VC Activity Takes Nose Dive

The Money Tree report on VC activity in 2008 shows how the recession has hit funding for high growth deals.  From that report:

The decline in investments over the prior year is spread across industries and stages of development, with some notable exceptions. Dollars invested in the Clean Technology sector grew more than 50 percent in 2008. Companies in the Seed Stage of development also received more money in 2008, reaching the highest level seen since 2000.

The increase is seed funding is probably attributable to some long term hedging on deals.  With lower returns in funds it is likely that there will be more risk-taking on early stage ventures to gain higher returns in the out years of these funds.

The increase in “clean” technology is undoubtedly anticipatory economic rent seeking behavior.  Investors are betting that the new administration is going to make good on its promise for massive government spending on “green” energy — and they are getting in line at the public trough.

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Use of Bartering Expands During Recession

Bartering is nothing new to bootstrapping start-ups.  Small firms trade services or products with each other, which allows both to preserve their precious cash flow. 

The recession has increased interest in bartering as a bootstrapping strategy for entrepreneurial businesses of all sizes.  Out of the increased demand for bartering opportunities comes growth in businesses that offer a more formalized barter network.

From the Wall Street Journal:

Typically, a small business sets up an account at a barter company, similar to a checking account at a bank, for a one-time fee. “Trade dollars” earned for services rendered are deposited into the account and can be spent on any product or service in the network. Companies regularly find others willing to barter via the barter site’s online directory of services, email newsletters, referrals or by contacting a firm’s account manager.

On top of the setup fee, both parties pay the barter company a transaction fee of about 5% to 6% on each deal.

Do the Braddy Dance

One of the really cool things about living in Nashville and teaching at Belmont is the connection to the music industry.  Our alums read like a who’s who of country music — Brad Paisley, Tricia Yearwood, and Josh Turner are just a few of our alumni.

Our alumnae Melinda Doolittle came very close to winning “American Idol” back in 2007.

Our latest sensation is 2007 Belmont graduate Ricky Braddy, who just made the final 36 on this year’s American Idol.  Part of his appeal is the “Braddy Dance.”  Go to his official site and see several Belmont people “doing the Braddy”.  My personal favorite is video #46 — this is Jane Warren, conductor of our Women’s Choir.

Healthcare and Banking are not the Only Thing being Socialized

Professor Scott Shane of Case Western University is at it yet again.  He made waves last year for assailing entrepreneurship education, particularly if they have anything to do with small business, or what he calls “marginal businesses” that he asserts actually hurt employment in the economy.  I refuted his analysis here and here at this site. 

Now he is questioning if we really have an entrepreneurial culture in the US in a column at US News.  The same Scott Shane who previously trivialized the importance of small business is now using self-employment statistics to make his point that the US culture is becoming less entrepreneurial.  He looks at self-employment rates over the past ten years.

First, always question those who shift definitions to suit their agendas.  He wants us to only focus on high growth ventures and R and D as the relevant forms of entrepreneurship, but now is using self-employment as his definition of entrepreneurship in our culture.  Why doesn’t he look at LLC and S-corp formation over time, employment in entrepreneurial ventures over time, and the percent of innovation in small ventures over time?  All of these are readily available, and all show the entrepreneurial nature of our culture and our economy.

Second, to look at cultural trends we need to look at more than a ten year snap shot. 

Third, if we are looking at the behavioral part of entrepreneurial cultures, we need to look at comparative rates of business formation across economies.

Finally, a true measure of culture must look at both behaviors and shared values, as pointed out by Dawn Rivers Baker in her counter point to Prof. Scott also published at US News:

Compared to other places on the planet, the United States is very forgiving, culturally, of risk and even of failure.

That is what makes us entrepreneurial…. 

In looking at Prof. Shane’s writings it is clear to me that what he wants is more government directed economic policies toward business formation giving preference only to high growth, high potential entrepreneurship and innovation.  

This is what I call socialized entrepreneurship, which sadly seems to be where the US is headed at the same time that we are socializing healthcare and banking. 

The movement toward socialized entrepreneurship is the one trend that may squash our entrepreneurial culture in this country and it will ruin any hope that entrepreneurship will be the spark to create a new age of economic growth.

Bootstrapping Key to Success

Sramana Mitra tells aspiring entrepreneurs that they need to be ready to bootstrap if they intend to launch a business during the recession.  But, bootstrapping does not mean that you can’t build a successful and worthwhile venture:

Businesses often fail to take flight because they cannot raise funding. Well, start with the assumption that funding will not be available until the business is substantially further along, if ever, and that bottleneck is removed.

Additionally, most businesses should not look to raise money. They are truly small businesses – in this day and age even a $5 or $25 million business can be considered a small business, and does not really fit the framework of professional venture capital.

That does not, however, mean that these businesses are not worth building. In fact, a $12 million a year company fully owned by the entrepreneur is a wonderful situation. Full control. Loads of cash. And true independence. Heck, even a $300,000 a year business has many of those same attributes, and is plenty worthwhile.

 

Advice for the Accidental Entrepreneur

My column in the Tennessean this week is for all of you accidental entrepreneurs out there. 

The recession is creating many “accidental entrepreneurs” — people who suddenly find themselves out of work with no viable option except to make it on their own through self-employment or starting a small business.

A question I am frequently asked these days is, “What kind of business can I possibly start?”

The best business opportunities come from things people already know something about. They come from our work experiences, our hobbies, or our everyday lives. Find something from your experiences that is also a need for others.

If you are lucky, it may be a niche that nobody has discovered. Or, if there is competition, the existing business may not be meeting the needs of customers in that market. Either way, solving everyday problems that you understand is the best path for your first business venture.

