The Entrepreneurial Mind

IN CONGRESS, July 4, 1776.

The unanimous Declaration of the thirteen united States of America,

When in the Course of human events, it becomes necessary for one people to dissolve the political bands which have connected them with another, and to assume among the powers of the earth, the separate and equal station to which the Laws of Nature and of Nature's God entitle them, a decent respect to the opinions of mankind requires that they should declare the causes which impel them to the separation.

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.--That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, --That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness. Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn, that mankind are more disposed to suffer, while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed. But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security.--Such has been the patient sufferance of these Colonies; and such is now the necessity which constrains them to alter their former Systems of Government.

Posted by Jeff Cornwall at 09:55 AM | Permalink | Comments (1)

A study recently released by the SBA's Office of Advocacy has some interesting findings related to entrepreneurship, income and wealth. The study finds that in 2001 small business-owning households were more than twice as likely as non-owning households (57.1 percent to 25.5 percent) to be high income (defined as at least $50,000 in family income).

The study also found that small business owners were over eight times more likely (21.2 percent to 2.5 percent) to be high wealth households. High wealth is defined as having at least $1 million in family net worth.

Posted by Jeff Cornwall at 05:55 AM | Permalink | Comments (1)

One of the keys to success in raising money for a venture it to really understand how the various sources of funding think, what their expectations are, and how they make decisions. This is true for bankers and investors.

There is a good article that was just posted at Wharton's web site, based on a panel discussion they hosted, that gives some insight into the perspective of venture capital investors.

Risk is part of the landscape when investing in start-up firms, and venture capitalists need to approach this peril across a range of dimensions, including geography, industry and the timing of investments in the product development cycle.

There is an old adage that says, "There is a bank on every corner." I remind entrepreneurs that each bank is different, and even though one is not a good fit, the next one might be. The same is true about investors. In reading the article about this panel discussion, one starts to see how just like bankers, each VC has different criteria, objectives, preferences, and biases.

(Thanks to John Russell for passing this along).

Posted by Jeff Cornwall at 08:51 AM | Permalink

I wrote about my bias for S-corps over LLCs in a post last month. It seems that I am not the only one who sees its benefits.

There is a move in Congress, called H.R. 4421, the "S Corporation Reform Act of 2005," to clean up a few of flaws in the laws that govern S-Corps that will make S-Corps even more attractive.

One of the traps that is a part of current S-Corp law involves this thing called passive income. I remember in our S-Corps that we spent a lot of money paying our CPAs to made certain that we avoided the so-called "sting tax" that goes along with passive income. Generally, passive income is a pretty good gig. It refers to income that you receive for activities in which you do not "materially participate." That's right, it is and investment in something that makes you money while you are sitting on the beach.

But when these passive investments are part of an S-Corp, the wrath of the IRS will come down on you. Thomas Sullivan from the Office of Advocacy of the SBA summarizes the current implications of passive income in an S-Corp in his testimony before Congress yesterday:

Specifically, if an S-corporation that previously was a C-corporation has undistributed dividends, and earns 25 percent of its gross receipts as passive investment income, then two things will happen. First, the S-corporation is taxed on its income at the highest corporate rate. Second, if the S-corporation earns too much passive investment income for three consecutive years, then the S election is terminated all together. The result is that the S-corporation becomes subject to double taxation. Double taxation is the penalty for earning too much of the wrong type of income (i.e. passive investment income) and/or earning that income too often, thus eliminating the purpose for electing S status.

This passive income rule does not apply to other pass-through entities like partnerships and LLCs. The rationale for why passive income has been treated this way is no longer relevant and the sting tax should be eliminated.

Another change that is part of the S Corporation Reform Act of 2005 would allow for more than one class of stock. S-Corps can only have one class under current law. This can create challenges for family business succession. Again from Sullivan's testimony:

It is common to plan for the next generation of leadership of a family business, by issuing preferred shares to the generation that is leaving the business as a means to provide for their retirement and their orderly withdrawal from the enterprise. However, because S-corporations may not have more than one class of stock, this practice is prohibited. Thus, family owned businesses must incur additional expense to ensure that the retiring generation is provided for.... H.R. 4421 would allow S-corporations to issue qualified preferred stock which will enhance succession planning for many small family-owned businesses.

A third change would allow for non-resident aliens to be owners in a S-Corp, which is currently not allowed under the law. In our emerging global economy, this provision also seems to need changing.

Finally, anyone who has formed an S-Corp knows that there is a limited window of opportunity to make the S-election. The proposed changes under H.R. 4421 would loosen this up a bit to allow for mistakes in filing or invalid elections to get corrected.

Changing the S-Corp law is not the stuff that inspires voters in campaign speeches. But, it is extremely important to help the entrepreneurs who are creating the vast majority of new jobs and generating about half of our national GDP.

Posted by Jeff Cornwall at 07:14 AM | Permalink | Comments (5) | TrackBacks (1)

The President may have breathed some new life into the fight against Kelo. From Jurist:

President Bush issued an executive order Friday directing that US federal agencies and government departments may not seize private property unless the taking is for public use "and not merely for the purpose of advancing the economic interest of private parties." Bush's order instructs the US attorney general to ensure that all federal entities limit the use of the government's eminent domain power to the taking of private property for projects such as government offices, parks, hospitals, and roads.

