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. 

Rich Unemployment Benefits may Actually Hinder Recovery

What I am about to say may not be very politically correct.  It may even sound heartless. 

The “Stimulus” Package (or as some like to refer to it, the “We’re All Socialists Now” Act of 2009) includes a hefty increase in unemployment benefits.  It increases weekly benefits by $25 and extends coverage for those scheduled to run out in March through the end of 2009.  While that may sound like an uncontroversial idea on the surface, it may hinder our long-term recovery.

In a soon to be published article by economists Maria Minniti, Professor and Bobby B. Lyle Chair in Entrepreneurship at SMU Cox School of Business, and her German co-author Philipp Koellinger find that increasing unemployment benefits also reduces the incentive of people to start a new business. In fact, their study reveals that unemployment benefits reduce start-ups not only from people that lack other employment options (often called necessity-entrepreneurs), but also from people who plan to start innovative ventures with high growth potential for the future. This is particularly worrisome given the “multiplier effect” high potential start ups have on the economy.

Koellinger and Minniti’s analysis showed that increasing unemployment benefits by 0.1 percent of GDP reduces the share of entrepreneurs in the population by roughly 3%. The USA currently spends about 0.3% of GDP on unemployment benefits and 7.7% of the adult population are currently in the process of starting a new business. If the government were to decide raising unemployment benefits to 0.4% of GDP, the rate of entrepreneurs would decrease from roughly 7.7% to 7.4%. Although that may not sound like a big number, given a population of 200 million, it would mean a loss of 600,000 start-ups. On average, every new entrepreneur employs 2 other people. Hence, an additional 1,200,000 jobs would be lost – which is roughly the adult population of Houston. These are lower bound estimates that do not take other indirect effects of unemployment benefits on the number of jobs into account, such as established firms hiring less because of decreased sales or higher social security costs.

Are unemployment benefits bad? Koellinger and Minniti’s position is that unemployment benefits are important, but governments and voters should take the indirect costs of these benefits into account when deciding how generous they want their unemployment benefits to be.  I agree.  The unintended consequences may leave us much worse off over the intermediate and long term.

Recessions tend to foster entrepreneurs, albeit some of them more “accidental” entrepreneurs than others.  We may be greatly reducing the number of these new ventures during the current recession through expansion of unemployment benefits.

Bottom of the Recession will not Occur Until at Least Second Quarter of 2009

I wrote yesterday about the job outlook as indicated by the NFIB monthly survey of small business owners in the US.  The full report was issued this morning.  For small business owners, January started off as badly as December ended. The Index of Small Business Optimism fell 1.1 points to 84.1 (1986=100), the second-lowest reading in the 35-year history of the National Federation of Independent Business survey.

“The failure of the index to rebound from historic low readings as it did in 1980 indicates that the recession will encompass the first quarter, with little chance for a bottom before the second quarter,” said NFIB Chief Economist William Dunkelberg.

The Silver Lining of Economic Downturns

There is one bit of good news that we can take from history about recessions and even depressions.  They tend to be a time of major transformations due to the typically high levels Schumpeterian creative destruction active in the economy. 

Consider the following brief list of examples:

  • GE was founded during the Great Economic Panic of 1873 
  • Disney was founded during the Recession of 1923 
  • The Great Depression saw the founding of both HP and Polaroid
  • Trader Joe’s was founded during the 1958 recession 
  • During the 1975 recession Microsoft was founded
  • CNN and MTV both were launched during the 1981 recession 
  • And in the 2001 recession iPod launched and Google finally got its market footing and emerged from its start-up phase

Innovations like these helped create ripples of new ventures and other innovations that were the major force in reviving the economy.

So why aren’t we finding ways to help spur entrepreneurship in our economy instead of being consumed with bailing out failing businesses and declining industries? 

Small Business Job Outlook Still Weak

I am blogging this morning from my father’s house in southern Florida where the recession seems to have hit particularly hard.

The NFIB has released an early summary of the job creation portion of their monthly survey summary due out this week, and it is also not very promising for the short-term employment outlook.

Seasonally adjusted, there was a decline in average employment per firm of 0.74 workers reported by small business owners in January, the second largest monthly decline in survey history (December was the largest at -0.86 workers per firm). Eight percent of the owners increased employment by an average of 3.3 workers per firm, but 23 percent reduced employment at average of 4.1 workers per firm (seasonally adjusted). The private sector is very weak, with the only job growth coming from education, healthcare and government.

