What is it with Economists and Small Business?

I have been rebutting Scott Shane’s maligning of small business in the economy in this blog for some time.  Prof. Shane is an economist who teaches entrepreneurship at Case Western Reserve U.  (You can see those posts here, here, here, here, here and here).

Now we have a post at the Economist blog, Free Exchange, that examines the role of small business as an engine of jobs in the U.S. economy.  They start with this graph:

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They explain the graph this way:

“Entrepreneurs boost the economy by exploiting new ideas and business
models in order to turn a profit. The ones that do this well don’t stay
small; they grow rapidly, helping to disseminate new technologies and
create jobs. If your economy has a lot of small firms, that’s an
indication that some part of this process is broken. If you look at the
Italian example, for instance, you find that a lot of small Italian
firms are retail and service enterprises protected from competition by
onerous regulation.”

I guess economists can’t help themselves.  It may seem that they disdain small businesses, but it may just be how they get trained to think.  Classic economic theory never has really had a place for small business.

I studied economics at undergraduate level (a minor), MBA level (applied econ), and doctoral level (in my DBA program had to take the same two intro PhD Econ courses as Economics PhD”s did), so I have a sense of where this comes from.

Economists view commerce as a place where small businesses compete again each other.  The strong beat out the other small firms and become larger.  Then the larger compete against each other and the largest win and get to be really big monopolies.  It is a static model that for the most part minimizes disruptive innovation, or as we like to call it, entrepreneurship.  It is also a view that takes out the emotional and psychological aspects of entrepreneurship — passion, risk tolerance, ethics, values, life/work balance, and so forth.

Their world view is one of only purely rational economic goals.  Entrepreneurs start ventures for so many more reasons that that.  We want to create jobs, build a certain kind of culture, find safe and cool niches to operate in profitably, etc., etc. etc.  It is rarely to simply maximize shareholder’s wealth (our own in this case). 

To do so impinges on our other goals, exposes us to outside funding requirements that are just not worth the hassle (i.e., banks and their personal guarantees and venture capitalists and their term sheets), and can just plain take the fun out of owning and running a business.

And by the way — this analysis is based on about seven decades of a very different economy that was dominated by large firms.  That economy stopped creating jobs back in the 1980s.  Most research shows that entrepreneurs created about 75-80% of all new jobs from about mid 1980s up until the Great Recession began in 2008.

The good news is that most of the time economists just talk to other economists.

Pivot with Purpose

Business models are developed
by visualizing all of the “working parts” that make up a business.  A traditional business plan, on the other
hand, is most often a formal, written document that provides details about how
an entrepreneur intends the business to operate. 

Learning to develop a sound
business model helps ensure that everything that is critical to the success of
the business is in place and working in harmony. 

Developing the business model
depends fundamentally on engaging real customers very early in the creation of
the business so we have a better chance of offering what the market really
wants. 

One of the biggest benefits I
have seen from using business modeling over writing a traditional business plan
is that it allows for adaptation.  We use
what we learn from the very beginning of the start-up to make changes in our
business model as we uncover who our customers really are, what they really
want, and how best to put everything in place to ensure that we deliver what we
promise to them.

This process is known as
“pivoting” the business model. 

We all start with a clear plan
in mind of what our business will be. 
The problem is, most of the time our plan is either only partially right
or just plain wrong.  Successful start-ups
become a series of pivots to the business model we started with as we learn
more and more about where our business really fits best in the marketplace.

“As a founder, keeping your
company alive requires you to think creatively and independently because more
often than not, conditions on the ground will change so rapidly that any
original well-thought-out plan quickly becomes irrelevant,” explains
business model guru Steve Blanks.

A
note of caution: Pivot with purpose

One of the flaws of the old
business planning approach to start-ups was that many entrepreneurs got so
wrapped up in the process of developing the “perfect business plan” that they
never got to the point where they were able to pull the trigger and actually
start the business.  This became known as
“paralysis by analysis.”

I am beginning to see a similar
problem surface when using the business modeling approach to guiding business
creation.

