Many startups and companies in the early stages of their growth benefit from the management training, office environment, marketing and other resources provided by business incubators. But what is a business incubator? In our new article, you’ll get a quick overview of what incubators are and what they can do for your small business.
Succinct, to the point and absolutely true. Why? Because the best way to find success is to plan for it. But what exactly is a business plan? Simply put, it’s a written document that outlines the steps you and your business will take to reach profitability and prosperity. A road map, if you will. A way to get from here to there. By plotting this process out, you’ll be able to identify potential opportunities and avoid pitfalls along the way.
Click here to download our guide on developing a business plan for your small business.
by Reed Richardson.
For many entrepreneurs, the notion of making even a small mistake often sends a chill down their spines. That fear of failure can be a powerful motivator, but if in the pursuit of avoiding such a mistake it breeds hidebound thinking and paralysis, it can create even bigger problems.
“Success in a business career—any career, really—doesn’t happen because everything falls into place,” notes author Bob Sellers in his book “Forbes Best Business Mistakes.” “There’s virtually no activity, athletic or otherwise, in which trial and error doesn’t play a role. Why would a business career be any different?”
In the world of Big Business, this inherent messiness sometimes translates into Big Mistakes. But even some of the most notable corporate screw-ups have a surprising upside and can provide an important lesson to small business owners.
Less that a year after high-flying Apple debuted its Macintosh personal computer in a now infamous 1984 Super Bowl ad, the company found itself locked in an ongoing internal battle. Its co-founder, Steve Jobs, had effectively created a splinter group within the company—to the point of flying a pirate flag atop a separate building—and his personality was clashing with newly hired CEO John Sculley. Amidst pressure from lagging Mac sales, Apple’s board chose to bet the company’s future on the experienced manager Sculley rather than its chief visionary, effectively firing Jobs in 1985.
That fateful decision would soon send an idea-starved company on a 10-year downward spiral, one where it continually lost market share until it reached the brink of bankruptcy. Only after Apple acquired Jobs’ follow-on computer venture, NeXT, and tapped him to retake the helm as CEO did the company’s fortunes rebound.
“I didn't see it then, but it turned out that getting fired from Apple was the best thing that could have ever happened to me,” Jobs said in a 2005 Stanford commencement speech. “The heaviness of being successful was replaced by the lightness of being a beginner again, less sure about everything. It freed me to enter into one of the most creative periods of my life.”
For Apple, the break-up turned out to have an upside as well. Having been pushed to the edge of failure, the company welcomed the return of its prodigal son Jobs, whose embrace of the entrepreneurial spirit turned the once moribund company into what is now a top global brand.
Small Business Lessons: First, don’t let any member of your venture, even a founder, continually sow dissension amongst the ranks—it creates a corrosive atmosphere that will eventually undermine any chance for success. Second, remember that good executives are far easier to replace than brilliant designers and engineers.. And third, be willing to put ego and pride aside for the long-term sake of your company, even if that means bringing back someone you thought you no longer needed but now realize you do.
In the pantheon of boneheaded business moves, Coca-Cola’s decision to abandon its best-selling, 99-year-old soda formula often ranks among the top. Bowing to focus groups that preferred the sweeter-tasting Pepsi in sip tests, Coke rolled out a sweeter “New Coke” in the spring of 1985 to near universal antagonism from customers. Within weeks, the company saw its market share plunge and its chief rival, Pepsi, take a public relations victory lap. As summer approached, a desperate Coca-Cola caved to customer appeals and re-issued the old formula as “Coke Classic.”
That’s usually the end of the story one hears, but there’s more to it. What was undeniably a strategic miss of epic proportions actually paid numerous dividends within a few months. With two products now bearing the Coke name in the market, Coca-Cola rebounded quickly, so much so that sales and profits from all operations actually rose 10 and 9 percent, respectively, for the entire year. What’s more, by listening to the consumer’s overwhelming response and reacting rather nimbly for a worldwide corporation (“old Coke” was only off the shelves for 11 weeks), the company rewarded its customer’s loyalty.
“Yes, [New Coke] infuriated the public, cost a ton of money,” acknowledged former Coca-Cola marketing executive Sergio Zyman in the late 1990s. “Still, New Coke was a success because it revitalized the brand and reattached the public to Coke.” In fact, after it returned original formula Coke to the market, the company experienced a near decade-long run of ever-increasing market share. And because Coca-Cola made a point not to fire or demote anyone associated the New Coke decision, former Pepsi CEO Roger Enrico later admitted that the way the company stood by its employees through the crisis paved the way for future brand broadening efforts, like the top-selling Diet Coke.
Small Business Lessons: Number one, don’t overlook the many different ways your customers may relate to your product. Coke’s reformulation decision was framed entirely around one of taste, so it missed the powerful emotional relationship its customers had with the brand. Next, be open to “third way” solutions. Rather than just drop New Coke and go back to the old formula, Coca-Cola chose to sell both, which rejuvenated sales even quicker. Finally, don’t sacrifice tomorrow’s next great idea by harshly punishing those responsible for today’s lousy one. Though it easily could have tossed numerous executives overboard, Coke sent a message to its employees that risk-taking was acceptable and it has since reaped the benefits.
In the summer of 2009, Amazon realized that it had been selling certain novels to its Kindle e-reader customers illegally, because the publisher had failed to properly acquire the rights. Faced with the prospect of having sold intellectually purloined material, Amazon decided to refund its customers and remotely delete the content. Unnerved by the company’s unilateral action, a public relations uproar ensued with customers claiming their privacy and trust had been violated. (In addition, Amazon appeared to have violated its own Kindle license agreement, which grants customers the right to a “permanent copy” when they buy and download digital content.) And there was also the too-good-to-be-true ironic twist: one of the books in question was 1984, George Orwell’s dystopian novel about life in totalitarian society ruled by an all-powerful Big Brother.
Making matters worse, Amazon responded to the initial outcry with a vague press release sprinkled with legalese. So, six days after the incident, Amazon CEO Jeff Bezos finally addressed the situation on a post at a company-hosted bulletin board.
“This is an apology for the way we previously handled illegally sold copies of 1984 and other novels on Kindle,” wrote Bezos. “Our ‘solution’ to the problem was stupid, thoughtless, and painfully out of line with our principles. It is wholly self-inflicted, and we deserve the criticism we’ve received. We will use the scar tissue from this painful mistake to help make better decisions going forward, ones that match our mission.”
As far as corporate apologies go, Bezos’ was bracingly honest and forthright in its ownership of the mistake. By speaking plainly and avoiding the passive tone, he sent a clear message that the company had erred and, more importantly, that it had realized and accepted that it had erred. For Kindle customers concerned about further encroachments by Amazon into their personal devices, his straightforward (albeit somewhat tardy) mea culpa was welcome news and went a long way toward repairing any damage the brand had sustained.
Small Business Lessons: While it goes without saying a company should never violate the letter of the law when it come to its own user agreements with its customers, it’s also worth pointing out the potential damage from violating the spirit of those contracts. Amazon learned this hard way and re-affirmed the old-fashioned notion that two wrongs don’t make a right. But Bezos once again proved that customers are forgiving if they feel that a company has genuinely accepted responsibility for a mistake and is taking legitimate steps to preventing it in the future.
by Sherron Lumley.
