The Entrepreneurial Mind

Triple Pundit is our host for COTC this week.

Posted by Jeff Cornwall at 08:39 AM | Permalink

There was a lot of hand wringing when the music industry consolidated, yet again, a few years ago to create three giant companies that seemed poised to dominate the market. It was 2003 and I had just moved to Nashville. Many of my friends wondered what an entrepreneurship professor was doing moving to a city dominated by such a mature industry and taking a job at a university that has one of the largest music business programs in the country.

Well, beneath the feet of the three dancing dinosaurs that dominate the current industry structure there is a whole new structure beginning to take form. The music industry has long been made up of lots of small businesses and independent contractors, as seen in this article from StartupJournal.

What has changed is that this grass roots level of music entrepreneurship is beginning to become more than self-employed artists (see the Future of Music for a discussion of these changes). Technology and consumer preferences are facilitating a restructuring of the music industry that will lead to an unprecedented shift of power. Both content and distribution have been firmly in the hands of the industry giants for the past few decades. However, the changes that are taking place in how music is made and how it is gotten into the ears of its customers are beginning to loosen the "big three's" grip.

It would be a mistake to assume that we are simply taking a small, controlled step forward to the "next thing," as when we moved from the 45 to albums and from albums to CDs, and that the industry giants will somehow grab control of digital distribution. Why? It is because this step in the evolution of the music industry is not being created by the market leaders as seen with the last few changes. This change is outside of their established system. It is revolution, not evolution.

I think that the iPod does not represent the "next thing" in the industry, as many are assuming, but really just one of several catalysts that will help propel entertainment into several years of entrepreneurial innovations and breakthroughs just as we witnessed in the information/computing industry in the 1980s and 1990s.

The music and entertainment industry is entering a period of new beginnings. This is spring time in the music business.

Posted by Jeff Cornwall at 05:38 AM | Permalink | TrackBacks (1)

"If we build it they will come."

Not likely.

"This thing will sell itself!"

Don't count on it.

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To be successful, the start-up of a business should involve attention to the product/service and how to connect with customers. For some entrepreneurs selling comes easy; it even seems to come naturally. But, to others, the thought of hawking their goods is a terrifying prospect. They avoid selling by continually tinkering with their product or service.

As Forbes.com points out, this can be particularly true with techies and consultants. They offer some basic tips on successful selling that can help even the most introverted entrepreneur:

Explicitly Define The Value You Bring

The critical first step in defining the value you bring is to be able to clearly and concisely define what you do. I get worried when I ask a techie entrepreneur to tell me about their business and thirty minutes later I have to politely ask them to stop. Every entrepreneur needs to be able to describe what they do, no matter how complex the concept, in twenty-five words or less. This is the "elevator pitch" or "cocktail party answer" to the question, "Tell me about your business." Very often you have just a few moments to communicate what you do and what value it brings before potential customers or investors make up their minds about you and what you can do for them. There will be time for details later. A first impression must be made and it must deal with value.

Manage Expectations

Don't over-sell what you can offer or set unrealistic timelines. While it may make the initial sale, the goal is to develop a loyal customer base. If you set expectations that you cannot deliver, customers will not return. As the old adage goes, "The goal of good marketing is not only to get 'em in the front door, but to close the back door so they don't get away."

Price it Right

Many techies and consultants can be elusive about their pricing. Keep it as simple and clear as possible. Don't do to your clients what so many attorneys do to theirs. Lawyers are often vague and even defensive when asked about what they will charge for something. Then when the bill arrives, the client can be shocked to see all of the charges on their invoice. The blog site the [non]billable hour offers some great insight into billing professional services fairly and effectively.

Posted by Jeff Cornwall at 06:31 AM | Permalink | TrackBacks (2)

Senators Jim DeMint and Lindsey Graham, both of South Carolina, have proposed the abolishment of the US individual income tax. They would replace the income tax with an 8.5% national sales tax. There would be an automatic rebate of $1,641 for those under the poverty line. They would also replace the corporate income tax with an 8.5% tax on purchases from suppliers.

This plan is similar to the Fair Tax that has been made popular by talk show host Neal Boortz. A similar bill has already been introduced in the House (HR 25).

This approach would eliminate the 60,000 plus page tax code as it now exists.

Such a move would be a huge savings in administrative and compliance costs to small businesses that now spend thousands of dollars just on tax compliance. What a boom it would be to small business and their employees if this were, somehow, to come to pass. High and complex taxes get in the way of entrepreneurial development and growth in an economy.

Will this bill see the light of day? I hope that it will, but the odds are against it.

Such a change would:

- Take away power from elected officials, which they will not give up without a fight. They will couch it not in terms of their own power, but in "fairness." The media will help them in this deception.

- Threaten the powerful accounting and legal industries. They now help to write and enforce the current system. The tax system as it is now is a billion dollar industry for these folks.

- Threaten the army of lobbyists who focus much of their efforts on tax breaks for their constituents. They will fight to keep this key part of what makes them a value to their employers.

