Show Me the Money

When it comes to employee compensation and job tenure, size does matter, according to a study released today by the Office of Advocacy of the SBA. The study found that all other things being equal, employees of larger companies have longer job tenures than those working in smaller ones. Moreover, the study found that service and manufacturing occupations pay more in larger businesses.
The study determined that each additional year of tenure on a job reduces the probability of turnover by 81 percent. It also established that the offering of benefits reduces the probability of an employee leaving in a given year by slightly more than 26 percent.
Recent surveys by the NFIB have reported that finding qualified workers continues to be a challenge for most small businesses, although easing a bit due to the sluggish economy.
What this study tells us is that even though small firms may be able to offer creative and attractive non-financial benefits, such as more flexible work conditions, more interesting work, etc., in the end what matters most is the money.

Credit Cards Target Small Business

The Wall Street Journal has a piece on how credit card companies are targeting small businesses.

Credit-card use is soaring among small businesses. Many entrepreneurs find it’s faster and simpler to sign up for a card than to apply for a bank loan. Others are turning to plastic because they don’t qualify for bank loans. And they’re using the cards, ones geared toward small business as well as consumer cards, to pay for just about everything — including health insurance, energy bills, taxes and photographers.
Card spending by small businesses on tax payments and preparation alone jumped by 80% in the 12 months ended February 2007, according to a report by Visa USA, based on data about spending on Visa cards by 600 small businesses during that period.

To say that I am not a big fan of using plastic to fund small businesses is an understatement. I have seen too many small businesses forge ahead prematurely with a business idea using what seems to be easy credit to secure. It is expensive debt that is almost always personally guaranteed. So even if the business fails, the credit card debt remains for the entrepreneur. They also make spending just too easy. Most of us have experienced this at one time or other in our personal finances.
Again from the WSJ:

Experts say business owners need to remember that there is good debt and bad debt — and to respect the difference. Good debt generates revenue; bad debt consumes it.
Furthermore, credit cards don’t provide an impartial adviser on sound borrowing practices, so it’s critical to build a relationship with a banker or other knowledgeable adviser outside a credit-card company.

Amen!! This is critical advice for any small business owner. If you can’t get other credit for your business there is probably a good reason. Make sure you understand why they have concerns about your business.

Interesting Data

There were a couple of interesting findings In a study released by the SBA Office of Advocacy.
Contrary to previous findings, this study did not find any evidence that having parents who were entrepreneurs increased start-up rates. If this is supported in future studies, it may signal a shift in the profile of entrepreneurs. Growing up in an entrepreneurial household used to be seen as a major predictor of who will become an entrepreneur. But, with the explosion of entrepreneurship in our economy it may be coming more of a mainstream career choice.
Also, the impact of the existing wealth of the entrepreneur on start-up rates was much more subtle than the researchers seemed to think going into the study. There was some impact of wealth when the data was scrutinized (as we used to say in my doctoral program, “torture the data long enough and it will talk”). So the old adage of “it takes money to make money,” while somewhat supported in one slice of the data, is not as strong as is commonly thought. Another victory for bootstrapping!!

First Rule of Bootstrapping: Watch Your Overhead!

My column this week at the Tennessean looks at the first rule of bootstrapping: Keep your overhead to a minimum!

Recent studies find that the average business start-up has only $6,500 to $10,000 in initial capital. So, how do entrepreneurs get businesses off the ground with such meager means? They succeed by using a variety of tools and techniques that are known collectively as “bootstrapping.”
Entrepreneurs can pull themselves up by their bootstraps by finding creative ways to launch and grow a business within the limited resources available to most new ventures. They find ways to achieve what needs to get accomplished for the business by creatively getting it done for a lower cost.
The first rule of bootstrapping a business is paying attention to overhead.

Overhang in the Healthcare Equity Market

I have pointed out for a long time that there is a growing level of overhang (excess liquidity) in private equity markets. This has led to speculatory behavior in certain “hot” sectors, such as healthcare, as discussed in this post by Bobby Guy at a new blog by Waller Lansden law firm.

