Data Made to Dance

Academic types, and I’m talking about the purists among my colleagues, have long been enamored with high growth companies (they call them gazelles, always with a whimsical tone in their voices) rather than small businesses (which they call life-style businesses, always with bit of a condescending tone). And if you read their text books and research articles on entrepreneurial finance, you would think that all entrepreneurs are funded through venture capital. The facts are that VCs have always played a very small part in entrepreneurial financing.
In a report in Inc.com on Kauffman’s GEM (Global Entrepreneurship Monitor) study, this bias comes through loud and clear. The article sounds alarm bells even in its headline “VC Money for Start-ups Continues to Dry Up: Report shows amount of investments in early-stage companies hit lowest level since 1980.” Is this evidence that our entrepreneurial economy is collapsing? The shrill tone of Inc.com’s report leads one to conclude that it may be true (I won’t go so far as to claim this is politically motivated by journalists or academics — I’ll leave that to the reader to decide).
“Small business owners looking for investors would do better with their time than to seek venture capital. According to a study by Global Entrepreneurship Monitor, of the $18.2 billion in venture capital invested in 2003, only $304 million was invested in seed- or start-up-stage companies, the lowest level since 1980.”
“Lowest level since 1980”?? It must be a crisis in the making! But to understand this data, we need to understand that venture capital has been evolving over the past twenty five years. Venture capital in 1980 was nothing like venture capital today. As the venture capital market became larger, more complex, and more specialized, the investment strategies pursued by its managers has changed in focus from start-up to later stage investment.
In its wake there came a growth in angel investment. Wealthy individuals who preferred investing in start-ups pursued these opportunities directly, while the venture capital funds attracted investors interested in lower risk second and third stage investments (that is, established companies with a track record needing capital for growth rather than start-up).
In fact, the GEM data shows this trend as reported by Inc.com at the very end of the article.
“The Center for Venture Research estimated that angels invested $18.1 billion in start-ups last year, up from $15.7 billion in 2002, and that there are between 250,000 and 400,000 angel investors in the country, as well as 1 million to 5 million potential angels.”
Markets work and markets evolve, even if they are capital markets. Venture Capitalists are, in fact, very busy doing what they have done for years: investing in growing ventures. And they are doing so, as this web log has reported, at a brisk pace in 2004. If small businesses are fruitlessly chasing VC funds, we can probably thank academics and the media who continue to give too much focus on venture capital and lead them down this blind alley. VC money is important, but has become specialized and focuses on a very small part of the entrepreneurial economy. Keep it in perspective and put it in context.

Report Issued on Household Debt

The Congressional Joint Economic Committee has issued a report on household debt and our economy that has some interesting and rather complex findings:
“Many analysts have expressed concern about the growth of consumer debt and its effect on the U.S. economy. Some fear that the combination of increasing debt and higher interest rates will impair the ability of households to meet their monthly financial obligations. However, interest payments as a percentage of disposable income have actually fallen since the end of the recession in 2001. Total household debt has increased since the end of the recession, but the vast majority of the increase can be attributed to the growth of home mortgage debt spurred by historically low mortgage interest rates.
Highlights:
* More than 90 percent of the increase in total household debt since the end of the recession is due to growth in home mortgage debt.
* As a share of total household debt, consumer credit (e.g., credit cards and automobile loans) has fallen to its lowest level in a decade.
* After rising throughout the 1990s, the burden of household debt has fallen in recent years.
* Total household assets are more than five times larger than total household liabilities.”

Home-based Business Ideas

Anita Campbell has a list of the “hot businesses are for not for those who want get-rich-quick schemes. Rather, they’re for entrepreneurs serious about operating a business.” The list includes examples of folks who create significant income from a sustainable business. Too bad the government only counts these people as “employed” in the household survey!

IPOs to Increase this Fall

Red Herring reports that IPOs will increase significantly and it will happen much earlier than it normally does in the fall season.
“In past years, Wall Street’s investment bankers and IPO investors rarely saw the new-issue ball start rolling this soon after the Labor Day weekend. Over the last few years, the kickoff for IPOs occurred any time from mid-September to early October.”
This signals a significant surge in IPOs and economic growth from the entrepreneurial firms they finance.
“So far, the IPO pipeline has 160 companies hoping to go public, according to available records. They expect to raise $33 billion. On January 2, the IPO pipeline had 49 companies planning to go public. At that point, the expectation was to raise a total of $8.9 billion.”

Keep the Message Clear and Concise

Too often I hear pitches from entrepreneurs only to be left less clear on what their business is all about afterward than I was before they began. Presentations to potential investors or even customers can be filled with too many technical buzz words. These entrepreneurs also use language that is intended to impress, but ends up confusing the intended audience. An article in StartupJournal offers some good advice for making a presentation about your business to any audience, but particularly to investors or customers.
“The ability to speak and write concisely and with clarity is fast becoming a competitive advantage for entrepreneurs and small-business owners….Articulating clearly what your business is, what kind of goods or services you sell and how much they cost helps the bottom line. Potential customers or clients appreciate clear and meaningful information. It even can make the difference between success and failure.”
Technology start-ups are some of the worst offenders. “Using plain English is crucial when seeking funding to start or grow a business. Venture capitalists and bankers have little tolerance for gobbledygook. If small-business owners can’t cut to the chase with answers to their questions, their chances of securing funds are basically zilch.”
I was once asked by a friend of mine (a former U.S. Senator) to help him with his struggling consulting business. I started my conversation with my usual question, “So, tell me about your business.” Twenty five minutes later, I finally had to ask him to “Stop!” (I found out from his reaction that Senators are not used to people cutting them off no matter how long they go on). However, I had no idea what he was providing through his consulting services even after his twenty five minute pitch.
So, like any professor worth his salt, I gave him an assignment (he was not used to getting assignments from people either). I told him to go away and develop a twenty five word, not minute, description of what he did in his consulting. I wanted his to be prepared so that when asked at a cocktail party in Washington about what he was doing now that he longer held elected office, he would be ready with a clear and concise answer.
He did it, and it worked. Soon he had a steady flow of business because people knew what kind of work he could perform for them. Good business communication should always be clear and concise, but especially when you are an entrepreneur trying to get the attention of badly needed investment money or customers.