While this is a good step, remember that this only has an impact on federal agencies. Local and state governments have been the most active in using eminent domain for development and targeted economic developments plans, such as corporate relocations. From the NFIB's Executive Director Dan Danner:

While this is an important first step, still more needs to be done in order to avoid the slippery slope of seizing private property in the name of economic development: narrowly defining 'public use;' making 'just compensation' truly just; and discouraging the taking of private property except for when the government truly needs it.

Small businesses should not have to fear that their business could be seized by the government in order to promote increased economic development. In addition to the executive order, small-business owners urge the members of the Senate to follow the lead of their colleagues in the House and pass legislation on this vital issue.

Leadership and renewed publicity helps on an issue like this. We still need to push ahead at the state and local levels to finally counter the impact of the Kelo Decision.

The full text of the executive order can be found here.

Posted by Jeff Cornwall at 05:43 AM | Permalink | Comments (1)

Landing a big corporation as a customer can put a small business on the map. It can provide the kind of infusion of sales that can make a start-up become viable or help an already thriving small business to grow. But, as with so many things, with all of the good that comes with such a breakthrough, comes new challenges. StartupJournal has several stories of the headaches and heartaches created by a big corporate customer.

Here are a few that I warn small business owners about:

- Dependence. Many small businesses can become almost totally dependent on their large corporate customer. This can make your business vulnerable to the whims of corporate strategy. Corporations think nothing of shutting down a product line or moving their purchasing to an overseas supplier. There is no loyalty when you are feeding at the corporate trough. What is there today, can be gone tomorrow with no warnings or apologies. That is why I urge small businesses to never have one customer that generates more sales than you have profit margin. If your profit margins are 10%, then your biggest client should be no more than 10% of your sales. That way, you can survive the loss of that biggest client and move on. Realistically you cannot always have this ratio. But the moment you land a big customer you should move to make sure that you reach this ratio as soon as possible. Don't get lazy. As my father likes to say, "Pigs get fat, and hogs get slaughtered."

- Culture and Ethics. Remember when your mother told you that you will be known by the people you hang out with? Make sure you understand how a potential big corporate client does business. Your ethics, and your character, are shaped by the people you choose to do business with. If you sign on with a sleazy corporation, your ethics will be challenged and eventually you may be forced to compromise. You cannot isolate you and your employees from this, either. Their culture will infect your culture.

- Cash Flow. Big customers can mean big headaches for cash flow. We ran into several situations in our small health care business when big health insurance companies or governmental agencies used us to manage their cash flow issues. Some large corporations routinely push their accounts payable out to 90 days just because they can.

- But Will They Still Love You Tomorrow? If a large company decides they need quantities that you can't provide, or need just in time orders you cannot possible supply, or lower prices that would force you to sell to them for a loss, they won't care what that means for your business. If you can't meet their needs today, you will be history tomorrow. It doesn't matter if you have sold to them for twenty weeks or twenty years.

So think through very carefully any decision to get into a business relationship with a large corporation. Run it through your business plan to make sure you understand the financial, operational, and cultural implications for your business. And remember to be careful of what you pray for. You may just get it.

Posted by Jeff Cornwall at 07:20 AM | Permalink | Comments (1) | TrackBacks (1)

A compromise on the death tax passed by the House last week and will be taken up by the Senate this week. While this bill does reduce the tax burden by making estates under $5 million ($10 million for a married couple) exempt, it leaves open the door for changes in this tax in the future. If the Death Tax had been killed, as was the original plan, that would in all probability be the end of estate taxes in our life times. But now with this compromise, estate taxes stay in place and remain a tempting target the next time the government sees the need to raise more taxes.

Posted by Jeff Cornwall at 07:02 AM | Permalink | Comments (6)

Americans are like the frog in the kettle. The burner is on. The water is heating up. And we are naively oblivious to the fact that we are about to be boiled alive.

It is one year since the Supreme Court changed the definition of property rights with the Kelo decision. With this one decision, we have shifted ownership of property from an inalienable right of individual citizens to a privilege that can be taken away by a state or local government that decides they have a "better use" for our property.

I wish I could report that there was the kind of grassroots uprising that some had hoped for. But, there has been little progress to temper the effects of the decision that gives government the power to use eminent domain to take property away from small business owners and private citizens, often to benefit large developers and corporations.

From the North Country Gazette:

Wonder whether the threat of eminent domain abuse has grown worse since the U.S. Supreme Court's Kelo ruling one year ago this week?

Consider this fact: in just the past year, more than 5,700 properties nationwide have been threatened by or taken with eminent domain for private development-a figure that compares with more than 10,000 examples over a five-year period preceding the Kelo argument, according to one of five reports released Tuesday by the Institute for Justice (which argued the Kelo case before the U.S. Supreme Court) and its grassroots activism project, the Castle Coalition.

