A Veteran at Bootstrapping Offers Advice

I just finished several weeks of teaching about bootstrapping to my students. It is becoming a traditional that I wrap up this unit with a visit from Charles Hagood, co-founder of The Access Group and Health Performance Partners. Charles, a graduate of Belmont’s Massey MBA Program, shared his advice on being a successful bootstrapper:
1. Cash is King. Enough said!
2. Sometimes Less is More. Having fewer resources can force a business to be more flexible and more resourceful. For example, Southwest Airline’s business model grew out of the limited number of planes that they had to work with during their start-up. I am a firm believer that too much money early in a business creates too much mischief. The temptation is to live beyond your means. Start-ups spend money on overhead that they just cannot support once they have to rely on day-to-day cash flow.
3. Keep Your Priorities in Order. Never compromise your ethical principles, even when money it tight.
4. Enjoy the Ride. Love what you do in your business and enjoy each day. That will make the lean times easier to take.
5. Cut Costs, Not Quality. Focus your money on customers when money is scarce.
6. Impress Your Customers, Not Yourselves. Don’t waste money competing internally over who has the best stuff. Invest it in your customers and in your product.
7. If You Have $1 Left in the Bank, Spend in on Marketing. Even when the market is not buying your product stay in front of them so they will remember you when things pick up. Charles tells the story of the huge hit their business took after 9/11. They decided to cut back on all spending except marketing. They kept in front of their customers. When the economy turned around, they were rewarded for this investment in marketing. They came back stronger than ever.
8. Always Look Bigger and Tougher Than You Are. A classic from NFIB.com offers tips that should be part of a good bootstrapper’s tool kit. Each recommendation is relatively inexpensive, but offers good value in terms of its impact. And each of these ideas can make your business look larger and more well established to your potential customers.

– Set up a first-class voicemail system.
– Get a toll-free number.
– Send all mail on custom-designed letterhead in a designed envelope.
– (Y)our business card should be world class.
– Write articles for trade publications.
– Send out press releases whenever warranted.
– Dress the part.

9. Continuously Reassess Your Business for Wasteful Spending. As more cash flows in, the risk of wasteful spending increases as employees take their eye off the need for bootstrapping. Bootstrapping should not just be a part of your start-up. Build it into your culture and your business will build more value over time. The value of your business will ultimately be determined by the cash you can take to the bottom line. A bootstrapping culture will help maximize the amount of cash that makes it to your net profits. In this piece from Inc magazine from 1997, you can see what the ultimate bootstrapping culture looks like in even a large business.

Hiring Key Team Members

The challenge of hiring key members of the team can lead to many a sleepless night for entrepreneurs. Each hire is important not only for what they will or will not contribute to the business, but also in regards to how they will fit in the emerging culture.
Kauffman’s eVenturing has a great new collection of materials on hiring key team members including examples, how-to’s and tools.

Q4 GDP Revised Upward

The eocnomy at the end of last year was stronger than first thought. The outlook for 2006 is even better.
Highlights of the latest report:
– Real gross domestic product was revised upward from an annual rate of 1.1 percent to 1.6 percent growth in the fourth quarter of 2005.
– The upward revision to the percentage change in real GDP reflects upward revisions principally to exports, federal government spending, equipment and software, and to change in private inventories that were somewhat offset by an upward revision to imports.
– Real GDP growth for all of 2005 was unchanged from the advanced estimate, remaining at an increase of 3.5 percent (from the 2004 annual level to the 2005 annual level).
– The Fed’s preferred measure of inflation, the PCE core deflator, was revised downward from the 2.2 percent annualized growth rate initially given in the advanced estimate to a 2.1 percent annualized growth rate in the fourth quarter of 2005.
Although the growth of GDP slowed in the fourth quarter of 2005, economists are already looking to the first quarter of 2006 for a large rebound. Forecasts for GDP growth during the first quarter of 2006 are ranging from as high as a 4.5 percent annual growth rate to a 4.1 percent annual growth rate. Expectations for the second half of 2006 are for a healthy yet slower rate than that of the beginning of the year. For the entire year of 2006, most forecasts are hovering around a strong 3.3 percent growth rate.
Here is the link to the Bureau of Economic Analysis report.

