Getting Your Business Off The Ground
HOW SMALL BUSINESS CAN PRESEVERE IN TOUGH TIMES
Raymond Aker had a simple idea. The owner of a San Diego-based cleaning service operating in four cities saw that his customers were often asking for services he didn’t offer, such as carpet cleaning or large-scale window washing. He knew that other companies offered some of these services. What if, instead of contacting multiple cleaners to find one that fit their needs, customers could go online and compare prices across competing cleaning services?
So in 2007, Aker started calling cleaning companies throughout the country to ask them to participate in his start-up website, bidmycleaning.com, where he would advertise their services for a commission. But in September 2008–just a month after the site launched–the financial industry unraveled. Although it didn’t have a dramatic impact on the number of customers signing up for services through the site, the market meltdown did spook some potential investors. “I had a few people looking to invest in August, and by November, it was ‘no way,'” he says.
Aker is one of many entrepreneurs who are trying to get their businesses off the ground in the midst of an economic storm. It turns out that the recessionary climate is having little negative impact on the rate of small–business creation. A slightly higher percentage of Americans started new businesses each month in 2008 than in 2007, according to an annual index published by the Kauffman Foundation, a small–business research and education group.
But just because the number of small–business start-ups isn’t dropping doesn’t mean their ability to turn a profit won’t. Kauffman’s index found that the increase in start-ups was only among companies operating in industries that tend to support low- and middle-income businesses, such as barbershops, car washes, and grocery stores. Companies considered to have middle-income potential include shoe stores, Internet service providers, and warehouses. Meanwhile, fewer businesses in industries such as software publishing, real estate, and auto sales–which tend to earn the most income–launched in 2008 than in 2007. So why might the recession be hitting the higher-income start-ups harder? A possibility is that businesses that are likely to make a lot of money need a lot of money to get going–and that cash is exactly what’s lacking in today’s economy. Small businesses across the board are having a hard time borrowing these days, according to the National Federation of Independent Business.
Bad economic times sometimes play a significant role in the evolution of budding entrepreneurs. Data from the Small Business Administration show that during the past two recessions, more small businesses with multiple employees started up than went out of business. During the bear market at the beginning of this decade, the number of one- person businesses increased from 16.9 million to 18.6 million, according to the SBA.
Why do recessions increase entrepreneurship? The saying goes that necessity is the mother of invention. As unemployment rises and jobs become harder to find, more people start their own businesses. Whether it’s a case of more free time or more motivation, people “have had the idea of being an entrepreneur in the back of their heads–and now they can do it,” says Chad Moutray, chief economist at the SBA’s Office of Advocacy.
Filling the vacuum. Molly Gordon, an author and business coach for self-employed professionals, says her business quadrupled from January to March, partly because of the increase in unemployed workers who are looking to start their own ventures. Sam Fischer is one of them. Even before his position as a vice president at a large software sales firm in Dallas was eliminated, Fischer had been thinking about breaking out on his own. His newly unemployed status presented an opportunity. “Everybody desires…to be in control of their destiny,” he says. Through his new business, Route To Market Partners, Fischer advises companies on how to construct sales networks. “I kind of look at this as a perfect storm,” he says. But the challenge, he adds, is persuading potential clients to sign on when many of them are tightening their budgets.
The need for large companies to cut back can create business opportunities for entrepreneurs. “In a recession, there are companies and individuals who may be trimming back their investments in higher-cost resources, who may be laying off internal staff,” says Gordon. With his consulting business, Fischer hopes to fill that void at a lower cost to companies hurt by the recession.
There’s no question that bootstrapping entrepreneurs are having a hard time building a customer base in this recession. Gordon says it’s not unusual for first-time entrepreneurs to go months without making a profit as they cultivate relationships that they hope will pay off later. Lean times can actually help entrepreneurs down the road, she says: “If you don’t have clients, you have time to develop content.”
A recession also can benefit entrepreneurs because it thins out the competition. “When the market goes down, that separates out people that were just chasing short-term opportunities,” says Pamela Slim, author of Escape From Cubicle Nation. And just as there’s less competition, there’s also less demand for many of the assets business owners use to expand their operations. A business owner who’s willing to make an investment, such as purchasing an existing business or website, may now be able to snatch it up at a lower price, since many cash-strapped entrepreneurs are looking to unload.
