The Entrepreneurial Mind

A recent study issued by the outplacement firm Challenger, Gray, & Christmas has been making the rounds the past couple of weeks in the newspaper business sections. The study reports that baby boomers are looking in large numbers to make entrepreneurship part of their retirement plans.

One of the reasons stated by boomers for choosing this path relates to a lack of retirement planning. It seems many in my generation lived it up from the 1960s through the 1990s and have little wealth to show for their efforts. Many seemed to carry the "live for today" mentality throughout their entire working lives.

However, the problem with viewing entrepreneurship as the Holy Grail for their sunset years is that it may not help them achieve wealth.

Many are choosing a self-employment, consulting route to entrepreneurship. They gained significant expertise within some specific area, and they become a "free agent" selling their service to a variety of clients. While this can create an income flow, it is not a business model that generally creates a path to wealth.

There is often nothing to "sell" when the boomer entrepreneur really wants or needs to retire. A consulting business is tied to the activity of the owner and has no residual value that someone will be able to buy. A business has value to a buyer if it creates on-going cash flow into the future. If the boomer entrepreneur/consultant retires, the cash flow from his/her consulting activities ends.

There seems to be a myth that entrepreneurship and self-employment are secret paths to wealth. If these boomers didn't prepare in their working years, they can start a business when they reach retirement age and it will magically create wealth. It just doesn't work that way.

Wealth takes time, effort and careful planning to build, whether it be through a job or through your own business. Creating wealth from an entrepreneurial venture is something that has to be engineered into the business model. That is why many experts recommend having your exit plan in mind from the very beginning of the business.

You need be able to build a business that will generate cash flow into the future long after you leave the scene. That is what has value to a buyer more than anything else. They don't care about assets or reputation unless these things can continue to generate income after they buy your business.

Posted by Jeff Cornwall at 05:33 AM | Permalink

John Sage, the co-founder of Pura Vida Coffee, spent the day at Belmont University yesterday. John has created a for profit coffee company with a mission that mandates they donate all of their profits back to help the children of the countries that supply their coffee.

Pura Vida is 100% charitably owned. All of our resources go to help at-risk children in coffee-growing countries who suffer from the damaging effects of poverty.

An interesting business model to say the least! They offer any investors only the possibility of a modest financial return (at best) capped at about a T-Bill rate. They believe that the good that they can do through the capitalistic system more than makes up for any shortfall in profit returns to their investors.

Posted by Jeff Cornwall at 06:32 AM | Permalink

While the U.S. Environmental Protection Agency (EPA) has made progress on reducing the burdens small manufacturing businesses face, testimony from Thomas Sullivan of the SBA asserts that there is room for even more flexibility for smaller companies without sacrificing environmental protection.

America's small manufacturers face a disproportionate regulatory compliance burden. Small firms spend four and half times as much per employee on environmental compliance as their larger counterparts do.

Posted by Jeff Cornwall at 05:42 AM | Permalink

I ran a post earlier this year on the challenges of spouses also being business partners. It was based on a very insightful interview from Inc.com.

StartupJournal offers some additional thoughts into what helps make being marriage partners together with being business partners a positive combination. There are over 13 million married couples in business together in the US, so it can work.

And that is the key word: work. A good marriage takes hard work and a good business partnership takes hard work. Putting the two together and making them both work creates the need for a tremendous amount of effort and planning. It rarely just "happens."

Think it through very carefully. The interview from Inc.com offered this caution:

Though there are no accurate statistics about what happens when spouses try to run a business together, expert estimates are grim: "Only 5% of couples can make all-in partnership work," says Azriela Jaffe, a frequent reporter on the phenomenon of entrepreneurial couples....

The challenges of being both types of partners at once are not just twice as many; the challenges can feel like they go up exponentially. That is why I call it a partnership squared.

Posted by Jeff Cornwall at 05:01 AM | Permalink | Comments (1)

While it has gotten so much easier to get monthly financial statements using off-the-shelf accounting software, these numbers are not all that is needed to effectively manage a business.

First, the income statement, balance sheet and cash flow statement are all based on historic data. They tell you where you have been, but not necessarily where you are headed. A professor from the east coast tells of an exercise he uses to bring this point home. He takes his students to a big open parking lot, where an old car sits with all of its windows blackened out with paper except the rear window.

He sets up a simple course to follow with orange cones. The trick is this. His students must navigate the orange cones driving forward by looking only through their rearview mirror. The cars careen all over the lot as the students try to master this almost impossible task.

The moral of this lesson is to illustrate the challenge of trying to go forward while only able to look in the past.