Be On Time

Making a sale, getting the books closed out, making coffee, finishing work for that new client, emptying the trash and a myriad of other things tend to make up an entrepreneur’s typical day. All of the rush of just keeping the business moving ahead often leads to running a little bit behind. But this is a bad habit to get into, as it can create problems down the road with customers, bankers, partners and family members all of whom are counting on you, or even expecting you, to be on time.
Being late is bad business etiquette. Chronic lateness can say a lot about a person’s character. Any form of lateness can be viewed as a sign of disrespect.
Diana DeLonzor, author of Never Be Late Again: Seven Cures for the Punctually Challenged, says that there are seven types of tardy people. A review in the Denver Post offers this summary:

Rationalizers: They deny their problem and maintain they’re late only occasionally.
Indulgers: Run late because they give in to procrastination. They lack self-discipline and moral fiber. Should join the military.
Deadliners: Get their thrills from crisis-induced adrenaline, so they almost enjoy missing planes, trains, weddings, birthdays.
Perfectionists: Tend to be female, hence the Washington Post-style neologism “inerstrogen” to describe the state of trying on five outfits, four hairstyles and three types of lipstick while in a tearing hurry.
Rebels: Time is so bourgeois. And what better way to show your contempt for society than by freeing yourself from the shackles of the schedule. Should the revolution come, they would miss it.
Absent-minded professors: They get easily distracted en route. They’re the ones who actually stop and smell the flowers.
Producers: Feel unimportant and self-medicate by overscheduling.

I am not sure which of these types best fit my students who are chronically late, but I sure have a lot of tardiness in my classes these days. For right now it just makes their old professor irritable and cranky. However, some day this bad habit could cost them a lot of money.
Well I better get going now. The absent-minded professor doesn’t want to be late for class…..

New Businesses on Campus

We offer our students the opportunity to learn through experience in two ways. For those who have their own business, we offer student business hatcheries and incubator programs. For the rest we have formed a series of campus based businesses. Our first three were retail stores: a record store with our music business program, a retail art gallery with our art department, and a clothing buy generic topamax store set up as a private business by one of our majors. This year we launched two new campus-based businesses: a public relations firm and a graphic design firm. Both are in cooperation with those academic departments. The Nashville Business Journal ran a story on these two new businesses this week.

Franchising 101

StartupJournal has put together a get collection of material for any of you interested in franchising.
They start with basic research tips:
– Look into franchisee litigation (almost inevitable these days, so look for troubling patterns)
– Know what you are getting into when buying a franchise. The SBA has a good overview in their consumer’s guide.
– Talk to existing franchisees, including as many as you can who own the franchises you are considering.
– Pay attention to the legal details, as these are the rules that will govern any and all disputes once you sign on the dotted line. The UFOC (required by law) is the key document, so read it and make sure you understand what it says.
– Some franchises may be eligible for financing through the SBA.
StartupJournal has some other helpful articles that cover the benefits of buying a franchise versus going it alone, the general pros and cons of franchising, evaluating your personality fit for franchising, and what it takes to succeed as a franchisee.
Beyond the contractual issues that arise in franchising, there are some fundamental business and personal concerns that many franchisees experience after it is too late.
One of the biggest sources of frustration among franchisees is that they perceive that the value added they get from association with their franchisor diminishes over time. A franchise will charge a significant monthly percentage fee (this can average about 7% of sales) associated with all that they offer in terms of systems, marketing, purchasing power, and so forth. Over time, many franchisors realize that they can be just if not more effective on their own without paying the monthly percentage of sales to the franchisor. This on-going monthly fee is often glossed over by franchisees during start-up planning, as they tend to think only about the initial fees and capital expenditures in their planning.
Another concern expressed by franchisees is that with all of the rules and standardized procedures, they tend to feel more like an employee than a business owner. Those who try to break away from the predetermined model and processes can face the wrath of the franchisor. Larger franchisors have entire staff dedicated to franchisee compliance.
A financial risk to consider is that many first time entrepreneurs can only afford newer franchised concepts, since well established franchises can cost hundreds of thousands of dollars to buy in. These start-up franchisors can begin to experience their own growing pains. Some don’t survive. In some cases they may take the franchisees down with them.
It is critical to understand all of the ins and outs of franchising as a general business strategy first. Then if the idea of a buying a franchise still makes sense, do your homework on the company and its concept. All franchise opportunities are not created equal.

