Publisher: U.S. News & World Report
The perils and pitfalls are many, but the timing is good.
Mary Kittrelle never expected to start her own business. An M.B.A. student at the University of California Los Angeles in 1998 during the dot-com boom, Kittrelle watched as classmate after classmate chased new ideas and made pitches to venture capitalists. "I had never really thought of something I would be that passionate about," says Kittrelle, who lives in Hermosa Beach, California.
That changed two years ago, when Kittrelle started feeling restless at her job as a corporate finance manager. Always jumping from one assignment to another, she wanted instead to manage her own division. But her job search yielded few results, and she began to contemplate life as a business owner. An amateur wine connoisseur, Kittrelle had noticed enrollment in local wine education classes soar. At one session, "the place was sold out in the first five minutes, and there really wasn't any atmosphere," Kittrelle recalls. "I said, 'This is incredible. There is a huge demand.' "So last July, she handed in her two weeks' notice and began sketching out plans for an upscale wine bar, showcasing the works of local artists, in downtown Long Beach, Calif. She plans to open her doors this fall.
Even though the small business failure rate is daunting, this is an opportune moment for Kittrelle and other budding entrepreneurs. Low interest rates and a still soft job market have made capital and employees available at affordable rates. Credit is in ample supply, and banks are looking to lend. Factor in strong consumer and government spending and a pent up demand for new wares by companies, and the picture becomes even more attractive. "I can't imagine a better time, from a broader economic perspective, to start a small business," says Mark Zandi, chief economist of Economy.com. He also points to strengthening sales figures across most industries as another reason to hang out a shingle now: Competition is less tight as many established firms have all the business they can handle.
Despite the rosy outlook, most new firms will never make it from the drawing board to the real world. According to a study by the Ewing Marion Kauffman foundation, a center for entrepreneurial research based in Kansas City, Mo., at any given time approximately 10 million Americans are attempting to start their own businesses. Yet only a third of these individuals will actually open one. And a 2002 Small Business Administration study found that while survival rate for small business are not as dismal as folklore suggests, only 66 percent of new firms with employees will weather the first two years or more. After six years, only 40 percent are still in operation.
But there are ways to improve your odds. The trick can be as simple as doing your homework: researching possible locations where your business is sure to thrive, building a network of experts to tap for advice and support, securing the necessary funding (story, Page 67), or getting the relevant education or experience. "If you are going to drive on a long trip, you would want to have a map. You would want to check and see where the construction zones are," says Christine Pigsley, who counsels small business owners at Women Venture in St. Paul, Minn. "It's the same thing with business."
The first roadblock many entrepreneurs face is coming up with and idea. For the truly stumped, a franchise may offer the perfect solution (story, Page 69). But there is certainly no lack of other places to look for inspiration. Most people believe that all entrepreneurs follow the same path when launching a business: Start with and idea, line up financing, market the product, find a client, and make a sale. That simply is not true, says Clemson University entrepreneurship Prof. William Gartner, who is tracking a random sample of 1,261 nascent entrepreneurs from 1998 onward. So far, results of the study reveal that there is no perfect formula to a new business. Many outfits begin with a client's offer to purchase a product or service, like a freelance assignment to design a website or a short term consulting gig, and grow from there. Some entrepreneurs are prompted by a new discovery or invention. In other instances, the catalyst may be accidental.
Take Claudia Mirza. Three years ago, the Colombian immigrant attended a corporate seminar on horse care in San Antonio to pick up class materials for her father, a ranch worker who spoke little English. The Spanish language handout "was so poorly written," Mirza recalls, "The Hispanics had difficulty understanding the material." Sensing an opportunity, Mirza, now 29, offered to rewrite the pamphlet for free. Pleased with the results, the firm soon referred paying customers to Mirza.
Still, Mirza tested the waters by volunteering her services for a few months until demand skyrocketed. Her Spanish language translation al consulting firm, Akorby, now boasts four full time employees. "I saw the growing need," she says. "It was selling like hot cakes." Mirza recently expanded her operation and now provides Spanish speaking temporary staffers to businesses. Sales are estimated to reach almost $300,000 this year, far surpassing last year's $50,000.
Putting pencil to paper may be the best way to scope out the prospects of your dream. Literally writing a plan, say experts, can help an entrepreneur identify promising areas and possible perils and pitfalls. "Many clients come to us thinking they need a business plan because the bank or the lender wants one," says Carl Trautmann of St. Louis, a 17 year volunteer with SCORE, a nationwide nonprofit counseling service that provides free small business expertise. "The real value of a business plan is to think ahead to what you need to do." That's what happened with a recent client of Trautmann's. The would be entrepreneur realized that she needed to obtain additional permits as she fine tuned her plan to open a restaurant.
Fortunately there is no shortage of organizations dedicated to walking newbies through the start up maze. What's more, many services are provided at no cost. SCORE (www.score.org), for example, runs a free mentoring program, linking retired business professionals with fresh faced entrepreneurs. The Small Business administration (www.sba.gov) offers similar services, as well as financial planning and counseling assistance. And with SBA centers and SCORE volunteers located all over the country, help may be just around the corner. You can also touch base with your local chamber of commerce, which typically helps aspirants by sponsoring seminars and events with prominent business leaders.
One of the most important decisions in opening a new business, of course, is the choice of real estate. "The realtor's chant of location, location is not wrong." Says Bruce Phillips, a senior economist with the national Federation of Independent Business, an advocacy group in Washington, D.C. "It can make the difference between success or failure." Indeed, since many small shops cater to a local clientele, regional variations like population density or climate can explain why an ice cream shop in California flourishes, while a similar store in Alaska may fail.