The challenge for the entrepreneur is to develop a set of numbers that lets them see ahead for their specific businesses. These measures tend to be unique for each situation. For example, it may be the steps that are taken in the sales cycle. If measured and used to manage, these numbers can help predict future sales and improve the steps taken to secure new business.

Here are a few key steps that can assure that you have these numbers and that they are there when you need them:

- First, identify those specific activities that, when taken together, are critical for building sales and growing profitability.
Keep number of measures to the critical few that matter most. Limit to 5-8 measures to assure that managers keep focused.

- Link compensation to these performance measures, placing emphasis on quality rather than just quantity.

- Create a list of numbers you would like to see on your desk each day, each week, each month, and each quarter that will help you see where your business is headed. Focus on those numbers that are critical to guide and navigate the company to desired sales and profits objectives.

- Sit down with your bookkeeper or accountant and see what other suggestions they might have. They can add to your list, but not delete. If you need to, upgrade your information systems and staff if needed to get these numbers. Growing profitably should easily pay for these costs.

- Be Assertive. Do not accept gaps in information or unnecessary information in reports you receive. Make sure that everyone understands the importance of these numbers for the future of the business and knows the part they play in not only providing this information, but in using it to help move the business ahead. Use the key numbers to motivate your employees, so they are working with you to grow the business.

Find the key processes that help make your business grow and find a way to measure them. Don't ever try to move your business ahead while only looking in your rearview mirror.

(Note: Some of these ideas come from a 1999 article in the Journal of Accountancy and from a 1990 article in Inc magazine).

Posted by Jeff Cornwall at 07:11 AM | Permalink

Small business owners, trade association representatives, think tank scholars, congressional staff, and elected officials came together to celebrate 25 years of the Regulatory Flexibility Act (RFA). The RFA, designed to make sure that small businesses are considered during the regulatory process, was signed into law on September 19, 1980.

But, as I wrote last week, there is a long way to go. Firms with fewer than 20 employees annually still must spend $7,647 per employee to comply with federal regulations, compared with the $5,282 spent by firms with more than 500 employees. Small businesses face a 45 percent greater burden than their larger counterparts.

The RFA requires federal rule writers to consider alternatives that will lessen a proposed rule's impact on small business. Perhaps this it is no longer enough to "consider" alternatives for small business when it comes to drafting legislation aimed at commerce in this country.

Given the importance of entrepreneurship in today's economy, a new paradigm is in order. Rather than make a bureaucratic pass at "alternatives" for small business it may be time to view all legislation through the lens of small business.

Most new regulations that impact commerce in this country are big hammers aimed at large corporations. But, given the smaller and smaller role that large employers play in our current economy it is like we are trying to kill squirrels with nuclear bombs.

Here is my proposal. Let's pass laws that consciously foster small business development, while considering alternatives to specifically regulate the largest of employers as needed. We have been trying the reverse for decades, with only limited success.

Posted by Jeff Cornwall at 06:28 AM | Permalink

Find COTC this week at AnyLetter.

Posted by Jeff Cornwall at 06:26 AM | Permalink

The latest edition of the Cost of Doing Business is out from the World Bank. This report looks at the cost of regulations on small businesses around the world.

The most small business friendly countries in terms of regulations:

Canada
Australia
United States
New Zealand
Singapore

Why does this matter? The lack of regulation on small business and favorable tax structures are the two most important predictors of entrepreneurial development.

Posted by Jeff Cornwall at 06:12 AM | Permalink

A new study just released by the Kauffman Foundation finds that there are 500,000 new business start-ups in the US every month. If accurate, that means we are now seeing start-up rates of 6 million a year!

Here are additional highlights as reported by the National Dialogue on Entrepreneurship:

Somewhat surprisingly, the study shows a relatively stable rate of entrepreneurship activity despite major changes in the national economy in the last decade. Based on data from the Census and the Bureau of Labor Statistics for 1996 - 2004, an average of 0.36 percent of the adult population created new businesses each month with the low mark of 0.33 percent in 1997 and a high of 0.40 percent in 2004.

Most of the recent increase is attributable to immigrant entrepreneurs. While illegal immigration is a very serious problem that needs serious solutions, this shows that many of today's immigrants coming into the US are helping to improve our economy through their entrepreneurial activities.

Posted by Jeff Cornwall at 06:01 AM | Permalink

The lessons from 9-11 and Hurricane Katrina are still fresh in many small business owners minds. We now face another huge threat with Hurricane Rita. Inc.com reports on a check-list from Chubb Commercial Insurance that can help small business owners work toward a successful recovery from such events. It includes health and safety issues, getting basic services back to your business, protecting property, and restoring basic business functions for your business. This is an excellent resource that all small business owners should have in their disaster plan. And all small businesses should have a disaster plan in place!