“I didn’t want to start from scratch,” says Ann Bell who bought a Subway sandwich-shop franchise in 2010 with her husband Steve. “I was a stay-at-home mom and our kids are older now and off to college, so I decided it was time to go back to work,” she says. Although her husband had small business experience, Bell was more of an entrepreneurial beginner, so buying a franchise appealed to her as a safe way to invest in a business and re-enter the work force. “I work better under structure,” she says.
In the franchise form of business, a franchisor licenses to a franchisee the right to operate under a trade name, sell its products and services, and receive guidance, in exchange for a fee. “My first step was to research the business model, to see if I could believe in it and embrace it,” says Bell. Typically, the franchisor provides business expertise in the form of marketing plans, management guidance, financing assistance, training, and sometimes site location. The Bells who are from Oregon, went to “Subway School” in Connecticut for training.
Here is a look at three early steps to franchise ownership.
A franchise is a familiar form of business in America, accounting for 10.5 percent of all businesses with paid employees, according to the U.S. Census Bureau. Clearly, the decision to buy a franchise has some strong advantages. In The Franchise Bible, How to Buy a Franchise, or Franchise your own Business, author Erwin J. Keup, says that group advertising power, recognizable trademarks, franchisor experience, patents and designs, training from experts, and a lower risk of failure or loss of investments are top reasons to become a franchisee. Other reasons are uniform operation, assistance in financial and accounting matters from the franchisor, and ongoing support.
Although ongoing support is typically considered one of the greatest advantages of franchising, it comes with a price. Nolo.com, a legal resource publisher, provides a look at some of the disadvantages to franchise ownership, which include royalty payments to the franchisor, advertising fees, and high start-up costs. Indeed, nine of the top ten U.S. franchises have start-up costs averaging more than $100,000 and the top three (Hampton Hotels, ampm convenience stores, and McDonald’s) are beyond the million-dollar mark to start.
For a sense of the ongoing fees franchisors expect, Subway requires franchisees like the Bells to pay 12.5 percent of their gross sales every week to the company; 8 percent of this goes toward franchise royalties and 4.5 percent goes towards advertising. This is in addition to the initial franchise fee of $15,000 and Subway franchise capital requirements fall between $115,000 and $258,000. However, not all franchises require such a hefty investment. Number seven on the list of the Franchise 500, Vanguard Cleaning Systems, has start-up costs of just $8,000 to $38,000.
For more information on choosing between launching your own business or buying into a franchise, check out our recent story: “My Way or the Buy Way.”
Certainly, cost will be a factor and franchise options will be far different for a small business owner with a few thousand dollars of capital versus another with a million or more to invest. Here are a few of the many ways to shop for a franchise at all budget levels:
The Federal Trade Commission recommends attending a franchise exposition to compare a variety of franchise opportunities and using a franchise broker who can help with applications and paperwork. But remember, the brokers often work for the franchisor. Information about upcoming national and international franchise expos and trade shows is available online at FranchiseDirect.com.
Franchise.com is another popular online resource. It offers an interactive search of franchises for sale by budget, industry, and location. The Internet is full of franchise websites to research, but “be on the lookout for certain characteristics that are very common among untrustworthy or illegitimate franchising sites,” warns Kevin Murphy, author of The Franchise Handbook. He specifically cautions against dealing with a company that does not provide full financial details at the outset and says that websites with overly aggressive marketing and a lot of hype should also be avoided.
As with any small business venture, consider the demand, competition, and ability to operate the business in making a franchise selection.
“Never do business with people you have not met,” say the authors of Street Smart Franchising, Joe Mathews, Don DeBolt and Deb Percival. “Franchising at its best is a highly personal relationship. You are entrusting your dreams and capital into the care of the franchisor leadership,” they say. Visit the franchisor’s home office and further investigate the franchise by interviewing franchisees in person, and reviewing the Franchise Disclosure Document (FDD) with an attorney with expertise in franchise law.
In interviewing other franchise owners, ask questions about their experiences, both good and bad. “It’s important to interview people so you know the bad and ugly,” says Bell, who found this helped her know ahead of time what it would really be like to own a franchise. For example, she learned that unlike working for someone else, “It’s nice to work for yourself, but you do take your work home with you,” Bell says.
A look at financial prospects for franchising
Using Census Bureau data, the International Franchise Association released a detailed report on this segment of the U.S. economy called The Franchise Business Economic Outlook: 2011. It forecast growth in all industries except Business Services, reporting: “The largest percentage increases in the number of establishments in 2011 are projected in Lodging (4.4 percent), Automotive (3.9 percent), Retail Products and Services (3.9 percent), and Commercial and Residential Services (3.7 percent).”
“The forecast of stronger growth in 2011 for franchise businesses is good news for our country. When franchise businesses are stronger, so is our economy as a whole,” said IFA President and CEO Stephen J. Caldeira. “However, while the forecast reflects a stronger outlook for the franchise industry and the overall economy, franchise businesses will continue to struggle with accessing sufficient credit that would enable business expansion and job growth,” he said.
Caldeira says that lending to franchise businesses was down in 2010. “For 2011, the credit gap between supply and demand should show some improvement, but we are a long way off from the pre-recession, more robust appetite for business investment and lending.” According to the SBA, total small business lending peaked in 2008, when depository institutions in the United States held small business loans valued at more than $711 billion, then declined by 8.3 percent to $652 billion by 2010. In the first quarter of 2011, the SBA reported bank lending to small business [including franchises] fell by $15 billion.
Since 2007 when the Census Bureau first gathered franchise data, the number of franchise establishments is estimated to have grown steadily from 765,723 to 784,802, whereas overall entrepreneurship has had a slight decline. (Bureau of Labor Statistics data for self-employment in non-agricultural industries.) Perhaps one explanation for this is that risk-averse behavior kicks in during times of economic duress. The Bells wanted to own a small business, without all of the risks involved with going solo. By buying into something larger, gaining considerable expertise and centralized marketing, advertising, and promotion, Bell says she felt comfortable with the decision to buy a franchise. “I’m really happy with my outcome,” she says.
Additional Franchise resources:
Cary Cheung wakes up at 4:30 a.m. every morning to run a business that requires him to pay a fee. He doesn’t own it outright, and it doesn’t even bear his name. And yet he couldn’t be happier.
That’s because Cheung is a franchise owner of Doc Popcorn, a maker of flavored popcorn that uses a variety of organic and all-natural ingredients. In fact, Cheung abandoned his career as an assistant vice-president at WaMu Investments to become Doc Popcorn’s very first franchisee in November 2009. And just a few weeks ago, Cheung and his wife, Judy, opened their second Doc Popcorn location in California.
The Cheungs aren’t alone. According to the International Franchise Association, approximately 4 percent of all businesses in the United States are franchisee-worked. And the consultancy Franchise Marketing Systems says that franchising is a business model that generates more than $1 trillion in U.S. sales annually across more than 70 industries. Franchised businesses ran 767,483 establishments in the United States through 2008, including establishments owned by both franchisees and franchisors.
