Is Entrepreneurship the Best Road to Riches?

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.

Know How They Think

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).

Big Companies as Customers Can Mean Big Sales and Big Headaches

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.

Social Entrepreneur Wins Young Entrepreneur Award

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.

Stewardship in Family Firms

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.

What is Home Depot Doing in my Niche?

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).

Socialized Entrepreneurship Gains Steam

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.

Comment on Comments

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

Entrepreneurial Economy Slowing Down?

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.