The Entrepreneurial Mind

I love to see free markets working at their best.

The big shipping companies, recognizing that we are moving further into an entrepreneurially-based economy, are finding creative ways to attract small businesses. From the Comumbus Dispatch:

FedEx has quietly become the nation's second-largest producer of signs and banners, and it's about to unveil a service aimed at helping entrepreneurs get into the direct-mail-marketing industry. DHL has begun a smallbusiness magazine and is funding micro-enterprise efforts....And UPS has become one of the top providers of Small Business Administration-backed loans in the country.

A big part of their move into retail operations, FedEx with their Kinko's acquisition and UPS with their Mailboxes, Etc. acquisition, was to position their businesses to capture the exploding small business segment in the economy.

Posted by Jeff Cornwall at 05:58 AM | Permalink

Greg Mankiw's Blog has a summary of the New York Times review of a new book on family business Dynatsties: Fortunes and Misfortunes of the World's Great Family Businesses, by David S. Landes. The book profiles a handful of family businesses, some famous and some not as well known.

While it is interesting to note that "family" businesses in the Fortune 500 (no longer private family businesses, but still family controlled) outperform their "professionally managed" counterparts, their recognition of the power of a truly good corporate culture is what is most intriguing to me. From the New York Times:

There's also much to be said for family "stewardship" -- the sense that you have been entrusted with a multigenerational inheritance, not just a company. The Northeastern grocery chain Wegmans is now run by a fourth generation of family managers. Regularly voted one of the best American employers, it is known for the range and quality of its goods, its beautifully appointed stores and its knowledgeable and friendly staff. The buyout experts who snapped up grocery chains through the 1980's and 90's, firing workers and cutting benefits, would not have understood what the Wegmans are about.

The link to Greg Mankiw's Blog came from Ben Cunningham, who raised the interesting point in his e-mail to me about what these businesses can teach us about the estate tax. These families not only build good companies, but profitable ones, as well. Is it not in the public interest to try and support these businesses rather than try to tear them apart through the burdens of the estate tax?

Posted by Jeff Cornwall at 12:58 PM | Permalink

The cover story in this week's New Yorker (via National Dialogue on Entrepreneurship) is about the debate over the future direction that micro-financing should take. The evidence is overwhelming that micro-financing is a powerful tool to help people use free enterprise to pull themselves out of poverty. The debate is over what business model is best suited for the entities that provide micro-financing.

On one side of the debate is Nobel Peace Prize recipient Muhammad Yunus, who favors the non-profit model used in his Grameen Bank. This model argues that the goal is eradicating poverty and that a non-profit keeps the focus front and center on this objective.

The other side of the debate, favored by many cashed-out entrepreneurs such as eBay's Pierre Omidyar argue that we should not be concerned with the form these agencies take. Whatever form works best in a given situation is what should be used.

I agree with the second approach. Let the each situation, dictated by local markets, populations, and economies, dictate whether a non-profit or for-profit is the best model.

Posted by Jeff Cornwall at 10:35 AM | Permalink | Comments (2)

A common practice in writing business plans is to offer three scenarios: most-likely, best case and worst case.

When I see worst cases presented in most business plans, they are almost always not the worst case scenario. They are most often a less optimistic variation of what the entrepreneur thinks will actually happen. The real worst case should be this: if things don't go as planned and the deal fails, what is the outcome for investors and lenders?

Entrepreneurs seem to operate under the assumption that if they don't plan for failure, it can't happen. If they don't ever address the real worst case, investors and lenders won't think about it.

I get push back on thinking and planning for worst case from my students. "Don't you think my idea is any good?" That is not the issue here. Even good ideas can fail, as most opportunities come from a dynamic, changing environment.

All of this came to mind after a conversation yesterday with my father. We were talking about a potential deal, and he made the statement that he wants "protection" in a deal. That was an interesting word to me. After all, we aren't a bank that can get a personal guarantee on debt. Any investment would be at risk.

But, he meant something else. He simply looks at every deal and imagines what it will look like if it goes bad. What can he hope to take away from it? He thinks this way because his generation saw the ultimate worst case -- they lived through the depression. It is not that he is risk averse as a result -- to the contrary. Rather, he is always soberly realistic that deals go bad, and we should understand where that will leave everyone involved. That is a perspective that we seem to be losing in our society.

Failure is real, and it can happen to even the best among us. So plan for it. Just in case it does happen, and hopefully the odds of that are slim if you have done your homework, you will be ready to move on to the next opportunity. You will have created a deal in which you have actually planned the worst case and have created a business where the worst case is not the end of the world for you -- just for that deal.