It seems that people are
beginning to believe that since pivoting is good for a start-up, more pivoting
is somehow better.  When they follow this
logic, we see many entrepreneurs get so wrapped up with pivoting that they
forget the goal is to get the business model right so that you can move
forward.

Adjustments to the business
model are important, but once the market tells us that we are finally offering
the right product to the right customer, it is time to slow down the pivoting
and focus on growing the business.

Never forget that the ultimate
goal is not to develop the perfect business plan or the most elegant business
model, it is to identify a need in the market and build a profitable business
that meets this need.  Business plans and
business models are just tools that help entrepreneurs achieve success. 

Jobs not Improving in Small Business Sector After All

There are some recent reports suggesting that small businesses may be getting in a hiring mood.  Not so, says the latest survey of small business owners by the NFIB that is about to be released.

“We wish there was good news to report, says William C. Dunkelberg, chief economist for the NFIB.  “But sadly, we will give you more of the same: The prospects for a good jobs report are dim. In August, small-business owners reported job losses averaging .08 workers per firm over the last three months. This follows a loss of .23 workers per firm reported in June and .15 workers per firm in July.”

Dunkelberg tries to add a glimmer of hope by adding, “The good news is that the trend is moving in the right direction–losses appear to be decreasing.”

However, he goes on to point out that the change doesn’t seem to be moving fast enough to close the employment void we’ve been experiencing for the last several years.

“While the readings remain historically weak, we can find a grain of encouragement as we look at hiring prospects. Over the next three months, 11 percent plan to increase employment (up 1 point), and 12 percent plan to reduce their workforce (also up 1 point), yielding a seasonally adjusted net 5 percent of owners planning to create new jobs, which is a 3 point improvement over July. But, let’s not get ahead of ourselves,” cautions Dunkelberg.

That is good advice, since we have seen small business owners appear hopeful of future hiring in previous months, only to be disappointed.

So the bottom line is that the employment picture is largely unchanged.

Customers Don’t Want Excuses

“I’m sorry the delivery is late, but….”

“I know this didn’t turn out the way you ordered it, but….”

As entrepreneurs, we have all been in situations when we have been unable to meet our customers’ expectations.  

You may have been counting on suppliers who did not deliver to you on time or with the products you ordered.  Maybe your workers did not show up on time or quit in the middle of a job.  Or maybe you may have had a sudden influx of business or an unusually big job that you just did not expect and you and your employees just can’t keep up.  

However, it is important to remember that you are the one who picked those suppliers.  You hired and trained those workers.  You accepted all of that extra work.  

Explaining why you did not meet the expectations of your customers with excuses does not build trust and confidence with customers.  While there may be reasons behind your failure to meet their expectations, customers generally do not want to hear about your problems.  What they want is for you to do what you have said you would do, and do it when you said you would.  If you can’t, they expect you to make it right.

Think of it from the customer’s perspective.  Blaming bad customer service on your supplier or your employees communicates to your customers that you are less than competent.  It is your business, so whatever goes on within it ultimately reflects on you.

Even worse, telling a customer that the reason you could not deliver as promised is due to taking care of another customer, communicates that their business is less important to you.

The importance of taking full responsibility and acting with integrity with your customers is important any time, but it has become critical during the ongoing Great Recession.  

Recent surveys conducted by the National Federation of Independent Business suggest that weak sales are is the single biggest challenge facing small business owners during the recession.  Since the forecasts of most economists call for a continuing sluggish economy for some time to come, taking steps to attract and keep will continue to be a significant challenge for entrepreneurs.  Not meeting customers’ expectations or telling them that their business is less important certainly is not wise when operating in an economy where customers and the revenues they create are increasingly hard to come by.

Taking full responsibility with customers builds confidence in you and your business.  Making each customer feel like their business is always the most important builds loyalty.  Building confidence and loyalty in customers is essential for surviving the continuing recession and thriving when the economy finally does recover.

When things go wrong with a customer offer no “but’s” and no excuses.  Be honest, take full responsibility, and tell what you intend to do to make it right.

Social Media Fuels Guerrilla Marketing

Guerrilla marketing for entrepreneurial bootstrappers is nothing new.  Entrepreneurs have been finding creative ways to promote their businesses when they have little or no marketing budgets for generations.

