NOW IS THE TIME TO FORM YOUR STARTUP
Jim Hansell
Published by Jim Hansell at Smashwords
Copyright 2011 Jim Hansell
ISBN 978-0-9770161-2-9
Smashwords Edition, License Notes
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Table of Contents
Chapter 1 Startups and the Government
Chapter 2 Sources of Startup Funding
Chapter 3 Do it Yourself: Moneysaving Tips and Tools
Chapter 4 Some Startup Pitfalls
Chapter 5 Acquiring Entrepreneurial Education and Skills
Chapter 6 What Does it Take? The Startup Entrepreneur's Recipe for Success
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Preface
Why do so many people want to start companies in the United States under our economic model? Because the emotional and financial rewards for growing an enterprise can be enormous. Being an owner of a small, well-run business can provide a pride of accomplishment that is difficult to measure, and the value created as a profitable company grows, and the knowledge that the founder has the skills to do it again (and again), afford a level of security that cannot be duplicated.
I have written this booklet because I sense that while more and more people are interested in starting their own companies, information about what it takes to make small entities successful as presented in business schools and the media is seriously flawed. Management of small business is a very high-skill activity and not well understood or properly taught in our business schools.
As a small business manager, I have successfully grown a number of startups, micro businesses, and turnarounds since leaving public accounting in the late 1960s. I have used my education, training and skills to create growth and value in many little businesses by obtaining capital and providing effective, hands-on leadership for them. Although many of the companies were technology- and software-based, some were not. While some of the companies had venture capital investments from some of the most recognizable names in the industry (Tom Perkins, Don Lucas, and many more), a number had little or no venture capital investment, and I had to be creative in obtaining funds for growth. And when company growth and market conditions were right, I managed IPO and secondary public sales of stock, although I also raised substantial funds through bond sales and other debt. I never sold stock to the public in order to leave a company - I did it primarily to raise capital for future growth.
Since I have been involved with startups and turnarounds for so long, I have become particularly adept at keeping unprofitable companies alive with minimal cash while new products and services are developed. Time and time again, I have reduced large amounts of debt to give strapped companies extended life - and now debt reduction seems to be a hallmark of my experience and skill.
In my opinion, business schools and the media give too much emphasis to venture capital and the idea of start up and get out. Success stories in startup magazines and newspapers seem to thrive on young, serial entrepreneurs, their ability to effortlessly raise venture capital, and the amount of money they make in short periods of time - before they are on to their next creation. Management skills, time and patience do not seem important to these managers, who seemingly have little interest in building a solid company that will provide for its owners and employees for many years. When seed funding comes from venture capital, the entrepreneur will never have control of a company; and the interest of the board will always be for the fastest possible growth and sale of the company. In these circumstances, where founders own less than 50% of a startup, management only serves to promulgate the concept for the business. Startup managements are often and easily changed.
In the following pages I have set the framework for why the United States is such a popular place to create an enterprise and described important new ways to obtain small amounts of seed and expansion capital from non-venture capital sources, management concepts and actions that should be followed in an emerging or developmental company when there is no venture capital, the managerial skills that must be acquired and where they are found, tips about how to extend the use of limited capital, and the mindset needed to profitably run a micro business.
Because of our economy's long recession, the federal government's slow recognition that new businesses are the best solution to their revenue problems, and the likelihood that a great new source of financing for startups will soon be available for any new or emerging business, this is a unique time to start a well-thought-out, innovative new enterprise.
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Prologue
The United States is a capitalistic society.
Before starting a business, an entrepreneur should have a clear understanding of the most basic mission of all new companies. The United States operates under a capitalistic economic system. While there is no consensus on a precise definition of Capitalism, most people accept that under Capitalism, means of production are privately owned and operated for private profit and profit is distributed to the owners. The capitalistic system is the world's most dominant form of economic model. Under this system, owners are the key stakeholders in businesses. Conversely, under Capitalism, governments primarily perform regulatory activities, look to businesses formed to provide basically all goods and most services, and generally do not compete against owners. In the United States, the government does not have a way to earn money. The funds the U.S. government receives come primarily from taxes, and taxes result almost completely from jobs created by businesses. Countries around the world have come to realize that businesses are key to the health of nations and the success of governments.
Most owners intend to make money from their companies to ensure the survival of the entity; therefore their businesses are termed "for profit" enterprises. While there are nonprofit enterprises, they are not discussed in this book and do not use startup models followed by entrepreneurs seeking to create wealth and value. As businesses grow, they acquire goods and services from vendors and hire employees to perform and manage the functions of the companies. Governments tax the earnings of employees as well as the profits of businesses to obtain the majority of funds they need to function. Therefore, in addition to the owners who own businesses for the purpose of making profits for themselves, vendors, customers, employees, and various levels of government also have an interest in the success of companies. While these five groups have a stake in the success of companies, many people in the media and in government are confused about the primary role of a business as it relates to these five groups. The primary role of a business is simply to make money for its owners. Conversely, it is not the primary role of a business to hire people so they can have a job and earn wages; it is not the primary role of a business to provide health care or retirement so its employees will have a comfortable life; and it is not the primary role of a business to hire people so their earnings can be taxed to provide money to the government. Businesses will hire people, pay competitive wages, and provide a variety of benefits only if these activities contribute to increasing the profitability and growth of the company.
Under this economic model businesses require capital. This booklet deals with raising and conserving capital, as well as the unique small business skills needed to successfully manage startups.
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Chapter 1
Startups and the Government
Sports figures, movie stars, television personalities and even politicians get constant coverage from the media, and their actions are closely followed by an envious and adoring public. Their celebrity provides them with a lifestyle that is free from many of the worries that most of us deal with, and their fame often provides them the platform to tell and show the rest of us what is allegedly good for us, our country, and even the world. However, aside from the entertainment value of their crafts and activities, these folks (including politicians) do little to actually better the lives of the average citizen. And there seems to be no end to the trouble they can cause.
