From time to time I have written about myths that I see when dealing with aspiring entrepreneurs. Entrepreneur.com has put together their own Top 10 list of Small business Myths that are worth a read for anyone thinking about starting a business.
Several of their myths dealing with financing issues:
Myth No. 1: “The government has grants for startups.”
Generally this is not true. There are a few instances where local governments set up programs for disadvantaged people looking to use free enterprise to improve their lives, but they are not that common.
Myth No. 2: “The SBA loans money directly to small businesses.”
Another financing myth busted. You still must go to a bank. Some banks work with the SBA program to get small business loans guaranteed by the SBA.
Myth No. 3: “Venture capitalists loan money to startups.”
VCs fund less than 0.5% of entrepreneurial ventures, and of those, only rarely do they fund a start-up.
Myth No. 5: “I’ll be able to write everything off.”
Actually you can, but you will face interest and penalties from the IRS, so I don’t recommend it either.
Myth No 6: “I can pay myself whatever I want.”
Again, you can, but you’ll be out of business in a few weeks. You can only pay yourself what is left after everything else gets paid. You are last in line if you want to make your business work.
Myth No. 8: “I should be profitable after six months, because I’m an expert at what I do.”
The article states that most businesses take 2-3 years to make a profit. That is also kind of a myth. I have owned businesses that make profit within a few months, and I have had some that took years. It all depends on the business model and the market. That is why a plan is so important to help you understand what you are getting into. Which brings us to another of their myths:
Myth No. 10: “If I’m not getting funding, I don’t need a business plan.”
See my comments above…
They also have a couple of marketing myths:
Myth No. 7: “If I create a website, I’ll get traffic (or the more popular ‘If I build it, they will come.’)”
Myth No. 9: “I don’t need a marketing plan or marketing materials. This product/service sells itself.”
I tell entrepreneurs that they should be prepared to spend 80% of their time selling and marketing early on. Nothing sells itself and no website creates its own traffic.
Finally, one of their myths deals with lifestyle:
Myth No. 4: “I’ll have more time to do what I want.”
You should assume you’ll have some long hours early on. But, if time is important, make sure to build that into your business plans. Plan for slower growth or less ambitious goals if you want to structure time for other things. Also understand that some businesses just demand more of our time by their very nature. For example, if you want to start a restaurant, plan on very few days off, long hours, and no vacations for a LONG time. Know what you are getting into before you start any business and make sure it fits your non-financial and lifestyle goals.
Make sure to go the the Entrepreneur.com article, as it has some great links to more information on all of these topics.
Everyone Must Do Marketing
A common mantra in successful new ventures is that everyone in the company must be a part of marketing. Building customers is the most important activity any start-up engages in.
eVenturing from the Kauffman Foundation has a great collection of articles and tools for on-line marketing in entrepreneurial ventures. This is fast becoming one of the most important aspects of marketing in today’s economy. It gives tips on getting clicks, and helps understand the world of Google and the issues of privacy and security.
Courage?
Every virtue has two ditches that take it beyond virtue and into vice: one ditch is deficiency and the other one is excess. Courage, which is a commonly used virtue for entrepreneurs, is no exception.
Take for example Andre Agassi. What a wonderful career he has had in tennis, winning eight major tournaments that included a career grand slam.
This past weekend he played his last US Open. The word courage seemed to come up every five minutes on TV and in every story written about his efforts this year. For those of you who are not tennis or even sports fans, Agassi played this last year with a severely injured back. But, he played on, in spite of his father publicly stating that he should not.
He was touted as a hero. “Give Agassi credit, he retired swinging”, was one headline.
While he has shown great courage in the past with his comebacks, playing through injuries, and with his incredible work ethic, this weekend Agassi went beyond courage and into the vice of recklessness. Even the commentators who marveled at his “courage,” would say in the next breath that this last tournament could cause serious permanent physical injury.
So why did he go on? It was not the money — he and his wife have more than they can spend. It was not to win another major — even Agassi knew he could not win again in a major.
Sadly, I think society has convinced many of us that being Herculean even when there is no hope of success is somehow noble and good. But this is not true. Every virtue, even courage has limits.
There are good lessons here for the entrepreneur. When taken too far, risk taking can become reckless. Staying with a deal or sticking with a major decision even when it is clear that the best course of action is to move on is not courage, it is recklessness. Taking risk just for the sake of taking risk is not courage, it is recklessness.
