses in how to start and run a small business are becoming as ubiquitous as Economics 101. Gone is the conventional wisdom that running a small business cannot be learned by sitting in a classroom.

According to the Kauffman Foundation in Kansas City, Mo., more than 2,000 colleges and universities now offer at least a class and often an entire course of study in entrepreneurship. That is up from 253 institutions offering such courses in 1985. More than 200,000 students are enrolled in such courses, compared with 16,000 in 1985.

I first started teaching as a graduate student in 1981 and had my first full-time teaching position in 1982. Although I helped to launch an entrepreneurship program where I taught, it met with significant resistance from faculty, parents and even many students. I left in teaching in 1988 in part because I was frustrated by how resistant business schools were to teaching entrepreneurship and small business.

Entrepreneurship education come a long way in a short time when you consider the glacial pace of change in academia.

(Thanks to soon to be alumnae of Belmont and aspiring social entrepreneur, Janice Dotti, for passing this along).

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Many collegiate entrepreneurs are taking advantage of the growing number of student business hatcheries popping up on college campuses. Hatcheries offer students access to space, technology, expertise, and experiential learning as they start and grow their businesses while in school. It allows them to take their businesses out of the dorms and run them with better resources, a more professional setting, and more support from mentors and peers.

One of the students who took full advantage of our hatchery here at Belmont was written up in Milt Capps' Venture Nashville Connections.

Reality pushed Jennings toward his dream. He explained yesterday that he realized during his third year at Belmont that his love of music (guitar, trumpet) was unlikely, by itself, to produce the income and standing he wanted as a songwriter and producer. An earlier venture with several other students -- MuziK Cellar Music -- didn't last. However, the lessons Jennings learned in that outing helped sharpen his judgment and his focus.

Determined to make a living in entertainment, he undertook double music-business and entrepreneurship majors and added a fifth year to his college career, which ends next month.

Cornwall's support and Belmont's Hatchery student-business incubator have been key success factors. Nearly 60 students use Belmont's Hatchery.

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The Brookings Institution has been busy pushing forward on an agenda for socialized entrepreneurship.

Two items from the National Dialogue on Entrepreneurship this week caught my eye (and raised the hair on the back of my neck).

First:

A new report from the Information Technology and Innovation Foundation and the Brookings Institution suggests that a new National Innovation Foundation could do a better job of structuring key Federal agencies to support innovation. The study recommends that a newly created National Innovation Foundation serve as the Federal government’s primary support mechanism and point of contact for issues related to innovation. The report proposes three possible structures for a new NIF: housed within the Commerce Department; a publicly-sponsored corporation similar to the Corporation for Public Broadcasting; and, as an independent federal agency like the National Science Foundation.

I must admit I would never have dreamed of modeling anything after the Corporation for Public Broadcasting.

Next. another report. I should note that both of these are from the same series, which they call Blueprint for American Prosperity: Unleashing the Potential of a Metropolitan Nation:

A new Brookings Institution study contends that current Federal policies do too little to promote cluster creation, i.e. agglomerations of businesses, service providers, and other partners who operate in a particular field or sector. As part of a wider set of programs to spur innovation, the report recommends that policymakers initiate a new set of programs to catalyze cluster activity across the US. This effort would contain two components. First, a Cluster Information Center would help map cluster initiatives across the US and provide research and evaluation about these programs. This effort is modeled on a successful European effort, the European Cluster Observatory. Second, a new Federal grant program (of about $360 million) to help fund state and regional cluster initiatives. This effort would help seed state and local innovations and also build closer connections between Federal, state and local partners.

And while we're at it, let's create another federal agency promoting rent seeking and model it after a European agency that tries to steer business activity to advance social agendas.

No thanks, Brookings! Keep your hands off American free enterprise! Markets work. Federal bureaucracies do not.

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My column in this week's Tennessean looks at the ins and outs of niche markets.

Generally, a niche strategy is a good way to enter the market for a new business. It usually takes fewer resources for the startup because of lower marketing costs and the ability to start on a smaller scale.

Success rates tend to be higher for niche businesses since they have less direct competition.

Without much competition, niche businesses often can charge higher prices, which allows for quicker positive cash flow during startup and better margins once the company is profitable.

But, entrepreneurs also should be cautious when picking a niche. Here are some things to consider.

My column offers five key tips for finding success in a niche market.

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Ideablob.com attracts a large number of ideas for social ventures. This one caught my attention as continue as guest advisor for this week. Seeding Labs reclaims and refurbishes laboratory equipment from universities, hospitals and biotechnology companies in order to equip talented scientists and clinicians living and working in the developing world.

Seeding Labs aims to transform the global map of scientific innovation hubs. By refurbishing laboratory equipment from universities and biotechnology companies in the United States, we equip talented scientists working in the developing world and reduce the environmental burden in the U.S. We believe that talent is everywhere, and that scientific research is the key to improvements in education, healthcare, environmental stewardship and a thriving modern economy. Our goal is to help our colleagues pursue the issues that matter most to them, at the same time connecting scientific communities across international borders. Visit us at www.seedinglabs.org.