Strong Q2 for Small Businesses

The state of small business in the U.S. remained healthy in Q2 of 2004. Entrepreneur’s income and optimism were both strong according to a report issued last week by the Office of Advocacy of the Small Business Administration.
“Economic conditions for small business improved in the second quarter of 2004 according to the recently released Quarterly Indicators: The Economy And Small Business. The report, issued by the Office of Advocacy, shows proprietors’ income increased at an annualized rate of 14.8 percent and the National Federation of Independent Business (NFIB) optimism index remained in record high territory.”
There seems to be good reasons for the positive reports on the state of small business heading into the fall.
“The report notes that interest rates remained low with the prime rate at 4.0 percent while the rate for small business loans of less than $100,000 averaged 4.2 percent. Worker productivity remained strong with a 4.6 percent increase in nonfarm business output per hour. And, the 2.8 percent increase in Gross Domestic Product (GDP) marked the eleventh consecutive quarter of positive real output growth since the recession of 2001.”

Positive Labor Stats on this Labor Day

The Household Survey on employment, which is the most accurate measure of employment including small businesses and entrepreneurs, continues to be strong in August. Here is the latest report from the Congressional Joint Economic Committee:
“The Bureau of Labor Statistics (BLS) announced today that 144,000 new payroll jobs were created during the month of August. According to the household survey, which is used to calculate the unemployment rate, employment increased by 21,000 and unemployment fell by 174,000. The unemployment rate fell to 5.4 percent. Payroll employment gains for July and June were also revised upward by a total of 59,000. Manufacturing added 22,000 payroll jobs in August. Over the past year, nearly 1.7 million new payroll jobs have been created; over 1.4 million new payroll jobs have been created thus far in 2004.
Highlights:
* 144,000 new payroll jobs were created in August. Since August 2003, nearly 1.7 million new payroll jobs have been created.
* Manufacturing added 22,000 new payroll jobs in August. 97,000 new manufacturing payroll jobs have been created in 2004.
* The unemployment rate fell to 5.4 percent, well below its recent peak of 6.3 percent last June, and below the average unemployment rates of the 1970s, 1980s, and 1990s.
* Payroll employment gains for July and June were revised upwards. July payroll employment gains were revised upward to 73,000 from 32,000, and June gains were revised upward to 96,000 from 78,000.
* Payroll jobs gains over the past year have been broad-based, with 9 out of 10 major private sector industries adding new jobs since August 2003.”

Follow eBay to Opportunity Globally

Anita Campbell over at Small Business Trends reports on eBay’s growing global presense through acquisitions in Germany, India, China and and Korea.
“If you want to see where the next hot eCommerce markets are across the globe, just watch where eBay is expanding. Everywhere eBay goes, opportunity for small businesses follows. Millions of eBay sellers in these countries will benefit, not to mention the myriad of businesses that inevitably pop up to service and support eBay sellers.”
It’s a small world, indeed!

Unions Target Small Companies

We’ve all read the obituaries of organized labor in the U.S. But, there is one segment that has seen a growth in unionized workers: service businesses. And who is leading the way in growth in service industries? That’s right, entrepreneurs. Inc. tells of the growth of organized labor in small service businesses in this article by Amy Gunderson.
“True, union membership as a whole continues to decline. But groups active in professional and service industries are booming, their ranks swelled by workers who fear increased health insurance costs and the outsourcing of jobs to Asia. IT staffers, graphic designers, and engineers — this is the new face of labor. And guess where many of them work? The average workplace organized last year had just 53 workers. ‘More attention is being paid to smaller workplaces,’ says Bob Bruno, a labor and industrial relations professor at the University of Illinois at Chicago, who adds that ‘organized labor has a higher success rate in small businesses.’ There are several reasons for this. Labor activists have discovered that unlike large corporations, small businesses often lack the resources and the know-how to fight unionization. Plus, their employees are are often more receptive to organization because union reps can make a personal, individual appeal for their support.
And unlike the large old economy companies that they populated over the past century, unions are behaving rather entrepreneurially.
“Old-school union bosses, sensing a rare opportunity to grow, are devoting more resources to small-company campaigns. For example, the International Association of Machinists and Aerospace Workers, whose members have traditionally come from the likes of Boeing and General Electric, recently launched a Web-based effort to organize technology workers. Other established unions have made inroads in a variety of traditionally nonunionized sectors, ranging from restaurants to nonprofits to health care, where even doctors are now pursuing collective bargaining with HMOs. But it is tech workers who are, without question, the group that unions are focusing on with the most intensity.”
There are two old adages that I used to teach about in Management classes twenty years ago:
1. Poor management practices are the biggest single cause of worker unionization.
2. You get the union you deserve.
Probably still good words for today’s managers of small businesses to think about.