For all of you entrepreneurs who have been whining “Where’s our bailout?” your time at the public trough has now arrived. It is not the rent seeking entrepreneurial welfare that was the topic of conversation at this blog a few days ago, but it is darn close.
The U.S. Small Business Administration made a new loan program for struggling businesses available Monday. The ARC loans, which were funded by the American Recovery Act, are interest-free loans of up to $35,000 with no SBA fees for existing businesses that were profitable at one point, but need extra help now.
The program is unusual in that most small-business loans are for businesses trying to expand to fund profitable operations.
Thus my label of “bailout.” This are not sound loans — these are handouts.
Thankfully, bankers are hesitant to join in this give-away. From CNN Money:
Before the details were released on Monday, lenders were hesitant to commit, concerned that there wasn’t enough economic incentive
for them. Now, with key details about how the program will work finally
available from the SBA, many haven’t retreated from their initial
wariness.
“While we have received a few requests from our customers, we are still leaning against it,” says John Handmaker, president of Quadrant Financial,
a small business lender based in Louisville. “The guidance from the SBA
indicated rates and terms, which have provided some clarity, but we’re
not 100% certain about what we need to be careful of. We don’t feel we
have a solid grasp of the standard operating procedures and rules, and
we’re not going to jump in until we really understand it.”
Well, at least the government is consistent. It is ready to rush to enact another program without worrying about the details. I am sure we will soon hear that bankers are being pressured to get on board with this program.
Please, just say no to this latest bailout. If you believe in free enterprise do not become part of the rush to socialism.
I continue to be concerned about the inordinate amount of attention that Washington is giving to venture capital. There seems to be an assumption that VC investment is a White Knight that will help spur entrepreneurship in America and pull us out of our recession.
Remember, venture capital only funding a small part of the entrepreneurial sector. In fact, one study found that 99.962% of entrepreneurial ventures in the US had NO venture capital investment.
It seems inevitable that venture capital must shrink considerably. While there is no question that venture capital can facilitate some forms of high-growth entrepreneurial firms, its poor returns make the asset class uncompetitive and at risk of very large declines in capital commitments as investors flee this underperforming asset. While any estimate is subject to much uncertainty, it seems reasonable–based on returns, GDP, and exits–to expect the pace of investing to shrink by half in the coming years. We should also expect a continuing sharp decline in the amount of money invested in information technology, a maturing sector with declining capital requirements in its remaining innovative segments. Capital will continue to grow in other areas, including clean technology, but the sector must shrink its way back to health if venture capital is to provide competitive returns and secure its own future as a credible asset class and economic force.
These days many entrepreneurs are struggling to find enough customers just to keep the doors open. While survival is the key right now, be careful not to set the stage for a business model that won’t be sustainable when the good times return.
Understanding who our target market is and what they want from us as customers, are the keys to developing a brand that customers will remain loyal to over time. It help to create what marketing folks like to call our product positioning. A strong market position can help protect sales over the long-term, even during economic downturns.
Steve McKee reminds us of the importance of a clear target market in our businesses in his recent article in Business Week:
That underscores an important principle: The further removed your brand
is from your core target, the less relevant you should expect it to
be–and to some people, perceptions about your brand may even tip into
the negative column.
So in the race to find enough sales to keep afloat, we can run the risk of alienating our core group of customers.
The week of Oct. 6, 2008, is often referred to as “Black Week,” when the Dow Jones Industrial Average fell 18% in its worst-ever weekly decline.
In the aftermath, venture capitalists tightened their purse strings to reflect the new reality. Sequoia Capital held a now-famous meeting on Oct. 7 for portfolio companies in which a PowerPoint presentation titled “RIP: Good Times” underscored the importance of cutting costs. Young start-ups struggled to attract new investors as investment levels plummeted in the coming weeks.
But some venture firms continued on fueling new companies, perhaps mindful that Cisco Systems Inc. raised money from Sequoia about two months after the 1987 stock-market crash.
He identifies eighteen emerging firms that got financing within 30 days of “Black Week”.
Hat’s off to Belmont MBA alumnus Dr. Jim Stefansic and his co-founders. Their company, Pathfinder Therapeutics, made this list!