Just a year and a half ago, entrepreneur Jeff Bishop of southeastern New Hampshire was enjoying boom times. He used some cash generated from his first business–beaconequity.com, an online research provider focused on small-cap stocks–to start other online ventures. One was a leap into the world of instant messaging. Bishop headed up a team that created Reach Messaging, a sort of gossip forum designed to target generation Y. Currently, more than 1.5 million people use the service each month to chat about topics that include pop culture and fashion, he says.
Reach Messaging is just breaking even because of the sluggish advertising market. The lack of ad revenue has also thrown a wrench into Bishop’s plans to build new websites. Finding anyone willing to invest is the biggest challenge, he says: “When the market cratered, it didn’t necessarily mean investors are scared. They’re just more selective.” Fortunately, Bishop built up that cash reserve during the good years, which gave him enough money to buy a handful of existing websites, including an online trading site and a fantasy sports site. A huge advantage, he says, is that they’re already up and running and are drawing heavy traffic. Bishop is betting that when the economy finally turns around, these low-cost investments will take off. But for now, “we have to figure that things will not get better soon,” he says.
Winners and losers. Can low-income businesses, aided by cheap operational costs and thin competition, use an economic downturn to eventually become high-income businesses? “It’s quite possible that once we get through these times, your business could really take off,” says Rob Fairlie, author of the Kauffman index. But getting through these times is no easy feat, even for highly motivated entrepreneurs. Bishop admits that his work has become more stressful, despite his past success.
Many start-ups don’t make it through the hard times. Andy Lawrence, 27, had an idea for a business that would change the world of art collecting: applying the concept of fractional ownership to art. Lawrence left his job at a commercial supply company in Los Angeles in April 2008 to start Untitled Partners, which would sell shares of single art pieces to multiple collectors.
He and his business partner, Jordan Cooper, had a big advantage over many other first-time entrepreneurs: outside investors. Cooper had connections to venture capital that Untitled Partners was able to tap. Lawrence also benefited from good timing. If he had waited a few months, the funding would have been much more difficult to obtain. “Now, the capital environment is a completely different ballgame,” he says.
Even with venture capital, United Partners was not able to overcome a more significant problem: The recession was wiping out demand in the art market. Early this year, Lawrence began to fear that he couldn’t find enough clients. “The target customer no longer existed,” he says. Wall Street high rollers who would normally be interested in buying art aren’t spending as the financial crisis takes its toll on Manhattan. Lawrence realized that the business wouldn’t make money in the next few years, so he and Cooper are now returning half of the capital they acquired and shutting down the business. Lawrence is looking for a job. “Given how hard the fundraising is, there was more opportunity to do what I’m good at–leading a team–at an existing operation,” Lawrence says.
The challenge of finding capital is a serious one. Studies show that access to financial capital is the most important determinant of a business’s success by almost all metrics, says Fairlie. The good news for Aker, who started the cleaning-service website, was that he boosted his savings before start-up investors were scared off. “If we had been 60 days later, we probably would not have gotten half of the money we raised.”
Despite his cash reserves, Aker (as of April) doesn’t have the capital to expand bidmycleaning.com to new cities. “We should be in 30 cities, but we’re in four core markets–Houston, San Diego, Dallas, and L.A.,” he says. (Bidmycleaning.com offers services in other cities, but Aker considers these “soft runs,” because the providers there are not yet paying him for their participation.)
Aker had to cut spending in a few areas, such as customer service, sales staff, and promotions, and he has slowed the expansion of the site’s services. He also abandoned his plan to get venture capital funding by March 2009 when his contacts became wary of making new investments. So despite already having launched a business, Aker is in the same position as many first-time entrepreneurs. He and the other founding staff members are “making personal sacrifices,” he says, including keeping salaries down.
The current economy is creating both obstacles and opportunities for those dedicated enough to launch a business in the midst of a recession. Aker, for one, thinks the opportunities will win out and his start-up site will be better prepared for the post-recession economy. “You find out what you’re made of,” he says. “If you’re still happy to do it, then you’re doing the right thing.”