Our thoughts and prayers are with all of you on the Gulf coast of Texas and Louisiana as Hurricane Rita approaches.

Posted by Jeff Cornwall at 05:35 AM | Permalink

I invited Bobby Guy, a local attorney with Waller/Lansden here in Nashville, to speak in my MBA class last week. While it may not seem that unusual or blog-worthy to mention that I had a lawyer in my class, it is his area of law that makes his visit unusual. For you see, Mr. Guy practices bankruptcy law. How often do entrepreneurs get to hear from a person who understands business failure from the inside before they start their ventures?

From this perspective, Mr. Guy clearly has a very instructive message for entrepreneurs. He likes to give a talk called "A View From Down-Under: The Top Ten Reasons Companies That Should Make It ... Don't."

And here are his Top 10:

10. Over-expansion. The need to get there first or to demonstrate revenue growth to anxious investors leads businesses to grow too fast.

9. Poor Capital Structure. Companies take on too much debt....Enough said!

8. Failure to Control the Controllable Costs. Businesses spend down the initial cash before it is flowing in at a positive rate.

7. Failure to Prepare for Volatility of Uncontrollable Costs. For example, energy, materials, labor, or insurance.

6. Add New Products or Divisions that Drag Down the Profitable Ones
5. Poor Internal Controls and Execution -- customer service, accounting controls, theft, fraud

4. Poorly Designed Business Model

3. Reliance on Critical Financing that Dries Up

2. Failure to Adapt to a Changing Market

AND THE #1 REASON? Management in Complete Denial......

Posted by Jeff Cornwall at 05:31 AM | Permalink | Comments (1) | TrackBacks (1)

I have written in recent months about how flush with cash most venture capital funds are these days. Here is more evidence of that from an article sent to me by Dr. Jim Stefansic, COO of Patherfinder Therapeutics, Inc.

Let the good times roll. But, also keep in mind that this, too, shall pass. Availability of money comes and goes over time. For right now, there is plenty of cash for the right deals.

Posted by Jeff Cornwall at 05:03 AM | Permalink

Coyote Blog has a Kelo update from California and it is not good news. Attempts to block the fallout from Kelo have stalled, and eminent domain rolls on in the Golden State. It is sad to see that the outrage over Kelo is subsiding in some circles. There has been no other ruling by the Supreme Court that has a more profound impact on small business and fundamental property rights.

This one decision of the Court has taken the US from a society where individuals ultimately own property to one in which property is ultimately owned and controlled by the state.

And the band played on.......

Posted by Jeff Cornwall at 05:47 AM | Permalink

Time to check in again with Jason as he works his way through the start-up of his coffee shop in Bozeman, Montana. He is finally getting close to a lease. I am sure the journey to this point has seemed like an eternity to him, but Jason has been diligent with every step. He has not rushed through key decisions just to get the doors opened. Too many entrepreneurs get antsy and make hasty decisions during the start-up process that they can regret for years to come.

We will have to have some sort of major web-based celebration when he finally sells his first cup of coffee. Being the purist that I am, I hope it is a mug of pure, black coffee.

Posted by Jeff Cornwall at 05:38 AM | Permalink

A common part of business plans that I read involves some strategy that will lead to the shelves of Wal-Mart or one of the other big mass-merchandisers. StartupJournal tells the tale of one entrepreneur's attempt to get his product placed in Wal-Mart stores.

Last year about 10,000 new suppliers applied to become Wal-Mart vendors. Of those, only about 200, or 2%, were ultimately accepted. "We just don't have very many empty shelf spaces," says Excell La Fayette Jr., Wal-Mart's director of supplier development.

It is a journey that generally takes a minimum of six months just to get approved -- and even then an order is not guaranteed. And along the way expect your margins to get thinner and thinner as costs go up and the price that Wal-Mart is willing to pay you goes down.

One change that is helping more entrepreneurs break into large retailers is that all of them, even Wal-Mart, are allowing more local autonomy for purchasing. But even with this change the odds are against you ever getting a shot at any shelf space.

Anita over at Small Business Trends has some interesting thoughts on this article.

Posted by Jeff Cornwall at 05:17 AM | Permalink

In somewhat of a surprise move, the Federal Reserve decided to raise interest rates another 0.25%.

From a summary issued by the Congressional Joint Economic Committee:

The Fed views risks of substantial increases or decreases in inflation over the next few quarters as roughly balanced. Risks of substantial increases or decreases in economic growth are also seen as balanced.