Fewer than half the states had enacted any legislation and efforts at the federal level have stalled, according to a summary issued by the Small Business and Entrepreneurship Council.

And now the developers and power hungry politicians are fighting back.

- In Oklahoma the Supreme Court sided with developers who were fighting a proposed constitutional amendment to limit the use of eminent domain in that state.

- Governors in Iowa and Arizona vetoed bills to limit the use of eminent domain. Iowa is debating about whether to call a special session to address the issue again.

- In Connecticut, where this all began, there is a call from the Speaker of the House to end the voluntary moratoriums on the use of eminent domain and forget about any attempts to limit it through legislation.

- In Colorado, an effort to get an initiative on the ballot failed to get enough signatures.

- In New Mexico, the issue has been relegated to legislative purgatory as the Governor has sent it to a task force.

There is still progress on some fronts.

- North Carolina, New Jersey, South Carolina, Nevada, seem to be inching toward passing bills or getting initiatives on the ballot.

But sadly, I think I know how this game will play out. Americans have shifted their attention to other matters. We have softened the pressure on politicians to act, so there is less incentive for them to limit their own powers. Over time, we will see any progress that was made get quietly eaten away through new laws, court decisions, and regulatory actions.

Doesn't anyone else think that this water is getting awfully hot?

Posted by Jeff Cornwall at 07:23 AM | Permalink | Comments (2)

An 18-year old founder of a non-profit business that buys, renovates and sells abandoned homes to families in need has won the 2006 National Federation of Independent Business (NFIB)/Visa USA "Young Entrepreneur of the Year Award."

In recognition of her entrepreneurial achievements and spirit, Ashley Gunn of Brandon, Mississippi has been awarded a $10,000 educational scholarship. It will be sent to the University of Pennsylvania to help defray the cost of her tuition, this coming fall.

Ms. Gunn is the founder and chairman of Students Aiding Indigent Families (SAIF), a non-profit organization that buys, renovates and sells abandoned homes to families in need, usually single mothers, at below-market value. Ms. Gunn first thought of this business idea after returning from a mission trip to Africa in the summer before entering the 7th grade. Moved by the poverty and despair all around her while in Africa, she was determined to help address similar needs back home in her Jackson, Mississippi community. On track to generate $100,000 in revenue this year, SAIF has been certified by the Mississippi Secretary of State and all proceeds from their home sales go toward providing college scholarships to deserving students who are in need.

Posted by Jeff Cornwall at 07:39 AM | Permalink | Comments (2)

Impact Lab summarizes a study that appears in the June issue of Family Business Review in which the author finds that family businesses experience better financial performance than non-family firms.

Professor Jim Lee said family firms tend to experience higher employment and revenue growth and are, overall, more profitable than non-family businesses. He says his study suggests the average profit margin for family firms was 10 percent, 2 percent higher than non-family companies.

Most of us think of family businesses as being Mom, Dad, sister Sally, and cousin Fred. Prof. Lee looked at a very different type of "family business." His sample was Fortune 500 businesses that still have the founding family having a significant presence in the company. I know, I know, this is a blog about entrepreneurship, not corporate America. But, the study does raise an interesting issue that is relevant for all businesses from small to gigantic.

I wondered why these businesses would have better performance. Were they smarter business people? Not likely. Were they in certain types of businesses that performed better? No, because he controlled for those other variables.

Then I started thinking about the chapter I just sent to my co-author earlier this week. It was about the virtue of prudence in entrepreneurship. We argue that prudent entrepreneurs are those who understand that their role as a business leader is one of stewardship. From a theological position, we are all stewards continuing God's creation here on earth. From a more pragmatic perspective, we are stewards of the resources we have pulled together from a variety of sources: money from investors and/or lenders, labor from our workers, time away from our families, space from a landlord, materials from our vendors, and so forth. As entrepreneurs, all of these folks trust us to use the resources given to us wisely and effectively.

You will often hear entrepreneurs talk about the heavy responsibility they feel when an investor hands them a check. It is no longer just the entrepreneur's money to lose, but now someone else has said, "I trust you to use this money to build a successful venture."

By being good stewards, by being prudent, we think twice about how we use this precious resource that we have been given to build our business. We think long and hard about whether what we are spending will really build sales and profits. Good stewards are good bootstrappers. We look to be effective, but by spending the least amount of money that we can.

In today's public corporation there is not just a separation of ownership and management, there is a total disconnect. We see CEOs from public companies spending money like drunken sailors. If fact, some might argue that they are spending money like politicians in Washington! A million dollars here, a billion dollars there. But who's counting? My co-author Mike Naughton talks about the disconnectedness between capital and communities in today's culture as a contributing factor to this absence of stewardship and prudent actions in business.

But, maybe in the public firms in this study, where there is still a large presence of the family still associated with the business, there is a stronger sense of stewardship. Money is not some commodity that comes flowing in from people they will never meet nor be personally responsible or accountable to: it is still in large part the family's money they are spending.

This study at least hints that good stewardship in business is not only a morally good act, but financially good, as well.