The Unintended Consequences of Meddling with Markets

An issue that advocates of small business continually fight is minimum wage legislation. The NFIB raises numerous concerns over the consequences of increasing the minimum wage:

– The Kennedy amendment would enact the largest increase ever in the starting wage, $2.10 over two years. A 36 percent increase in labor costs would place a huge burden on small businesses.
– Many small employers already are facing 15 percent to 20 percent increases in health insurance premiums. A large minimum-wage increase not only adds to these labor costs but also could force employers to cut back on health-care coverage or other fringe benefits that they need to attract workers.
– Nearly two-thirds of minimum-wage workers move above the minimum wage within one year. Most minimum-wage jobs are entry-level jobs that are not lifelong dead-end jobs. These jobs allow Americans to establish a track record of work that creates opportunities for better paying jobs.
– Higher mandated wages reduce employment opportunities for the least skilled and cause shifts in the profile of those who get hired as employers favor more highly skilled applicants. And as entry-level unskilled job opportunities disappear, welfare recipients have a more difficult time finding work. Thus, those who most need assistance are helped the least.
– Minimum-wage hikes have ripple effects on the economy, often having unintended consequences against the entry-level earners the minimum-wage proponents profess to help. When small business and employees are hurt, it’s a double whammy for the economy.

One unintended consequence that can happen when you meddle with a market is that small business owners just give up and close their businesses. However, sometimes entrepreneurs and other innovators will find a way to work around onerous regulations. BoingBoing.net has a wonderful example of this related to minimum wage.
impact of minimum wage.jpg

Abir Majumdar says: “I went to one of those Taco Bell/KFC hybrids in Morrisville, NC and all the ordering was done through the gigantic touchscreens. No humans take orders there. You go to the machines and you’re presented by an animated Colonel and talking taco. Then you put in an order as if you were at amazon. You can pay with cash and credit card.”

Ethical Challenges with Growth

My entry yesterday about growth prompted Credo Advisors to reflect on the ethical challenges that growth can bring.

While it may seem obvious that ethical issues might start to crop up (or increase in frequency) with growth, I’m often surprised by how many businesses get caught off guard anyway. I’ve personally fallen victim in the past, having been blindsided by issues regarding key personnel that I missed during the initial vetting process. In my case, I tend to be a very idealistic and trusting person and typically think that anyone who wants to work with me has the same motives.

Quite true. Every person you hire can contribute in some way to the evolution of your culture. Pick the wrong people, and their contributions can take your culture in the wrong direction.

So I Guess We REALLY Better Save for Retirement

Scientists are envisioning a day in the not too distant future when the retirement age might have to move from 65 to 85. It seems that anti-aging drugs are a real possibility. From Red Herring:

But drugs that prevent aging itself are on the distant horizon, and with them could come dramatic social changes, such as much later ages for everything from puberty to retirement, and massive inequality in life expectancy between those who can afford the life-lengthening compounds, and those who can’t. These changes, in turn, would have a significant impact on the global economy.

I guess they would! First, the idea generating part of my brain has kicked into high gear thinking about all of the new businesses that would come out of such a change. But then I started to think about all of the deadbeats who can’t even manage to save for the longevity we now enjoy. Does that mean we have to fund social security to cover these people for 40, 50 or even 60 years???