Now, it seems money is available everywhere. Many specialty lenders focusing on the healthcare sector have been birthed in the last few years, and hedge funds and private equity funds focusing on the healthcare sector have exploded. Even with interest rates rising, money continues to be available at historical levels. It was recently reported that there is enough money in hedge funds to take the entire NASDAQ market private—twice. Credit derivatives contracts (agreements that divide up risk, either by using pools or through swaps) are worth more than nine times global gross domestic product. A month ago, I talked to a fund with almost $100 million to invest in the next three months, and if it did not meet its three month deadline, all money would have to be returned to investors to chase yield elsewhere.

This is getting to be a worrisome equity market in my opinion. And Mr. Guy agrees:

For the moment then, easy money is “hip” and cool. No one knows how long the current wave will last, but it is fresh wind in the sails of the healthcare market compared to the doldrums of 2001-03. Remember that inevitably, as with all financial cycles (and bubbles), this one too must turn (burst) . . . but maybe not yet.

Of Height and Power and Leadership

In the 1960s there was a series of studies that tried to find the traits that created effective leaders — things like height, hair, sex, etc. What they realized was that these traits were correlated with ALL leaders, because we had a bias on who we thought made good leaders. We soon realized that it was what leaders did and how they behaved that commanded true leadership.
In the 1980s we went through the same drill with entrepreneurs — they just had to be born that way due to some sort of combination of traits. Again, this line of thinking led nowhere. Success in entrepreneurship is also based on how you act and behave.
USA Today ran a story that suggested that taller CEOs are more powerful.

Le Gourmet Gift Basket CEO Cynthia McKay wears 3-inch heels even though she’s 5-foot-9 in bare feet.
Why? For the same reason that 6-foot-3 Don Peebles, CEO of The Peebles Corporation, the nation’s largest African-American-owned real estate development company, puts his hand on the shoulder of shorter adversaries and crowds into their personal space when negotiating a key deal.

But again, this thinking is flawed. Just because they seem more powerful does not mean that over the long-term they will be any more effective as CEOs. They might be able to be better bullies, but not more effective at leading, inspiring others, and creating positive cultures in their companies.
(Thanks to Tahirah King for passing this along).

Pre-revenue Valuation

How do you value a business that has nothing to value? That is the challenge for pre-revenue ventures. They have no sales, and therefore certainly no cash flow, so how do you agree on a value that can be used to give equity in the business to investors that is fair to all parties? How do you assess a value to “potential”?
A common approach has been to basically postpone any valuation and issue convertible notes that allow early investors to convert from debt to equity when later stage investors come in once revenues start to flow. But even this method has flaws and pitfalls.
The latest collection of articles, tools and profiles from Kauffman’s eVenturing examines the issue of pre-revenue valuation. What is particularly valuable is that it looks at valuation from both the entrepreneur and investor side of the negotiation. Very good material for any high potential start up to review before entering into discussions with a VC or an angel.

“The Call of the Entrepreneur”

Rev. Sirico and the Acton Institute have a new project that is about to be released: a documentary film. It’s title is The Call of the Entrepreneur. Even though this film will never get the attention of a Michael Moore’s films, this one is a whole lot better — trust me!
You can get more information on this film here at their web site, including premiere information and a trailer of the film. We are working on hosting a premiere here in Nashville — more to follow if we can work it out.

More on the 20 Million Self-Employed

The National Dialogue on Entrepreneurship offers some interesting facts about the 20 million self-employed in the US recently reported by the Census Bureau:
– Each day, 2,356 Americans decide to go into business for themselves.
– Their companies account for 78% of all US businesses.
– They collectively obtain annual receipts of $951 billion.
– Georgia (up 7.6%) and Utah (up 7.2%) showed the highest annual increases. The national average increase was 4.4 percent.
– The fastest growing sector was Web search portals, where the number of self-employed jumped an astounding 41.2 percent in one year.