The Fed mentioned that dislocation of economic activity and higher energy prices that resulted from Hurricane Katrina will weigh on spending, production and employment in the near term. The Fed believes, however, that the economic developments stemming from Katrina will be transitory and "do not pose a more persistent threat."

Rates have been steadily increasing from 1% in June 2004 to the current rate of 3.75%. Such rate increases will impact small businesses that have operating lines of credit, which most often have fully variable interest rates.

Posted by Jeff Cornwall at 01:52 PM | Permalink

Trying to advise entrepreneurs on the workings of venture capital firms has always been a bit of a moving target. Over time, they have moved from earlier stage to later stage firms, have gone from highly specialized to broader in their interests, and have changed their target returns from incredibly high to astonomically high.

Recently, due to the impact of various forces including Sarbanes-Oxley and a glut of capital available for investment, we have been seeing another shift in the VC industry.

The latest twist and turn is a move of investment dollars away from smaller VC firms in favor of larger, more established firms. From Red Herring:

The median size of new venture capital funds raised during the first half of the year jumped 20 percent to $192.5 million, up from a median of $160 million during 2004, according to VentureOne. The 2003 median was $100 million.

Sub-$100-million venture funds garnered 40 percent of the total capital committed during the first half of 2005. "In the pre-bubble days, that number would have been closer to 70 or 75 percent," said Joshua Grove, a researcher at VentureOne.

What this means is that start-up firms will need to look more at the angel market for money. This is a rather sharp change from less than a year ago, when we saw more money flowing into start-ups from VC funds.

The investment capital is never stable, so entrepreneurs cannot rely on "common wisdom" on where to look for outside funding. They often have to pay as much attention to the trends in the capital markets as they do to the market for their new product or service.

Posted by Jeff Cornwall at 08:17 AM | Permalink

The International Finance Corporation (IFC) has a new newsletter that highlights their efforts around the world to fight poverty through economic development. Much of this development is through small and micro enterprises. In their first issue, the IFC highlights work being done in Bangladesh through micro lending programs.

Posted by Jeff Cornwall at 06:22 AM | Permalink

Even with the push toward regulatory flexibility for small businesses at the federal and state levels, the average cost of compliance with federal regulations per employee is still 45% higher when compared to large employers.

According to a study released this week by the Office of Advocacy of the U.S. Small Business Administration, firms with fewer than 20 employees annually spend $7,647 per employee to comply with federal regulations, compared with the $5,282 spent by firms with more than 500 employees.

The report thoroughly analyzes compliance costs for economic, workplace, environmental, and tax regulations. It details regulatory costs for five major sectors of the U.S. economy: manufacturing, trade (wholesale and retail), services, health care, and other (a residual category), revealing that the disproportionate cost burden on small firms is particularly stark for the manufacturing sector. The compliance cost per employee for small manufacturers is at least double the compliance cost for medium-sized and large firms.

Among its other findings, the report also shows that the annual cost of federal regulations in the United States totaled $1.1 trillion in 2004.

Where do those trillion dollars go? Much of it ends up in the pockets of lawyers and accountants. In a duplicitous dance, lawyers and accountants help politicians shape much of the legislation behind these regulations. These same lawyers and accountants then turn around and charge hundreds of millions in consulting fees to their clients to keep them in compliance with the very laws they helped to write.

The tax and regulatory compliance industry is very large and very powerful. And their axis with politicians and bureaucrats may be nearly unbreakable.

The peer-reviewed study, The Impact of Regulatory Costs on Small Firms, written by W. Mark Crain with funding from the Office of Advocacy, updates two earlier reports from 1995 and 2001, which showed similar patterns of disproportionate regulatory burden borne by small businesses.

Posted by Jeff Cornwall at 06:01 AM | Permalink

WILLism hosts COTC this week.

Posted by Jeff Cornwall at 08:16 AM | Permalink

We've all heard the claims for generations. Small towns and large cities become known for a particular product. For example, Sheboygan, Wisconsin (and for that matter Bucyrus, Ohio) claims to be the Bratwurst Capital of the World. (Growing up on Wisconsin bratwursts is probably what has made my cholesterol so high....).

There are claims of the World Capital of This and the World Capital of That all over America. Fortune Small Business profiles some of the current "World Capitals" in their September issue.

Most entrepreneurs look for a unique niche to start a business, as this is often considered the safest way to start a new venture. But, every rule has an exception.

In the business phenomenon known as a cluster, businesses find advantages in operating in close proximity to their competitors. Clusters are a bit of a paradox. They can help attract customers (Auto Dealer Row), make getting materials from suppliers more efficient, take advantage of a geographic anomaly, or tap into a specialized labor pool. This is particularly true with today's successful clusters.