In an article at Business on Main, Jeff Wuorio shows how social media is taking guerrilla marketing to a whole new level.

Wuorio offers strategies on the effective use of social media and discusses how it can be used to scale a business. 

But like any marketing efforts, social media requires deliberate planning and careful monitoring.

“Despite its powerful potential, guerrilla marketing isn’t an
effortless slam dunk. For one thing, strategies like blogs, Twitter and Facebook
mandate creating a schedule and sticking with it,” said Wuorio. “Also, be sure to track the reach of your programs by
monitoring their affects on such indicators as sales or inquiries. If something
seems to be working, keep riding it. On the other hand, if you try something
that just doesn’t seem to be panning out over three to six months, don’t be
afraid to scrap it and try something new.”

More and More Young Entrepreneurs Arriving on Campus

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My favorite time of year.  The beginning of a new academic year. (By the way, my office is the first bay window on the top floor up on the top right in the picture above — stop by and visit sometime!)

When I left academics years ago to go into the private sector as a healthcare entrepreneur, I was shocked how much I missed the rhythm of the school year my first couple of years away from teaching. 

This year’s freshman class has moved into their dorms and are ready for their new beginning.

The Beloit College Mind-Set List has labeled the class of 2015 the “Internet Class”.  The authors of this annual list tell us that this year’s freshmen have grown up in an age “when everything from parents analyzing childhood maladies to their
breaking up with boyfriends and girlfriends, sometimes quite publicly,
have been accomplished on the Internet.”

We continue to see the entrepreneurial mind-set deeply rooted in this group.

Typically, we start with about seven or eight students entering Belmont intending to major in entrepreneurship.  They are often are hard core group who are ready to hit the ground learning about all things entrepreneurship.

Over the four (or so) years until they graduate, their numbers usually grow to about 25-30 as more students from their class realize that where they want to go in their careers is a path defined by entrepreneurship.

This year’s freshman class is starting out at about 20 students!

So now the forecasting fun begins.  Will the class of 2015 grow by the typical 20 students?  Or is the growth a multiple, and will they grow to 60-80 by their senior year? 

Like any entrepreneur, I see this growth in our program as a good problem.  But as an grizzled, road tested entrepreneur I know what fast growth can do if you are not careful!!

This year’s freshman will find many improvements in our program.

We have fully implemented the shift in our curriculum to the business modeling approach.  While business plans are still part of what they learn, they are positioned simply as a tool to communicate the business model to investors.

They will also benefit from a major shift in where and when we teach. While the classroom is an important learning environment, we are putting more and more emphasis on learning outside the classroom. 

We have created lots of co-curricular innovations over the past eight years, but they have grown into a difficult array of programs to navigate.  We offer hatcheries to start businesses, various and sundry mentor programs, legal and accounting clinics, seed funding, early stage funding, peer roundtable groups, and so forth.  We realized that many students seemed a bit overwhelmed by what we offered and were not sure what they really needed.

So this year we are focusing our efforts on putting some structure into the co-curricular learning environment.  I have two new team members to help with this effort.  Lisa Davis has joined us as Program Coordinator of the co-curricular programs.  We will be assisted in this initiative this year by veteran tech entrepreneur John Wark, who is serving as our entrepreneur in residence working with our practicing student entrepreneurs.

We also have two new campus-based businesses to join our array of retail and service businesses already in place.  We have two students starting a music store — a natural for Nashville — and are starting an app development company through the collaboration with our alumni who started the app firm Aloompa.

We will be trying to engage the class of 2015 early.  We cannot wait until they arrive in our classes their sophomore or junior years.  They are arriving ready to connect and ready to learn, so we will get them integrated into our co-curricular learning opportunities.

So this year I have a heightened excitement to the beginning of classes.  More budding entrepreneurs creating more challenges and more opportunities.  What more could an entrepreneur in academia ask for?  

Moving Beyond the Kitchen Table

Bootstrapping is the name of the game for most startups. By keeping their expenses low, particularly overhead costs, entrepreneurs are able to start businesses with limited initial funding. 