Want to see the logical conclusion that one reaches when one buys into the notion that the government is the answer to every problem we face? Go to this blog post at Yu-Kai Chou to see the “logical” conclusion one reaches when one assumes that the government knows best when it comes to fixing our economy. Here is an excerpt:
The government can give entrepreneurs a VERY low amount of survival money,
like $20,000 a year, as a salary to do entrepreneurial work. This is
useful because there are lots and lots of people who would be entrepreneurs but
they couldn’t pursue their dreams due to realistic survival issues.
This plan allows them to pursue the innovation work they want without the fear
of dying on the streets.
That’s right…it is a call for an entrepreneurial welfare program. I kid you not. Read the entire post and the comments, but make sure you do it before you have had too much caffeine. Your blood pressure may go off the charts.
I have been warning you that there is a movement to push for socialized entrepreneurship in America.
There are some signs that the recession may be bottoming out. The NFIB Index of Small Business Optimism rose again in May for the second straight month. But just what will the recovery will look like? And what is the longer term outlook for the economy?
The recovery will be quite lumpy. This is not going to be a case of a rising tide lifting all boats. Certain sectors in the economy and geographic regions are improving, while others seem to be mired with flat or even continued declining sales. And even within industries we are seeing inconsistent trends.
For example, while much of real estate and construction remains almost dead in the water, those who work within the healthcare segment of this industry report improving performance..
We have to be careful not to assume that this recovery will behave like others. Economists will try to predict the recovery’s behavior based on historic data from past recessions. My concern continues to be that this recession and its recovery may last for some time – a so-called “L” shaped recovery that could drag on for years rather than the “V” shaped robust recovery that we have often seen after deep, steep drops in the past. That is, this time of “bottoming out” may go on for months or even years.
In looking deeper in to the most recent NFIB survey we can also see signs that this recovery may be a long, slow road. Even though entrepreneurs feel more optimistic, they do not plan to increase hiring anytime soon. It seems that some of their optimism may be coming from a realization that the cries that the next great depression was on its way were unfounded.
“The biggest concern on the minds of owners is the weakness in spending which has now started to turn up as consumers become less concerned with proclamations of pending disaster for the economy – it’s not going to happen,” said NFIB Chief Economist William Dunkelberg.
However, the improvement in consumer spending shows little sign of a strong bounce anytime soon.
And what can we expect for the long-term economic outlook? Understand that economies are not just isolated to commercial transactions. There is a strong long-term tie between our economy and our society and culture. There are signs that we may be in a period of fundamental economic and cultural change.
The frenzied consumerism-driven economy that dominated our past decades may never return. Because the changes we are seeing in economic behavior may last for a long time due to a slow recovery, we may emerge from the recession into a very different economic/cultural reality.
For example, entrepreneurs whose business models are tied to luxury goods are holding their breaths hoping that their sectors will be the lagging ones we have seen in the past.. From Reuters:
Sales of luxury goods, which are expected to drop 10 percent this year, will not recover fully until 2012, according to a new report by Bain & Co, as austerity and understatement remain the “must-have” items of the rich and fabulous.
But this understatement of the rich may become culturally reinforced. A Washington Post story from earlier this week examined the shift in consumer behavior from being obsessed with “keeping up with the Joneses” to consumers seeking to be perceived by those around them as being a frugal spender:
The recession has changed the conversation in America. People are clamoring for caps on executive pay and recoiling at the idea of bosses cavorting at expensive spas. Friends are swapping recipes instead of making restaurant reservations.
Instead of feeling self-conscious about spending less, people are flaunting frugality.
“Something very deep has changed in the American psyche,” said Dan Ariely, a professor of behavioral economics at Duke. “The recession basically woke us up.”
Over the coming decades, this may translate into a fundamental shift to a more tempered society in which people are no longer seeking to find value from their economic behaviors, but instead are looking to non-commercial definitions 0f success and self-worth in their lives.
Opportunities can still be found in such a transformed economy if it actually occurs. The key will be to understand these changes and offer new business models that respond to changing needs, preferences, attitudes, and consumer behavior.
In my column this week at the Tennessean I offer some final reflections on our trip to Eastern Europe:
I have been in Eastern Europe with a group of students from Belmont University for the past three weeks.