Posted by Jeff Cornwall at 06:51 AM | Permalink | Comments (1)

The Small Business and Entrepreneurship Council offers what I think are some of the better public policy rankings. In their 2005 Congressional Scorecard (just recently issued), they rank congressional delegations on how they voted on lowering taxes, simplifying regulations, and supporting of open and competitive markets.

Here are the top 10 and their scores:

1 Idaho 95.7
1 Oklahoma 95.7
3 Alaska 94.3
3 Wyoming 94.3
5 Utah 92.4
6 Kentucky 92.1
7 Alabama 91.0
8 Nebraska 90.6
9 Kansas 88.6
10 New Hampshire 87.0

And the bottom 10:

41 New Jersey 41.6
42 Connecticut 41.2
43 New York 38.9
44 Maryland 35.2
45 North Dakota 33.8
46 Maine 30.9
47 Hawaii 24.1
48 Rhode Island 18.1
49 Vermont 15.7
50 Massachusetts 12.2

Posted by Jeff Cornwall at 07:45 AM | Permalink

Almost every entrepreneur believes that they are in a niche. In a niche strategy, the entrepreneur finds a small part of a market that is not being served or is significantly under-served. A niche strategy gives the entrepreneur a safer market with less competition and a more dependent market.

Generally, a niche strategy is a good way to enter the market for a new business. It usually takes fewer resources for the start-up, due to lower marketing costs and the ability to start on a smaller scale. Success rates tend to be higher for niche businesses since they have less direct competition. Without much competition, niche businesses can charge higher prices, which allows for quicker positive cash flow during start-up and better margins once profitable.

But, as the old saying goes, all good things come to an end. Thus is the case with entrepreneurs across the country running Mom & Pop car washes, according to a story at StartupJournal, which have operated for years in safe little niches, amassing their quarters into nice little sums of wealth. It seems that Home Depot and Sam's Club have caught on to these little cash machines.

While significant growth in your market niche may not sound bad, it can attract more competitors. And if it grows large enough, it can attract some of the "big boys." At some point your cozy little niche can feel quite crowded and really is no longer a niche. That requires that you adapt your business strategies to this more competitive market.

One strategy is to fight the "big boys" head on. Your pricing will be forced downward, while the cost of business may go up due to increased marketing costs, greater expectations from your customers, and higher labor costs due to more competition for your best staff. Your goal becomes keeping market share in the increasingly competitive market, as you will now need volume to assure profitability. When fighting with the likes of Sam's and Home Depot, this may be a losing strategy. Their pockets are so much deeper than yours.

Another strategy is to adapt. Give your customers new features that the "big boys" don't offer to differentiate your business from their more generic approach.

Facing growing competition,...car washes around the country are launching new services aimed at grabbing customers' interest. Some are promising shorter cleaning times and opening plush waiting rooms with Wi-Fi service. Others are pitching Netflix-style discount plans in which customers pay monthly for unlimited washes. Some are even washing the family dog.

While you will lose market share to the "big boys," your enhanced offerings can be offered a premium price. Rather than competing head on as a commodity, which they will win almost every time, these entrepreneurs are creating in effect a new product for those customers who are looking for more than a generic car wash. They are redefining their product by creating an experience that has more value and more appeal to a certain segment of the market.

So is a niche a good place to enter the market? Absolutely. However, change is inevitable and even in a niche market an entrepreneur needs to be able to adapt to survive over the longer-term.

(Thanks to John Russell for suggesting this topic).

Posted by Jeff Cornwall at 05:57 AM | Permalink | Comments (2)

There is a steam roller building momentum called socialized entrepreneurship, which is the term I use for government trying to manage the entrepreneurial economy.

This week's National Dialogue on Entrepreneurship has several examples:

- A report on how state and local governments in the South can pick winning industries and businesses to spur entrepreneurship. (It never works over the long-run, and often fails even in the short-run).

- A report of similar efforts down under in Australia. (OK, so they won the US Open. I'll give them that much.....).

- An article on how state governments are helping low income people gain access to entrepreneurship by creating "asset building accounts" for them through a variety of programs. (Redistributing wealth is still redistributing wealth no matter what you call it).

- And a brand new academic journal on how governments can more effectively meddle in the entrepreneurial process. (I kind of figured that some of my colleagues in the academy where behind all of this.....).

To all of you who think that socialized entrepreneurship can actually work, please remember that the first word in free enterprise is free.

Posted by Jeff Cornwall at 07:46 AM | Permalink | Comments (4)

A note to my regular visitors:

I have had a major problem with spam attacks at this site. In an attempt to address this growing problem, the IT staff here at Belmont made some changes. During that process they inadvertently wiped out about two years worth of your legitimate comments.

They assure me that they have back-ups and are working to get the comments restored. (Don't ask me how -- remember that I am basically a Luddite blogger.....).

I appreciate the wonderful dialogue that many of you help to contribute to this site. Please be patient as the problem is getting fixed.

All recent comments from the past couple of weeks are OK, and any new ones that you continue to add will not be affected, so please keep 'em coming!