And just so you don't go in the wrong direction with this, your outcome in the worst case should not be to declare bankruptcy for the deal. That is a reputational scar you do not want in your background as an entrepreneur if you can avoid it. To plan for bankruptcy is in my opinion, unethical. Once in a while it unavoidable, but that should not be the predetermined plan.

Don't be in denial about the worst case. Understand it. Plan for it. Make it an outcome you can move on from.

Posted by Jeff Cornwall at 09:14 AM | Permalink | Comments (2)

Once again this semester I had Charles Hagood, co-founder of the Access Group and Healthcare Performance Partners, come into my class to close out our unit on bootstrapping. (Here is an overview of his talk from last semester that offers several great tips on creating a bootstrapping mentality). Charles and his partner are great examples of what bootstrapping can accomplish building a highly successful business.

This semester he added a new point to his talk that is often overlooked by entrepreneurs once they get beyond the start-up phase. They get out of their bootstrapping habits, get a little lazy, and start spending cash on things that are not going to create sales or take care of customers.

Something like this happens with a golf swing. We start scoring well, and soon forget all of the subtle little things that got our swing to that point in the first place. We assume it is now natural and get a little lazy. That is why professional golfers never stop working on their swing. They hit thousands of golf balls every day. They know that without constant attention to the details of their swing it will not hold up. The same is true in how we manage the scarce resources of our businesses.

Being prudent stewards of the cash we have in our business takes the same concentration and attention to details. Once the cash starts coming in, we relax and think we can go on cruise control. But just like with a golf swing, bad habits and laziness can creep in to take you off of peak performance. And then when your business hits a tough patch or a crisis hits, you are not as ready to meet it as you thought you were.

For Charles this was 9-11. They had gotten out of their bootstrapping ways -- not completely, but enough so that when the economic aftermath hit their business, they could see all of the ways in which unnecessary costs and lazy habits had evolved int their business. Luckily, they got back to their bootstrapping roots, and eventually came back stronger than ever.

Never lose that bootstrapping edge. Every dollar you can save while still achieving the desired result makes you more competitive, strengthens your business for the future, and builds your wealth.

Posted by Jeff Cornwall at 06:03 AM | Permalink

According to a new National Federation of Independent Business Small-Business Poll on Local Business Climate, small-business owners consider local institutions and attitudes towards enterprise key factors that contribute to a small firm's success.

Nearly two-thirds of the owners surveyed, 65 percent, think their local community has a favorable business climate. Characteristics most valued by Main Street are community support, people working together, a strong customer base, constant growth and expansion in the area, a close-knit community, little government interference, opportunity, diversity and quality of life.

As much as they want to get their fingers into things, state and federal efforts to spur (or control) entrepreneurship are not important factors in small business success. In fact, most of their efforts no matter how well intentioned are counterproductive. What they can do to help is to reduce regulatory interference of small businesses, cut taxes, and then get out of the way.

Posted by Jeff Cornwall at 05:39 AM | Permalink

My friend Rhonda Abrams blogged last week about an interview she heard with a professor from a "distinguished university" (that may have been the problem right there):

I recently heard a professor from a distinguished university say on the radio that 90 percent of new businesses fail.

To me, that's like hearing fingernails scraping on a blackboard. I've looked at statistics of business births and deaths closely, and I know of no credible study showing anything close to a 90 percent failure rate.

She is correct.

Credible studies show success rates five years out (the normal time line for such studies) to be around 50% +/- 5%. And as I've said many times, smaller studies of those who have gotten trained and educated in the process of starting and growing a business find success rates as high as 80-90%.

This urban myth is perpetuated by the histrionic media who loves find evidence of doom and gloom even when it isn't real, and by ignorant and uninformed "experts" who are too lazy to do the research needed to find out the truth.

(Thanks to John Russell for passing this along).

Posted by Jeff Cornwall at 08:10 AM | Permalink | Comments (6)

StartupJournal reports on a study from the Center for Venture Research at the University of New Hampshire that reaffirms a trend that we have been observing for a while now. Angel investors seem to be shifting to later stage deals. Rather than providing seed funding, which has been their bread and butter investment, angels are now doing deals that were once the focus of VCs. And VCs are shifting to even later stage deals.

A few years back 75% of angel money was seed investments in start-ups. in 2005 it had dropped to 48%. It is now around 40%, according to this report.

But before we panic and predict the end of the entrepreneurial economy we need to step back and look at the context of all of this.

- There are more angel investors than ever with lots of cash. There are only so many seed deals to go around that meet their requirements for investment.

- Some angels are gathering in packs, called angel networks, that are mimicking venture capital firms in many ways, including more pooling of funds on deals and professional management. It is not surprising that this also includes developing investment strategies that look a lot like those of venture capital firms.