Although the entrepreneurial climate in this part of the world is much weaker than in the United States, the entrepreneurs we have met have tended to have a global view for their small businesses.
For
example, while shopping in a small antiques store in Prague, Czech
Republic, we found items that originated from all over Europe.
One
item caught the interest of one of my colleagues. But when he inquired
about its price, the store owner told him that it had been sold over the
Internet to a buyer from overseas.
During our travels, we took our students on a tour of the Ruckl crystal factory, which is a small business in a rural part of the Czech Republic that had been taken private after the fall of communism.
Their
craftsmen make fine, handmade leaded crystal using age-old techniques.
Although they compete with mass-produced products from China and
Poland, Ruckl has been able to compete effectively in the global
market. They sell 80 percent of their products outside of their country
in outlets throughout the world.
Minimize risks
American
small businesses are not keeping up with the global strategies of
entrepreneurs from other countries. A 2007 survey sponsored by UPS
found that most of America’s small businesses have failed to explore
the opportunities offered by an increasingly global economy.
Specifically,
67 percent of the U.S. small enterprises are still relying solely on
the U.S. economy. This is due to their perception that international
trade is too risky, an admitted lack of knowledge about international
markets, and their unfamiliarity with regulations related to expanding
a business beyond U.S. borders.
While the risks associated with international trade are real, they can be overcome.
The
financial risks of engaging in foreign transactions have resulted in
many entrepreneurs not getting the products they had paid for or not
getting paid at all. Banks generally offer several ways to reduce the
financial risks of trade, but the payment procedure ultimately depends
on finding partners whom you can trust.
While
banks can help — often for a sizable fee — there is still some relative
degree of risk taken by both sides of the transaction. There is almost
always a trade-off in these things. And when thinking about the savings
from outsourcing, make sure to be clear on all expenses, including
shipping, the cost of transactions gone bad, and bank fees for
international transactions.
Entrepreneurs
who plan to sell or buy in the global marketplace need to have access
to an attorney who knows international trade law. Make sure to get a
clear understanding of the cost of regulatory compliance and figure
that into your expenses.
The
recession is forcing entrepreneurs to think about new sources of
materials to keep costs down and new markets to sell products. The
global marketplace offers many opportunities for today’s entrepreneurs
— just take care to learn the ins and outs.
Forbes is currently
conducting a search for “America’s Most Promising Companies”. Forbes is using a free comprehensive self-assessment survey to
determine how fundable an emerging company really is. All companies receive a free,
12-category qualitative assessment upon completion of the survey. Select
companies however, will receive a spot on the list to be printed in Forbes,
fast-track status for a funding term sheet with TVA Capital and its funding
partners, along with other benefits.
Those who have been reading my blog for a while know my mantra when it comes to effective bootstrap marketing — Think like your customer!
For example, since not every type of customer looks to the web for information, not every business necessarily needs a web page. The same limitation holds true for social media. It only works if it is where your customers go for information.
Even if websites or any of the new media sources out there are the right way to reach your customers, you still need to be clear about your intention with any form of promotion. What do you want your customers to do at your website? What do you want them to do with your use of social media as promotion? Bootstrappers can’t just throw a bunch of marketing stuff to the wall with their promotion and hope something sticks. You have to be intentional in what you do with any form of promotion.
And finally, keep in mind that their are probably a billion websites out there and almost as many people trying to use social media to get business. You can’t just build it and they will come. You need a strategy to get people to notice your message and push them to act.
We’ve been misled as to the benefits of social networking sites. Many of us are
finding that these tools do not live up to the hype, especially for small
business. Once we start digging deeper, we’re finding a lot of challenges.
Marks discusses five myths about the use and effectiveness of social media for promotion. This is a good read for anyone currently trying to use social media or thinking about using it.
Social media can be an effective tool. But, you need to understand if it works for your customers. If it does make sense as a tool for your target market, the next step is to determine how best to make social media a productive part of your promotional mix.
Marks is not out to prove that the new media does not work as promotional tools. There are many examples of successful promotion through social media, such as the effective use of Twitter for marketing and businesses that were built through sites like Facebook.
In fact, I can guarantee that he understands that the new media can be effective if used properly. After all, his public relations person nagged me long enough to get me to blog about his article!
