Tag: startups

The Entrepreneurial Push

Why do people start startups? To solve a problem or fill a need?  To be their own boss?  To escape the 9-5?   To make gobs of money? The answer is different for everyone, but its probably a combination of a few of these factors.  Lots of people I talk to have great ideas, but don’t end up taking the next step even though they would like to make money, be their own boss and escape their 9-5 job.  How come?

I’ve been talking with other entrepreneurs and doing a bunch of thinking about this question for the past few months, but had not completely put it into words until I read  Paul Graham‘s latest post about why he started Y Combinator, an innovative investment fund that gives techies mentoring, an office and small amounts of funding in exchange for small pieces of equity.

The most common reasons for people not starting their own companies are that they think it will be harder than it actually is, they are risk averse or are worried about capital.  For some people, these are real reasons not to start a business, but for many people who have good ideas, they are more excuses and rationalizations than reasons.  They simply do not know where to start or how to move forward with their plans.

This is not a personal failing on the part of people with good ideas who have not moved forward yet.  It is a failing of high schools and colleges for not teaching them the necessary skills and punishing creativity.  It is the failing of entrepreneurs who have been successful for not showing others the entrepreneurial process and its the failing of a society that makes entrepreneurship seem much more dangerous, risky and hard to do than it really is.  Potential entrepreneurs have to get past objections from family and friends who ask things like “why don’t you work for a real company ” or my personal favorite  “when are you going to get a real job.”

This isn’t to say that starting a company is easy and that everyone should do it.  It’s not easy and some people aren’t cut out to be entrepreneurs.  It takes hard work, perseverance and the ability to motivate yourself even when you run into obstacles, but it’s not as hard as people think.  Here is why Paul Graham started Y Combinator:

The real reason we started Y Combinator is one probably only a hacker would understand. We did it because it seems such a great hack. There are thousands of smart people who could start companies and don’t, and with a relatively small amount of force applied at just the right place, we can spring on the world a stream of new startups that might otherwise not have existed.

In a way this is virtuous, because I think startups are a good thing. But really what motivates us is the completely amoral desire that would motivate any hacker who looked at some complex device and realized that with a tiny tweak he could make it run more efficiently. In this case, the device is the world’s economy, which fortunately happens to be open source.

That “relatively small amount of force applied at just the right place” Graham writes about is the Entrepreneurial Push.

I have been trying to give the Entrepreneurial Push to as many people as possible, without having a name for it.  I think it’s important for people who have started companies to share their experiences with others to set an example that it can be done.  I try to use my blog and consultancy to show people that you can be an entrepreneur without a business degree, tons of startup cash and a team in place.  Whenever someone comes to me with an idea for a business, I try to encourage them to start going down the startup path because once they start to write their business plan, they are much more likely to actually start.

While we all don’t have the wealth of resources (time, money and experience) that Paul Graham and Y Combinator have, I think that entrepreneurs should go out of their way to give as many people the Entrepreneurial Push.   I started Capital Entrepreneurs, a network of young, Madison-based Entrepreneurs, partially in hopes that the group would influence more UW students to start companies while  in school or see it as a viable option after graduation.

What should entrepreneurs do to give others the entrepreneurial push that they need to get started?  Here’s a short list of ideas, but please comment with any other ideas or strategies that you have.

  • Advocate for entrepreneurship to make small business and startups more visible in other places besides California and Boston.
  • Give back by helping others who are just starting out to eliminate the “cloud of apprehension” surrounding entrepreneurship.
  • Join local entrepreneur clubs.
  • Speak in high school and college classes.

These small entrepreneurial pushes help smart people who are thinking about start their own companies actually start. They could create amazing companies that could change their lives or even the world.

Note: If you are an entrepreneur in Madison and are interested in joining Capital Entrepreneurs, shoot me an email.

The 40 People Who Can Change Your Life

The 40 people who can change your life are, after your family and friends, the most important people in your life.

I first learned about the 40 important people who can change your life from Roy Elkins, the found of Broadjam.com and member of my MERLIN Mentor Team here in Madison.  The concept is simple, but very powerful.  Make a list of the 40 people who are likely to be able to change your life, either through business connections, investment, job opportunities or simply being there for you to help you get past a road block in your business plan.  Once every 4 months, email your 40 important people who can change your life and let them know what you are up to.  The goal is to keep the 40 people who can change your life up to date on what you are doing so that when you do need to ask for advice, money or other help, they will not only remember you, but know what you are doing.  Its much more likely that someone will be willing to respond to your request when you need it if they are familiar with you.

I just started doing this a few months ago and have already seen the results.  I set up a rotation so that I am always emailing 10 different people each month so that I always have someone different to connect with.  Its been a great way to stay connected with the people who might be able to help me out down the road and its been fun.  Many of these people have responded with articles or suggestions relating to my businesses that have been incredibly helpful.

I like the concept so much that I just started my own list of family and friends who I want to stay in contact with on a more regular basis.  I want to make sure that I stay up to date with friends from college who have moved away and my extended family who I probably only see a few times a year.