I admire the courage of those leading this true tax reform movement, but fear that the current system may be too entrenched. I encourage all of you who want to see this entrepreneurial economy expand and grow to support this proposal. At least we can dream....

Posted by Jeff Cornwall at 07:20 AM | Permalink

Where there is customer pain there is opportunity.

A former student of mine from Minne-so-cold, Natalie, sent along a profile from seattlepi.com of a business that may deal with not only the pain of the customer, but a pain experienced by retailers who try to serve these customers. The common source of these pains? Teenage retail employees.

Experticity, which recently landed $1.2 million in angel financing, is testing a technology for in-store computer kiosks that would allow shoppers to touch a flat-panel screen and then get questions answered from a customer service agent -- one who may be located thousands of miles away. With a broadband connection transmitting data and voice, the customer service agent could advise a shopper on the benefits of certain products, pull up pricing information on eBay or show diagrams of how products work. The system also could be designed to allow shoppers to speak with agents in Spanish, Russian or other languages.

One of the questions I always ask those who are considering starting many types of retail operations is this: "Do you want your financial future left in the hands of a bunch of high school kids?!"

While this may solve part of that problem, the Luddite in me cringes at the thought of another computer to interact with. You see, I still get yelled at by the woman's voice in the computerized self check-out for messing something up every time I try to buy a few groceries at Publix .....

Posted by Jeff Cornwall at 06:28 AM | Permalink

A new global study, part of the Global Entrepreneurship Monitor ("GEM") project, has found that just 9.8% of the world's entrepreneurs expect to create almost 75% of the jobs generated by new business ventures. The report looks at what it calls high expectation entrepreneurs as all start-ups and newly formed businesses which expect to employ at least 20 employees within five years. Although these businesses would still be considered relatively small businesses by US standards, they have far reaching consequences for many of the economies in which they operate, particularly because of their impact on job creation and innovation.

The report's key findings include:

- Among country groups studied, more high expectation entrepreneurial activity occurs in North America (USA and Canada) and Oceania (Australia and New Zealand) than in any other country group. For these groups, high expectation entrepreneurial activity ranges from 1% to 1.6% of the adult population

- Among five countries studied individually, high expectation entrepreneurial activity is highest in the USA (1.6% of adult population), roughly twice the rate in the UK and Germany (0.7% each)

- Worldwide, 9.8% of entrepreneurs expect to create 74.1% of all jobs born out of new business ventures

- High expectation entrepreneurial ventures are most prevalent among well-educated men aged 25-34 years with high incomes

The report recommends "removing 'dis-incentives' for entrepreneurial growth" and supporting education for potential entrepreneurs. These are, once again, two of the most important public policies to support entrepreneurial development. The other is a simple tax system with relatively low tax rates.

As I like to say, offer entrepreneurs educational support and get the government out of their way!

Posted by Jeff Cornwall at 10:55 AM | Permalink

What does a buyer really "buy" when they buy your business? Is it your assets? Your reputation? Your team? Your customer base? The answer to all of these is yes, and no. The only reason any of these have value is if they will continue to create cash flow profits for the years to come for the new owner. After all, what good are a building, machines, or customers if they do not generate profits?

As we know, accountants have come up with about 17 different measures of profits (another full employment ploy on their part, no doubt). The one that matters here is EBITDA (Earnings Before Interest Taxes Depreciation and Amortization). That is the best measure of cash profits of a going concern for most businesses. Using EBITDA makes comparing businesses possible as it controls for financing, corporate form and accounting practices related to assets which all can vary.

So what does a buyer look do with EBITDA? In the simplest sense they use a multiple of EBITDA to give the business a value. The higher the multiple, the stronger they expect earnings to be going into the future. In most cases, the multiple they use on EBITDA ranges from 3 - 8. Now that is a huge swing in possible values. A company with EBITDA of $1 million could be worth anywhere between $3 million and $8 million!

The multiple varies based on any number of factors. The Christman Group LLC (a firm that specializes in exit planning for entrepreneurs) offers their top ten factors that have an impact on the size of multiple you can expect when your sell your business:

Number 10: Industry Outlook

If the outlook for the industry is bright, the price goes up. Buyers look hard at the outlook for a company's gross margins, future growth projections, international economic factors, etc.

Number 9: Depth of Management and of the Sales Team

If an owner wears all of the hats, including generating most of the sales, the price will go down. A strong and experienced management team to operate the business is key value driver.

Number 8: Customer Base

If a company has limited customer concentration with no single customer representing more that 5-10% of revenues the price goes up. If the customer base is made up of “blue chip” companies, the price goes up too.

Number 7: A Good Story to Tell

Telling a company's story is critical in helping the buyer recognize the full value of a business. An extensive confidential offering memorandum that describes the business operation, the marketing and sales programs, its organizational structure, its facilities and equipment, its financial performance, and provides a financial analysis including a believable 5 year financial forecast.

Number 6: Stage of Industry Consolidation

If a company's industry is experiencing consolidating with the big companies getting bigger through acquisition, prices for smaller companies will rise.

Number 5: Company Track Record

If a company can show a track record of consistently growing profits and sales, buyers will pay more.