Courage has two ditches. And Andre Agassi strayed off the road of courage into the ditch of recklessness.
Good Employment News for Labor Day
There is a hopeful sign that our economy, and particularly our entrepreneurial economy, is bouncing back. After a few months of sluggishness, we are seeing increases in employment.
An overall view of employment shows a drop in unemployment in August, according to data just released by the Bureau of Labor Statistics.
And in the NFIB membership survey for August, just released this morning, there is an indication of a significant strengthening of employment in small business, with 55% of those surveyed reporting that they hired or tried to hire new employees in August. This improvement in small business hiring is critical, as small business is now 50% of our GNP and consistently accounts for about 70-80% of new job creation in the US.
What Was Once Old…
Sometimes the best opportunities can come from old concepts that we take out of the proverbial attic and dust off. Here is an example of an idea posted at AOLnews from five decades ago that has gotten new life:
Before there was McDonald’s, there was the Automat….Three young entrepreneurs are hoping to revive the tradition – with a few modern twists – when they open Bamn! Automat in the East Village this week.
In fact, their business concept is to take Automat and marry it with modern fast and convenience foods that today’s under 30 crowd love to eat.
I wonder if there is a market for my old love beads…..
(Thanks to Matt Sells for passing this along).
Lots of Idle Cash Creates Opportunity
Venture capital funds have been more successful in raising cash than they have in finding the right investments, which has created a large surplus or overhang of cash in their funds. This is consistent with the capital markets in general.
An article in Fortune Small Business argues that this makes it a good time to think about selling your business. The law of supply and demand tells us that excess cash creates a seller’s market.
[N]ow is a particularly good time to sell a business. The economy is, by many measures, in its best shape since the dot-com bubble burst in 2001. Banks are aggressively lending money for all kinds of acquisitions. Increasingly, corporate America views the purchase of small firms as a shortcut to growth and innovation. As a result, a small-business feeding frenzy is in progress. According to FactSet Mergerstat, there were 8,115 small-company acquisitions (deals valued at $100 million or less) in 2005, almost a 20% increase from 2002.
The FSB article goes on to offer four good pieces of advice for anyone thinking about selling.
1. Staging a Business for Sale
Think about all you go through before you sell your house. You add some paint, spruce up the yard, declutter the living room, clear out your closets, and clean, clean, clean. The same logic applies to your business. But in the case of selling a business, curb appeal is much less important than income statement appeal. Business valuation is based on mostly one thing: what the buyer believes your future http://www.honeytraveler.com/buy-xenical/ cash flow will be. The higher you can get your free cash flow and the more growth it looks like it can have in that cash flow, the higher the selling price.
2. Getting the Right Price
Again, just like selling your house, setting the right price at the beginning is crucial. Bidding wars are very rare events. The only direction the price will go is down once negotiations begin. So work hard to make sure you have the right price in mind from the beginning. And for goodness sakes, bring in experts — never do this by yourself or with attorneys who have little experience in selling a business. You may pay a hefty fee to M&A experts, but it is usually worth every penny.
3. Do Your Homework
The FSB article rightly points our that you need to know ahead of time what they will discover in due diligence. And be prepared for the emotional ride of a life time. Half of all deals that get to due diligence never make it through to the sale.
4. Buyer’s Bag of Tricks
The devil is in the details in a business sale. Listen to your M&A attorney when she tells you that some minor wording is important. The buyer will likely try many tricks to reduce their risk and devalue the deal, often in ways that a non-expert would never even see coming. Don’t get ahead of yourself. Half the deals that get near closing also fail.
Character
So many entrepreneurs, and if fact so many professionals, think that what they do during their working hours has no impact on who they are outside of work. They believe they can lead a divided life, treating people one way in their work and another in their personal life.
The truth is, however, that every act, every decision we make, in some way shapes our character. If we act a certain way once, we are more likely to do it again. This is true for good behaviors as well as bad behaviors. If we lie to customers as part of our everyday business, we are more likely to lie to our employees. And if we lie at work, we are more likely to lie to our families and friends.
Virtue is nothing more than a habit. And so are vices. The more we act in a particular way the more it becomes ingrained in who we are — it becomes part of our character.