- Angels that do smaller deals are off the radar. They are hard to get data on in the first place because there is no formal reporting mechanism. Add to that their intense desire for privacy, and it is no surprise that we are seeing mostly the larger deal angels working in networks.

- Our entrepreneurial economy is dynamic. As the percent of GDP that is created by smaller companies surpasses 50%, we can expect that there are more deals that have grown to need more capital. Supply follows demand. We must also take into account that it is beginning to look like success rates are climbing for new ventures, due to both a favorable economy and better education for the entrepreneurs.

Here is my fear from this report. Policy makers and politicians eager to get their claws into the entrepreneurial part of the economy will use this to say, "We have a crisis!! We need to develop programs for government seed capital funds or the economy will stumble." Or how about this one: "We need to get control of this to make sure we understand what it going on so we can enact effective legislation. It is time to call for registration of private equity placements so we can track all of this."

Mark my words -- we are moving toward socialized entrepreneurship. Our government is no longer ignoring our entrepreneurial economy and once they pay attention to it, can not leave it alone.

Posted by Jeff Cornwall at 05:53 AM | Permalink | Comments (1)

Married couples are now a minority in America, according to a recent article in the New York Times.

Reflecting on this, columnist Cal Thomas puts at least some of the blame where it belongs -- on those of us who are the Baby Boomers:

My generation has been obsessed with making money and acquiring things in place of investing necessary time on marriage and children. The message the kids get is that if marriage is mostly about accumulating wealth and acquiring stuff, they can do that without getting married.

Family trees are beginning to resemble kudzu....

The Entrepreneurial Generation (those 25 and under) places the blame in the same place (see Michelle's comment on this post as an example of how they feel). They want to try to work hard on both their careers and their families. For the sake of both our culture and of this great country, let's hope they get it right...

Posted by Jeff Cornwall at 08:35 AM | Permalink | Comments (2)

According to a semi-annual survey, American Express Small Business Monitor, small business owners remain optimistic about growth. 43% expect to see growth in their small businesses. This is only down a bit from 49% a year ago, which given all of the doom and gloom in the media is pretty remarkable. Unemployment is down, inflation worries are easing, interest rates have stabilized, but you would think we are entering the next Great Depression. Some of this is a continuing focus on the old economy by the media and politicians. They still want to measure only half of what is going on in our economy and ignore the half that is made up by small businesses. One note on this survey -- it was taken when gas prices were still high and there were scares about heating costs. I wonder what the same survey would now show with lower gas prices and forecasts of cheap natural gas prices this winter.

Posted by Jeff Cornwall at 08:21 AM | Permalink

Despite what you are hearing, construction remains a strong sector of the economy. This is particularly true among small businesses in the industry. From the NFIB:

The construction industry is still stronger than the overall small-business economy and has slowed the economy only as it converges to the performance of the rest of the small-business sector. There are many reasons for this, including the fact that it will still be a good housing year, following record performances in earlier years. Furthermore, business construction remains strong, so firms find work in endeavors other than building new homes and condos. There will be work in New Orleans and the hurricane-affected region for some time to come.

Posted by Jeff Cornwall at 05:47 AM | Permalink

We had the pleasure of welcoming Clint Smith, who is co-founder of an e-mail marketing business called Emma, to one of my classes this week. Just four years old, this Nashville-based business has had impressive growth. At first glance it would seem that they must have built their growth using their own systems -- that is, through e-mail marketing. However, this is not the case, as their system is based on permission -- it is not a spam model. Their system is designed to take contacts that a business already has, and develop a customized system to communicate with them through e-mail. Therefore, as Emma is a new business, they did not have existing businesses to e-mail to. Therein was their challenge.

The approach Clint and his co-founder Will Weaver took to marketing was efficient (like any good bootstrapper strives for) and personal. Clint refers to the personal part of their approach as "karma marketing." They also clearly understood their target market, and designed all of their efforts toward reaching those clients.

The founders of Emma defined their customers from the very beginning as small business and non-profits for which "style" matters. They targeted specific types of business that fit their profile, such as design agencies, non-profits, artists, music venues, universities, and "cool stores and hangouts." And they targeted cities where they believe that style matters.

They filled their message with wit and humor, and made it have a personal feel. Here is an example from Emma's website from one of the profiles of a staff member (and former student of mine):

Sara works with small businesses who've expressed interest in using Emma to help interact with their customers or members. "We're interested," they may have said, sometimes adding an exclamation point on the end for emphasis. And so Sara gives them a tour, often regaling them with tales of Nebraska along the way. Did you know they have a replica of Stonehenge made out of cars? Carhenge. Kid you not. Sara wields a degree in Music Business and Marketing from Belmont University, where she was a member of the (nationally ranked) Belmont Speech and Debate Team and the Belmont Service Corp and the Student Advisory Board and president of her student council in high school. It really is amazing what you can learn about people when you actually read all the way to bottom of their resumes.