My advice:

I would build partnerships with universities through their new interest in social entrepreneurship and service learning. Rather than just plug into their research labs, also tie into their academic programs dedicated to either social entrepreneurship and/or service learning.

Social entrepreneurship is popping up all over the country. Some schools have developed single courses, while others have developed full programs (for example, here at Belmont University we will be launching a Social Entrepreneurship major this coming fall).

Service learning is more established in academia. Using this pedagogy professors add service projects to classes that apply what students are learning to real situations that are tied to social issues in the community or around the world. Some schools have campus wide requirements for students to get involved in service learning (Duke just got millions of dollars for such an initiative).

Don't assume that the research labs on campus interact with social entrepreneurship and service learning programs on their campuses. Universities are notorious for creating academic silos. You may need to create the bridge for them. Once you do, you will not only have access to the laboratory equipment, but to a ready army of skilled and talented volunteers. There is a good chance that they also have access to funding to help with each project.

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The average start-up in the US has about $10,000 in funding to get things rolling. A common myth is that if you start small you will stay small. Not true. Even the most cash tight bootstrappers can build a business that is scalable.

From Texasmonthly.com:

Founded Sweet Leaf Tea Company in 1998 with $10,000 and a recipe from his grandmother / Now markets ten flavors of bottled iced tea in all fifty states and has doubled sales each year for the past five years / Announced in April that he had raised $18 million in private equity.

This story is worth clicking through to hear about this success story from the entrepreneur's own words.

(Thanks to Bro' Steve for passing this along).

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I was at a meeting attended by several local entrepreneurs the other morning. They all agreed that everyone is worried that the economy is in bad shape, but none of them were really feeling recessionary pressures in their businesses. The only thing that worried them directly was inflation.

In economics, perception can very quickly become reality. With enough talk about a bad economy we can all start behaving like there is poor economic conditions.

Take the latest results from the OPEN survey from American Express Small Business Monitor as a case in point.

Optimism among small business owners is at the lowest point in the six-year history of the OPEN survey. The economy is cited by four in ten small business owners (44%) as the issue that will most sway their decision on the next president of the United States, followed at a distance by homeland security (cited by 16%).

HOWEVER, despite concerns over the economy, growth is still a priority for entrepreneurs as seven in ten business owners plan to grow their business over the next six months and 31% of entrepreneurs report plans to hire, up 7% from the fall.

That is the psychology of mass panic that can make a weak economy seem worse than it really is. The media loves bad news (as they used to say -- "It sells newspapers"), so they have an incentive to make even worrisome news about the economy sound much more dire than it actually is at the present time. It can also lead to behaviors that make the economy become worse than it otherwise might have.

Are we in a slow down? Yes. Is it across all sectors? No. Is it across all geographic regions? Definitely not. Are we in a recession? Not yet, and if small business has its way and pursues the growth plans they are talking about, I doubt we will actually experience a true recession.

However, I still remain very concerned about inflation. Very, very concerned.

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The idea I picked to give advice to for ideablob.com Week at the Entrepreneurial Mind is one that offers an innovative product tied to wellness.

Individuals begin fitness programs each year, but set unrealistic goals or improperly structure their fitness programs and eventually lose interest. I'm developing a portable touch-screen device equipped with a heart rate monitor, acting as a personal trainer. The device uploads workouts from our website, where based off an individual’s fitness goals, they can build their own workout or use one of ours. The device displays progress charts, advice for future workouts, and can incorporate daily nutrition information. The website also functions as a social networking website centered around device results for exercise gurus, athletes, and anyone who enjoys living a healthy lifestyle.

While I think this is a cool idea, the entrepreneurs need to keep their eye on the big picture -- that is the future of healthcare policy in the US -- and not just their customers and competitors.

My advice:

Wellness might well become the "next big thing" in healthcare. The reason I say "might" is due to the uncertainty of the elective and what healthcare plan ends up being passed in the next president's term.

This is a great example of a good idea that may blossom or fade due to macro trends outside of the entrepreneur's control.

If healthcare stays a primarily private sector industry, products like yours has a bright future. Health plans will be trying to implement more programs and initiatives to help their population of covered lives get healthier. As a society we have become too sedentary and are eating too many calories. It is taking its toll on health care costs. Insurance plans are trying to find ways to incentivize people to get healthier and use fewer resources for healthcare. Your product would be a great tool for this.

If healthcare goes with a more public payment model in the next few years, we will likely have all attention focused on lobbying to keep coverage for certain illnesses. We will also see resources going to create healthcare entities that will be able to maximize their market share of federalized healthcare dollars (think economic rent seeking). Not as much money will be going to wellness.

When I was and entrepreneur in the healthcare industry we paid attention to the macro changes in the 1980s and 1990s. We saw a shift from insurance to managed care and positioned our business accordingly. We saw Medicaid being pushed down from the federal level to individual states -- again we shaped our strategy to meet this macro trend. We still paid attention to our customers and competition, but those really involved more short-term tactical decisions. Our strategy was shaped by the direction of those broader trends.

Don't just look at your competitive environment -- keep your eye on the macro trends that may shape your future. See which way the election takes our country as it will have a huge impact on healthcare and on the wellness sector you are operating in with your new product.

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