But while running a franchise business can be both professionally attractive and personally satisfying, not everyone is cut out for the task. Just ask Amy Bennett, owner of The Greene Grape, a Brooklyn, New York-based seller of fine food and wine. The choice was obvious to Bennett: “Part of opening my own business rather than a franchise was for it to be a creative outlet for me. I wanted something I could contribute to meaningfully.” Add that desire for creativity to the many negatives associated with franchising, such as royalty fees, restrictive licenses, meddlesome franchising authorities, and a lack of ownership, and it is easy to see why many are dissuaded from signing up to become a party to a franchise.
For many others, of course, those negatives are more than outweighed by the many benefits of running a business associated with an established brand and backed by the marketing muscle and support of a large corporation. So how do you know if you’re best suited to run a franchise or if you should strike out on your own? Answering these five questions can get you a step closer to the right answer.
“When you invest in a franchise, you’re getting the brand name of the franchisor, the operating system, a proven track record, not to mention ongoing support, education and training,” says Brian Miller, president of The Entrepreneur’s Source, a business ownership consultancy in Connecticut. “If you started out running your own business, however, you really wouldn’t have anybody to rely on.”
That kind of pre-existing structure was precisely why the Cheungs opted to run a franchise. “My parents owned their own restaurant so I saw the struggles they had starting off and all those lessons they had to learn,” he says. “The attraction of a franchise is the system is created for you.”
“There are very few people who are true entrepreneurs and who can really go out and make a business their own,” says Miller. “But there are a lot of people who have that passion and fire in their belly and know that they want to take control of their own destiny but need a little bit of help.”
Launching your own business often requires little to no capital, especially if you start small. But many popular franchises demand lots of upfront capital and collateral—sometimes up to millions of dollars—from a prospective franchisee before offering a contract. These “working capital reserves,” as they’re called, are often required by franchisors so that they will feel comfortable that a franchisee can stay in business until he or she reaches the financial break-even point.
In the case of Cheung, he invested between $100,000 and $150,000 to open his first store, including upfront franchise fees. “That was a main reason why we chose Doc Popcorn—the low entry point.” Every other franchise he looked at was going to cost from $200,000 to $250,000 to start, he says.
Still, some franchises are willing to lend a helping financial hand. “My wife and I funded the store on our own, but I know that Doc Popcorn has third-party connections to help with funding,” says Cheung.
To learn more, check out our previous article on franchise startup costs.
While there’s definitely something to be said for creating your own business, many entrepreneurs are proud to peddle a franchise’s products. “The only reason we signed with Doc Popcorn is because of the product and what it represents,” says Cheung. “Of course, trying to make money is always a goal for all business owners but you have to believe in the product.”
For Bennett, however, launching The Greene Grape was an opportunity to express herself and act on her vision of a perfect wine shop. “At the time I opened my first wine store, there wasn’t really a franchise that focused on handcrafted, affordable wine,” she says. “My twist on a regular wine store was part of the creative process.”
“The advantages to running your own business are mostly in creative control,” says Bennett. “I can market the way I want, my store can have a personality that reflects who we are. This means a lot more work, of course, but at the end of the day I can step back and be proud of how the store is presented.”
That’s not to suggest that franchisees don’t have any input. Rather, Miller explains, “As you become successful in a franchise system, there are opportunities for you to work collaboratively and to develop new products and services.”
According to Miller, “the support given by a franchise in the beginning in terms of brand recognition means that you might have a quicker start in terms of sales. Educating the consumer for a new business definitely takes more time. Depending on how a franchise agreement is structured, that could mean breaking even for the franchisee earlier.”
Still, if the substantial franchise buy-in requirements are too steep, taking the franchise route (and its more desirable, early break-even point) may not be a realistic option for many budding entrepreneurs. Instead, they may have no other option but to launch on their own, either diving into entrepreneurship full-time and striving for a quick rise in profits or running a side or part-time venture for a longer period of time, until the business proves it can stand on its own.
“I’m at work all the time,” says Beth Rountree, owner of Beth Rountree Design in Austin, Texas, a home-based graphic design business specializing in print media. “I had my daughter in 2000 and was on maternity leave when I got my first client, then it ballooned into a business,” she says. “Having the flexibility to stop and be with my family for dinner is huge for me,” she adds.
More than half of all U.S. businesses are home-based, according to the U.S. Small Business Administration (SBA). For some people, the dream of working from home stems from a desire to be a stay-at-home parent, others want the opportunity to pursue what they love, and then there are those who just want to avoid an unnecessary commute. Although the reasons behind it are many, operating a business from home is a rewarding, yet challenging, balancing act that many people are choosing to pursue across a broad spectrum of industries. Here’s a look at five popular choices, followed by a word of caution about fraudulent work-at-home schemes.
For John and Laura Roberts, owners of Burnt Ends BBQ in Portland, Oregon, their part-time venture started from a hobby. “Our business grew out of our experience competing in professional barbeque contests,” John Roberts says. “People started asking us if we catered, and now we have an office set up within the home,” he says.
Rountree and Roberts give a peek at what its like to say, “I’ll be home for business,” in the service sector, which accounts for more than half—52 percent—of all home based-businesses in the United States, according to a report for the U.S. Small Business Administration Office of Advocacy.
“A big advantage for me,” says Rountree, “is being home for my family and being able to be active with my kids.” But there can be drawbacks, too, she acknowledges. “The downside is that I have to wear so many hats,” she says. “Also, you never know when you’re going to get paid. That’s a tough pill to swallow. You go on vacation—you don’t get paid.”
The Roberts couple adds, “One of the challenges is that we are fitting it around our other work schedules.” In addition to the demands of running the catering business, including marketing efforts such as creating brochures, placing local advertisements, and updating their web presence, they are still maintaining other full-time jobs outside of the home.
A distant second to the service industry, representing 16 percent of home-based businesses, is construction. Though only one-third of carpenters are self-employed, an overwhelming 93 percent of them are home-based. Similarly, of all the general contractors in the country, approximately one in four are home-based businesses, according to the Bureau of Labor Statistics. For more on working out of one’s home in the construction industry, the SBA provides information and resources, including relevant details about issues such as energy efficiency, federal contracting, and hazardous materials.
Retail trade accounts for another 14 percent of home businesses and Web-based storefronts have become even more popular among the work-at-home crowd in recent years. In Do-It-Yourself Web Stores for Dummies, author Joel Elad says, “Your ultimate goal as a web store owner is to purchase your inventory via wholesale channels.” For product sourcing, he lists a few websites to get started: Worldwidebrands.com, Whatdoisell.com, and Liquidation.com.
Finance, insurance, and real estate make up five percent of home-based businesses. These require licensing by various national and state agencies based on educational requirements and exams. About one in ten professionals in this sector works from home, with the highest percentage found in real estate. The National Association of Realtors (NAR) lists many types of real estate businesses including residential, commercial and industrial brokerage, farm and land brokerage, and appraisal.