Number 4: Type of Business

A manufacturing company with a proprietary product will sell for more than a job-shop manufacturer. A distributor that adds value by offering installation, repair, and/or engineering/design will sell for more money than a non-value-added distributor. A service company with a special expertise will sell for more than a similar service company without this expertise.

Number 3: Revenue Size

The larger a company's revenues, generally the higher the price. A business with $25 million of annual sales will sell for more than a company with $5 million in sales.

Number 2: Market Position

A company that dominates its market or has a unique niche in the market will sell for a premium over other companies that do not dominate their markets.

Number 1: Having Multiple Buyers

When there are multiple buyers bidding on a business, the price of the business will exceed the price paid for a business that is sold without competitive bids.

Posted by Jeff Cornwall at 08:24 AM | Permalink | TrackBacks (6)

I have been kind of rough on us baby boomers over the past couple of weeks. It seems that we are not planning our family business succession very well. Also, some of us are looking to entrepreneurship as a quick fix for our poor retirement planning.

However, a recent survey on small business and retirement planning conducted by the NFIB cuts us a little slack in all of this. It finds that most baby boomer entrepreneurs have given considerable thought to their retirement. Interestingly, nearly half (46%) intend to never fully retire.

Posted by Jeff Cornwall at 06:04 AM | Permalink

COTC is hosted by Blawg Review this week.

Posted by Jeff Cornwall at 06:01 AM | Permalink

One of the things that makes teaching entrepreneurship so enjoyable is that it is a "full contact sport." That is, to teach entrepreneurship effectively requires finding ways for students to put the knowledge we offer them into action. We can do that through how we teach our classes and through the co-curricular experiences we can offer our students that lets them take their learning out of the classroom. One of my students, Tyler Oban, sent a link to his blog site where he has found that this is catching on throughout all of business education.

Posted by Jeff Cornwall at 06:54 AM | Permalink

Inc.com offers a preview of its Inc 500 issue coming out in November. What they found in this year's list is more evidence of where jobs are being created.

The businesses that made Inc. magazine's 24th annual list of the country's fastest-growing private companies...together generated some 25,180 new jobs last year alone, up a full 35% on a year-over-year basis. They're also planning to add 17,000 more jobs in the coming year.

By contrast, Fortune 500 companies lost jobs on average between 2001 and 2003, before rebounding by just 1.3% in 2004.

Since being founded, this year's Inc. 500 companies together created more than 95,000 jobs.

Although this list is a self-nominated list, it still offers a remarkable snapshot of the entrepreneurial economy.

Posted by Jeff Cornwall at 05:29 AM | Permalink

Forbes has published its list of the top 200 Best Small Companies. A couple of thoughts on this:

- Sales for these businesses range from $21 million up to $745 million -- not necessarily what most of us think of when we hear "small companies." Small by Wall Street standards, most certainly, but not the typical small company that I see in my work.

- Although Forbes talks about these businesses as entrepreneurial, all of them are public. I decided several years ago that once a business goes public, things change enough that I no longer consider the business to be entrepreneurial any more. All of these companies were started as entrepreneurial ventures, but being a public company alters governance, corporate culture and management practices enough to make it a different animal in my mind.

- With the chill of Sarbanes-Oxley I wonder if the companies on this list aren't somewhat of a dying breed. That would be a shame as that could inhibit long term growth in our economy. High growth firms tend to not do as well once they are acquired by a big company. Bureaucracy seems to take over enough to slow things down.

Posted by Jeff Cornwall at 07:20 AM | Permalink

Venture capital fundraising for the first three quarters of 2005 is already ahead of total fundraising for all of 2004 according to a new study released by the National Venture Capital Association.

For all of 2004 there was almost $17 billion raised for venture capital and $52 billion for buyout and mezzanine financing.

In just the first three quarters of 2005 there has been well over $17 billion raised for venture capital and $54 billion for buyout and mezzanine financing.

Just to put this in perspective, in 2000 there was over $106 billion raised in venture capital alone, but we all know what happened to most of that money....It vanished when the dot.com bubble burst.

The money flow has slowed down a bit since Sarbanes-Oxley has all but shut down the IPO market for small to mid-sized firms. However, the funds have had an overhang of cash for almost a year, so their coffers are getting really full of cash.

What this means to entrepreneurs looking for funding is that the already cash rich venture capitalists have even more money to invest. That makes money more plentiful and terms a little more favorable for ventures looking for equity financing.

Posted by Jeff Cornwall at 05:29 AM | Permalink

Rob at BusinessPundit has a great post that proves the old entrepreneurial saying: "There is a pony in every pile of manure if you just dig deep enough."

Posted by Jeff Cornwall at 06:55 AM | Permalink

COTC can be found at Accidental Verbosity this week.

Posted by Jeff Cornwall at 06:52 AM | Permalink

Last month I wrote a post about baby boomers looking to entrepreneurship as a magic wand to fix their lack of retirement planning.