Jeff

Posted by Jeff Cornwall at 07:34 AM | Permalink

Carnival of the Capitalists comes to us from Canada this week at Blog Business World this week.

Posted by Jeff Cornwall at 07:31 AM | Permalink

There is an interesting buzz going on around the Internet and around the world about the source of entrepreneurship. The question being asked is this: are entrepreneurs born or are they made?

The World Bank's blog has a good summary of the debate. Here are the highlights:

- A UK study of identical twins claims that genes explain 48% of a person's propensity to be self-employed. (FuturePundit explores this study in more depth).

- Another study looks are testosterone levels as a predictor. (BusinessPundit has an interesting take on this study).

- While a couple of other studies, including one from China summarized at the World Bank blog and the study that I panned their conclusions in a post earlier this week, favor the nurture argument over the genetic one.

So what is my take on this debate? While it may be an entertaining academic discussion, there never will be a single answer. It is part nurture, part nature, part culture, part economic policy, and part circumstances. So enough already!!

How someone gets to the point of wanting to start a business does not really interest me at all. I am a pragmatist. What matters to me are those things we can do to create an environment in which entrepreneurs will have the best chance to succeed. And what creates that environment? Come on everybody, sing along: less regulation, lower and more neutral taxes, and education.

My part in this is to rant about regulations and taxes, and to try and be a part of the educational movement to improve how we teach and train entrepreneurs. As I argued a while back in response to a Fortune Small Business article, Yes, Entrepreneurship Can, and Is, Being Taught.

(Thanks to Diego for suggesting this topic).

Posted by Jeff Cornwall at 07:25 AM | Permalink | Comments (6)

The NFIB's monthly report on small business optimism took a dip in March. But then in April, it seemed to bounce back. The results from March were called a possible "fluke." However, the results from May seem to indicate a somewhat alarming change. The NFIB Small-Business Optimism Index slipped again in May, down 1.6 points to 98.5 (1986=100), suggesting that the March decline may not have been a fluke, but the beginning of an oscillation in the outlook that is signaling a peak for economic growth. A closer look at the data indicates that any slow down will be mild and rather short-lived, according to the results of the survey.

Any slowdown in small business activity is critical, however. Small business now represents 50% of our GNP.

Posted by Jeff Cornwall at 08:04 AM | Permalink

Every year I have several students who are not interested in entrepreneurship to build their own wealth, but because they want to use the skills and knowledge they learn to start new non-profits related to social causes they care about. This type of entrepreneurship is called social entrepreneurship. The Entrepreneurial Generation (born after 1980) has less faith that social problems can be fixed by government, and would rather find private sector solutions. It is part of the libertarian (with a small "l", not a capital "L") streak that is a strong part of this generation's values.

A new study from the Global Entrepreneurship Monitor finds that this is true for the youth in the UK, as well.

The largest, annual survey of social entrepreneurial activity in the United Kingdom shows that young people are more likely to be social entrepreneurs than any other age grouping. 3.9% of those in the 18 - 24 year-old category would pursue a socially minded enterprise, compared to only 2.75 of those over 55s. Similarly, education is a strong predictor of social entrepreneurial activity, and those in full time education are the most likely group to be SEA active (5%).

My anecdotal evidence from our program would have this number even a little higher, maybe as high as 10%.

Their vision for social entrepreneurship is to create a different kind of non-profit than we've seen in past generations. Rather than rely on fundraising and grants from foundations, these young social entrepreneurs are seeking ways to blend free market capitalism with their favorite social causes. They seek to blend together providing service to the community with businesses that create value to the marketplace. They use the profits from their ventures to fund their causes.

I even see more traditional non-profits heading in this direction. A good example is Thistle Farms, located here in Middle Tennessee.

Named for the only wildflower that grows along the roads that Nashville prostitutes frequent, Thistle Farms is the cottage business of Magdalene - a two-year residential community for women with a criminal history of addiction and prostitution. Magdalene was created to provide a sanctuary in Nashville for women in need of a safe, discipline and compassionate community.

The women of Magdalene have chosen to create products that bring healing to their bodies and souls as well as to others. Thistle Farms creates all-natural and organic handmade healing products that are as kind to the environment as they are to the body.

Some social entrepreneurs are even bypassing the traditional non-profit route and creating a for-profit business that funnel the majority of their profits toward a cause. Pura Vida Coffee is a good example of this model.

We believe in a different approach to business. One driven by good rather than greed. One that sees capitalism as an agent for compassion. Pura Vida is 100% charitably owned and all of our resources go to help at-risk children and families in coffee-growing countries build more hopeful futures. The work of Pura Vida is rooted in a desire to empower the poor in coffee-growing regions of the world. We welcome all people to serve with us in partnership.

It is encouraging to see that the Entrepreneurial Generation believes so strongly in entrepreneurial free market capitalism that they are entrusting not only their own economic future to it, but the betterment of our society and culture, as well.

Posted by Jeff Cornwall at 07:29 AM | Permalink | Comments (2)

They are available all over. Tools to help write a business plans can be found in books, software programs, and on-line sites. While many of them have some good features to them, for many entrepreneurs these aids become a short-cut.