Transportation ranks fifth place for home-based businesses, comprising four percent. A popular new concept in this category is non-emergency medical transportation, helping those who need assistance, such as people who use a cane, walker or wheelchair. Check with the local department of health-and-human services for specific requirements, which vary state by state..
You can also check out our earlier article on the too-good-to-be-true nature of many work-at-home schemes.
Most if not all cities in the U.S. have zoning laws in place regarding which businesses can be run from home. “In terms of zoning, the potential issues for home businesses include: exterior signage, parking, noise, pollution, fire and hazardous substances, employees working in the home, client visits, deliveries and shipping, water runoff and drainage,” say James Stephenson and Rich Mintzer in the Ultimate Homebased Business Handbook. Check with city officials to learn what local laws are in place governing home based businesses in your location.
There are home office tax deductions available for home-based businesses in every industry. To learn more about them, visit the Internal Revenue Service (IRS) web page on home office deductions. “Generally, deductions for a home office are based on the percentage of your home devoted to business use,” the IRS says.
There are many models for home businesses and buying a legitimate work-at-home franchise is an option gaining momentum, but an ounce of prevention against fraud is a must. The SBA counsels prospective entrepreneurs to investigate any franchise opportunity by asking previous and current investors about their experiences and having an attorney review the offer. Get all the facts about the franchise, including a written substantiation of any income projections or profit claims, which the Federal Trade Commission (FTC) requires that any franchisor must provide upon request.
So, if that work from home medical transcription job or online Mystery Shopper opportunity sounds to good to be true, it very likely is. Doing your due diligence is the only way to know for sure. A good place to start one’s search is the FTC’s Scam Watch site, which explains how to avoid bogus business opportunities and offers key clues for spotting fraud, such as claims of exorbitant or guaranteed pay as well as promises of ideal work situations. It also lists the most popular work-at-home schemes in its top 10 online scams.
To determine if a home-based business franchise is a legitimate opportunity: investigate, investigate, investigate. Start with a reliable source such as the Better Business Bureau or FranchiseDirect, which is a BBB-accredited company that provides a directory of legitimate franchises for sale, including a home-based category. Only then will you begin to know if you’re ready to say, “I’ll be home for business.”
“In my mind, it seems like I’ve been through this cycle three or four times,” says Rick Reed, founder of R.A. Reed Productions in Portland, Oregon, a company that creates scenery for theaters, opera houses, and performance venues around the world. “Persistence comes from doing something you like and believe in,” he says, with the wisdom of 33 years at the helm of his company behind him.
“Starting your own shop is a passion; you want to create something special,” says Sander Flaum, CEO of Flaum Idea Group in Manhattan, a consulting firm he launched in 2004 after retiring from decades in the top ranks of global advertising. “I decided I didn’t want to work for anyone anymore,” he says.
Call it having a growth strategy coupled with calculated risk-taking or more simply optimism and guts, being able to roll with the punches means adjusting to difficult circumstances as they happen. This idea has a literal meaning, from boxing, where staying in constant motion lessens the impact of your opponent’s blows, an apt metaphor for the small business owner—finding opportunity in the face of adversity, surviving, and winning.
Finding opportunity certainly isn’t easy nowadays, however, as a recent National Small Business Administration study confirmed. Among the NSBA’s members, who represent every state and industry in the nation, the survey found that 72 percent had serious concerns about the economy. Perhaps not surprisingly, business optimism has likewise eroded in the face of stagnant economic growth. In fact, optimism is lower than it was a year ago, lower than in the Reagan-era recession, and it’s now even lower than during the Great Depression, a phenomenon the Pew Research Center calls the Optimism Gap.
Nevertheless, the hardscrabble years of the 1930s provide an important lesson for the small businesses of today. Despite the economic catastrophes, financial fragility, and a longer-lasting period of high unemployment, Pew found that Depression-era Americans still remained hopeful for the future. And today’s entrepreneurs should understand that adopting a head-in-the-sand, do-nothing strategy is not the way to get through tough situations. So, here are three business strategies that have stood the test of time in the worst of times.
Perhaps the easiest of the three strategies, at least on paper, involves finding new target markets for a business’s current products. In addition to stage scenery, Reed has a large supply of barricades for outdoor concerts and festivals. The cache of crowd-control equipment he has in stock is something that sits idle in a warehouse most of the time, waiting for that next festival to come along. It is not something he would want to sell, though, as the need comes up again and again. So, by being willing to rent the product to others, Reed was able to tap a new target market. In fact, the barricades have been rented to new customers—some as far away as Japan—that were never going to be in the market for his scenery.
Despite the additional revenue from this clever rental strategy, Reed’s business has significantly declined, forcing him to lay off 85 of his 100 employees. “We’ll do almost anything for money,” Reed says with a little laugh. But he has seen this happen before.
With a smaller crew, Reed now focuses on industry innovation, creating automation software for what he sees as the future of the business. “Our customers are moving away from stage hands pushing stuff around,” he says. Similarly, a product development strategy means finding new products and services to sell to your current customers. It can involve creating an altogether new product or it could mean extending the product line—for example, by offering less expensive products that meet the needs of customers’ smaller budgets.
Call this strategy the haymaker—a hard swing with all of one’s might. Diversification means providing new products and services to new markets, and it has a long history of success. A famous example comes from the Prohibition era, when alcohol became illegal in the United States. Beer brewers sitting atop vast acres of farmland and thousands of square feet of warehouse space decided to redirect their resources toward dairy farming, providing a new product (milk) to new customers.
Although going after new markets with new products sounds highly risky, it doesn’t have to be. “Everyone is kind of wringing their hands about the economy,” says Flaum, “but we are doing better than ever.” During its seven years of existence, the company has grown from two initial employees to a staff of 29 today by doing something entirely new, what Flaum calls focusing on the big idea—providing breakthrough strategy for new customers in the healthcare and biotech industries. “We do whatever service in whatever area that the clients need,” he says. “We give the customers hope and they put their trust in us.”
Although Reed is retrenching and Flaum is in expansion, both have decades of experience in weathering business cycles and don’t worry too much about them.
“You only have 24 hours in a day. How much time do you want to spend angry, depressed, rejected, and thinking ‘Why me?’” Flaum says. A struggling national economy, an industry lifecycle in decline, a seasonal dip in the market—whatever the scenario, a small business will experience some hits. It’s part of the territory. But it’s what you do afterwards that makes all the difference.
Breakthrough, by Paul Kurnit and Steve Lance (2011)
Make Your Own Luck, Success Tactics You Won’t Learn in Business School, by Peter Morgan Kash with Tom Monte (2002)
Selling When No One Is Buying, by Stephan Schiffman (2009)
“Learning from the Great Depression,” Bloomberg.com, Businessweek, by Stacy Perman, October 17, 2008:
National Small Business Administration, 2011 Mid-Year Economic Report:
The Pew Research Center
by Reed Richardson.