In today’s economy you can create a strong competitive advantage if you can find a way to build better value for customers, perhaps by offering them the same or even better quality than competitors at a lower price.

Seize the passion

Make sure the business is something you are passionate about. Is the business something that will truly make you excited to get up in the morning?

There are many tough periods during the growth of a business when entrepreneurs need true passion to carry them through. Many entrepreneurs will tell you that the only type of business you should ever start is one that is fun for you to operate.

Doing something you enjoy — and believe in — will help carry you through the long hours and the stressful days to come.

Money also matters. The business will need to generate enough income for your personal budget. Also, it will need to become profitable before you run out of whatever funds you have saved to live on during the start-up period. If your savings are meager, you may need to find a venture that generates cash flow quickly.

An entrepreneurial business is not just a simple financial investment or a way to make quick income. It becomes more personal and emotional than that.

Surveys of entrepreneurs tell us that income and wealth are only part of the reason for launching businesses. Often entrepreneurs want to build a business that has a culture that reflects their personal values.

Finally, don’t overlook the importance of building a business that allows room for the other things that are important in your life. The time and energy you want for your family, your friends, your church, your hobbies. All that must be factored into your planning.

Although you may have never planned to start a business, many of the “accidental entrepreneurs” from the last major recession in the early 1980s found it a rewarding career path and have continued to be entrepreneurs ever since. Keep the faith.

Keep Marketing

Effective marketing is more important than ever right now.  There are two cirtical big questions to consider about your marketing efforts.  How much should you spend?  And, what should you spend it on?

Business Week as a good article that addresses the first question on how much to spend:

While there is no definitive answer as to how much any business should spend on marketing, there are general guidelines any company can use to develop a formula that works for them.

Your first step should be to try to find out what the advertising-to-sales ratio typically is in your field.

To answer the second question entrepreneurs needs to rethink their marketing plans to adjust to tighter cash flow and cautious consumers.

Now that the economy has slowed, consumers are thinking twice about spending money.  This creates a much more competitive environment as even consumers with jobs are careful about spending.  

Customers are postponing major purchases, opting instead for short-term repairs to keep what they already own functioning as long as possible.  They are also cutting back on discretionary spending.  For example, we are seeing that consumers are dining out less often and when they do go out to eat they are choosing less expensive restaurants.

With customers cutting back on their spending, small business owners must fight even more aggressively to maintain their revenues. That is why marketing and advertising becomes more important than ever.  

Effective advertising starts with a simple rule – think like your customer. 

Understand why a customer will choose your business over a competitor’s.  There are usually very few criteria that lead to that decision.  Know what is most important to the customer and build those criteria into the message of your advertising.  If price and value are key factors, those should be the focus of your message.  If it is quality, your ads should highlight why your product is superior to others. 

Learn where your customers go to get information to help them make purchasing decisions.  Marketing dollars are a precious resource, especially during tough economic times.  We cannot afford to spend money on advertising that does not reach our target market or does not influence where customers choose to spend their dollars.  If your customers go to the web, develop a strong website and an effective strategy to drive people to your site.  If they are bargain hunters, direct mailing or e-mailing of coupons and sales promotions may be most effective.  Remember that pricing is part of your marketin strategy.  If brand awareness is important, consistent advertising in the newspaper, on television or radio, on billboards, and so forth will probably be most effective. 

Advertising should be a process and not an event.  Never get into the pattern of panic advertising – that is, only spending on ads when business slows down.  Research clearly shows that consistent advertising is much more effective than one-shot or occasional ads.  Develop an advertising budget for the year and stick to it as your cash flow allows.  Be ready to make adjustments in your plans. 

Also, be ready to experiment.  Not everything you try will always work as planned, so listen to where your customers are hearing about you and why they are choosing to do business with you.  Tie specific offers to each ad so you can track which seem to work best. 

And more than ever it is time to creative and find ways to bootstrap your marketing efforts to ensure the biggest bang for your precious marketing bucks.

From Hot to Not

What just three short years ago seemed like the next great thing may no longer make sense in this new “Age of Value”.

Entrepreneur.com looks back at businesses that went from “hot” to “flop”:

There are some important lessons in these tales. 

Even in the best economic times there’s a fine line between a trend and a fad. When times get tough, a hot idea can fizzle out just as quickly, so do your research and take careful consideration.

My take — always look for a business with legs.  Start a business that you can imagine will be valuable to customers for years and even decades to come. 

Ask yourself these questions:

  • Does my business idea offer value that people will desire over the long term?
  • Is the source of the opportunity a fundamental change or a permanent shift in technology, society, demographics, or market structures?
  • Do I have a niche that I can protect indefinitely, or will I soon see a flood of new competitors?
  • Is my idea just a temporary fix to a market problem that will soon be replaced by something better?
  • Is my product or service something that people will need even if the economy weakens?

Some Tips for a Successful Launch During Soft Economy

Diana Ransom at Smart Money offers four tips on launching a new product in the current recession:

Launching a new product when consumer confidence is at an all-time low is daunting enough for large companies. But for small businesses, if the product doesn’t take off, it could be devastating.

“Even if what you’re offering is packed with value, consumers just aren’t willing to spend money on anything nonessential these days,” says Jeffrey Cornwall, the director of the Center for Entrepreneurship at Belmont University in Nashville, Tenn.

Even if you think the timing may be just right for introducing a new product or service, offering a perk or two to customers can’t hurt, says Cornwall.

Her tips include being flexible on the terms and contracts associated with your new business, offering strong guarantees, find a way to sell smaller and less expensive offerings, or better yet, find a way that you can offer lower prices while still making a buck.