Surprisingly, they use very traditional print media for much of their own marketing efforts. They send out postcards to targeted businesses and they use print ads in alternative weekly newspapers. They do some advertising on local public radio stations, as this is the best outlet for their target customer profile. They also go to their target cities and set up events and "chats" at popular local watering holes, inviting existing customers and prospects.

Emma builds good "karma" with existing customers with techniques that are simple, personal and powerful, building strong customer loyalty along the way. Here are some of their tools:

- Visa gift cards (with the Emma logo on it) for referrals, sent in hand written thank you notes
- Free Emma tee shirts for any customer who asks for one
- Discounts for anyone who takes Emma with them to a new employer (called "friendly discounts")
- Sponsorship for selected customer events

They also have a program called "Emma Twenty-five". Each year they ask existing customers to nominate non-profits that need Emma's system, but cannot afford to pay for it. Emma picks the twenty-five most worthy and gives all of them free e-mail marketing services to keep in touch with their contact base -- and they get this for free for as long as they need it.

Why is Emma so successful? They know who their customers are and how best to reach them. Once Emma has them as clients, they find as many ways as they can to make them feel good about working with Emma -- they focus on building loyalty through building "good karma" about Emma as a service and as a company. And they work hard and have fun doing it. A good formula for any small business trying to grow.

Posted by Jeff Cornwall at 06:05 AM | Permalink

For the past several years business schools have been busy trying to break down the functional silos that had developed over the years in response to the silos in corporate America. In reality, business schools have tended to be followers mirroring the corporate world that supported them. So when the corporate world began pushing cross-functional teams, business schools tinkered with their curricula in an a attempt to "integrate" across the functional silos. However, traditional b-schools have fostered even more entrenched specialists than we have even seen in business organizations.

There are now some attempts underway at some Universities to not only break down the silos, but to get us off the farm in search of new ways of thinking and new ways of acting. Metacool has a post on a Business Week article that shows the innovation that can occur when we really reach across campus by drawing from Design Programs to improve innovative problem solving.

I have been blessed to work at two universities that allowed me to reach across campus. And believe me, this is not an attempt for me to show the rest of those academics what business schools can teach them. Quite the contrary. At the University of St Thomas I had the pleasure of working with Professor Michael Naughton from Theology. He helped me to truly integrate Christian Social Teaching into how I think about, teach about, and write about Entrepreneurship. Here at Belmont University we have a more ambitious project, funded by the Coleman Foundation, to reach all across campus to find linkages.

We are working with Art, Music, Design, Music Business, Political Science, English, Theater, Health Sciences, Audio Engineering, Video Engineering, and many others. And although we do this to help integrate entrepreneurship, self-employment and free enterprise with these disciplines, I take even more back with me from what I learn from these students and their faculty. I use what they teach me in what I do in my classes and in my writing every day.

(Thanks to James Shewmaker of Qwerty for passing this along)

Posted by Jeff Cornwall at 05:20 AM | Permalink

The 2006 Nobel Prize winner in Economics, Professor Edmund S. Phelps, is a strong supporter of free enterprise and entrepreneurship. In a recent Op Ed piece from the Wall Street Journal, Phelps outlines two basic economic systems prevalent in the Western world.

Several nations--including the U.S., Canada and the U.K.--have a private-ownership system marked by great openness to the implementation of new commercial ideas coming from entrepreneurs, and by a pluralism of views among the financiers who select the ideas to nurture by providing the capital and incentives necessary for their development....This is free enterprise, a k a capitalism.

The other system--in Western Continental Europe--though also based on private ownership, has been modified by the introduction of institutions aimed at protecting the interests of "stakeholders" and "social partners." The system's institutions include big employer confederations, big unions and monopolistic banks.

Phelps argues that the private-ownership system of the US has drifted away from what was its purest form. And the further we drift the bigger the risk that we will lose the entrepreneurial engine that powers our economy. We have seen this economy drift more toward the kind of system we see in Western Europe. He asserts that companies like Microsoft, those that have not only vast economic power but also political power, are a "deviation from the model." As Schumpeter showed us, a dynamic economy requires free markets that allow newcomers to come in and participate in its evolution and growth. Owning capital and wealth does not make one an entrepreneur. Entrepreneurs are the newcomers, the disruptors, who fuel dynamic economic development.