Instead of these celebrities, the real heroes of our society are the entrepreneurs who start the businesses that provide the jobs that give Americans the highest standard of living in the world and provide the basis for the personal and corporate taxes that fuel the services mandated by our government. These risk takers usually struggle against overwhelming odds to make their dreams successful, and if their companies fail, they are often saddled with debt that can affect their lives for years and in some cases force them into bankruptcy. So why are so many people interested in taking such a large risk? And why do so many people come to the United States to follow this dream? And yet, why are so many people denied the opportunity to try their plan? The answers have to do with the perception that capital is widely available in the United States for innovative business ideas. Unfortunately, this capital has not been available to many.
Businesses are critically important to the wellbeing of our country because the jobs they create provide the earnings for their employees that are the lifeblood of our society. Income taxes paid by individuals provide about 45% of the federal government's income, income taxes paid by corporations provide roughly another 14% of the federal government's income, and social security taxes provide about 36% of the federal government's income. The remainder, only approximately 5% of the federal government's income, comes from non-payroll related sources. These numbers show why a high unemployment rate is so devastating for the United States and its citizens. When conditions arise that cause businesses to contract and fail, rather than directing staggering amounts of money to large businesses that are fully staffed, the federal government and the states should create an environment of support and encouragement for startup entrepreneurs, since they are the real source of new jobs.
The most important economic citizens in a capitalistic society are business owners, and in particular owners that create new businesses. Small businesses are the bedrock of our society, and the entrepreneurs that create small businesses are special, high risk investors/operators who should be encouraged and protected, although they seldom are. Approximately 25 million small businesses in the United States historically have provided half of the U.S. employment and approximately 75% of new jobs. Recently I read that at present nearly all new jobs in the U.S. are created by firms less than five years old. In spite of these compelling statistics, little help or encouragement is available for the thousands of people who would like to start their own businesses. According to the Bureau of Labor Statistics, unemployed workers increased from 7.078 million in 2007 to 14.825 million in 2010. Without different thinking about startups in Washington D. C. as well as in all states, it will probably be many years before the country sees an unemployment rate as low as it was in 2007. Not enough people are working to provide the revenues the various levels of government have become accustomed to receiving.
Even though the statistics related to the source of new jobs from new companies is well known, state and federal governments invariably try to coax existing companies into hiring additional employees they don't need by offering a payroll tax credit for new hires. This type of plan is attractive only to companies that need new employees to meet increasing demand for their products and services, and these companies will hire new employees even without the tax credits. Companies that are fully staffed will never put on new employees simply for a small payroll tax credit. Unfortunately, these same programs are advocated every time unemployment rates rise, and they never work. Employment programs designed by the government to get businesses to hire people they don't need cannot work for the simple reason that small businesses are very fragile and cannot carry costs that do not contribute to earnings. To hire an employee simply to get a tax benefit would mean that the owner would soon have to discharge that person, since there would be no ongoing benefit for carrying that person on the payroll.
These governmental programs emanate from the thinking of economists with a macro view of just about everything, even about the workings of individual businesses. The broad views of economists have no place in business management. All businesses, and especially small businesses, can be successfully managed only when attention is given to the minutest details of each business transaction and operation, because any such business operation must ultimately produce income. The required activities to manage a small business are not well understood by state and federal governments. As a result, the governmental business stimulation programs put together by economists and governmental employees to increase employment do not create jobs. Although most people in government have never had a job in business, these are the very people assigned the responsibility of creating jobs.
Further, it seems that most high-level government policy setters are attorneys. Attorneys are attorneys, not business people. Few people in government have business backgrounds, and those that do generally come from highly visible businesses, which almost always means they come from big companies. Big businesses and small businesses are as different as day and night. Because of a lack of knowledge about what it takes to run small businesses, government programs to increase employment are invariably targeted toward giant companies. Despite agencies like the Small Business Administration - which actually does very little to help small businesses - the federal, state, and local governments that benefit most from businesses and their employees basically have no meaningful programs to get new businesses up and running, although they readily assess fees, taxes, performance requirements, and reporting obligations that contribute to the mortality rate of approximately 50% suffered by startups within their first five years. With such evident cause-and-effect, it is difficult to understand why the various levels of government do so little to kick-start this solution to their revenue problems.
Interestingly, a new concept for financing startups is developing on the Internet, which holds the promise of providing capital and loans for the creation of more new businesses than all the venture capital seed financings over the last forty years. This new type of funding is an offshoot of the micro-lending developed for the poorest of the third world countries and is described in the next chapter.
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Chapter 2
Sources of Startup Funding
The most important aspect of any startup is obtaining adequate working capital to make sure a concept can be brought to fruition. Micro-funding is developing as a new way for some startups to obtain seed funding.
Two elements are critical to starting a business: first, the idea that makes the business unique in some way, and second, the financing that enables the idea to develop to the point where the company is self-sustaining. Most entrepreneurs think that the business idea or purpose is the most important aspect of their plan; however, without working capital great ideas cannot become successful. There has never been a shortage of unique ideas for new businesses, but there also has never been adequate financing available to get most of these new companies started. Venture capital up until now has been available only to relatively few startups, and seed financings from venture capital firms are trending down each year. The few new startups that do receive funding are located mainly in Northern California. It has never been available to the majority of entrepreneurs outside of Silicon Valley. Now, through the Internet, new sources of loans and capital are becoming available to practically anyone who has an attractive plan. While these micro-funding web sites do not provide the massive amounts of money of the traditional venture capital funds, they are a potential source of capital for non-high-tech companies where none existed previously.