Concentrations of specialized experts may result from a university producing patents on new technology and graduates who understand them, or a large corporation sloughing off workers who see entrepreneurial opportunities their less nimble employer didn't. Silicon Valley is a prime example of a brainpower-based capital, as is our lesser-known find, Orlando, where the University of Central Florida feeds the local virtual-reality industry.

What ever the reason, sometimes it pays to be in a crowded market.

Posted by Jeff Cornwall at 06:08 AM | Permalink

The political race is now on to see who can offer the most spending to help rebuild the Gulf Coast.

The Democrats are tripping over each other to offer as many new programs as possible. The Congressional Black Caucus proposes huge new spending programs that go beyond the immediate crisis. They seek to expand anti-poverty spending with federal grants touching a variety of areas that are already part of entitlement programming. They also want to stop all of the efforts to suspend regulations and provide tax relief for the area, such as the recent easing of environmental laws in the gulf region.

Other Democrats are calling for a new Marshall Plan. This plan seems to be big on spending, but offers little detail. It is clearly going to be based on government leading the way to rebuild the area not just with money, but with bureaucrats deciding how to spend that money.

President Bush's plan has some elements to it that have proven to work in other parts of the world suffering from economic distress. He recognizes the importance of entrepreneurial economic development as the key to long-term success and growth in rebuilding the region. He is also committing to rebuild the infrastructure of the region. Bush goes beyond this, however, and also offers expansion of governmental programs related to traditional entitlements.

The race is on to see who can appear the most compassionate. We all feel the pain of people in the Gulf Coast region and want to do things to help in their recovery. Unfortunately, sound public policy decisions that rely on entrepreneurial economic development may get swamped by rising tides of big government spending programs being proposed by both sides.

Posted by Jeff Cornwall at 06:05 AM | Permalink

While the movement for regulatory flexibility for small business is picking up steam across the country, some states are actually increasing regulations impacting small businesses according to Fortune.

Provide an extra six weeks of job-protected family leave. A written accident-prevention plan for even the teeniest business. The most lavish unemployment-compensation benefits in the country. If you run a small business in Washington State, those are just some of the mandates you face-well beyond what the federal government or other states require. "It's like the frog in the pan. The state government turns the heat up a little each year," says John Heaton, president of Pay Plus Benefits in Kennewick, which administers payroll and benefit functions for other small companies. "I think small businesses are beginning to feel burned."

Studies clearer show that more regulations will lead to less entrepreneurial activity. It seems that we may be taking one step forward with regulatory flexibility, but two steps back with this barrage of new regulations in states across the country. Given the number of small businesses operating in multiple states, this complexity will only make doing business more difficult and may discourage expansion in many cases.

Posted by Jeff Cornwall at 06:43 AM | Permalink

Station West is a thriving recording studio and production company in Berry Hill. It has been owned and operated by Luke Wooten since it's founding in 1998. Luke is a 1994 graduate of Belmont University, who first got interested in the recording industry while still a student interning at Famous Music. His internship developed through a friendship with Carl Jackson, a local writer and producer. Soon Luke had outside sessions, and began freelancing, a practice he continued upon graduation.

Two years after graduation, Luke was asked by Carl to form a partnership with his new publisher. He did, and they benefited from a successful business that ended when the publisher sold their song catalog.

Luke found himself at a crossroads. He was a producer/engineer with no studio. That's when he found the perfect studio in Berry Hill. Luke was able to use the proceeds he received from his partner's buyout, combined with a bank loan to purchase the studio.

Business ownership initially created serious stress for Luke. "I had a new studio, two houses, and my second child on the way. I woke up and my left arm was numb, and it felt like someone was sitting on my chest. I didn't even wake up my wife. I just drove straight to the hospital."

Fortunately, it wasn't a heart attack, and Luke was soon back to work. By using equipment leases and leveraging his own knowledge of the industry, he got the studio running and open for business.

"I got the 'monkey' off my back after that first year," he says.

Business at Station West grew over the next three years. The Studio now has six employees. Luke has built a loyal base of well known artists who work with him on each successive project, including country music superstar Dierks Bentley.

"Dierks is a great artist to be associated with. He is a nice guy with a great work ethic who is always professional and dedicated. He's been known to spend the night in the studio, he's so dedicated. Having artists like that makes all the difference in the world."