I can usually spot a plan that has been written using one of the latest software tools or books. Several things stand out:

- They have a predetermined structure, so all plans written using these tools looks the same. I can spot plans using some of the more popular software a mile away.

- They tend to have fairly weak transitions and flow from section to section.

- They have sections that make no sense for some businesses, but people leave them in and try to write something. For example, a section on distribution often makes very little sense for a service business, but it is in the software and it ends up in their plan any way.

- Most importantly, the financial statements are often inconsistent (at best) with the written part of the plan. This is a fatal red flag for most financial backers, including bankers and investors.

Experienced business plan readers do not read the plan in the order it is presented. Typically, they read the plan in this order:

- Skim over the Executive Summary to see if it is even in the ball park for plans they consider.

- Look at the Team to see who is proposing to do the deal.

- The marketing plan is next. And as they read it they are looking back at your income statement to see if the marketing plan explains your revenue forecasts. This is the backbone of any business plan. Think of it this way. The marketing plan and revenue forecasts should tell the same story in two different languages: one in English and the other in the language of business.

- The next step is to look at the operating plan and compare it to the expense forecasts to see if it is consistent, realistic, and complete.

- If they are still interested, they will then look at the financing plan/proposal to see if they like the deal structure.

Remember that they may throw it in the trash at any point in this evaluation. The typical VC, for example, gets hundreds of plans each year. Only a small number get any significant consideration and only a small handful will get funded.

When you develop your plan, work on it in the order that they will evaluate it (other than the Executive Summary, which you write last). Start with market research of the industry, competitive environment and potential customers. Use that to develop a strong and compelling marketing plan. Then forecast your revenues based on the marketing plan. Take your time. This is probably the hardest step of writing a plan if you do it correctly. Revenues are simply price times quantity, but those are two of the most uncertain issues you will face. Do you homework to show that you are making reasonable assumptions.

Then work on the operating plan and expenses. This is usually easier for most of us. However, don't worry about getting it right down to the last dollar. Too often we waste time on these sections. We feel safer here, so seem to want to work on that which we feel most comfortable with. Be accurate and complete, but never overly obsessive with every last detail.

When you finally put it all together you will put it in the traditional outline that most of the books and software suggest, as that is a fairly commonly expected standard format. But, when you write it free-style as I am suggesting, you have the best chance of ending up with a powerful story that holds together for even the most experienced business plan reader.

Save the money you would have spent on one of those books or software packages and treat yourself to dinner when you finish writing the plan the correct way.

Posted by Jeff Cornwall at 07:06 AM | Permalink | Comments (4) | TrackBacks (1)

COTC is being hosted by Value Investing written by a 15 year old investment blogger. Let me see....what was I doing at 15.....

Posted by Jeff Cornwall at 10:40 AM | Permalink | Comments (1)

Once in while there are some interesting findings that come out of academia. The National Dialogue on Entrepreneurship reports on a new study sponsored by the Census Bureau (I thought the constitution says they were only supposed to count us every ten years to figure out representation in the House....) that looks at the impact of a family business background on entrepreneurial success. Does it make a difference if an entrepreneur grew up in a family business environment? The study finds that it does improve success for the entrepreneur, but only if the entrepreneur actually worked in the family business.

That is not an earth-shattering finding to any of us who have some family business in our history. I learned a lot of lessons from the successes and mistakes by working in the businesses that my Dad started and bought. I see the same thing in some of my students who come from family businesses and have had experience working in them.

So the conclusion I would draw from this is that if you want your kid to have a slightly better chance for success should she decide to become an entrepreneur, which is much more likely in today's economy, then let her work in your business while she is growing up. (A note of caution: Read this post if you live in Washington state before you start your kids doing any work in your business). I would also conclude that with the explosion of entrepreneurs in the economy, our future is bright if we heed Crosby, Stills, Nash, & Young and teach our children well. (For you younger readers, this is a group from the 60s and 70s, not a law firm from Manhattan).

But the authors of the study, both from California I might add, make one of those incredible leaps in logic that only a hard-core fan of socialized entrepreneurship can make. They conclude that these findings show that we need more public sector "governmental programs providing mentorship, internships, or apprentice-type training (to) help the historical inequalities in business ownership patterns." That's right, it is not fair that my father (who did not go to college and was the classic self-made man from the WWII generation) took the risk to start and buy businesses and gave me the chance to learn by working in several of these businesses. Why, that gave me some marginal benefit in the economic game of life.

I have been warning of government creeping into the world of entrepreneurship. The more important it becomes in our economy, the more we will see them trying to meddle by trying to pick market winners, getting their fingers into angel financing, trying to set standards for training entrepreneurs, etc., etc. And this is not just a concern within the US. As entrepreneurship expands economies around the globe, agencies like the UN are also trying to get their hands into the process with proposals like the World Tax and other programs to redistribute wealth and pick market winners to establish new businesses in specific economies of their choosing.

For our economy to continue to grow over the coming decades it will require continued entrepreneurial development, which requires free markets, not socialized entrepreneurship.

