Is Bankruptcy Law Bad for Entrepreneurship?

An article at Knowledge@Emory raises an interesting possibility. They question whether the newly passed Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 may dampen our entrepreneurial economy. Why? Because so many entrepreneurs use personal credit cards and second mortgages on their homes to finance start-ups. For these entrepreneurs, easy bankruptcy provides a safety net if things don’t go right.
When I teach entrepreneurs and potential entrepreneurs I try to push them to think about start-ups in a prudent and responsible way. Success and failure will both have consequences, so they need to think things through very carefully. I am much less concerned with how many of them start-up a business as I am with how many of them still are operating their businesses three, five, even ten years from when I have them in class. Those businesses that do last over time are my measure of the success of what I do, not the volume of those who do any old start-up.
I want them a little afraid at their start-up. I want them a little nervous. I want them a little worried about what happens if they fail. Entrepreneurs who rush in blindly like marauding pirates have not learned the lessons we try to teach them in our classes.
When thinking about how easy bankruptcy has become, I recognize what a different time and place that I grew up in. When I was young bankruptcy brought a certain shame if it was self-inflicted. Certainly some folks ended up at this point through events outside of their control, and for them we all felt pity. But, if someone was reckless in jumping head first into a business deal that was full of risk with only a small chance of success, there was not pity except for his family who had to endure the consequences of his failure and the resulting bankruptcy. Some spent years slowly and quietly paying of debts from deals gone sour just so they could avoid the stigma of self-inflicted bankruptcy. They were good people who understood that they had a responsibility to fulfill. The Corporate wall of protection was rarely used as a shield from personal responsibility for a business that failed.
Now just like marriage, we encourage people to jump into business with the knowledge that there is an easy way out. We don’t get along? No problem, we can just get a quick divorce. Business doesn’t make it? No problem, bankruptcy can protect us from most of the consequences.
To me this now means that socialistic thinking has crept into two of the most important foundations of this society: marriage and private enterprise. We now can jump into a marriage or a business deal knowing that there is an easy exit, limited consequences, and a great big government with all kinds of programs and laws to protect us and make it all better.
If Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 causes folks to think twice about their business idea, that to me is a good thing. If one of their main exit strategies is a quick and easy bankruptcy, then I want them to either rethink their plan or start over. Or if they are one of my students, plan to take the class again next semester.
(Thanks to Jennie Bowman for passing this article along to me).

Rent-a-Tune?

Could music row be moving out of the 1950s and into the digital age? Music Row (the heart of the music industry here in Nashville) congregated here at Belmont University yesterday to here about the this month’s version of the future of the music industry. There are some facinating developments in the wings, such as rent-a-tune subscription services. But, change in the entertainment industry is a likely to increase and some of the incremental adaptations tried so far just don’t seem to be making it witht customers. Most of the giants in the industry are looking for a static, one-time fix to make all of the change go away. These are fast times in music, best suited for entrepreneurial thinking and action.
This article from today’s Tennessean has a detailed overview of what Music Row executives heard. Are they listening?

Virginia Enacts Regulatory Flexibility

Virginia is the latest state to pass regulatory flexibility for small businesses, thanks to a new law that gives Virginia’s small businesses a voice in the state’s regulatory process.
“Virginia’s small business owners now have a seat at the table when regulatory decisions are made,” said Thomas M. Sullivan, Chief Counsel for Advocacy.
Passage and signing of Virginia’s Small Business Regulatory Flexibility bill resulted from Virginia small business stakeholders working together in a coalition. Virginia’s Small Business Regulatory Flexibility bill implements elements of small business friendly regulatory legislation put forward as a model by the Office of Advocacy of the U.S. Small Business Administration. Similar to the federal Regulatory Flexibility Act (RFA), it encourages entrepreneurial success by requiring state agencies to consider the impact of their policies on small business before they issue final regulations.

New Zealand is a Hot Spot for Entrepreneurship

I am chairing the International Conference for Small Business this coming June (more on that as it approaches). I have been delighted by the interest in our conference coming from New Zealand. The National Dialogue on Entrepreneurship offers a couple of interesting links on entrepreneurship in New Zealand. One is a report from the New Zealand Ministry of Economic Development and The Treasury and one is a site on their framework for growth and innovation. As I look at these sites I see most of their focus is on cutting government interference of small business and enhancing entrepreneurship education. A good agenda, indeed!

