Tag Archive for 'startups'

Take on the law of numbers with grit and fundamentals

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by
Jim Blasingame
on 11:29 am
in Entrepreneurship, Inspirational and Motivational and Management Fundamentals
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A rabbit was being chased by a hungry fox. Running for his life, he hopped over a turtle as he made haste across a small stream. Tucking himself safely inside his shell — not wanting to become collateral damage in the rabbit’s emergency — the turtle inquired about his anxious neighbor’s prospects, “Hey, Mr. Rabbit. You gonna make it?” To which Mr. Rabbit replied over his shoulder, “I GOTTA make it.”

When small business owners wake up in the morning, they often feel like Mr. Rabbit. But why are so many operating so close to the edge of survival? Why is every challenge or opportunity so momentous? Why are their circumstances so much more dramatic than for their Big Business cousins? The answer is found in the law of numbers. Let’s look at just three key examples:

Customers
Big businesses have lots of customers, so losing one is usually not a big percentage of their customer universe. A small business’s customer universe looks more like a list, on which each name represents a much larger percentage of the total. Losing a sale or customer takes a bigger mathematical bite out of the future viability of any small business.

Employees
When an employee leaves a big business, there are probably three replacements ready to be promoted off the bench to that single assignment. But even if there is a bench on a small business team, it isn’t deep. And since there are more jobs to do in a small business than people to do them, every employee is a key employee who’s difficult to replace.

Capital
Big businesses are blessed with multiple capital options, including the equity and debt (bonds) markets. A small business is the stepchild of the capital markets – sometimes more like an orphan. Other than bank loans and whatever retained earnings that can be held onto after taxes, the best way to describe other capital acquisition options is found in the names of the twin brothers of desperation, Slim and None. And even when outside capital is found, it often comes at a prohibitive premium.

With the law of numbers and perilous percentages against them, translating into limited options, small business owners survive by calling on a special kind of “I GOTTA make it” resolve. But, alas, resolve alone isn’t enough. To overcome the reality of their numbers and operate with less desperation they have to combine their grit with a focus on operating fundamentals that address the exposures. For instance:

  • Customers: Know what each expects from you and deliver that within an inch of their lives. This is part of your special sauce and one of your advantages over a big business.
  • Employees: Hire only those who could one day be promotable off of your bench.
  • Capital: Build and maintain good relationships with at least two banks, and retain earnings like your business’ life depends on it. It does.

During The Second Punic War (218 BC), Hannibal crossed the Alps with 35,000 men and a squadron of elephants. When snow blocked their progress, scouts reported the way forward was impossible. Sensing disaster in the eyes of his men, and realizing that this was a test of his leadership, the great Carthaginian general is said to have uttered those words that small business owners say to themselves, and their people, every day: “We must either find a way – or make one.”

Write this on a rock … Like rabbits and generals, small business owners GOTTA make it with a combination of grit and fundamentals.

Why the decline in startups helps mature small businesses

Published
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Jim Blasingame
on 1:21 pm
in Uncategorized
. 0 Comments

In my last column I revealed four reasons why the economic recovery since 2008 has produced fewer startups than those in the past, and the implications of that decline on economic growth. This week I’ll explain why companies that survived since 2008 are better off than before, including how the decline in startups may have helped them.

As great as startups can be for macro-economic growth, they can also be messy for a couple of reasons.

1. The risk for startups is extreme and the total cost can be prohibitive. Founders put into their startup more time, energy, emotion and capital than they ever thought would be necessary. And since most fail, the total cost in the aggregate to launch startups that succeed is enormously underestimated.
2. Startups disrupt the price structure. While trying to get a foothold in the economy, and before they know what it takes to capitalize business growth, a classic startup practice is to enter the market with low prices. This sounds like honest competition and good for customers. But established companies do know what they must charge to sustain their business. And even after a startup runs out of capital and leaves the marketplace, damage to the price structure remains.
Small businesses that survived the 2008 financial crisis and aftermath did so by establishing exactly what it takes to run their business in the leanest and meanest terms. One of the consequences of this trial by fire is that these firms have emerged in better shape than after previous significant economic downturns. Here are six reasons:
1. Fewer startups. There has been less price structure disruption since 2008.

2. They deleveraged. Surviving small businesses paid off debt and, as a sector, refused to add new debt (NFIB Index). The banking industry has confirmed an unprecedented lack of business loan demand, which is ironic in that interest rates have never been lower.

3. Stronger balance sheets. Reduced debt, plus disciplined merchandising, inventory and supply chain practices that prevent inventory creep, all improve important financial ratios.

4. More gross profit. Rigorous expense control relieves pressure on gross profit from flat sales and pricing pressure.

5. Improved capital and cash. All of the above practices contribute to profitability, which in the current environment is more likely to be retained. Retained earnings push capital and cash in the direction of sustained operations and long-term success.

