The Entrepreneurial Mind

An interesting evolution is taking place with angel investors. Those who were once as illusive as unicorns are now creating more formalized systems.

Investment angels are beginning to form groups that actually encourage contact and solicit proposals. In fact, the Kauffman Foundation has put together an Angel Organization Summit, which bings together groups of angels to a common event.

When our business received proposals from a couple of potential angel investors (this was well over a decade ago) it was through intermediaries of intermediaries. The process was quite guarded, and the angel investors were more concerned with protecting their identities than we were about our business secrets. The meetings felt as if we were part of a spy network about to receive some top secret information from Russian agents.

To be sure, many angels are still quite private and can only be reached when they want to be through their accountants, attorneys, or advisors. But in many ways, we are now seeing a more open and aggressive equity market, which can only be good for entrepreneurs. The old ways are too heavily tied to the good old boy networks of years gone by. A more open "system" creates more opportunity for many entrepreneurs who would never have gotten an introduction to potential investors just a few years ago.

Angel investors still have the same basic preferences as they have in the past:

1. The typical deal size is $50 - $500K, although some will invest over $1 million
2. Like to be involved at Board level, but not in day-to-day decision making (as one once said, "I don't want to flip the hamburgers".)
3. They generally don?t like retail, but a few do and actually specialize in it.
4. They are more patient than venture capitalists, but still are looking for a 3-7 year pay-off and exit from the deal.
5. They can often provide a quicker decision than other equity sources.
6. They are much more willing to provide seed or stage-two funding than venture capitalists ever will be.

Posted by Jeff Cornwall at 09:47 PM | Permalink

"I could never start my own business. I cannot tolerate that kind of risk. After all, entrepreneurs are nothing more than gamblers who are willing to bet it all on a hunch of a business idea." Many people view entrepreneurship this way. To them entrepreneurship is as nothing more than a crap shoot. However, when we study financially successful entrepreneurs a very different picture emerges.

This primary cause of this myth about entrepreneurs comes from a misunderstanding of risk. Risk is erroneously defined only in terms of the downside potential of the business. This can be thought of as "Sinking the Boat Risk". Ultimately, this could be the failure of the business. We read over and over that 80% of business start-ups fail. While this is may be true to a point, this risk can actually be drastically reduced with proper training and preparation as discussed in a previous posting on this site.

In our writing about the "Good Entrepreneur", Mike Naughton and I talk about the virtue of prudence as playing such an important role in managing this type of risk. If entrepreneurs view their role as one of being a steward of the resources at their disposal, they begin to take a much more careful and thoughtful approach to business formation. The true act of entrepreneurial courage from this perspective is not blindly forging into a new venture, but rather become one of a willingness to only move ahead when "Sinking the Boat" risk is minimized.

The view of entrepreneurs as gamblers obscures another key aspect of risk. "Missing the Boat" risk refers to what economists call the opportunity cost of not acting on a viable business idea. That is, there is a risk that is associated with not acting on an opportunity just as there is a risk associated with acting, but failing. In fact, failure to act on a business opportunity that has real potential for success can be seen as being equally imprudent and shows poor stewardship of the resources at your disposal (and ultimately the gifts you have been given). Succumbing to fear and not moving ahead can be viewed as the vice that corresponds to virtue of the courageous act of starting a new venture.

The successful entrepreneurs I have been associated with are rarely gamblers. In fact, they are careful, thoughtful business people who understand the risk of moving ahead, and approach that risk with a sober understanding of their responsibilities.

Posted by Jeff Cornwall at 02:05 PM | Permalink | TrackBacks (2)

Visit this week's Carnival of the Capitalists hosted by Keven Brancato at Truck and Barter.

Posted by Jeff Cornwall at 01:55 PM | Permalink

Dan Hanlon has written a book that chronicles his adventures as he raised a boat load of money to start up Excelsior-Henderson Motorcycles, built a manufacturing facility, but never made it to commercialization.

It is often said that we need to look not only at successes in entrepreneurship, but "failures" as well. For example, the site I linked to from Harvard is a good example of a focus only on the successes. There has been a lot written about the tale of Excelsior-Henderson from the outside (much of it quite critical). This gives you a chance to see it from the entrepreneur's point of view.

I still believe that this is a story, at least in part, about a business that actually was too successful in raising money. I am a firm advocate that too much money early in a business creates too much mischief. Dan's take is different than that, and it is fascinating to look at this story from his perspective.

I would love to know what others think about this story and his book.

Posted by Jeff Cornwall at 07:58 PM | Permalink

Harvard has put together an impressive collection of on-line videos from their "stable" of entrepreneurs. Some of these are quite good. Each has a little plug for HBS, but just consider those to be "a word from our sponsor". The stories can be quite compelling and make excellent cases for practitioners and students. They are well organized by topic, and have clear and concise messages.

Posted by Jeff Cornwall at 09:49 PM | Permalink

Carnival of the Capitalists is up for 11/17/03. Check it out!

Posted by Jeff Cornwall at 06:24 PM | Permalink

There are more signs that the economy is on the upswing. There is increasing evidence that we will enter 2004 with a strong economy that includes job growth (sad news only to the legion of democratic presidential hopefuls).