This is an important time to listen to the words of Professor Phelps. Our economy is more dependent on true free enterprise and the work of real entrepreneurs than it has been in over one hundred years. This is no time for us to embrace the kind of socialized entrepreneurship we see in much of Western Europe. Government should not be in the business of institutionalizing economic winners. It should, instead, be the protector of the economic newcomer entrepreneurs, who if we let them, will create our economic future.

(via National Dialogue on Entrepreneurship).

Posted by Jeff Cornwall at 06:09 AM | Permalink | Comments (1) | TrackBacks (1)

Time for Fall Break here at Belmont. I plan to play a little golf, work in the yard, and tackle a rather tall stack of mid-term papers my students just turned in. So until I'm back at it next Monday, I'll leave you with a Ronald Reagan quote my Dad passed along to me this week. By the way, just so you know where I get my Luddite tendencies from, he printed it off from an e-mail and sent it to me via snail mail -- the acorn certainly does not fall far from the tree.....

"Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it."

Posted by Jeff Cornwall at 07:24 AM | Permalink

Just as many tax accounts are creative in finding ways around taxes, so too are the politicians who come up with new taxes. This is evident in the latest state business tax ranking issued by the Tax Foundation. One would assume that Tennessee, where I live, would be among the highest ranked states for a favorable tax climate for business. After all, we have no state personal income tax and a relatively low corporate tax. But sadly, we come in kind of in the middle at 18th.

Politicians are finding ways to tax us all around and everywhere except on income (for now, at least). We have one of the highest state sales taxes, a "significant tax" on personal income from interest and dividends, a "franchise tax" on LLCs, and higher than average unemployment and property taxes. Tennessee tax policy clearly favors large, traditional corporations, rather than entrepreneurs and small business owners. This is not good news with America's emerging entrepreneurial economy.

Posted by Jeff Cornwall at 08:28 AM | Permalink

An old joke went something like this:

Q. What is a consultant?
A. Someone between real jobs.

Self-employment is no longer a laughing matter in our economy. There are now about 20 million self-employed in the US, and more and more of them have made a conscious choice to work this way. In today's entrepreneurial economy the self-employed are becoming a major force.

But up until recently, the Labor Department has basically ignored the self-employed, viewing them as we did in the last century, as being a group that are just in between real jobs in the work force. It all has to do in how we measure employment. The old way of measuring jobs primarily measures employment in large corporations. It drastically under-counts the self-employed. The Household Survey is a much better measure of the health of the entrepreneurial economy.

Bill Hobbs offers an excellent analysis of this issue, from a first-hand perspective, pointing out that the Department of Labor recently revised employment upward by over 800,000 after reconciling the data from the Household survey with that of their traditional, old economy measurement. As many of us have been arguing, the economy is stronger than Washington policy makers realize. We may soon be facing a true economic crisis if we do not begin to shift our policies away from 1950s economics. Regulation, tax policy and property rights are the three most important tools to fuel an entrepreneurship-based economy. Other parts of the world are catching on faster than we are.

Posted by Jeff Cornwall at 06:42 AM | Permalink | Comments (1)

Small business hopes rebounded in September as the National Federation of Independent Business Small-Business Optimism Index rose 3.5 points to a more normal level of 99.4.

"This confirms the slowdown in the economy anticipated in the July survey -- down, but not out," said NFIB Chief Economist William Dunkelberg.

The Index, bouncing back to near its 30-year average, was lifted by positive movement among six components including the outlook for an improved economy, favorable earnings and higher sales. Inflation pressure also eased.

Small business owners surveyed continue to plan on supporting jobs in the economy. Job creation plans held firm at this survey's near-record levels from August. They also plan to spend on capital, which is a very good sign compared to previous months. They are still concerned over inventory levels, as signal that they are still somewhat cautious.

Posted by Jeff Cornwall at 05:45 AM | Permalink

The Internet can be a scary place. And that is not just the Luddite in me talking. And no matter how hard we try to stop them, the bad guys seem to keep one step ahead of us. Take for example phishing. Phishing is a variety of tactics to fool people into giving up personal information that allows the bad guys to steal our money and/or our identity. If often starts with a fake e-mail from a bank or from eBay. At first, these attempts were rather clumsy. But because they worked enough of the time, the bad guys improved their techniques to fool even more unsuspecting folks. Remember, if this stuff does not work, they wouldn't keep trying.

The accounting firm Kraft CPAs offers some assistance in sorting this all out. If you have received e-mails that really look like they are from your bank or eBay they offer advice on how to protect yourself and your small business:

Spoofed emails are a method used by scammers and hackers in an effort to obtain personal information from unsuspecting individuals and is commonly known as "phishing." The scam artist crafts an email that appears to originate from a popular and legitimate company to entice the end user to reveal information such as passwords, credit card numbers, social security numbers or other types of personal data.