As the economy has struggled over the past few years, one notable side effect from the recession has been a renewed interest in entrepreneurship. But as the number of Americans launching their own ventures has grown, so too has the number of those falling victim to work-at-home business opportunity scams. For budding entrepreneurs looking to break out of the corporate rut full-time or even those just seeking to supplement their regular income, these supposedly lucrative, low-risk, high-reward offers often prove hard to resist. Certainly, there are work-from-home jobs and small business enterprises that are on the up-and-up, but distinguishing these legitimate investments from the fraudulent ones isn’t always so easy. So here are some key warning indicators and due diligence recommendations to help prevent your entrepreneurial dreams from turning into a financial nightmare.
1. If it sounds too good to be true…it is!
Eileen Harrington, Deputy Director of the Federal Trade Commission’s Bureau of Consumer Protection notes that the telltale signs of business opportunity fraud boil down to three main elements: “You can earn a lot of money,” “I will show you how to do it,” and “You can count on being successful.” (For more tips on researching business opportunities, watch the FTC video on avoiding job scams, located in the sidebar.)
Of course, rare is the small business that skyrocketed to profitability performing easy, uncomplicated tasks that require no previous experience. So, if a business opportunity promises big returns or guarantees results but seems to involve little more than executing simple, mundane tasks like stuffing envelopes, processing rebates, or performing online searches, you would be well advised to proceed with caution. These can’t-miss pitches usually bury important details in the fine print and often involve using unsuspecting entrepreneurs as shills to rope more people into a pyramid-like scheme, one in which the business is only sustained by bringing in multiple levels of ever-increasing numbers of investors.
For example, a recent envelope stuffing scam, successfully prosecuted as fraudulent by the Federal Trade Commission, promised to pay $10 plus postage for every envelope mailed, resulting in potential income ranging from $550 to $3,000 a week. “Consumers paid a fee of $65 to $160 upfront for a package of supplies from the defendants after being promised ‘BIG PAYCHECKS Within TWO WEEKS . . . If you Act NOW!’” according to the FTC judgment. “While consumers did receive the envelope-stuffing materials, they soon discovered they were simply sending out more solicitations for the defendants’ purported business opportunities. None made the money the defendants promised and none were reimbursed for postage either.”
2. Treat as suspicious any solicitations to pay anything before seeing or starting the business opportunity
“If someone wants you to make an advance payment to ‘get in’ on the ground floor of a new business opportunity—especially if it’s a big investment, or you don’t have much information about the deal—this is a big red flag,” notes this Better Business Bureau article on work-at-home scam warning signs. “Don’t do it. ‘Advance fee scams’ are very common and they come in many varieties.”
This is even true if a business opportunity guarantees full refunds or claims it will send you all their prospectus materials for free, but still wants to charge your credit card a small fee for shipping and handling or processing. If you’re dealing with someone unscrupulous, giving them your credit card number and allowing them to process one transaction, even for just a few dollars, can unlock the door to many other charges, which you may have unwittingly agreed to by clicking on a link on their website or checking “I agree” next to a set of their terms and conditions. And often, that same fine print includes complicated, onerous provisions—commonly called “negative option proposals” or “continuity plans”—that make canceling these ongoing and unwanted charges all but impossible. (Click on this recent FTC report to read more on how a negative option scam works.)
Conversely, some ultimately fraudulent business opportunities can appear completely legitimate because, rather than give their product or service away for next to nothing, they instead require large upfront investments, whether it’s to buy specialized equipment and software or to stock up on initial product inventory. “Often these are the most persuasive kinds of scams. It seems like it might be a real business opportunity—but it’s not,” the Better Business Bureau points out. “Here’s what happens: the buyer makes the purchase and never receives the things needed to set up the business. You can avoid this situation! Check the business out completely before you send a dime.”
3. Research every potential business enterprise thoroughly
Because a preponderance of work-at-home business opportunities begin through contact online or via phone, it is imperative that a budding entrepreneur look beyond what is being said or written to find out what is or isn’t real. A good place to start is the Better Business Bureau and state consumer protection agency. There, you can check the business’s rating and find out if there are any past or pending complaints from other clients. No rating, a poor rating, or even an ongoing lawsuit doesn’t mean a business is fraudulent of course, but a legitimate enterprise with such a track record should be able—and willing—to provide potential investors a reasonable and detailed explanation.
Don’t be fooled by glowing references to the business on apparent news sites or the use of large, corporate brand names like Google in the sales pitch either. The former are often phony and the latter are often completely unrelated to the business opportunity. (In fact, Google’s name has become so popular with work-at-home scammers that in late 2009 the company filed a lawsuit to stop what it said were attempts by fraudsters to deceive people into thinking they actually would be working for Google.)
In addition, it’s imperative that you acquire from any potential business opportunity a full set of written disclosure documents, which should include data supporting any earnings claims as well as a list of every purchaser of the business venture. By law, the FTC also mandates that, upon request, a business must provide potential investors with the names and contact information, including both the phone number and physical address, of at least 10 other investors. So, don’t be satisfied if you’re only provided a handful of contacts, which consist solely of a name and phone number.
Why? Because those few, unseen contacts may very well be in on any scam and therefore primed to exploit your budding interest by feeding you reassuring claims of their experiences. If at all possible, arrange to meet any references in person and ask them for documentation that backs up any individual claims of sales revenue or profitability. If the business can’t provide you with any references that live close enough to personally visit, ask them to explain why. And if a reference can’t back up his or her claims of success with some semblance of proof, this should be another warning sign.
4. Fast No’s and Slow Yes’s
As former work-at-home scammer Jim Vitale tells it, the process of luring someone into parting with their money involves carefully manipulating their enthusiasm (or desperation) to get them to follow a series of seemingly small steps that inevitably lead up to the large decision of buying in. The best counterpunch to that slippery slope, he advises, is an attitude of fast no’s and slow yes’s. In other words, approach any work-at-home business opportunity with a skeptical attitude, one that prevents this momentum from building up and errs on the side of caution and inactivity. Don’t be persuaded into doing something you’re unsure of or uncomfortable with simply because someone warns that the opportunity is a limited offer or only good while supplies last.
Likewise, if detailed questions about the business’s inner workings and demands to see its disclosure documents are ignored, glossed over, or met with a suddenly hostile attitude, it’s wise to step back and reassess the venture. “If [a telemarketer] is dealing with somebody who is asking questions about the legitimacy of the business, at that point, you do a slap takeaway,” Vitale recalls. This high-pressure sales tactic, where the business representative threatens to scuttle any further talks and dismisses the potential investor as not serious, is simply a disingenuous move designed to restart the sales process and encourage someone to take more risks to prove their real interest.
“People want to believe that there is some opportunity that they can invest in that will guarantee that they will have financial success,” notes the FTC’s Harrington. But that willingness of budding entrepreneurs to step out into the unknown must be tempered with a strongly critical, common-sense approach when it comes to buying a work-at-home business opportunity. Or, as Harrington emphasizes, potential small business owners must continually remind themselves: “There just is no sure deal. None.”