Well now a study reported in Inc.com seems to show that baby boomers who are already entrepreneurs and have created family businesses are not much better at planning:

Accounting firm Kreischer Miller surveyed 3,000 family-owned businesses and found that almost all expect to keep ownership and management within the family through the generations. However, only half have a formal plan in place to identify and train family members to take the reins once founders retire. Many families neglect to train, mentor, and groom future family executives. What's more, only one-third have non-family members on their board of directors, an arrangement which often ensures that the best qualified family members are chosen to lead.

Posted by Jeff Cornwall at 06:37 AM | Permalink

The people who run my blog have been trying to deal with the mass of spam that all blogs face. An unfortunate outcome of this is that many of your comments have been inadvertently filtered and have not even made it to me for approval. For this we apologize! They hope to have this fixed soon.

Posted by Jeff Cornwall at 07:55 AM | Permalink

We have been following Jason as he prepares to open his coffee shop in Bozeman, Montana. Today he ponders the competition he will be facing in the market.

I think there are answers to the question of competition. I think it is healthy. It keeps us on our toes and makes us be unique and different. Yes, we all want to make money and stay opened but I think there is room for that in this market in Bozeman.

Jason offers an important perspective on entering a competitive market. Rather than dismiss or even ignore your competition, you need to look at your competitors honestly and then take them on with a clear vision of what will make your business successful.

Posted by Jeff Cornwall at 07:42 AM | Permalink

Health insurance costs are consistently ranked among the most important issues faced by small business owners. This is not a surprise since the cost of offering health insurance is much higher for the smallest employers as seen in a recent study released by the SBA.

A new report issued by the National Association for the Self-Employed (link provided by NDE) looks at health insurance in America's smallest employers, also known as micro enterprises. These are business that range from ten employees down to an individual who his self-employed.

The study found that 51.1% of America's smallest firms do not offer health insurance to the owner or his/her employees. Of those that do offer health insurance, 85% report an increase in premiums over the previous year with an average increase of 17.3%. The average cost of health care for those small business offering insurance amounts to 4% of their total gross sales.

Given the razor thin profit margins of many small businesses, it is no surprise that over half of these small businesses cannot afford to offer health care insurance.

So where is this all taking us? The Small Business Health Fairness Act of 2005, which would allow small businesses to band together to purchase health insurance at a lower rate, is still stalled in the US Senate. While this would help bring down the cost of insurance for smaller employers and is therefore a good short-term help to entrepreneurs, it is not a long-term solution for the health care crisis.

We have taken most of the competitive market out of health care in this country. Health care lobbying from all fronts is intense. Employers, health care providers, insurance companies, pharmaceutical companies and health care advocates all spend countless millions of dollars at the state and national level pushing their agendas. The result is a highly complex, micro-managed mess that is not really controlled by the government or the free market.

To call our health care system a train wreck waiting to happen is a colossal understatement. While some, such as former AOL CEO Steve Case, are trying to work within the current system to find solutions, it is probably too late.

Since the two major political parties in the US offer us a choice between a dead sprint versus a gentle stroll toward socialism, I think we all know where this is headed. National health care will happen in this country in some form within the next decade. It will be more expensive than what we have now, and certainly much more expensive than a truly market-based solution. National health care will degrade the quality of our health care.

But, the politicians will put it in a nice package that will make us all feel good and then find ways to hide the real costs from the average citizen.

Posted by Jeff Cornwall at 06:00 AM | Permalink | TrackBacks (1)

The tax reform commission appointed by the Big Disappointment himself has made its recommendations. Scrap the IRS and its 60,000 page tax code? Nope. Their revolutionary recommendations include capping mortgage deductions and limiting health insurance deductions for highly compensated employees. That ought to add at least 1,000 more pages to the code before all is said and done.

The one good thing to come out is to end the Alternative Minimum Tax, but the other two changes are in place to make sure we still punish the successful.

Posted by Jeff Cornwall at 08:22 AM | Permalink

At least Judge O'Conner got it right in her minority opinion on the Kelo Decision. What will her replacement, Judge Miers, do the next time property rights come along? According to Coyote Blog this new judge will likely be "liberal" when it comes to economic issues.

Posted by Jeff Cornwall at 07:55 AM | Permalink

Federal Reserve Chairman Alan Greenspan offered a compelling assessment of the importance of economic flexibility in his remarks before the National Italian American Foundation yesterday.

Being able to rely on markets to do the heavy lifting of adjustment is an exceptionally valuable policy asset. The impressive performance of the U.S. economy over the past couple of decades, despite shocks that in the past would have surely produced marked economic contraction, offers the clearest evidence of the benefits of increased market flexibility.

We weathered a decline on October 19, 1987, of a fifth of the market value of U.S. equities with little evidence of subsequent macroeconomic stress -- an episode that hinted at a change in adjustment dynamics. The credit crunch of the early 1990s and the bursting of the stock market bubble in 2000 were absorbed with the shallowest recessions in the post-World War II period. And the economic fallout from the tragic events of September 11, 2001, was moderated by market forces, with severe economic weakness evident for only a few weeks. Most recently, the flexibility of our market-driven economy has allowed us, thus far, to weather reasonably well the steep rise in spot and futures prices for oil and natural gas that we have experienced over the past two years. The consequence has been a far more stable economy.