Even though the example email above appears to originate from member@eBay.com, it actually did not originate from eBay. The sending address can be modified, or spoofed, easily by the sender. Also, the link the scammer wants you to click is embedded in the "Respond Now" button and leads to a website that appears to be eBay, but is actually a site intended to gather your eBay logon information. Just as the sender's email address, the links embedded in the email are easily spoofed, too.

So how do I recognize a spoofed email?

An email stating the company is updating customers' account information is a common ploy. Always be suspicious of emails soliciting personal information. Reputable companies such as eBay will not request personal information from their customers by asking the user to click a link in an email. Your best bet is to ignore them altogether. If you believe the email may be legitimate, make a phone call to the vendor (using a number you know to be genuine) and ask for verification of the validity of the email.

How do I protect myself?

As mentioned previously, ignoring emails requesting personal information is best practice. Other measures you can take to protect yourself and your computer system are:

- Never email personal or financial information.
- Install anti-virus and anti-spyware software, keep them up-to-date, and perform regular scans.
- Install a personal firewall.
- If an email claiming to be from a financial institution is requesting personal information, report it to the financial institution.
- Always err on the side of caution. If a company needs any information from you for a legitimate purpose, they will find you.
- Utilize an email filtering system.

Kraft also recommends these sites as sources for useful information email protection.

www.us-cert.gov
www.antiphishing.org
www.nist.org
www.trendmicro.com/en/security/phishing

(The information from Kraft CPAs was used with permission).

Posted by Jeff Cornwall at 05:18 AM | Permalink | Comments (1)

A graduate student from Norway e-mailed me about how high-potential businesses are valued during seed financing, since there is nothing really to base a valuation on -- no sales and no cash flow. He suggested that any valuation seemed like holding a wet finger up to measure wind speed. The truth is, valuing a business during seed round is more like assessing wind speed by holding up dry finger in the air!

They answer to his question is this: they don't really even try to value the business.

The most common approach these days for seed financing is to use a convertible promissory note. It really delays any need to value the business until there is clearer information to use for valuation. It is convertible at the time that Series A money comes in, usually from VCs, at some multiple over the share value at the time Series A money is secured. Series A round financing usually occurs when sales have begun, or at least a clearer picture of market potential is evident.

For example, let's assume a start-up needs $1 million in seed funding. The investors issue a convertible promissory note with a 10% interest and with a 1.25 conversion multiple. So in effect, they give them a loan that can be converted to stock. At the time of the Series A round investment, which in this simple example is a $5 million VC investment one year later, the conversion occurs and they get shares that were equivalent to the $1 million seed money they originally put in the business times 1.25 plus accrued interest. So a year later the seed investors get shares that would be the same as if they invested $1,000,000 * 1.25 * 1.10 = $1,375,000. The logic is that by the time they are ready for Series A investment (in this case another $5 million) there is a clearer basis for valuation. They have begun to sell product, or they have a better idea on the size and scope of the market, they have time lines to product sale, etc. etc.

Seed money is most likely going to come from angel investors, angel networks, or small, boutique VC firms. The big boy VC firms will join in at the point of Series A or even Series B funding.

Posted by Jeff Cornwall at 05:58 AM | Permalink | Comments (2) | TrackBacks (1)

Clearly, the owner of a small business must take a different route to financing than the high potential, high growth entrepreneur. The myth is that they finance it all by credit card. While this may be true for many start-ups, USNews reports on a survey by Visa and SCORE that finds that only 21% of small businesses use business credit cards. The truth is that credit cards have not always been very convenient for small businesses. Traditionally the business cards issued to small businesses are really not very different from consumer cards.

Small-business owners don't use their cards as consumers do, but they also don't have access to capital as larger companies do. They may need credit, but many suppliers don't accept cards, forcing business owners to pay with checks.

Credit card companies are finally beginning to understand the needs of small business and are responding by issuing cards that better meet their needs for access to working capital. I guess the 23 million small businesses finally got their attention.

Posted by Jeff Cornwall at 05:34 AM | Permalink

I love to collect entrepreneurial myths that those of us who work in the world of new ventures have observed over the years. On of my former students (Chip Hayner) passed along this list of myths from the world of technology start-ups from Rondom Ramblings. It is both humorous and very much on target for many would-be entrepreneurs in any industry.

Here is a sample:

Myth #4: What you think matters.