6. More creditworthy. Firms that grow beyond organic funding will be more worthy of credit and preferred terms and rates.

When the next expansion does happen, surviving firms will be poised to more profitably take advantage than ever before.

Write this on a rock …The economy needs startups, but existing businesses, not so much.

Four factors that stopped the American startup

Published
by
Jim Blasingame
on 11:01 am
in Entrepreneurship and Start-up
. 0 Comments

As the financial crisis was being resolved in December 2008 I heard someone say, “Wait ’til the startups get going – they’ll end this recession and crank up the economy again.” Of course, this maxim had caught on previously because when you start a business, you create at least one job.

But as I thought about how that entrepreneurial expectation had been true in past recoveries, I considered the environment we were entering and concluded that this recovery was going to be different. Indeed, in my 2009 predictions I reckoned that there were going to be fewer startups in this recovery cycle than ever before based on two conditions I saw coming. Unfortunately, things got even worse due to two factors I didn’t forecast.

Typically, the founding of most Main Street startups are funded initially with access to the personal credit and home equity of the founders. I saw problems coming for both of these sources because:

1.   One morning in February 2008 – months before the financial crisis but with storm clouds on the horizon – millions of credit card holders woke up to discover their card issuers had withdrawn any available credit they had the day before.

2.   Then, over the next year, the bursting of the real estate/mortgage bubble – the prime cause of the 2008 financial crisis – resulted in wiping out or significantly reducing the home equity of millions of U.S. households.

The two factors I did not forecast are:

3.  The youngest – and largest – of marketplace participant groups, Gen Y and Gen X, age 20-44, apparently are not as entrepreneurial as their Baby Boomer parents were at that age. According to the Kauffman Foundation, since 2009 startup activity for those two demographics has been declining.

4.  In my half-century career, and my study of the history of the American marketplace, prospective founders of new businesses have never been subjected to the level of anti-business rhetoric and policies from the federal government as they have in the past seven years.

One of the seminal findings of the Global Entrepreneurship Monitor (GEM) is a direct connection between a country’s entrepreneurial vitality and its economic growth. The Great Recession ended in June 2009. But the subsequent U.S. recovery, now well into its sixth year of moribund performance (2% annual average GDP growth), has been stuck in a kind of circular reference: expansion-creating startups aren’t happening because of the four entrepreneurship-repressing factors.

Write this on a rock …Real economic expansion – more than 3% growth – will require a return to favorable entrepreneurial conditions lost since 2008.

Next week my column will reveal counter-intuitive ways the lack of startups since 2008 have been positive.

The unique ability of entrepreneurs

Published
by
Jim Blasingame
on 6:00 am
in Entrepreneurship and Inspirational and Motivational
. 0 Comments

One of the traits of an entrepreneur is a passionate desire for more - to discover and acquire more information, more efficiency, more productivity, more capability, more speed and yes, sometimes even more money and stuff.

But entrepreneurs don’t own the franchise on this trait. Lots of people WANT more. It’s just that entrepreneurs set themselves apart from others because they actually have the ability to create more. God bless entrepreneurs because, without their vision, courage, energy, and passion to create more, many of the things that enrich our lives would not exist.

It’s important that our world creates the fertile soil in which entrepreneurship can grow. Fertile entrepreneurial soil is where accomplishment is recognized, courage is admired, passion is encouraged, ideas can be openly debated and where truth is valued.

And entrepreneurs are not just found in the traditional marketplace. You can find them in education, in medicine, in research and yes, even in government. All species of entrepreneurs should be allowed to flourish wherever you find them.

But if you are having trouble finding an entrepreneur, the quickest way to solve that problem is to go hang out with small business owners.

Check out more great SBA content HERE!

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Tim Berry’s Top 10 reasons small business start-ups fail

Published
by
Jim Blasingame
on 1:57 pm
in Business planning and Start-up
. 0 Comments

In 1998, the SBA reported that 50% of small businesses fail in the first five years. That wasn’t good news but, sadly, it got worse. By 2008, the mortality of small businesses actually increased by 20% when it was reported that 50% of small businesses were now failing in the first FOUR years.

There are as many reasons why a business fails as there are business failures, but over the years it has become clear that all of those micro-reasons can be conveyed up into a smaller number of macro-reasons, including being under-capitalized, bad management, bad idea, failure to plan, etc.

Recently, on my small business radio program, The Small Business Advocate Show, I talked with someone who knows a lot about why some small business fail and why some succeed. Tim Berry is the founder of Palo Alto Software, the publisher of Business Plan Pro, the #1-rated software for developing a business plan and the author of two great books on business planning, The Plan as You go Business Plan and the business planning bible, Hurdle: The Book of Business Planning.  Tim is also one of the founding members of my Brain Trust.

Take a few minutes to listen to our conversation on why businesses fail so you can avoid making these mistakes and land in the survive and succeed category. And, as always, leave your own story and/or comments. Listen Live! Download, Too!


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