Posted by Jeff Cornwall at 05:50 AM | Permalink

Talk of inflation has the Federal Reserve taking swift action and has sent the stock markets tumbling. What's the big deal?

Many entrepreneurs have never had to do business in an age of inflation. In fact, the last bad inflationary period we had was almost thirty years ago. Since then, careful control of the economy with interest rate policy has helped to keep things in check.

Recently, many small business owners have begun to feel the pinch of inflation. Health care costs, fuel costs, and many raw material costs due to the many hurricanes of last season are pushing up prices on almost everything. Add to that labor shortages in key areas, and you have the recipe for inflation.

During times of inflation in the past we were still in the old economy and big companies could pass along the increased prices to consumers, who due to stronger unions in those days were able to push wages higher to keep up. If their ability to raise prices fell behind, they had lots of cash reserves and knew that they could soon catch up. They just laid people off, shrunk inventories, and tight supplies then pushed up prices. All of this would continue until the economy ran out of gas. We then had a recession to cool things off.

But, we are now in an entrepreneurial economy. Small businesses are always tight on cash flow. And if their inputs of raw materials and other direct operating expenses go up, they may not be able to pass along these costs quickly enough to keep their cash flow positive. And managing cash flow is not their only problem. From the AP:

Raising prices is a difficult process for many small businesses. Every increase potentially makes them less competitive, and raises the possibility that customers might go elsewhere.

Since everyone will be experiencing inflation if it happens, small businesses will have a little more room to raise prices than they are used to. But, if we have a period of inflation in our near future, it will be different that we've seen in the past.

First, some of the major causes of inflationary pressures right now are not within the ability of the Fed to control. Many of the top oil producers in the world are not the most reliable governments right now. Iran, Russia, Venezuela, Nigeria, and Saudi Arabia are all among the top 10 exporters. Some or all of these countries could decide to use oil as a weapon and hold back supply. If that happens, our current gas prices would seem like a nostalgic memory from days gone by. There are predictions of several more years of bad hurricanes. Some say even one more bad season is more than our economy will be able to take.

Second, we are in a much more open, global economy than we have been in the past. When we had inflation in the mid-1900s, everyone was faced with the same pressures and all could raise prices in relative harmony. Inflation is quite variable around the world, and therefore foreign competitors might not face the same inflation rates that we do in the US. That would put us at a huge price disadvantage.

Third, China and India are lurking. Both countries see themselves as the potential economic superpowers of the next century. They are big enough, strong enough, and centrally controlled enough to potentially use inflation and a weak economy in the US as wedge to gain advantage in the world economy.

So what can a small business do these days to try and weather this storm?

- Keep overhead low.
- Build cash reserves to buffer short term price increases that precede higher prices on your part.
- Watch your margins carefully. Worry about growing profits, not sales.
- Don't lock into long-term contracts that have narrow margins with large customers.
- When inflation heats up even a little, be aggressive with frequent small price increases rather than waiting and trying to catch up at some point with one big jump.
- Pay down variable interest loans ASAP. As long as there is inflation, interest rates will keep going up.

(Thanks to RM Cornwall for passing this idea along).

Posted by Jeff Cornwall at 06:34 AM | Permalink | Comments (1)

Just two days ago I sounded a cautionary note about the chances of a permanent repeal of the estate tax. It had passed the House and showed some progress in the Senate. Today we hear that 41 senators killed the repeal of the estate (or so-called "death") tax, at least for now.

From the Chattanoogan:

U.S. Senate Majority Leader Bill Frist Thursday made the following statement after the Senate voted against proceeding to legislation that would permanently repeal the "Death Tax:"

"The Death Tax is an unfair burden inflicted upon America's small businesses, farmers, and families during a time of grieving and pain. Wiping this vicious tax from the books is a matter of principle. We should protect -- not punish -- hardworking families by burying the Death Tax forever.

"It's unfortunate that a minority of my Senate colleagues have blocked debate on permanent repeal of this wrongheaded tax.

"This won't be the last time this year the Senate votes on this important issue -- be it on the floor or in some other form. Getting rid of the Death Tax is just too important an issue to give up so easily."

Posted by Jeff Cornwall at 04:47 PM | Permalink | Comments (3)

So just what is going on in the US economy? There seems to be confusion over recent employment figures and what that means for future growth.

Some analysts argue that the glass is half empty. They cite the slow down in new job growth in May as a major indicator. They worry job growth has lost its momentum, as signal that the economy will soon take a turn for the worse.

Others argue the glass is half full. They point out that we have had 33 months of job growth with 5.3 million new jobs (1.9 million in last 12 months alone).

The National Federation of Independent Business Chief Economist William Dunkelberg has now added his voice to this debate. It seems that when we look at small business, at least, the picture is a little more complex.

"The most recent jobs report ignited talk about slowing and weak labor demand. However, the unemployment rate fell, which is not a sign of a soft labor market unless workers are leaving the workforce in spite of rising compensation (nominal, real compensation has been eroded by rising energy costs). And the percent of the adult population with a job has been rising, reaching levels exceeded only by the crazy dot.com years. Neither signals weakening labor demand.