To accommodate Dierks and other artists, Luke is expanding Studio West into the house next door, building a new studio that will feature surround sound mixing and DVD authoring capabilities. Surround sound DVD is the new paradigm that will change music standards. Most high definition televisions are combined with surround sound and every X-Box, Playstation, and Gamecube will feature the ability to play DVDs and CDs in surround sound. Future generations will grow up especting a higher standard in sound quality and presentation. Studio West will be the first studio in Nashville to offer full range monitoring of 5.1 and 7.1 surround sound.

With the recording industry suffering a slump recently, Luke feels the opportunity for entrepreneurs is better than ever. Outsourcing and downsizing are leading to new opportunities for aspiring producers and engineers, as well as artists and promoters. However, he feels it is necessary to point out the importance of interning and working for other studios to learn the trade and industry. He says that new graduates tend to think that it is just a matter of opening a studio and the business will line up. The truth of the matter is that recording studios generally just barely break even, even when booked to capacity. A studio owner must search for other revenue streams, such as production and engineering to earn a profit.

Through all of his success in business, Luke has made a conscious effort to always make time for his family. He has coached his sons' soccer teams for seven seasons and has worked to make his facility as family friendly as possible. His kids come in to visit him daily and he encourages clients to bring their children in as well. With the long hours in making a record it is critical to put make time for family.

The recording industry is entrepreneurial by nature, and Luke is no exception. He has ventured into other areas of the business. He has a patent pending for his self-designed diffusion panels (installed in the new studio). He continues to search out new talent, including an up and coming singer/songwriter named Jessica Roadcap. Jessica is a multitalented young woman who also designed a beautiful wall sized watercolor that is prominently displayed in Studio West's new surround room. (She also happens to be an incoming freshman at Belmont University).

Posted by Jeff Cornwall at 05:13 AM | Permalink

Crossroads Dispatches is hosting COTC this week.

Posted by Jeff Cornwall at 06:03 PM | Permalink

A quiet revolution being led by young consumers is underway. Both of my young adult children are a part of this revolution. Many of you may be a part of it, as well.

Red Herring reports on a study by the Yankee group that highlights this quiet, but major change:

"The landline is going the way of the glove-box cell phone," said Yankee Group's wireless global practice leader Keith Mallinson. "Plenty of people have them for safety or backup but they rarely get used."

More than 65 percent of the U.S. population owns a cell phone, the Yankee Group estimates. And the average number of cell phone minutes used by U.S. subscribers grew to 754 minutes per month-almost 13 hours-by the second quarter of 2005, Mr. Mallinson added. Much of that time used to be spent on home phones.

Young adults seem to be leading the trend, with more than 30 percent of 18- to 24-year-olds lacking landlines. In the U.S. population overall, the trend is less dramatic, with one in 10 cell phone users without landlines.

This trend away from the old land line phone is amazing to someone who remembers party lines, Ma Bell, and rotary phones. The big telecom companies have been preparing for this trend for years. And as it continues, this trend will create more and more new opportunities for entrepreneurs to exploit. Just look at all of the consumer behaviors tied to land line phone use and find ways to replicate or improve on them for the new mobile phone world.

Posted by Jeff Cornwall at 05:31 PM | Permalink

Angel investing has become an important part of the fuel behind the entrepreneurial economic expansion. While investment by entrepreneurs and their friends and family still provides about 85% of the capital for new start-ups, angel investing is the next most common source of outside equity funding.

In the past angels hid in the shadows. Entrepreneurs had to gain access through a labyrinth of contacts through a mysterious network of attorneys and accountants. While that is still the case with many angels, more and more of them are coming into public view by joining various angel networks like the Nashville Capital Network we have here in Nashville.

As is usually the case, the more important something becomes, the more likely that governmental officials try to get their fingers into it. Inc.com has an article about the growing trend of states offering tax credits to entice entrepreneurs to invest in deals. This may sound good on the surface -- how can tax breaks be a bad thing, after all -- but, it is poor public policy.

Most tax credits really do not have the kind of impact on investing in deals that lawmakers would like to think. Angels have a certain percentage of their holdings that they set aside to invest in start-ups. While tax credits may give them a short-term windfall, they do not alter if or how much they plan to invest.

These credit plans tend to be limited to a certain percentage and capped at amount. "(T)he credits range from 15% to 50% of the amount invested, up to $1 million per person per year." Many are only on the books for a short time, sometimes only for a single year and must be renewed. These tax breaks are often the first to go when lawmakers get into their "soak the rich" mode of operation.

If one really wants to spur investment, why not create these angle investment tax credits with no cap and no limit? The answer is simple. This is a political strategy that positions lawmakers in the middle. They help the economy without looking like they are favoring the rich.

Looking at our tax structure as it now exists through the lens of angel investments, we see how fundamentally our tax system is flawed.