Reality: It matters not one whit that you and all your buddies think that your idea is the greatest thing since sliced pizza (unless, of course, your buddies are rich enough to be the customer base for your business). What matters is what your customers think. It is natural to assume that if you and your buddies think your idea is cool that millions of other people out there will think it's cool too, and sometimes it works out that way, but usually not. The reason is that if you are smart enough to have a brilliant idea then you (and most likely your buddies) are different from everyone else. I don't mean to sound condescending here, but the sad fact of the matter is that compared to you, most people are pretty dumb (look at how many people vote Republican ;-) and they care about dumb things. (I just heard about a new clothing store in Pasadena that has lines around the block. A clothing store!) If you cater only to people who care about the things that you care about then your customer base will be pretty small.

Posted by Jeff Cornwall at 09:25 AM | Permalink | Comments (1)

I wrote a post a few months back about a case involving an attempt to tighten the independent contractor statutes that was coming before the Vermont Supreme Court. "I'm not in Vermont," you say? Well you should still pay attention because these things can take on a life of their own and can have an impact on all of us sooner or later (can you say "Kelo"?)

Next Tuesday, October 10, the Vermont Supreme Court will hear oral arguments for a case that will determine the fate of independent contractors in Vermont, who in the present case are individuals that knit patterns for a local apparel firm, Fleece on Earth.

Bonny Dutton, owner of Fleece on Earth in North Chittenden, Vermont, contracts with individuals throughout the state to knit patterns for her shop. Many of the knitters are retirees and all work on their own schedules, use their own tools, have no deadlines and do their knitting from whatever location they choose.

Dutton considers these knitters to be independent contractors. But the Vermont Employment Security Board has declared that these individuals are Dutton’s employees, and is demanding that Dutton pay back taxes and unemployment insurance for these workers.

The Vermont law governing independent contractors establishes a three-part "ABC" test for determining whether workers are truly independent contractors or employees. The law requires, A -- workers must be free from control or direction from the contractor; B -- the service provided by an independent contractor must be outside the usual course of business; and C -- the worker is generally engaged in some sort of independent occupation.

The Vermont State Employment Board argues that because Dutton reserves the right to accept or decline products produced by the knitters, this demonstrates control or direction by Dutton, thereby violating part "A" of the test. The knitters, most of whom have never even been to Dutton's store, consider themselves to be independent workers and do not believe Dutton acts as an employer. This case would have wider consequences than simply knitters. For example, all of you techie folks out there who use independent contractors for web development might be at risk for violating the law under this interpretation.

"The 'ABC' test adopted by Vermont is intended to clarify who is and who is not an independent contractor. It was not intended to eliminate the status of these workers all together. Dutton does not control or direct the knitters’ work; she simply says she will accept garments that meet certain requirements. As a contractor she has the right to decide what products she will pay for," said Karen Harned, executive director of NFIB's Legal Foundation. "Accepting the board's argument would essentially eliminate the status of independent contractors in Vermont. Who contracts out for something but doesn't specify what the end product should be?"

And if the court rules against Fleece on Earth, the case could become precedent for other decisions down the line. Stay tuned....

Posted by Jeff Cornwall at 05:04 AM | Permalink | Comments (2)

In the most recent NFIB poll, small business owners were feeling rather grumpy. They were not planning to add to inventories as inventories were already too high. And they were not in the mood to invest in capital expenditures right now. So when the news came out this week from the SBA that they had set a record for making loans, I was curious. What could all those loans be going for if small business is not in a growth mode right now?

The SBA backed a net 100,197 loans totaling $19.1 billion under its two primary small business loan programs during the 12 months ending on Sept. 30, 2006. Both the number of loans and the dollar amount is a single-year record for the agency. The previous records were set last year, when SBA provided a net 94,554 loans worth $18.1 billion.

I have three possible theories.

Theory One

The answer may be found in another question in the NFIB survey. Small Business owners report that credit is harder to come by.

While the SBA trumpets 100,000 loans, what may be beneath those record loans is weaker financial statements combined with a nervous banking industry that is tightening its credit standards as the economy weakens. These two factors could be what has led more small business owners to seek SBA guarantees. Let's face it. Getting a loan with SBA backing is more complex than a straightforward business loan. It requires a significant amount of paperwork. Entrepreneurs will only go the SBA route if they are told to. And they are told to when they do not meet normal bank standards for business loans.

So Theory One would conclude that times are getting tougher for small business and they need help getting bank credit to keep afloat. After all, the biggest loan program from the SBA is their 7(a) program for working capital.

Theory Two

The SBA has gotten a lot of bad press and is under increasing political pressures to perform. Backing more loans is one way for the SBA to show success and justify its existence. The SBA may simply have been more effective in marketing their programs.