Zandi also notes that while he sees promise in the overall economic climate for entrepreneurs, the economy still remains shaky in some parts of the country. In areas of the United States yet to show solid growth, for example, new store owners may struggle to close a sale. "If you are selling to consumers and households in Ohio, Indiana, or Michigan, it's going to be harder than if you are selling in Texas and Florida, says Zandi.
Geography made all the difference when Arthur "Bud" Jones, 37, together with friends Brian Alford, 38, and Ryan Giles, 27, launched AGJ Systems & Networks, an information technology consulting business, in 2002. While Jones's former colleagues at an IT firm in Atlanta faced a wave of layoffs and a shrinking tech sector, AGJ saw its customer base increase from tow to 100 clients by the end of the year. The secret? Jones and his partners had relocated to Biloxi, Miss., where a booming casino and gambling industry had kept the local economy afloat. Jones, who grew up in the Gulf Coast city, had always wanted to return home to start a company, and the move proved serendipitous, thanks to the dearth of senior IT consultants in the area.
Not all infant entrepreneurs are so lucky. Many face stiff competition or find that another business has beaten them to the punch. But a bit of reconnaissance can help you get a toehold. First, pinpoint potential clients and suppliers as well s competitors. Sometimes, the best approach is to stand out from the crowd. Raymond Jones, for example, who launched a candle making business last year in Florida, knew the market would be tough to crack. But the 59 year old former chemist experimented with candle designs until he hit on one with few look alikes: a see through model made with gel, not wax. There local stores currently sell his candles, and he plans to diversify his line next year.
The same rules apply to those eyeing the Internet as the ideal storefront. Cyberspace is an attractive venue, as it is relatively inexpensive to sell your wares via an online auction site like eBay or your own website. What's more, the internet boasts a noticeably larger market. "We don't have the 300 cars driving by our business every day as you do in a metropolitan area," says Judy Wilhelm, director of the Texas Tech Small Business Development center in Abilene, Texas.
But the Internet is not a panacea for small businesses. Raymond Jones, who plans to create a website to sell his candles this fall, has already discovered a plethora of competitors. West Texas Pepper Traders, a purveyor of jalapeno foodstuffs, sells online to reach beyond its Abilene borders. Scott Bridges, 41 and co-founder of the firm, says sales were sluggish at first, although online purchases now account for 30 percent of revenues. Since Bridges doesn't advertise his website, most of his online sales are generated by locals who give jars of the company's signature product, the Original Bread 'N Butter Jalapeno, to out of state friends.
Between scouting for the perfect location and researching the competition, some potential business owners may get discouraged. "Many people that we counsel, when going through this, gibe up and say, 'I don't think I can do this,'" says Trautmann. That may not be a bad thing. Some hopeful entrepreneurs may benefit from waiting a while, working for other companies, or going to school, before going into business for themselves. Studies have found that factors like having a college degree, employing a staff, or previously owning another business can increase the chance that a new venture will survive. On the flip side, firms run by relatively young or inexperienced individuals show a higher rate of closure.
Stanley Brown of Stone Mountain, Georgia credits his prior work experience for helping him build a successful company. A banker, Brown, 41, put his dream of opening a virtual debt collection agency on hold while he learned the trade in the debt collection division of a large corporation. He was able to draw on former colleagues for advice on such things as necessary infrastructure, and he developed a client pool from the contracts made during the course of his career.
It's called networking, and no one can benefit from it more than a novice entrepreneur. The local chamber of commerce and the SBA can put a new business owner in touch with a roster of contacts who can help dig up clients and refine ideas and strategies. "In terms of stimulating creativity, you want to cover all bases," says Martin Ruef, an associate professor of sociology at Princeton University. "Talk to complete strangers; talk to some acquaintances that aren't related to each other; talk to family and friends." Ruef surveyed graduates of Stanford's business school between 1945 and 1998 who had started their own businesses and found that those with more diverse networks tended to be more innovative than those who never strayed from the same social groups.
A good network can also act as a support system. Though his New Mexico construction firm has passed the five year mark, Jesus Rudy Gonzalez, 36, relies on family and a close knit circle of other small business owners to help him brave the ups and downs of running a business. "If I have a problem on a contract, it's a lot easier to get help from my colleagues," he says. On his first perfect, building houses for the U.S. Army Corps of Engineers in a remote area of the state, Gonzalez couldn't find a concrete supplier. Gonzalez, worried about his mounting debts, ran into an acquaintance he had met through the SBA program. The man sold Gonzalez the concrete and "ended up saving my company," Gonzalez recalls. But Gonzalez was still forced to sell his home to finance the rest of the project. Today, he helps others by sitting on the board of a minority business group.
For a small business owner, balancing friends and family with the demands of a company isn't easy. "Many times the people around you have a rose colored glasses idea of what selfemployment is," says Pigsley, who used to run a women's clothing store and men's tuxedo shop out of her home. They think: "It's the person who takes a three hour lunch and can choose her own hours as she wants." That can make operating a business difficult. Pigsley found that friends would often drop by her home, asking her to grab a cup of coffee or see a movie in the middle of the day. She quickly learned to decline the offers.
In the end, the best preparation for newbies may be a healthy dose of realism about their chances of success and their new lifestyle. For many business owners, the lines between their personal and professional life will blur. "I find that I'm always thinking of the business, but I'm not always working on the business," says Marge Johnson, who heads an antique home restoration firm in suburban Chicago. Johnson, who sold her first company and accounting firm in 2001, sets more boundaries now so that she isn't working 24-7. "There are times when you should be working for you." She says.