When the U.S. economy gets tough and big businesses shed employees, the tough may get going-right into setting up their own businesses. But launching a startup can be intimidating, particularly for first-time entrepreneurs.
For those weighing such a move, experts like Charles Goetz, a senior lecturer of organization and management and a distinguished lecturer in entrepreneurship at Emory University's Goizueta Business School, can provide valuable and timely advice.
Knowledge@Emory caught up with Goetz, a serial entrepreneur who literally wrote the book on the subject-The Great Entrepreneurial Divide: The Winning Tactics of Successful Entrepreneurs and Why Everyone Else Fails!-to talk about the dos and don'ts of startups, and why entrepreneurs may face additional challenges in this recession.
Knowledge@Emory: Hard statistics on entrepreneurship can be tough to find. In June 2009, the U.S. Census Bureau reported that non-employer businesses or sole proprietorships grew by 4.5% to about 21.7 million. But that kind of government data typically lags, and in fact, it reflected the 2007 numbers. Are you seeing a continued uptick in the number of people considering launching their own enterprises?
Goetz: Yes. Today's high-tech, global economy means that knowledge is more important than ever, but despite that, a significant number of people are graduating with few job prospects, or they've been working and have lost their jobs to downsizing and cost-cutting. So interest in entrepreneurship is growing.
Knowledge@Emory: Based on your observations and research, what is the toughest psychological obstacle a first-time entrepreneur faces?
Goetz: It's the realization that you're now responsible for the whole business. Often, someone who has worked for an employer has become a sort of specialist. They may have been responsible for sales, or for a finance or accounting function, but suddenly they're responsible for marketing and finding sales leads, following through with them, maintaining the books and records, paying office rent (unless they're working from home), and stocking inventory and office supplies. They have to become a jack-of-all-trades.
Knowledge@Emory: What about making the transition from employee to entrepreneur? Can that be challenging?
Goetz: Definitely, and if it's not addressed upfront in a proper way, that issue could sink the new business.
Goetz: It goes back to the psychological outlook. To be a successful entrepreneur, you have to be passionate about the enterprise. If you see it as just a job, you'll never put in the time and effort needed to succeed. For example, it's not unusual for a person who's between jobs to become a consultant and to take on different assignments. Is a person like this really an entrepreneur? They could be, if they build up a stable of clients and are always on the lookout for the next assignment. But often, they're just treading water and filling in with consulting assignments until they can land a full-time position with a company and go back to being an employee. Some people just aren't comfortable with running a business.
Knowledge@Emory: Let's say a person clears the psychological hurdles and starts up a service or business that doesn't have high financial or other barriers to entry. At that point, what's the toughest issue ahead?
Goetz: The issue is simple-getting your first clients-but the solution is not so easy. The old thinking, build it and they will come, just doesn't work anymore. You have to figure out a way to market your business and convince people to deal with you. If you can't do that, your new business will never get off the ground.
Knowledge@Emory: What is the best way to start building a client base?
Goetz: Each situation is different, so it's difficult to generalize. But I can say that if you already have business relationships in place, perhaps through personal contacts or through your old job, that can very valuable. People like to deal with a known quantity, so you may be able to leverage your existing relationships.
Knowledge@Emory: When should an entrepreneur start the client-prospecting planning process? If you start talking it up before actually establishing a business, will you lose credibility with potential customers?
Goetz: The learning curve can be lengthy, so it's generally better to start sooner instead of later. But sometimes people devote too much time to the planning process and not enough time going out and doing something. Starting up a company involves risk, and it can't be totally eliminated, regardless of how much planning you engage in.
Knowledge@Emory: Any additional challenges you'd like to mention?
Goetz: Pricing is a big concern. In a startup, people tend to underprice their services, and once customers get used to a price point, it can take a long time to move it up.
Knowledge@Emory: What are some of the relevant factors in determining pricing?
Goetz: Your cost and your competition need to be investigated. On the cost side, consider alternate suppliers that may be able to offer a better deal, and when it comes to competitors, don't just look at your direct competition. Consider the range of choices your customer base may have. If you sell a product, for example, can a customer substitute a different kind of product that will deliver the same level of satisfaction? Reputation may also matter. A well known competitor may be able to charge a higher price because customers know they've got recourse if something goes wrong. One way around this-especially if you're selling goods-may be to partner with a name manufacturer that will back up the product with its own warranty. This way, prospective customers don't have to worry about whether you'll be around to stand behind the purchase.
Knowledge@Emory: What are some of the pitfalls would-be entrepreneurs need to be aware of?
Goetz: One of the most common traps involves establishing revenue projections based on top-down budgeting. That's where a startup assumes a certain level of sales based on capturing an assumed percentage of the estimated market. So let's say the market for widgets is $100 million a year, and the entrepreneur thinks, Well, if I get only one percent of that, I've got $1 million a year in sales, then develops the entire business plan around those assumptions. The problem is in assuming you'll capture a certain percentage of the market. In fact, you may not get anywhere near one percent, and your projections may all tumble down like a house of cards that has had the bottom row yanked out from under it.
Knowledge@Emory: What's the alternative?
Goetz: Bottom-up budgeting. First you identify your target market, research it thoroughly, and build up realistic sales projections based on analysis, not gut feelings. It takes a lot more effort, but it also improves your chances of success.
Knowledge@Emory: Let's say you've identified a target market, engaged in realistic budgeting, determined your pricing structure, and were able to close on some sales. What challenges remain?
Goetz: We already talked about how tough it can be to close a sale, but beyond that, many entrepreneurs don't realize how tough it can be to actually collect payment after the sale has been closed. At one time, you could reasonably expect to get your money within 30 days after delivering the goods or services, but now 60- or even 90-day collection cycles aren't unusual. The problem is that the longer you wait, the more chance your customer could go bankrupt and leave you with a worthless receivable.
Knowledge@Emory: What steps do you suggest to reduce the risk?
Goetz: One way is to set up a merchant account and have your customers pay by credit card. That way you're guaranteed payment, but you will incur fees. The other way is to investigate your customer before making a sale. Get a D&B or other credit check first. It's not a guarantee, but it may reveal red flags. Also, you can require a hefty up-front payment before delivering your goods or services. And if you're rendering a construction or other service that will run for multiple weeks or other cycles, you can bill and collect on a progress basis. If the client falls behind in his or her payments, you stop work on the goods or services being delivered. It gives you added leverage.
Knowledge@Emory: Besides starting multiple businesses, you also teach courses in entrepreneurship. What kinds of questions are you fielding in the classroom?
Goetz: More people are asking me if it's a good time to start a business, given the credit problems and the uncertain economy. I'm telling them that much of what we're seeing now is likely going to be the new normal and that in fact, it can be a good time to launch a business. Valuations are down, so it may be cheaper to acquire assets, and the relatively high unemployment rate means there's a lot of professional talent available you can hire or otherwise tap into at competitive rates. But besides understanding the mechanics and economics of business, you have to understand the psychology and methodology of the entrepreneur as well as his or her customer, and how to create, service, price and market your product or service. It's not easy.
Knowledge@Emory: Given the risks, is it perhaps safer to remain an employee, rather than become an entrepreneur?
Goetz: At one time, IBM, GM, AT&T and other conglomerates basically offered lifetime employment. But that kind of social contract has since ended and there are really no guarantees today. If you trust yourself, have good judgment, and stay focused and committed to your enterprise, you may be able to succeed as an entrepreneur. If not, then you may be better off being an employee who can deliver value added to your employer. But either way, there are no guarantees.