"So far this year, the small-business half of the economy (employing 60 percent of the private workforce) is telling a different story. The net percent of owners planning to increase employment has been historically high for a year now (exceeded only by dot.com numbers), driven by business expansion supported by strong growth.

"We've seen weak labor markets in the 32-year history of the NFIB small-business economic reports, and this doesn't look like one. The declining unemployment rate and the rising employment-to-population ratio are more consistent with the notion that there is a supply problem in our labor markets, not deficient demand," Dunkelberg concluded.

What is his evidence of this?

NFIB has found that small business is planning to create jobs.

They have also found that there are job openings in small businesses today.

So what is the problem? Labor quality.

So what does mean? Small businesses are the engine of this economic expansion and will be for years to come. Job shortages can lead to two outcomes over the intermediate and long run. One outcome could be that labor shortages may lead to wage induced inflation. Another outcome is that labor shortages begin to strangle small businesses' ability to continue the expansion. These are not mutually exclusive outcomes.

We are poised at the edge of a possible economic expansion the likes of which we have not seen in over a century. To make sure that we don't blow it, we need to totally rethink our economic policy including much freer markets with decreased regulation, and a simple and neutral tax system.

But, we also need to make sure to get the immigration crisis solved properly. Politicizing immigration policy misses the point. The choices should not be between wide open borders or isolationism, as we now hear the debate framed in Washington.

We need highly controlled immigration, strong protection of the borders, but both of these need to be coupled with an aggressive plan to meet our growing shortage of qualified workers. Cut the needless red tape for qualified immigrants coming here for the right reasons, but make sure that we do not import other countries social welfare problems.

Posted by Jeff Cornwall at 07:06 AM | Permalink | Comments (1)

I saw this article in our local paper yesterday and it made me think about my post from the other day about entrepreneurs starting younger and younger.

Ephren W. Taylor II has a success story like no other.

Not many people can claim at the age of 23 that they have "come out of retirement" to become one of the youngest CEOs of a publicly owned corporation, but that's exactly what he has done.

And I thought that having a large numbers of 22 and 23 year olds coming out of college to begin their careers as entrepreneurs was an amazing. This young man makes them look middle-aged.

When he was 12, Taylor's first company designed 3-D computer games. Later, at the age of 17, he created a dot.com job search business for teens and college students. At the time it had a value of $3.2 million.

Taylor now splits his time between running two corporations, taking a third one public, extensive community and charitable work, and spending time with his wife and two children.

One of his companies is Amoro Corporation, which he took public in this past spring.

Its mission:

Amoro Corporation is a publicly-held investment development group dedicated to "Empowering Communities With Socially Conscious Development." Our focus is to create affordable housing for homeowners, especially in urban environments.

And the secret to his success?

"You have to visualize success. You have to see it coming."

Posted by Jeff Cornwall at 07:30 AM | Permalink | Comments (2)

Congress is slowly moving toward permanent repeal of the federal estate tax. A bill has been passed in the House and a similar bill is now in committee in the Senate.

The Tax Foundation has issued a summary report of the estate tax issue. They cite two important issues for entrepreneurs in estate tax policy.

Previous Tax Foundation research has found the estate tax acts a strong disincentive toward entrepreneurship. A 1994 study found that the estate tax's 55 percent rate at the time had roughly the same disincentive effect as doubling an entrepreneur's top effective marginal income tax rate. The estate tax has also been found to impose a large compliance burden on the U.S. economy. Economic studies estimate the compliance costs of the federal estate tax to be roughly $1 for every dollar of revenue raised--nearly five times more costly per dollar of revenue than the federal income tax--making it one of the nation's most inefficient revenue sources.

Posted by Jeff Cornwall at 07:07 AM | Permalink

Entrepreneurs negotiate at every step along the way. We negotiate with:

- Our spouses when we get their blessings to pursue our dreams.
- Our investors and bankers who provide of the funding.
- Our customers when they agree to trust us over those they have done business with in the past.
- Our suppliers.
- Prospective employees.
- Landlords.
- The community and local governments.

Kauffman's eVenturing has put together a new collection of materials on negotiation for entrepreneurs. It is a must read set of materials for all entrepreneurs.

Posted by Jeff Cornwall at 08:48 AM | Permalink

The old advice used to be "go and work for someone for several years before you try and start a business." The thought was that you needed to learn about business, grow up, save some money, etc. Young aspiring entrepreneurs were discouraged from jumping in too quickly.

I rarely hear that kind of advice any more. We see growing numbers of young people leaving college and starting successful careers as entrepreneurs. Many even are starting their entrepreneurial careers while in school.

StartupJournal has some great advice for young, aspiring collegiate entrepreneurs (written by a young intern, but the way). Use your flexibility and low cost of living as part of your opportunity, leverage the resources and expertise that being a student entrepreneur can offer, and view your early experience as part of your education.

(Thanks to John Russell for suggesting this article).

Posted by Jeff Cornwall at 07:05 AM | Permalink | Comments (2)