FTC's guidelines to evaluating a business opportunity
1. Insist on seeing a written copy of the company's disclosure document, which includes:
2. Get information in writing about earnings claims
3. Interview references and previous buyers of the opportunity in person
4. Resist any urge to buy a business over the phone
If you feel you’ve encountered a fraudulent work-at-home business opportunity, report it by calling 877-FTC-HELP or going online to www.ftc.gov/complaints.
What’s the right way to start a small business?
by Reed Richardson.
Though many of today’s budding entrepreneurs are well versed in the latest technology and adept at leveraging social media, one age-old business question can often trip them up on the road to success: How much time and effort should be devoted to the small business when you’re just starting out?
With seemingly more pressing concerns like product development, marketing strategy, and capital funding looming over a new small business owner, focusing on this question can seem relatively unimportant. Indeed, for some, particularly the millions who have lost their jobs due to the struggling economy, the answer about how much effort to put into a new entrepreneurial opportunity may appear obvious. But for many others, the choice isn’t so clear. “Jumping into an entrepreneurial opportunity full-time, especially in this economy, still makes a lot of people nervous,” explains Farmington, New Mexico-based small business advisor Steven Schlagel.
But launching a new venture as a side or part-time business has its own set of issues. Companies that linger in an incubation stage with little steady income (or even taking steady losses) and no employees can often have a harder time achieving enough momentum for liftoff. According to the SBA, sole proprietorships that have yet to bring in an employee are three times more likely to fail than companies that have already hired someone.
To fully evaluate how entrepreneurs can best answer this “go big or side gig” question, business coach Schlagel, who also runs the my-small-business-mentor.com online coaching site, tells new clients to first think about what they want their future life to look like. “I ask them what their long-term life goals are and what they would want to accomplish with their small business, and then we start figuring out how to best meld those two things together.”
Entrepreneurs come from all walks of life and bring with them a broad range of motivations, constraints, personalities, and goals. As a result, easing into the small business arena part-time is often an attractive alternative. The part-time approach also allows entrepreneurs to prepare for how their small business will intertwine with their personal lives. Failing to do so could be laying a foundation for disaster down the road.
Indeed, an entrepreneur’s personal life and its attendant responsibilities, Schlagel points out, mustn’t be overlooked when launching a small business. “A lot of times, if an entrepreneur is supporting a family, those commitments will necessitate taking less risk initially, making a part-time enterprise a more reasonable starting point,” he explains. “Some people won’t lose any sleep over the idea of putting millions of dollars of personal assets on the line and failing, as long as they learn something from it. However, if you’d be scared to death over these day-to-day risks, perhaps you’re not yet ready for a full-time entrepreneurial opportunity.”
By rolling out a business at a more controlled or piecemeal pace, entrepreneurs can enjoy the luxury of being more deliberate in their decision-making process, working out some early (and inevitable) kinks, and possibly even avoiding some bigger mistakes. Often, starting out part-time allows a small business to test whether or not its products or services are actually marketable and profitable without jeopardizing all of the owner’s personal and financial assets along the way. “Part-time ventures can enable you to phase the small business lifestyle in slowly and can be a great stepping-stone to a viable full-time entrepreneurial opportunity,” notes Schlagel.
Sometimes a small business’s organic evolution makes starting part-time a natural choice. Take Gunner’s Recycling, a Nashville-based business that began 18 months ago when five-year-old Gunner Sweeney noticed that his hometown’s recycling program didn’t pick up unwanted glass from homeowners. Working with his dad, Mark, Gunner convinced six neighbors to pay them a small fee for the pickup and delivery of their leftover glass, using the family’s SUV.
“When we first started it wasn’t even a small business idea. It was just a way to spend time with my son, help the environment, and teach him a little about money,” explains Mark, who was, coincidentally, enrolled in Belmont University’s MBA program at the time. From that humble start, however, the project took off and the Sweeneys quickly found themselves with a viable small business, one that now has more than 350 customers. As a result of this growth, Gunner’s Recycling has incorporated, bought a dedicated delivery truck, rented warehouse space, and hired its first employee. “Still, it was a hobby first and then we turned it into a side business, which allowed us the time to build a business plan with an exit strategy and figure out the right leverage we need to grow to full-time,” Mark says. “We’re about three-quarters of the way there now.”
One the other major steps along this path involved Mark quitting his full-time corporate job as a financial planner to focus more on the recycling business. (He maintains another side job for extra income.) But it’s notable that his trigger for taking such an important step didn’t center on spreadsheets or dollar signs. “It was really based on my personal passion,” he recalls. “I’d wake up in the morning and not want to go to work at my day job, I’d really want to go work on our small business instead.”
While Gunner’s Recycling is growing quickly, its total customer base is a fairly finite and limited universe and its organic evolution naturally lent itself to a part-time approach to start. But entrepreneurs seeking a much larger market horizon, who have dreams of taking a startup from their garage to the ranks of the Fortune 500, may need a more dedicated commitment from the get-go.
In a SmallBusinessOnlineCommunity interview from last summer, Mint.com founder and serial entrepreneur Aaron Patzer explained that his early small business experiences taught him about the pitfalls of a too-cautious start. “I found out [one of my early businesses] had a much smaller market than I thought and I tried to do it while I was in school. So, I didn’t give it 100%,” he recalls. “What I learned there was that if you’ve got a good business idea, you have to give it 100%.”
As a result, when it came time to rollout Mint.com, Patzer, wary of making the same mistake again, quit his job and spent nearly a year working full-time on fine-tuning both the product and the marketing pitch. And from that experience he learned another valuable lesson about entrepreneurship. “There is a difference between a startup and a small business. A small business typically starts out with one location or with one set of clients and then it expands out,” he says. “With a technology-based startup like Mint, [I was] attempting to go national, or international, from day one.” That vastly larger initial market meant a part-time approach wouldn’t have been able to raise the necessary capital for launching the business on such a broad scale, he notes. “It’s a high-risk but also a high-return proposition if you make it.”
Besides a high degree of scalability, other structural considerations can make a part-time start a difficult choice, like if your proposed business will require a physical storefront or rely upon walk-in traffic for most of its sales revenue. Rarely can an entrepreneur afford the overhead of renting a retail space without keeping regular business hours. Of course, hiring employees to staff the store solves this problem, but that too is a significant step in the life of a business and adds in many other complications for part-time entrepreneurs that may make jumping in with both feet ultimately a better choice. “While part-time ventures let you phase into the lifestyle, there’s a risk that the business stagnates and never goes any further,” cautions business coach Schlagel.
Mark Rudder, owner for the past decade of the Tulsa-based graphic design and sign manufacturing company Signs & Wonders, has been on both sides of the part-time/full-time small business coin and says he greatly prefers the latter. “I worked a 9-to-5 job while running a sign business on the side, but when I got home each night I was so burnt out I didn’t have the energy necessary to do both,” he recalls. “Time is an entrepreneur’s most precious asset, so I finally asked myself ‘Where would I rather have my focus full-time?’”