- Entrepreneurship has been the single driving force of our economic growth for the past twenty years. It is expected to do so for the foreseeable future.

- Angle investment is an important fuel for this growth. Angels provide capital to higher growth, higher potential new ventures.

- The tax system as it exists now inhibits angel investment. Why else would politicians cut back on taxes for angel investors to spur their investment in deals?

Rather than tinker with the current system, a strategy that never works over the long term and only adds to the complexity of the current system, let's throw out the current tax code and start fresh. Individual investment and entrepreneurship were not major forces in our economy when the current income tax system was enacted. But today they are the most important source of our prosperity.

Private investment and entrepreneurship are our hope for the future. Let's create a new, simpler, fairer tax system that is aligned with our new economy and recognizes the fact that governmental policy making that tries to micro-manage economic behavior never achieves the desired, or should I say publicly stated desired results.

Posted by Jeff Cornwall at 06:46 AM | Permalink | TrackBacks (1)

One of the major causes of gas prices spiking after Katrina was the uncertainty of oil supply from the Gulf.

Many of the facilities were "shut-in" after the storm due to possible damage and safety concerns. Now that inspections have begun, oil is beginning to flow again.

At the peak of "shut-in" production on August 30, over 95% of daily oil production and close to 88% of daily natural gas production was shut in for environmental and human safety reasons in the Gulf of Mexico.

As of last Friday, shut-in oil is slightly below 60% of daily production and shut-in natural gas is around 38% of daily production.

Of the roughly 4000 Outer Continental Shelf production facilities, 37 shallow water platforms were destroyed (which produced only about 1% of total production from that region). Four large deep water platforms, which accounted for around 10% of pre-storm federal offshore oil production, were extensively damaged and could take from three to six months to bring back on line. Some pipelines suffered damage that could take months to repair, while others have been inspected, tested, and brought back on line.

According to the Minerals Management Service: "Despite this damage, about 90 percent of Gulf oil production could return to the market in one month, if refineries, processing plants, pipelines and other onshore infrastructure are in operation to receive, prepare and transport it to the consumer."

(Source: Congressional Joint Economic Committee).

Posted by Jeff Cornwall at 07:49 AM | Permalink

A new study by the NFIB and Visa finds that growth in the economy should continue through the end of the year.

From Inc.com:

"The fundamentals are looking good," said William Dunkelberg, the NFIB's chief economist: "Despite the hurricane and high fuel costs, you can expect the forth quarter to be very strong."

This report is consistent with most of the other forecasts in the wake of Katrina showing that a recession is not likely even with the economic disruption caused by this storm.

Posted by Jeff Cornwall at 07:45 AM | Permalink

FastCompany has a special feature on entrepreneurial leadership in their September issue (now available on line). What is interesting to me is that they focus on what I consider to be one of the most important skills that any entrepreneur should learn: opportunity recognition.

What are the elements of this alloy we call "leadership"? Certainly, they include vision and integrity, perseverance and courage, a hunger for innovation, and a willingness to take risks. But in building their list of the top business leaders of the past century, Harvard Business School professors Anthony J. Mayo and Nitin Nohria have unearthed an immutable attribute that's shared by all of the giants of business: They had an innate ability to read the forces that shaped the times in which they lived -- and to seize on the resulting opportunities.

Not all of the 50 great leaders they list are true entrepreneurs, but many are including their top five:

Samuel M. Walton -- Wal-Mart
Walter E. Disney -- Walt Disney
William H. Gates III -- Microsoft
Henry Ford -- Ford Motor
John P. Morgan -- J.P. Morgan Chase

Although the articles seem to mush great managerial leaders and great entrepreneurial leaders together, it is an insightful set of readings that I highly recommend. Thanks to R.M. Cornwall for passing this along.

Posted by Jeff Cornwall at 06:07 AM | Permalink

As in the wake of 9-11, we have seen businesses paying more attention to their disaster plans in the days after Katrina. Red Herring has telling examples from the technology sector.

Here are some suggestions on how entrepreneurs can prepare for disasters:

1. I would suggest for any business that the cliche' "Cash is King" has never been more true. After Katrina, there will be a prolonged period where many businesses almost ground to a halt. Having cash reserves will allow businesses to make it through the initial economic paralysis. Thirty days cash reserves (enough cash to cover essential and fixed expenses) would be my minimum recommendation. Even ninety days of reserve would not be too much to have at this period of time. One business owner recently told me that the new goal that many are setting is six months of cash on hand.

2. Good advice any time is to manage overhead carefully. Overhead pushes the breakeven point of any business higher. If sales suddenly drop off for an extended period of time, a lower breakeven point that results from lower overhead expenses can soften the impact of any economic shock.