First, business inventories are up in September for the first time in six months. Also, a new report on small business optimism from NFIB shows that the anticipated growth is now occurring, which is making small business very bullish on the future.

"The strong growth predicted by the August Optimism Index materialized, with GDP up a sizzling 7.2 percent at annual rates, the best since Reagan and the early 1980s," said William Dunkelberg, NFIB's chief economist and author of the survey. "The economy is hitting on all cylinders now. Fourth quarter growth will be very strong based on the October Index reading of 104."

Business owners are reporting that they are already adding jobs, and plan to expand facilities in the near future. Good news, indeed.

Posted by Jeff Cornwall at 04:29 PM | Permalink

A new report issued by the SBA sheds light on the cost of start-ups. It reinforces the point that many of us are making: most start-ups have nothing to do with venture capital type deals, so why do we spend so much time talking about them??!! Here are some highlights from this report:

"Entrepreneurs project modest startup costs for most new ventures, according to a study released today by the Office of Advocacy. Solo entrepreneurs expect median startup costs of $6,000, while the median cost expected by team ventures is $20,000. More than 80 percent of the entrepreneurs studied expected to cover their startup costs without bank loans, although on average they had saved only $2,000 towards that goal." (SBA Number: 03-49 ADVO).

And these are not just life style businesses. They are businesses that will result in substantial income:

"The study also showed that optimism about their business potential underlies the entrepreneurs' activities. On average, solo entrepreneurs believe they will have business income of $90,000 in the fifth year of their venture, while team ventures expect an income of $125,000 in the fifth year. The higher team venture projected income makes it more likely that such ventures will result in new job generation." (SBA Number: 03-49 ADVO).

For the complete study go to the SBA web site.

Posted by Jeff Cornwall at 03:45 PM | Permalink

Time and time again, I run into entrepreneurs who are petrified to share any aspect of their business for fear that someone will steal their idea and beat them to the punch. Just how real is this fear? In reality, the actually cases where an idea for a business gets stolen are quite rare. However, just to be safe and sleep well at night, here are my suggestions:

1. Success comes from sound execution and implementation (see this article for some good tips) much more than the idea itself. Ideas can be a dime a dozen. Even if someone does steal your idea, it doesn't mean that they can make a successful business out of it. That takes resources, building the right team, knowing the market, and so forth.

2. Be prudent on who you talk with about your idea. It is best to share the details of what you intend to do only with those who really need to know about it. This would include your attorney, your accountant, business advisors, and potential key employees. Keep your inner circle small and manageable, especially before you get the business going.

3. When in doubt, have them sign a confidentiality or non-disclosure agreement. This is only really used with potential investors, especially if they are already in your industry. Lawyers, accountants, bankers and so forth are not a threat to your idea and must be discrete due to codes of ethics and/or the need to maintain their professional reputations.

4. Patents can help, but are never completely fool-proof and often can be expensive. Just because a patent attorney will work with you to try and patent your idea does not mean that it should or even can be patented. Do your own homework on this. The government's web site is very helpful on this point

5. Trust your instincts. If someone makes you nervous with their questioning about your idea, back-off. You don't have to share information if you don't feel comfortable. Get to know the person and make sure you understand their motivation.

This article offers some additional tips on sharing information on your business.

Posted by Jeff Cornwall at 05:15 PM | Permalink

Here is a good article from Entrepreneur.com that offers more insight into my recent posting on cash flow management.

Specifically, it highlights the importance of keeping the cash in your business to support the infrastructure you will need to manage growth successfully. It is too tempting to start giving yourself raises as soon as your business is profitable. As my Dad always said, "Pigs get fat, hogs get slaughtered". I always advise that entrepreneurs keep their salaries minimal for a long time; just plan to live off a reasonable market salary. Let the success of your business go back into the business to build more success. This will help address the cash flow needs discussed in the previous posting on this topic. The goal should be to build long-term sustainable wealth in your business, not fall to the temptation to suck out every little bit of cash you can in the short-run.

Posted by Jeff Cornwall at 03:47 PM | Permalink

Entrepreneurship is the most sustainable and dignified form of economic development. North Carolina has embraced this fact and is aggressively pursuing entrepreneurship as an engine of rural economic development as seen on this web site. In the late 1980's, we developed a business that created over 100 jobs in one rural county in NC. We found it to be a great place to do business and found the county officials to be incredibly helpful in finding a site, getting over regulatory hurdles, and identifying local vendors to supply our venture. Initiatives like this a springing up all over the country.

Posted by Jeff Cornwall at 02:37 PM | Permalink

The Tennessean wrote a nice piece on our new entrepreneurship major here at Belmont. Check it out.

Posted by Jeff Cornwall at 12:38 PM | Permalink

I have always been a strong advocate of using S-corps for start-ups. Even with the advent of the LLC, I still usually favor the more simple S-Corp. There is so much more case law with the C-corp, and I never want to see my friends names end up in IRS cases! I almost never recommend starting with a C-corp, unless a quick public offering is planned. This article offers additional support for my bias.

Posted by Jeff Cornwall at 11:06 PM | Permalink

SBA is expanding its lending under the 504 program. See this article in the Startup Journal.

Posted by Jeff Cornwall at 10:59 PM | Permalink