Indeed, there is no substitute for real-life experience and, for many entrepreneurs, keeping a day job while running a side business can quickly turn into the equivalent of trying to learn how to ride a bike without ever taking the training wheels off. And though it might require bootstrapping your finances and creatively marketing your products or services, the sink-or-swim philosophy can often serve to sharpen one’s business focus and accelerate a company’s growth. “Sure it’s easier to work for someone else, but I’ve found there’s more personal growth in working for myself,” Rudder says. “So, why would I want to spend 40 hours a week building someone else’s business, when I could be using all that time to be building my own?”
Matt Mireles vividly describes it as his “hallelujah moment,” that point in time two-and-a-half years ago when the notion of starting his own business suddenly made perfect sense.
“After trying a number of other things in my life, I still felt like I hadn’t quite found my niche,” recalls Mireles, who is the founder and CEO of the Silicon Valley–based startup SpeakerText. But after a five-week entrepreneur’s course at the Stanford Graduate School of Business, he says he realized, “this is what I was born for.”
Ben Plikerd speaks of an altogether different experience. After starting a small, part-time computer repair business more than a decade ago simply to earn a little extra cash, Plikerd now sits atop a budding entrepreneurial empire comprised of seven different IT, communications, and real estate corporations that stretch across northern Indiana. Last year, all these ventures brought in annual revenue of roughly $2.8 million. But despite this success, Plikerd recalls on his personal blog: “there was never a day when I woke up and decided that I’d become an entrepreneur.”
Talk to enough entrepreneurs and you’ll no doubt hear a similarly broad cross-section of stories, explains Belmont University’s Director of the Center for Entrepreneurship, Jeff Cornwall. “Some come to it because it’s what they’ve always wanted to do,” explains Cornwall, who founded a number of successful health care start-up ventures in the ’80s and ’90s before embarking on his academic career. “But other people find it along the way or have it kind of thrust upon them. They’re what I call accidental entrepreneurs.” As a result of this diversity of thought and experience, Cornwall says, “The best predictor of success for entrepreneurs is not who they are but what they do.”
Beware the “Facebook effect”
So, is there any way to know if the entrepreneurial life you’re contemplating is right for you? The answer often depends not on the path you take but the reasons for choosing it. That’s why, to avoid putting the proverbial entrepreneurial cart before the horse, Case Western Reserve management professor Scott Shane recommends investing some time into carefully considering your motivations behind such a move. “One of the reasons the failure rate is so high is because many people say, ‘I want to be an entrepreneur, now I have to figure out what I want to do,’” he explains. “If the motivation to be an entrepreneur comes first, there’s a danger.”
As the author of the 2008 book The Illusions of Entrepreneurship, Shane attributes some of this pre-emptive launch behavior to what he calls the “Facebook effect.” Every so often, a startup like Facebook rockets out of obscurity to achieve fame and billion-dollar riches seemingly overnight, its meteoric trajectory romanticizing entrepreneurship for a whole new batch of dreamers. But for an overwhelming number of them, the reality is much less glamorous and financially rewarding. “Eighty percent of new startups are non-employer businesses that bring in a median of $45,000 in sales a year,” he notes. Couple these income figures with a failure rate of roughly 50 percent after five years and it becomes clear that the chances of becoming the next Mark Zuckerberg are almost astronomical.
Still, Shane has discovered that many push on, regardless. In fact, he cites surveys in which as many as 40 percent of entrepreneurs acknowledge that their new business offers no competitive advantage over others in their marketplace. “I mean, if the owner of the company already believes that, then why start the business in the first place?” Shane asks incredulously. “What we see in many of those cases is that motivation overrides common sense.” What are the warning signs of entrepreneurial ambition run amok? Shane says they include launching a small business without having any kind of expertise in that specific industry, choosing to forego any kind of a business plan, and placing no financial controls on a new company.
You gotta have a certain personality, right?
“I’ve learned in my own years as an entrepreneur—and now an entrepreneurship professor—that there is a gut level ‘fit’ for people who are potential entrepreneurs,” writes Daniel Isenberg in a recent blog post at the Harvard Business Review. And though Isenberg, who teaches management practice at Babson University, acknowledges that the 20-question test he developed for HBR was done quickly and somewhat tongue-in-cheek, he maintains, “There’s some truth there. People who make the leap have those attitudes.”
Still, Isenberg is quick to say that if someone doesn’t ace his test that doesn’t mean they lack some “entrepreneurial DNA” necessary to succeed. “There isn’t a gene for entrepreneurship,” he points out. “For any occupation, there is only a very, very low genetic component.” Basketball players do tend to be tall, he acknowledges, but he also points out that an overwhelming majority of tall people are not successful basketball players. “In fact, our research shows that most talent is not innate, we’re not born with it.” But what about the notion that entrepreneurial aptitude correlates with characteristics like a willingness to take risks and an abiding passion for following one’s dreams?
Ask SpeakerText’s Mireles and he’ll agree that launching a startup usually involves absorbing a certain amount of chaos and uncertainty into one’s life. (For more on his long, strange trip to becoming an entrepreneur, check out Mireles’ personal blog.) However, he is quick to add an important qualifier. “There is risk-taking, yes, but I think if you’re successful you don’t take stupid risks,” he says. “Instead, I call it having strategic courage.”
Isenberg agrees. According to his research, the most important characteristics needed for a successful entrepreneurial career involve the ability to cope with large amounts of uncertainty—a term he also uses instead of the more loaded word “risk”—and an ability to lessen that uncertainty incrementally by taking action. As for the need to be passionate, Isenberg emphasizes that budding entrepreneurs need not lose sleep if they can’t conjure up fiery emotions every time they think about their small business idea. “Most people think that passion is a critical part of entrepreneurship,” he says. “That’s really a big myth.”
Keep an open mind
More than a decade into what easily qualifies as a successful entrepreneurial career, U4 Corporation CEO Plikerd says he still experiences moments that leave him scratching his head. “There’s always stress, even now,” he explains. “But I got to where I am by not being afraid to ask questions when I didn’t know how to do something, even if that meant that I looked like the dumbest guy in the room.”
Unfortunately, says Plikerd, many of the small business tenants he encounters now in his capacity as a commercial real estate owner don’t share this affinity for curiosity and adaptability. “By now, I can usually tell within 15 minutes of meeting them and asking them questions about their business whether or not they’re going to make it,” he says.
Professor Cornwall echoes Plikerd’s anecdotal impressions. “Those [entrepreneurs] that work out the best are the ones willing to listen. Those that aren’t willing to adapt and change and instead just blame the ‘stupid customers’ for not buying their products—they’re the ones that are bound to fail,” he says.
But perhaps the most important thing to remember when contemplating an entrepreneurial endeavor is that, like everything else in life, you’ll likely get out of it what you put into it. “Starting a small business, technically, is a very simple process,” Cornwall points out. “However, it is a lot of work.”
Five good reasons to launch your startup in today's economy (and two reasons to think twice).
by Reed Richardson.
In a still fragile business climate marked by stubbornly high foreclosure rates, uneven consumer demand, and tight credit markets, budding entrepreneurs might consider right now to be one of the worst times to start a new business. But launching a startup in the midst of ongoing economic struggles can actually be a roadmap to long-term success.