Theory Three

We are seeing a record number of small business start-ups each and every year as our economy continues in its current transformation from the old economy of the 1900s to whatever new economy awaits us after this period of transition ends.

Perhaps the record number of loans backed by the SBA are simply at artifact of the growing number of small businesses in America. The SBA may be just hitching a ride on the current economic wave.

Posted by Jeff Cornwall at 05:58 AM | Permalink

The latest collection of articles and how-to's from eVenturing is one that sends a slight chill down my spine. As can be seen by this quote from a previous post, I am a bit of a Luddite:

I used to get teased by my managers, bankers, lawyers, and CPAs about how long I would drag my feet on new technologies. They complained that we were among the last businesses to buy a fax machine (OK, I am dating myself a bit here) and PC work stations. Everybody else had voice mail and e-mail long before we did, so they claimed.

Quite honestly, I was as much concerned about throwing money at new technology that did not deliver or would become obsolete before we even got it fully implemented as I was fearful of new technologies. For small business, cash is tight and we cannot afford to make bad decisions on expensive technology. It really needs to pay for itself through improved performance and/or efficiency. This collection from eVenturing offers some useful information to avoid making costly technology choices that just don't deliver a return on investment.

Posted by Jeff Cornwall at 12:16 PM | Permalink | Comments (1)

Self-employment is now a major part of our entrepreneurial economy, now approaching almost 20 million Americans. Many of the self-employed are choosing to work from home due to family considerations. For example, self-employment allows more flexibility for parents with young children.

Homestead Technologies commissioned a study on home-based businesses and found the following as their list of "hot" opportunities that can be run from home:

E-Learning: With advances in new web application tools such as podcasts and video blogs, development costs will decrease.

E-Bay Aftermarket: Helping companies conduct market research, pricing strategies, shipping, and competitive analysis is a great niche business.

Children Arts Education: There is a major market for teachers of right-brained education who are thought to help foster the development of future innovators.

Garage Organizers: Just as organizing closets was the next big thing in the 80's, the messy garage is the final space to clean up.

Background Checks: Small businesses with limited resources are turning to background check companies to handle investigation and due diligence.

Pet Sitting: An ideal home-based business where you get paid to walk and enjoy the companionship of pets.

Specialized Coaching: The coaching market has boomed in the recent years including specialized areas such as life, spiritual, corporate, relationship and business.

Home-based Debt Collection: Debt has become a way of life for many Americans. Operating a low overhead home-based collection service can serve the niche sections of this market.

Specialized Outsourcing: The small business market has limited resources and a focus on core competencies. Specialized outsourcing from home to small business will have a solid position market position for years to come.

Scrap Booking: In today's easy to save and store digital age, opportunities abound for the home-based scrapbook artist, workshop teacher, or a direct sales rep.

Will you get rich with any of these ideas? Probably not. But, that is not the point for most who choose to run a home-based business. It is to earn income while enjoying the flexibility and freedom of running a small business from home.

Posted by Jeff Cornwall at 05:43 AM | Permalink

Academics and other researchers sure can do some funny things sometimes. In a new report on "global competitiveness" the World Economic Forum uses a definition of economic competitiveness that includes several measures of socialistic public policy. They then go on to marvel at how the still socialistic leaning Scandinavians are so "competitive."

That is why we must always read the details of any ranking or study like this. Sadly, the media will just grab the headlines and run with it ignoring these critical details.

Posted by Jeff Cornwall at 07:02 AM | Permalink

A new study released by the University of New Hampshire reports that total angel funded deals are up 15% in the first half of 2006 when compared to the same period from 2005 even though the economy seems to be slowing down a bit. This is because the slowdown is thought to be short-lived. Angel investors look three to five years out, and in this time frame they see a strong economy returning.

Here are a few details from the study:

- Although there are more deals being made this year, they are making smaller investments. This could be a slight hedging of their investments using diversification due to the current soft conditions.

- If you are not in healthcare services/medical devices/equipment (27% of investments), software (18%), biotech (10%), retail (10%), media (10%), or IT services (10%), you are facing tough odds on finding angel investors. Those six sectors soaked up about 75% of all investment dollars so far in 2006. Although this is a much broader list than has been seen in the past, which is also a good sign for the future.

- Angels are not as early into the dance as they used to be with only 40% of their money going to seed or start-up financing. This percentage used to be much higher. What we don't know is if this is a true shift to later stage funding or simply more money being invested and some of it going into later stage deals. Anecdotal evidence suggests that they have shifted at least somewhat out of seed investing.

(via National Dialogue on Entrepreneurship)

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Posted by Jeff Cornwall at 06:39 AM | Permalink