Markets will always be more effective than any bureaucrat, no matter how well-intentioned, in providing economic growth and stability.

(Thanks to Ben Cunningham for this link).

Posted by Jeff Cornwall at 07:53 AM | Permalink

The consequences of the Supreme Court's Kelo decision are beginning to ripple across the country.

Dr. Samuel Gregg, Director of Research at the Acton Institute, offers his thoughtful assessment of the fundamental changes this decision is creating in our economy and our society.

(I)t suggests that the basic justification of ownership is no longer found in the fact of legitimate possession, but rather in which private individual or business is deemed more likely by local government to use the property in economically productive ways.

And here we find potential for very disturbing developments. St. Thomas Aquinas once wrote that private property was a great bulwark against undue expansion of state authority, precisely because my ownership of a property means that I, rather than government officials, make most of the decisions about how to use it. Kelo's expansion of eminent domain undermines this very basic protection against excessive government power.

Over time, Kelo will become known as the sharpest blow to free enterprise and entrepreneurship since this country was founded.

(Thanks to Annie Whiting for passing this link along).

Posted by Jeff Cornwall at 07:26 AM | Permalink

I am teaching a class this fall in which the students are sent out in teams to consult with small business owners mostly from the inner city. My students are doing wonderful work with these entrepreneurs and seeing first hand how free enterprise can make a difference in the economy of the heart of Nashville.

A new study published by the SBA documents the dynamics of America's inner city economies, which are larger and more active than is generally understood.

State of the Inner City Economies: Small Businesses in the Inner City reports that small businesses are the greatest source of net new employment in inner cities. They comprise more than 99 percent of inner city business establishments and they generate 80 percent of the total employment in those areas. In all, America's inner city small businesses employ about nine million people, or eight percent of the U.S. private workforce.

"This report demonstrates that local entrepreneurs are not only the backbone of inner city economies but their strongest source of new jobs," said Steve Adams Region I Advocate for the Office of Advocacy and formerly the Director of the Center for Urban Entrepreneurship at the Pioneer Institute. "Policy makers should take note of these findings showing that supporting new and established entrepreneurs in inner cities should take priority in their urban development strategies."

The report notes that inner city businesses are similar to business in the rest of their Metropolitan Statistical Areas, exhibiting similar startup and bankruptcy rates. It also found that inner city job growth was concentrated in service industries, mirroring the trends in other areas.

Posted by Jeff Cornwall at 05:51 AM | Permalink

Angel investors are directing their money toward more start-up ventures, according to a study reported in Red Herring.

Angel investors are funding more early-stage startups this year than at any point since the Internet boom....Innovators who meet with angels are twice as likely to get funding this year than two years ago, a study shows. In 2005, angel investors backed 21.8 percent of the companies they investigated, up from 10.3 percent in 2003, according to a study by the Center for Venture Research. (emphasis added)

In a related story Red Herring also has a Q&A interview with fund managers from a group that invests in early stage businesses. It provides some interesting insights into their investing strategies.

We think that early-stage opportunities now are some of the best we've seen since the fund's founding 22 years ago....There are areas like semiconductors, which are continuing to change the world. There is the enterprise. There's the rise of open-source and on-demand software models like AJAX, the transfer of applications to mobile devices, and so on....We're not into trend investing. We tend as a fund to be into the picks and shovels, and looking at applications that are less sexy, but high growth.

More money that is being targeted toward clear and simple business models. Let the good times roll!

Posted by Jeff Cornwall at 05:12 AM | Permalink

The latest small business poll has been released by the NFIB and in spite of what you hear in the media, things are still looking up.

The back-to-back hurricanes that slammed into states on the Gulf of Mexico left massive damage in their wake, but barely scratched the nation's overall small-business sector. According to the September NFIB Small Business Economic Trends survey, the outlook among entrepreneurs remains upbeat for continued solid economic growth.

The small businesses surveyed reported continued plans for new job creation and new capital spending. Since small businesses in the US make up 50% of total employment and 50% of GNP, this is good news for continued economic growth.

Posted by Jeff Cornwall at 02:51 PM | Permalink

If I have a blogging mentor it is Bill Hobbs. Bill got me into this about two years ago. He walked into my office and asked me if I wanted to blog. Since I had no idea what blogging was, I was more than just a little uncomfortable. Once I realized that it had something to do with the Internet (Whew!!), I decided to give it a try. The visitors to my site have grown from a handful in the first few months to several hundreds a day from around the world today. Bill had coached and guided me all the way.

Bill has decided to take break from the daily grind of blogging.

Today I am announcing major changes to BillHobbs.com, effective immediately, that will alter this blog's content and its role in the blogosphere for the foreseeable future. The short version: I am putting my writing of political commentary on indefinite hiatus. I am not, repeat, not completely shutting BillHobbs.com down or disappearing from the blogosphere. I am merely taking a break from what has become a rather time-consuming and uncompensated hobby in order to put more focus on my family, my career, and an increasing workload of blog-related consulting for corporate and political clients.