According to studies by the Kauffman Foundation and the outplacement firm Challenger, Gray & Christmas, the rate of entrepreneurial activity rose significantly between 2007 and 2009. But since the start of this year, the Challenger Job Market Index has found that the pace of new startups has cooled considerably, falling to 3.4 percent in the second quarter of 2010 from 9.6 percent in the last quarter of 2009. Clearly, the earlier statistics show that many people believed there were opportunities to be seized in a struggling economy, but perhaps a fear that it's now too late to take advantage of them has scared off some more recent entrepreneurs.
If you're among the latter, however, take heart; there are still many sound reasons for starting your small business today. Below are five arguments for jumping into the business waters right now.
1. Lower threshold to entry
Entrepreneurs don't need as much capital to launch right now because resource and overhead costs are at or near historic lows in nearly every category. For example, the commercial real estate market continues to suffer from high vacancy rates, so the rent or lease payments on, say, a new retail business's storefront location, might be had for a fraction of the price commanded just a few years ago. Similar gluts in durable goods and office equipment inventories likewise mean that everything from a manufacturer's source for its raw materials to a law firm's need for photocopiers and workstations can be found at pennies on the dollar.
Seth Levine, a managing director at the Boulder, Colorado-based venture capital firm Foundry Group, says that launching a business in this type of low-cost climate impresses upon entrepreneurs the critical importance of leveraging your startup's cash flow as far as it can go. "I think they get a practical advantage from having started their companies in an environment that often requires a certain amount of stinginess, which often serves companies well throughout their lives," Levine explains. "I think businesses have a tendency at all levels to spend too much. There's nothing like a really tight market to make you look more closely at every dollar going out the door."
2. Talent is cheap and available
Another critical small business resource that can be ripe for the picking in today's economy is people. With the Labor Department reporting unemployment rates near double digits and more than five candidates per job opening, now is definitely an employer's market. What's more, the deep and widespread nature of the financial crisis has left many workers, even those still employed at large corporations, uneasy about the future and suddenly more willing to entertain a lower-salary offer from a startup.
"People are finally realizing that we are all self-employed, regardless of our work configuration," explains Pamela Slim, who authored the book Escape from Cubicle Nation and writes about the topic on a blog of the same name. "In my experience as a start-up coach, I have seen a significantly larger number of corporate employees working on a ‘side hustle,' (a small business which provides supplemental income), which can act as insurance in case of a layoff, or as the early testing stage of a full-scale business." In addition, Levine points out that the significant decline-or complete dissolution, in some cases-of many employees' 401(k)s and stock portfolios makes it even easier now to recruit from the ranks of the currently employed for a startup business.
3. Taking a risk isn't so risky
Many a successful business can trace its roots back to a particularly ignominious period in the American economy-16 of the 30 companies in the Dow Jones Industrial Average, including household names like McDonalds, General Electric, and Procter & Gamble, began during a recession or depression. For millions of Americans who have lost their jobs in the past two-plus years, being laid off became the unexpected impetus that sparked their entrepreneurial passions and, just maybe, will lead them to similarly out-sized success. And there's good reason to adopt this ‘never look back' attitude, according to Indiana University business professor David Audretsch.
"People understand that there's something different about this recession," Audretsch explains. "In the past, being laid off might have been a temporary situation, until the inevitable recovery comes. But now people are finding that many of those old jobs were not sustainable. Those jobs have disappeared for good and so they can't count on going back to the same old company and picking up where they left off." Besides, adds Audretsch, a clever business idea is still clever in a boom or a bust cycle. "Real serious entrepreneurs don't pay much attention to the business cycle."
4. Your established competition may be already weakened (or gone)
It's human nature to want to preserve what you already have, and the same phenomenon often occurs within the business world as well. That's why, in tough times, many established companies retrench, pull back advertising, and focus on keeping their current customers instead of pursuing new ones. This pullback strategy sometimes backfires completely, sending a struggling company tumbling into bankruptcy and clearing the field for a startup, or, more often, creating a market vacuum that a new small business can fill and exploit.
Moreover, new startups aren't constrained by past performance, existing infrastructure, and future expectations the way large companies often are. Instead, they are free to experiment with new products and innovative solutions, which can take more conventional businesses by surprise. Some examples of this, startup coach Slim explains, involve early-stage financing and social media marketing. "If you can't get access to credit from mainstream institutions, you have to find a way to get money directly from consumers, without spending too much on materials or infrastructure. This phenomenon is creating highly functional and streamlined business models," she notes. Likewise, she adds, "the dramatic increase in social media users also means that you can expand your market far beyond your own geography."
5. Nowhere to go but up
A small business that makes use of a slow economy as a trial period-to perfect their product or fine-tune their marketing-may be in a significantly stronger position once good times return. "The business cycle has been with us as long as anyone can remember," points out Prof. Audretsch. "When the full recovery does arrive, you want your small business to be positioned to take maximum advantage of it, instead of just moving in, hiring, and starting to set up shop."
In addition, Slim notes that small businesses that survive tough times often gain something of a psychological advantage, one that, she says, can carry over to customers as well. "Consumers are looking for confident market leaders who can help pull us all out of the economic spiral," she explains. "When they see businesses starting and growing in one of the most challenging markets in generations, that instills deep trust. Those businesses who already have trust will be well positioned for growth when things do pick up. And they will."
Despite the aforementioned reasons in the affirmative, a fair-minded assessment must also acknowledge that there are some obvious drawbacks to starting a small business right now. Here are two significant obstacles that budding entrepreneurs should prepare for before hanging out their shingles.
1. Hard to raise money
Capital is the fuel that propels the engine of business and there's no denying that, right now, much of the economy is still sputtering along on fumes. Credit markets remain constricted, meaning that your startup may have to take a more modest, measured approach rather than rolling out a million-dollar product development and marketing campaign simultaneously. To combat this, many small business owners are embracing a spartan startup mentality known as bootstrapping, but this approach won't necessarily work for every kind of business. As a result, an undercapitalized startup could easily stall out prematurely and fail or be quickly poached by a better-financed competitor, even if it is selling a fantastic new product or the next killer app.
2. Getting lost in the crowd
As the Kauffman Foundation survey found, millions of Americans have decided to strike out on their own and start a new business in the past few years. For many, this moment is the culmination of years of preparation and planning, but for some, launching a startup may simply be a matter of joining in what appears to be the latest fad. "There is a such a thing as an entrepreneurial bubble," notes Indiana Univ. Prof. Audretsch. "If everyone you know is starting a business, a kind of herd mentality sets in."
Pamela Slim agrees. "I have noticed a lot more people trying out business ideas, or launching a small business after being laid off, instead of looking for another job.
Just like you can never guarantee a corporate job will last forever, you cannot guarantee a new business will be successful," she points out. This surge of entrepreneurship will undoubtedly help drive innovation forward, she explains, but, inevitably, it will also leave lots of failed small businesses in its wake. But even in those cases, Slim sees a silver lining. "The way you gain insight and experience as an entrepreneur is by trying a lot of things, failing often, learning, and trying again," she explains. "There is no perfect time to launch, so why wait? Get out there and see if your great idea holds water in the real world."
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