A bootstrapped startup also allows the entrepreneur to determine what the market really wants without having to lock in specific long-term expenses tied to a specific business model. 
Once the business model has been tweaked enough that it begins to attract a significant growth in new business, the entrepreneur needs to shift modes and begin to create more formal form and structure to the business. This stage of development usually involves two major changes: hiring employees and moving into a legitimate space for the business. 
However, walking over the threshold from bootstrapping and model testing to the commitment of adding fixed overhead expenses can be a frightening step. 
“I think one of the struggles of starting a bootstrapped company is when to finally make the call to take on long-term commitments,” said Kurt Nelson, a Belmont University alum and co-founder of Aloopma, a design firm with links to the Bonnaroo music festival. 
“In the bootstrap world you fight to survive. You watch every dollar very closely. You sign short-term leases, hire freelance contractors and buy inexpensive desks and furniture that may not match.”
But the extreme bootstrapping approach can only take a business so far. 
One of the first big decisions is choosing when to move out of the bedroom, kitchen, coffee shop, garage, basement or wherever a business was formed during its startup days.
“Making the move into a legitimate office space is something that we put off for quite some time,” said another former student of the Belmont University entrepreneurship program, Jake Jorgovan, co-founder of Rabbit Hole Creative, a firm that does unique digital advertising and event graphics. “The money we saved in overhead was money we were able to put back into our pockets and into growing the business.”
That penny-pinching approach allows for only limited growth. 
“Eventually we realized that we needed a legitimate office,” Jorgovan said. “It was somewhere around the time when we had seven people working out of a 150-square-foot apartment, and I was sitting on a box because we were out of chairs. That was the moment when we realized it was time to upgrade our space.” (The company moved to new digs on lower Broadway above a restaurant.)
Adding employees is the second major step that can be intimidating for entrepreneurs. The thought of being responsible for other people’s livelihoods can be daunting. 
“Pulling the trigger to bring on salaried positions is a tough spot for a bootstrapper,” Nelson admits.
Jorgovan agrees, adding, “It was a tough decision because when you hire your first employee you realize that someone is counting on you to bring in revenue every month to pay their salary. It’s a whole new emotional level when you’re responsible for other people’s financial well-being.”
But an entrepreneur working alone can’t do it all. Eventually he or she will have to begin adding employees to support the demands of a widening base of customers. 
I recommend that entrepreneurs never lose the bootstrapping spirit. But they also need to understand that some of the extreme steps that worked in those bootstrap days can actually strangle a business after it has left the starting gate.

Those on Wall Street are not Alone Wringing their Hands

Small business owners on Main Street are joining investors on Wall Street in worrying where the economy is headed, according to the latest survey from the NFIB.

For the fifth consecutive month, NFIB’s monthly Small-Business Optimism Index fell, dropping 0.9 points in July–a larger decline than in each of the previous three months–and bringing the Index down to 89.9. This is below the average Index reading of 90.2 for the last two-year period. Put simply, they are losing what little optimism they had been building during what had been hyped as the beginning of a recovery.  They now fear that there really was no recovery after all and more bad times are likely ahead.

Expectations for future real sales growth and improved business conditions were the major contributors to the decline in optimism. Remember that this survey was completed before the events of the last two weeks. 

“Given the current political climate, the protracted debate over how to handle the nation’s debt and spending, and the now this latest development of the debt downgrade, expectations for growth are low and uncertainty is great,” said NFIB Chief Economist Bill Dunkelberg. “And considering the confidence-draining performance of policy makers, there is little hope that Washington will stop hemorrhaging money and put spending back on a sustainable course. Perhaps we might begin referring to the ‘Small-Business Pessimism Index’ from now on.”

Indeed.

I am hearing economists who had been hopeful for our economy to muddle along and grow ever so slightly changing their tune.  More and more are talking “double dip”.  Since I do not agree that a true recovery has ever really taken root, I prefer to call it a “second plunge.”

“And what should the government do now?” 

That is the wrong question to frame the debate.  It is what the government has done over the past two administrations that has magnified the problems in our economy. 

Governments cannot create a sustained economic expansion through spending and monetary policy. 

Businesses and their customers do that.  Stop bleeding them of their money and get out of their way.