Thanks, Mr. Hobbs, for all of your support and help.

Posted by Jeff Cornwall at 06:53 AM | Permalink

We hear all of the horror stories about lottery winners who end up broke and miserable. Large windfalls of money can be difficult to manage if we are not prepared. I see some entrepreneurs face similar challenges as their businesses suddenly create drastic increases in monthly cash to the owner or windfalls of wealth from a sale.

I met with a former student who is facing the possibility of winning one of life's lotteries with his business. A sudden opportunity is creating the possibility of significant profits over a very short time. But, he seems to have his head on straight. He is already planning to use this influx of capital to help build his business.

So why are some people better able to handle situations like this? I believe most of them were brought up with an understanding of how to manage money. I also believe that they were raised with values that were not as materialistic as others. To them money is not the end, but rather a by-product of working hard and living a good life.

Scott Burns (free registration required for this site) suggests that we look to a popular book, Getting Rich in America, for some answers on how to put wealth in its proper perspective.

Here are the eight rules from that book and my thoughts on them (for what they are worth):

1. Think of America as the land of choices.

Each choice we make can affect our character. What kind of business we do we choose to start? Who do we choose as our business partners? How will we treat our customers and our suppliers? How will running our business have an impact on our family? Virtues are simply habits we form by doing what is right.

2. Take the power of compound interest seriously.

Start saving when you are young. A dollar saved when you are twenty will be worth so much more when you retire than a dollar you save when you are fifty. As I wrote about recently, many baby boomers did not learn that lesson and are trying now to make up for lost time.

3. Resist temptation.

As may father always says, "Pigs get fat and hogs get slaughtered." Don't spend money until you have it, and don't waste it on things that cost a lot but have very little value. Be frugal.

4. Get a good education.

If you are an entrepreneur, learning about the process of entrepreneurship will almost double your odds of success. But beyond that and more importantly, a good education will make you a more interesting person and a better citizen.

5. Get married and stay married.

Amen.

6. Take care of yourself.

I began to have some health issues as our business grew very rapidly and we began to look at options to sell. Stress takes its toll on you. My brother says I aged in entrepreneur years during that time, which he says are about like dog years.

7. Take prudent risks.

Successful entrepreneurs are not gamblers, but they will take risks that are well thought through and well planned for.

8. Strive for balance.

If you follow rule #5 you will only be married once. You only have one chance to be a good parent. Good friends take work.

You can and you should be so much more than an entrepreneur in your life.

Posted by Jeff Cornwall at 06:04 AM | Permalink

Happy 2nd Anniversary to COTC!! It is fitting that BusinessPundit (one of my all time favorite sites) is hosting on this auspicious occasion.

Posted by Jeff Cornwall at 09:38 AM | Permalink

Very few entrepreneurs start their business out of true innovation and even fewer out of true invention. Most of us apply simple solutions to simple markets needs.

Randall Rothenberg, director of intellectual capital at Booz Allen Hamilton, offers his insights to this premise from a marketing perspective in an excerpt from a new book to be released soon The Big Moo: Stop Trying to Be Perfect and Start Being Remarkable (edited by Seth Godin).

- Imitation Across Industries Is More Efficient and Effective Than Blue-Sky Creativity and Innovation.

Take what has worked in a different market or for different customers and apply in a new place. Ride the wave of change that is already at work rather than trying to create a new wave.

- The Energy Isn't in the Idea; it's in the Execution.

Vince Lombardi would tell us that plays do not happen on the chalk board. It takes blocking and tackling to move the ball down the field. (Sorry, but after our first win -- finally -- I had to work the Packers in some how).

- You Must Create True Believers Before You Can Win New Converts.

Your best sales people are your own customers. Word of mouth is something that entrepreneurs want, but it takes "true believers" to make it happen. You have to create the "true believers" in how you execute your new business.

I got the link to this article from National Dialogue on Entrepreneurship. They seem to be disheartened by these arguments. They want to keep the focus on the high growth, high potential ventures that so enthrall most academics I know. Hey guys, get with the entrepreneurial economy, which is mostly made up of simple, yet powerful market solutions.

Posted by Jeff Cornwall at 06:15 AM | Permalink | TrackBacks (2)

Ben Cunningham passed along a press release from the census bureau about the self-employed:

The number of businesses with no paid employees grew from 17.6 million in 2002 to more than 18.6 million in 2003, a growth rate of 5.7 percent, according to a report issued...by the U.S. Census Bureau. This represents the biggest rate of increase in self-employment since the Census Bureau began releasing such statistics in 1997; the rate during the 2001 to 2002 period, 3.9 percent, was the previous high.

The usual line I hear at this point is something like this, "OK, but these are just laid off people who got thrown into self-employment." And while this may be true for some, I am seeing more and more people who choose to start a one person business due to lifestyle issues or even because they can actually become better off financially on their own. And even if they are laid off corporate types, hey, they are using free enterprise to move on in life which is not a bad thing.