3. Whenever possible, avoid fixed, long-term commitments that are part of a static business model. Any major shock on a market may require new business tactics, strategies or even models going forward. One reason that the American auto industry reacted so poorly to the oil shock in the 1970s is that they had built their businesses assuming a very static business model. It literally took them years to undo this model and adjust to the new reality that they faced. They had to be able to react much more quickly to changing customer preferences, and operate in a market with many new competitors where there used to be only three.

4. Build in flexibility in all decisions. Understand that you may need to quickly undo some decisions. Make this as easy as possible for you to accomplish.

5. Watch and manage your inventories carefully. Certainly you should not choke your business growth, but don't go overboard with purchasing either. Purchasing raw materials or other inventory using volume discounts may not be wise. Be as "just in time" with your inventory as possible.

6. Think through the 'what ifs' and create contingency plans. These need to be major plans for how your operations will be handled given a variety of scenarios, and minor plans that deal with the day-to-day safety and security of your employees and customers.

7. Look ahead. It is critically important to try to look beyond any single event, no matter how devastating. Believe in yourself, your business, and the system that makes it possible. People in the Gulf region will need bold leaders, which are now seeing will not come from the politicians, but within the grassroots of our economic system. Be strong, be brave and be confident and others will follow.

Posted by Jeff Cornwall at 06:21 AM | Permalink

Find COTC this week at rethink(ip).

Posted by Jeff Cornwall at 02:49 PM | Permalink

The Congressional Joint Economic Committee has released their assessment of the full potential impact of Katrina.

Here are some of the highlights regarding energy costs:

- 1.4 million barrels per day of offshore crude oil production has been "shut in." This represents about 91% of daily oil production in the Gulf.

- Natural gas production shut in is 8,345 billion cubic feet per day, or 83% of daily gas production.

- At least 7 drilling rigs are adrift and 8 refineries have been shut down. This development has been estimated to have idled between 1.8 and 2.3 million barrels a day of refining capacity, a little above 10% of the nation's total.

- Katrina has disrupted the importation of 1 million barrels of crude shipped to refiners through the Louisiana Offshore Oil Port.

- Because the crude oil market is global in nature, effects on global oil prices from the millions of barrels per day of lost Gulf production will be spread out geographically and over time. This will reduce, somewhat, the near-term impact on crude oil prices.

- This is not true, however, of highly localized gasoline markets and the national natural gas market.

- The price of the near-term futures contract for crude rose $2.61 a barrel on August 30, reflecting pessimism about the consequences of Katrina for crude oil production; the January through March contracts rose to over $70 a barrel. In recent days, crude futures prices have subsided somewhat, reflecting an easing of concern about effects of shutdowns of petroleum platforms in the Gulf of Mexico.

- Crude prices are more than 50% higher today than a year ago, but would need to reach $90 a barrel to surpass the inflation-adjusted highs set in the early 1980s.

- Based on futures data, traders believe that crude oil prices will be around 6% higher in October than they would have been without the damage done by the storm.

- Retail gasoline prices have risen above $3 a gallon in many localities, and some analysts speculate that near-term retail prices in some localities could be pushed as high as $6 a gallon. Retailers have responded to the potential of severe near-term supply curtailments by increasing current prices to ration existing supplies.

- (However), based on futures data, traders believe that gasoline prices could be close to 20% higher in October than they would have been without the storm.

- Also based on futures data, traders believe that natural gas prices could be close to 18% higher in October than they would have been without the storm.

- The administration has responded to the energy difficulties that have arisen as a result of Katrina's damage by using the Strategic Petroleum Reserve, as it was designed to be used, to ease temporary but serious production and delivery shortfalls resulting from a catastrophe. However, more crude will not provide much help in the near term from difficulties derived from the Katrina-induced shutdown of 8 refineries.

Here are some of their thoughts regarding a possible recession:

Will the energy price effects of Katrina put the U.S. into a recession? Most analysts agree that the answer is "probably not." The event was a tragic special event. Historically, while difficult to measure, the impacts of major regional hurricane damage on the national economy have been minor. Lost production from the damage is often, over time, offset by increased production from rebuilding.

However, in contrast to most hurricanes, Katrina imposed substantial disruption in a region that accounts for around 25% of the nation's oil and gas production.

To the extent that persistently elevated energy prices are born out in the future, we will increasingly see purchasing patterns in consumer durable-goods spending and business investment spending change, with substitutions occurring away from relatively energy-intensive goods toward more energy-efficient goods.

Posted by Jeff Cornwall at 09:14 AM | Permalink