Over the next three months, 9 percent of small business owners plan to create new jobs (up 1 point), and 14 percent plan workforce reductions (down 5 points), yielding a seasonally adjusted net negative 6 percent of owners planning to create new jobs, the third lowest reading in survey history and unchanged from December. Lower readings occurred only in the 1974-5 and the 1980-82 recession periods. Not seasonally adjusted, job creation plans were positive in all the service sectors, but negative in manufacturing and construction, retail and wholesale. Of the nine census regions, only in the Mountain states did more owners plan to increase employment than planned to reduce employment.

With reports of sales and profit declines more frequent than at any time in the past 35 years, firms have little choice but to reduce costs to survive, and for small firms, the major cost is labor (about 80 percent). Consumer spending didn’t revive, so employment adjustments must now be larger, since hoped-for gains in sales did not materialize. Firms are now cutting hours faster than sales are falling, a rare event. This will raise productivity (sales per hour) and mitigate the rise in unit labor costs. 

There is a bit of a silver lining in their findings this month.  It looks like firms are making adjustments quickly now, which the NFIB believes should bring the economy to a bottom sooner rather than later. The service sector seems to be finding its legs.

Competitions for Small Business and Social Ventures

Dell has announced their 2009 Small Business Excellence Award.  This award offers small businesses in 13 countries a chance to win ,000 in Technology Solutions. 
For more information see their website. 

 

Dell is also running a competition for social ventures in partnership with the University of Texas.  It also has a $50,000 prize.  For more information on the Social Innovation Competition see their website.

 

 

Moving From Idea to Market

Are you one of the many new accidental entrepreneurs who find themselves out of work?  Are you trying to figure out how to move your idea for a business forward toward implementation?  I have been working with the folks at ideablob.com in their efforts to put together a short “how-to” for those wanting to translate their ideas into operational businesses.  There guide is called Idea Compass and it is available free at their website.

A View of the Post Recovery World

This week I showed the video Demographic Winter to both my undergraduate and graduate students. 

The video documents a chilling demographic trend that is not getting enough attention — the declining fertility rate that is occurring in about 70% of the countries around the world.

Here is a part of the synopsis of the film from their website:

One of the most ominous events of modern history is quietly unfolding.  Social scientists and economists agree – we are headed toward a demographic winter which threatens to have catastrophic social and economic consequences.  The effects will be severe and long lasting and are already becoming manifest in much of Europe.

A groundbreaking film, Demographic Winter: Decline of the Human Family, reveals in chilling soberness how societies with diminished family influence are now grimly seen as being in social and economic jeopardy.

Demographic Winter draws upon experts from all around the world – demographers, economists, sociologists, psychologists, civic and religious leaders, parliamentarians and diplomats.  Together, they reveal the dangers facing society and the world’s economies, dangers far more imminent than global warming and at least as severe. 

We had a rich discussion in both of my classes. 

We talked about the impact of declining populations on the future of the US and world economies.  The data presented in the film seems to paint a fairly bleak picture for the US and other western economies over the coming decades due to population decline.  Japan and much of Europe are already feeling the negative economic effects of declining fertility rates.  The US is expected to begin this slow economic decline beginning around 2010 — when Baby Boomers reach their peak spending age.

The graduate students, mostly Generation X, were stunned.  Our program is an evening MBA degree, so most of the students are working full-time.  They were concerned about their careers, their children’s futures, and their outlook for retirement.

My undergraduate students, who are mostly Generation Y, seemed to take it more in stride.  They reminded me that this is part of the reason why they are studying entrepreneurship, after all.  They understand that our economy will never look like it did even a decade ago.  They already know that it is up to them to create their own way in the world — the corporate career path of the past century is at a dead end in their minds. 

What is increasingly clear to me is that our post recovery economy will probably not be very robust.  The timing of this recession just at the time that Baby Boomers are reaching peak spending age is like, to use the words of one of my students, “the perfect storm.”  I believe the recovery will be slow, but that the long term will be a general decline over the coming decades.

Will there be opportunity in this world?  You bet.  But, you will need to be highly skilled at identifying more scarce market niches and a much more nimble manager as your business grows.  We will not see times when any fool can make money as an entrepreneur.  With softer markets only the best will thrive.

The film suggests that much of the boom of the past twenty years is attributable to one main cause — the Boomers reaching their peak consumption age.  Those times are over, and there is every indication that a long-term booming economy will not come again in the US for generations — if ever.