What are they all doing? There are some interesting findings:

- Some examples of industries with impressive nonemployer business growth are real estate appraisers, 19.1 percent; nail salons, 15.9 percent; landscape architectural services, 14.6 percent; software publishers, 14.4 percent; clothing accessories stores, 12.9 percent; bed and breakfast inns, 8.5 percent; carpet and upholstery cleaning services, 7.5 percent; and confectionery and nut stores, 6.5 percent.

- Four economic sectors accounted for almost 60 percent of nonemployer receipts -- real estate and rental and leasing ($176.0 billion, or 21.2 percent); construction ($126.4 billion, or 15.2 percent); professional, scientific and technical services ($102.9 billion, or 12.4 percent) and retail trade ($80.5 billion, or 9.7 percent).

Many of the self-employed I talk with like working alone. Some have had businesses with employees in the past, but the headaches of government regulations made them decide on a different business model.

Posted by Jeff Cornwall at 06:28 AM | Permalink

"But, where do I find an idea?"

Many aspiring entrepreneurs may have the passion to strike off on their own, but they sometimes lack the business idea to make it happen. Most of the time they are trying too hard to find the "next Microsoft" or invent the "next iPod."

The best business opportunities I typically see come from things people know something about. It is like Dorothy in the Wizard of Oz discovering how to get back to Kansas; the answer was right in front of her all along.

StartupJournal provides a couple of good examples in recent articles posted at their site. The first is a woman who turned a grocery shopping annoyance into a business:

Missy Cohen-Fyffe's business began when other moms gave her unsolicited feedback as she strolled down grocery-store aisles with her son riding in blanket-like protection in the shopping cart.

"I just didn't want my son biting on the gross, grimy metal," she said of her Clean Shopper invention.

Seven years and four employees later, Cohen-Fyffe has turned her crafty idea into a full-time career: selling the Clean Shopper and other baby products from her New Hampshire home base.

The second example is of a woman who turned her hobby of tennis into a new business and a new career:

Ms. Parker targeted a tiny but lucrative market: the sticky "overgrips" that some tennis players wrap around their racket handles. Overgrips cost a few cents to make, yet they retail for about $2 each. Full of naive optimism about her prospects, Ms. Parker hoped to turn a drab-looking product into a fashion accessory that might catch the public's fancy.

Don't over think of ideas for new businesses. The best ideas come from our work experiences, our hobbies, or our everyday lives. Find something from your experiences that is also a need for others. There may be competition, but they just do not quite take care of the need. Or if you are lucky, it may be a niche that nobody has discovered. Either way, solving everyday problems that you understand is the best path to your first business venture.

Posted by Jeff Cornwall at 05:21 AM | Permalink | Comments (1)

Where there is an action there is an equal and opposite reaction.

The action in this case was Sarbanes-Oxley and its onerous reporting requirements for small public companies, which basically killed the small IPOs in the US. The reaction, as predicted at this site earlier, was an increase in mergers and acquisitions as an alternative exit strategy for equity investors in start-up deals. Red Herring reports that M&A activity is up 23% for techie businesses.

IT service companies saw a large jump in transaction activity, rising 50 percent during the first half of the year. Acquisitions in the service sector are considered to be a leading indicator of IT investment. Valuations in the sector went up 37.5 percent....

The reaction to the reaction is a sharp increase in VC investments during the same quarter. VCs are flush with cash and looking for deals that can provide a large, relatively quick return. If they cannot get them from IPOs, M&As work just as well. Higher valuations for these acquisitions seem to have the VCs licking their chops.

Do not expect this current pattern of exit through acquisition to end any time soon. Sarbanes-Oxley is here to stay without any changes for smaller firms. The accounting industry is gearing up a public relations campaign to illustrate how important it is to keep a close eye on even the smallest public company.

Also, it is important to keep in minds that Sarbanes-Oxley created a new agency (imagine that) called the Public Company Accounting Oversight Board (PCAOB). The PCAOB board is appointed by the five members of the Security and Exchange Commission. In addition to being a clear constitutional problem this also assures that the lawyers and accountants who control the SEC will keep Sarbanes-Oxley a cash cow for their brothers and sisters in the big private law and accountings firms.

Posted by Jeff Cornwall at 06:28 AM | Permalink

Those who read business plans on a regular basis begin to see certain patterns that immediately send up red flags. One of the most common that I see is a when the entrepreneur downplays, or even dismisses their competition. Sometimes it is due to lack of careful research, sometimes it is due to tunnel vision, sometimes it is arrogance, and sometimes it is due to denial. But whatever the cause, ignoring the competition is most often deadly for a new business.

Jack Trout offers some good tips on how to look at your competitive environment at Forbes.com.

1. Avoid a Competitor's Strength and Exploit His Weakness

This reminds me of the classic entrepreneurial strategy from Peter Drucker: "Hit 'em where they ain't." If you notice weaknesses in your competitors your customers will likely see the same things. And if it is something that really matters to the customer, go after it and use it to your advantage.

2. Always Be a Little Bit Paranoid About Competition

If it feels like the competition is watching you, they probably are! They will adjust their strategy to counter moves you make. The start-up of a business is just that: the start. Competition is not a race to the starting line.