In the fast paced world of starting and growing a business we often have to make snap decisions and act quickly to take care of a parade of challenges and crises that seem to endlessly pass by. We can lose site of the consequences of these acts and decisions. And they happen so often and so quickly that it is easy to disconnect our daily decisions and actions from our core values — of what we believe in our heart is really right and wrong.
But each time we do this is shapes our character in some small but significant way.
All the decisions we make contribute to our character formation. Here is a short quote from the new book I am finishing up on with my co-author Mike Naughton:
So when an entrepreneur works, he affects the inner landscape of his character. The issue is not whether he changes himself, but how he changes himself. And the key to understanding the significant revealing of the entrepreneur’s personhood is not found in the amount of revenues he has generated, or the percentage of market share he has captured. Rather, the moral and spiritual character of the entrepreneur will be captured in the responsible relationships he has forged with others in the actions of running his business. More specifically, this can be shaped by the opportunities he pursues, who he chooses to do business with, who he hires, decisions he makes about products and markets, decisions about whether and how fast to grow, the corporate culture he builds, and his engagement with the community as a leader and/or citizen.
It is important to take time and reflect on who we are becoming through our work. If we are not careful, we might not like who we see in the mirror.
If I Only Had the Money….
Findings from a new study on start-up businesses released by Wells Fargo indicate that you really don’t need a lot of money to start most businesses.
The Wells Fargo report found that the average start-up financing for the new businesses they surveyed was $10,000. The study also finds that 73% of start-ups were fully self-funded. These findings are consistent with previous surveys that generally find that start-ups began with about $7,000 – $10,000, and that self-financing was used by 70-85% of all start-ups.
When Big is Small
There is a government funding program through the SBA called SBIR. The “IR” stands for Innovative Research. The SB is supposed to stand for Small Business, which the SBA has traditionally defined as 500 employees. Now for many of us, defining a company with that many employees as a small business is a stretch.
These grants were set up to help small businesses that were engaged in cutting edge research. And they are grants — this is not a loan or an investment. Once the money is granted it never gets repaid.
From the SBA website:
SBIR is a highly competitive program that encourages small business to explore their technological potential and provides the incentive to profit from its commercialization. By including qualified small businesses in the nation’s R&D arena, high-tech innovation is stimulated and the United States gains entrepreneurial spirit as it meets its specific research and development needs.
SBIR targets the entrepreneurial sector because that is where most innovation and innovators thrive. However, the risk and expense of conducting serious R&D efforts are often beyond the means of many small businesses. By reserving a specific percentage of federal R&D funds for small business, SBIR protects the small business and enables it to compete on the same level as larger businesses. SBIR funds the critical startup and development stages and it encourages the commercialization of the technology, product, or service, which, in turn, stimulates the U.S. economy.
If the Senate Committee that oversees the SBA has its way, these monies will now be available to much larger “small businesses.” In fact, businesses with up to 1500 employees will now become defined as “small” for the purposes of SBIR grants.
This grant program was set up to help make innovation in small business more feasible and to help small firms be more competitive with larger technology firms that have access to large pools of their own and VC monies. While I fear that this is one more step toward socialized entrepreneurship in this country, it is a program that at one level I can see might have some merit. But given where this is now headed, truly small companies will likely have an even more difficult time competing for these grants.
That is why socialized entrepreneurship never works. Politics and greed will take over even the most well intentioned government program.
Entrepreneurship for the Common Good
There are two demographic groups that are pursuing entrepreneurship in large numbers these days — the Entrepreneurial Generation (those under 25) and those at or near retirement, including the Baby Boomers.
StartupJournal reports that many of those in the “older” demographic group are becoming social entrepreneurs, choosing to start-up non-profits in their later careers.
Civic Ventures, a San Francisco think tank, identifies these ambitious and resourceful folks as being among a new breed of “social entrepreneurs.”
“They may have been business entrepreneurs in their middle years,” says Marc Freedman, the organization’s president. “Now they’re worshiping a different bottom line — a better society, enhancing the common good. If you create wealth, it’s OK, but it isn’t enough.”
For many of these people, what they’re doing is like starting a small business: They see a need for a service, form an organization, seek financing, and aim for an expanding venture that can help to support and perpetuate itself.
The article goes on to profile four very inspirational stories of social entrepreneurs.
(Thanks to John Russell for passing this along).