VCs are Flush with Cash

Venture Capitalists were busy raising money in 2004 and have some very full pockets of cash. The phenomenon is known as overhang, and you can read about it here.
More cash means more deals and probably a little bit looser purse strings with the investments they are willing to take. Good times are ahead for high potential ventures looking for money!

Fr. Sirico on Pope John Paul II

Fr. Robert Sirico of the Acton Institute offers his poignant reflection on Pope John Paul II.
“One of the marks of John Paul’s greatness was his rejection of ideological categories and limitations and his ability to hold complex thoughts together as a result. For him, there was no contradiction between celebrating the vocation of business leaders, as he does so innovatively in his 1991 encyclical Centesimus Annus, while upholding and defending the rights and dignity of simple peasants. In his view, both positions flowed, not from some poll he took, but from the intrinsic dignity and eternal destiny of the human person: a being at once unique, unrepeatable and immortal.”

Bank Mergers and Small Business

Bank consolidation has been a fact of life for small businesses for over a decade. For example, our business in North Carolina started out banking with NCNB (North Carolina National Bank), which was already a large state wide banking system that grew in part from acquisitions of smaller community banks.
As consolidation began to accelerate around the late 1980s, NCNB purchased First RepublicBank of Texas and soon became NationsBank. We saw our service from the bank change. The loan officers we worked with seemed to change as quickly as the seasons, we were no longer important or large enough to be part of their private banking system, and we noticed a change from a personal relationship to amore formal relationship with the bank. We soon decided to move our banking relationship, which included over $3 million in debt financing, to a smaller regional bank.
The Office of Advocacy of the U.S. Small Business Administration released a study this week that reports that the way in which bank holding companies (BHCs) grow, through either outright merger of non-merged acquisition, has a direct affect on its small business lending practices.
The study’s findings suggest:
– In general, larger BHCs tend to do less small business lending, as a percentage of total business loans.
– The organizational form of a BHC relates to small business lending. When BHCs acquire other banks — but do not merge them — small business lending is little affected. In contrast, if bank portfolios are merged and integrated into larger banks, their small business lending declines.
“Financial innovation and deregulation are changing the services banks offer to their small business customers,” said Thomas M. Sullivan, Chief Counsel for Advocacy. “Many of the changes have been positive and have opened up capital markets to more firms. Others are changing the relationship between what were once local banks and their customers. This study reports on one aspect of those changes and provides sound insight into the evolution of small business lending by banks.”
So what should an entrepreneur do if their bank is acquired or merges? I would recommend nothing at first. Some mergers of smaller or regional banks can be positive for small businesses as services can expand and improve. And nothing will likely change in your banking experience right away.
Pay attention to your banking relationship. See what happens with the people you have been working with at your bank and if there are enough changes that begin to concern you may want to start looking for a new bank. Another recent report from the SBA shows that some banks are much more focused on small businesses as clients. There should be options for you to consider. As one former business associate always reminded me, “There is a bank on every corner.”

The Growing Liability Risk: Your Information Systems

Business and government is not doing enough to protect sensitive and confidential personal information according to computer security experts at the annual Black Hat Europe conference being held in Amsterdam. From Red Herring:
“Simon Davies, a professor at the London School of Economics and director of Privacy International, told security researchers they would have to demand more transparency from organizations that deal in private information.
“‘Governments and businesses are saying ‘surrender your privacy and we’ll give you benefits and make a safer society.’ We have to push for greater accountability. We’re giving up this ancient right and the government’s not prepared to budge,’ said Mr. Davies.
“Recent scandals at Choicepoint, Reed Elsevier, Bank of America, and the University of California, Berkeley, have compromised the private information of millions of people. This data can be used to steal identities, apply for credit cards, and ruin debt records.”
But liability for lapses in computer security is not just the worry of large corporations. As small businesses gather more information about their customers they become more vulnerable to hackers and the liability that may result from their attacks.
And as the article in Red Herring points out, hackers are moving into the wireless world to find new paths into computer systems.
“Joe Grand, for example, gave a talk on vulnerabilities in common computer hardware. He said it was possible to break into a certain type of Dell wireless access point because nobody ever thought hackers would pull the appliance apart and test the software inside. ‘So many people in the computer industry trust hardware to be secure just because its hardware. It’s a total false sense of security,’ he said.”
Small businesses are setting up more and more wireless networks, and some, such as coffee shops, bagel stores and so forth, are setting up wireless networks open to the public. All are becoming vulnerable to a hackers attack, and if that leads to the wrong information getting into the wrong hands lawsuits will not be far behind.