3. Competitors Will Usually Get Better, If Pushed

Just like in sports, competition will make your opponent better. That means you will also need to work at getting better at what you do and what you offer to the customer.

4. When Business Is Threatened, Competitors Aren't Rational

Remember that the two responses of a threatened animal are fight or flight. In business, competitors rarely fly, so get ready for them to fight. The fighting response is not always well planned. It is usually instinctive and impulsive.

I recommend that business owners use a tool called a competitive matrix. It is really quite simple. Along the top of the matrix list the 3-6 primary criteria that customers use to choose either your product/service or your competitors. Think like your customer.

Then along the side of the matrix list each of the main competitors seeking the same customers as you. Again, keep the list to about 3-6 of the toughest competitors you will face.

Then inside each of the squares of the matrix describe how well each of the competitors addresses each of the needs of the customer. Be objective and be descriptive.

This should not be a one time exercise. It should become the way you continually monitor what each competitor is doing in the market and how your customers' tastes and preferences are changing.

Never take your eye off the competition and never underestimate what they can accomplish.

Posted by Jeff Cornwall at 06:25 AM | Permalink

This week COTC is at Drakeview.

Posted by Jeff Cornwall at 10:11 AM | Permalink

A risky business model is one that is one that is based on a dependent relationship with just a handful or even just one main customer. Inc.com has a good case in point from the auto industry in which GM is looking to cut its costs on the backs of its suppliers. Many of these companies are small businesses that are completely dependent on GM for their survival.

My rule of thumb is this: never let a single customer represent a percentage of your sales that is larger than your profit margin. That way if you lose one customer, even your largest customer, you can stay in business.

While this may not always be possible to achieve, it should be a goal that drives your growth. If you are heavily dependent on one or two customers, work hard to grow your business with new customers that can lessen this dependence.

It also allows you to fire any customer, if necessary. If a big customer makes it impossible to do business with them due to shrinking profit margins or impossible terms, you can tell them to take a walk. We did this twice with very large managed care companies in our business. Did it hurt? You bet it did, but we had enough other business to survive. We focused our efforts on replacing these customers with new ones that were more profitable and easier to work with.

Posted by Jeff Cornwall at 07:12 AM | Permalink

Small businesses continue to drive the U.S. economy, according to the updated 2005 Small Business FAQ, released by the Office of Advocacy at the U.S. Small Business Administration.

Small business statistics highlighted in the 2005 Small Business FAQ include:

- Small businesses represent 99.7 percent of all employer firms.

- Over the past decade, small business net job creation fluctuated between 60 and 80 percent.

- Small businesses generate more than 50 percent of the nonfarm private gross domestic product (GDP).

- Two-thirds of new employer establishments survive at least two years after start-up, and 44 percent survive at least four years.

- Small businesses employ half of all private sector employees.

- Very small firms with fewer than 20 employees spend 45 percent more per employee than the largest firms to comply with federal regulations.

- Minorities own 4.1 million firms that generate $694.1 billion in revenues and employ 4.8 million workers.

- Women own 6.5 million businesses that generate $950.6 billion in revenues, and employ 7.2 million workers.

- In 2004, an estimated 580,900 employer firms opened while an estimated 576,200 closed.

Posted by Jeff Cornwall at 07:05 AM | Permalink

Well, fall is here and that is the season of rankings. The latest is from Entrepreneur magazine with its rankings of top cities for entrepreneurial development. Here is their top ten:

1 Phoenix-Mesa, AZ
2 Charlotte-Gastonia-Rock Hill, NC-SC
3 Raleigh-Durham-Chapel Hill, NC
4 Las Vegas, NV-AZ
5 Indianapolis, IN
6 Washington-Baltimore, DC-MD-VA-WV
7 Atlanta, GA
8 Nashville, TN
9 Austin-San Marcos, TX
10 Memphis, TN-AR-MS

As always, it is important to look behind the rankings and see what is actually being measured.

In this ranking they look at the percentage of businesses that are 4-14 years old and that employ at least 5 people. This is a measure of newness of businesses in the area. The reason that the businesses must be at least four years old is to capture only those that seem to be surviving.

This ranking then looks at growth rate of these businesses and creates an index of entrepreneurial activity.

This seems to be a pretty good measure of entrepreneurial activity. However, care must be taken when interpreting any study based on percentage data. For example, if a state or city had a very bad economic climate in the 1980s and 1990s, the odds are good that most of their businesses will be newer and it will rank higher.

An interesting case from this ranking is Hawaii, which ranked 10th overall in this study.

Hawaii was devastated by the collapse of the sugar and to a lesser degree the pineapple industries. Both had been propped up by failed governmental policies. Unemployment skyrocketed during this time. Very little of their traditional economic base, other than tourism, remained.

Eventually, entrepreneurial activity began to fill the void and the Hawaiian economy began to be rebuilt. This new entrepreneurial economy is, in fact, working remarkably well. Hawaii now has relatively low unemployment (2.6% compared to 4.9% nationally) due to the growth of new businesses.

Posted by Jeff Cornwall at 06:17 AM | Permalink