Co-founder of The Entrepreneurial Mind, serial entrepreneur and professor of entrepreneurship.
Author: Jeff Cornwall
Dr. Jeff Cornwall is the inaugural Jack C. Massey Chair in Entrepreneurship at Belmont University in Nashville, Tenn. Dr. Cornwall's current research and teaching interests include entrepreneurial finance and entrepreneurial ethics.
Dr. Jeff Cornwall is the inaugural Jack C. Massey Chair in Entrepreneurship at Belmont University in Nashville, Tenn. Dr. Cornwall's current research and teaching interests include entrepreneurial finance and entrepreneurial ethics.
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.
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?
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.
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.
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.
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).
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.
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…
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.
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.