Try both of these ideas and see how it works for you.  I think both the 40 people who can change your life and a friends and family list are a great idea for anyone, but especially people who are interested in business.  Do you already do anything similar to this?  Do you think you will try it out?

How to Get Taken Seriously Running A Startup When You’re Under 25

Of all the lessons I learned running a startup, figuring out how to deal with people who did not take us seriously solely because of our age might have been the most important.  Many times, I could tell that the person on the other end of the telephone or across the desk was thinking “who are these kids and why are they talking to me?”  It was obvious that being young hurt our credibility before we even said a word.  We were confident in our idea and business plan and were  usually able to get past any initial credibility issues, but it was a definite obstacle.  In general, other entrepreneurs, VCs and angels were more likely to take us seriously from the start, compared to professionals or employees of other companies.  After a few shaky meetings and calls, we asked for advice from our lawyer and other successful entrepreneurs who had been through the same process.

We realized that many people who were older than us had an image of young people in their heads that was hard to break.  Many older people thought that young people were lazy, lacked direction and would not follow through on a project.  From the beginning, we always were professional, well dressed, on time and prepared, but we realized we had to overcompensate if we wanted to get through to people more quickly. Here’s what worked for us:

  • Do Your Research – We spent hours researching any possible question someone might have so that we would never be surprised.
  • Cut the Humor – In most cases, older people equate younger people with fooling around and not being serious.  Many times, jokes hurt your credibility
  • Schedule Morning Meetings – Many people were surprised when we would ask for meetings from 7-9am, as it shattered the mold of young people sleeping in.
  • Be Persistent – If you want a meeting, keep calling and leave professional messages.  You will be rewarded for your efforts.
  • Articulate Your Goals – We sent short lists of what we wanted to cover during meetings or calls the day before, as it put the person in a serious frame of mind.
  • Talk Less, Listen More – Young people are stereotyped as know-it-alls.  Talk less and listen more and people will take you more seriously.

While most of these are common sense and can be used with any audience whether they are younger or older, its important to remember your audience.  We used these strategies and success followed.  Have you ever not been taken seriously because of your age?  Do you agree that its necessary to overcompensate for youth for specific audiences?   What other strategies have you used?

FICA Tax Holiday Will Allow More Businesses To Succeed

Note: This is the second in a series of posts about policy changes that make starting a business easier.  The first post on heath care is here.

According to the US Department of Labor, there are a little over 1 million new businesses created in the US each year.   The popular misconception is that 90% fail within five years.  Although real data only show that at least 25% fail within the first year and at least 44% fail within the first three, that percentage is still very high.  Looking at real numbers, over 250,000 firms go out of business within one year.

Businesses fail for many reasons.  The market may change or a competitor could enter the market.  It could be a bad business idea.  The founder might decide to do something else or not have the time or make the necessary committment.  The business may have poor access to credit or funding.  Margins could be too small or the owner cannot make enough to live comfortably. 

Most startups are taxed by FICA (Social Security and Medicade) at a 15% rate on any net profit they earn.  FICA taxes cost small businesses and startups over 15% of net profits, as business owners have to pay both the employer and employee sides of the contribution.  Unlike the progressive income tax, FICA taxes start at $400 of income and end at a little over $100,000, making FICA a very regressive tax.

The 15% FICA contribution is a huge obstacle for new businesses.  For example, take a person who starts a dry cleaning business that makes $30,000 in net profits in year 1.  The founder has to make enough money to reinvest in the business and pay themselves a salary in order for them to stay in business.   The founder owes around $4,500 in FICA taxes.  Instead of taking home $30,000, less income taxes, the owner takes home $25,500.  For many people, $4,500 can be the difference between keeping the business open for year 2 or closing the business.  The same thing can happen to tech startups, too.  Many small businesses and startups need that little extra push to get them over the hump in the first three years.

I propose a FICA tax holiday for new businesses.  Here’s how it would work:

For the first two years, new businesses do not have to pay FICA taxes.  Instead, their FICA tax liability is “banked” and becomes due in year three, assuming the business is still around.  If the business fails, the founder would not have to pay FICA, but if the business succeeded, the founder would have to pay the FICA taxes from years 1 and 2.  Going forward, the business would pay their taxes normally.  

This plan is very similar to what many professionals like lawyers, accountants and others do with startups that they work with.  For example, its common (at least in Madison) for lawyers to agree to withhold bills for a year or two, or until the company is profitable or raises money.  It allows the startup to worry about business operations and not drown under expenses during the startup period.  If the business becomes profitable, the lawyers get their fees in full, plus more fees in the future.  

FICA taxes would work the same way.  Imagine if instead of 25% of businesses failing in year 1, only 24% failed.  Considering Americans start over 1 million new businesses per year, a 1% drop in the failure rate would lead to 10,000 new businesses making it into year 2.  These businesses would continue to generate profits and create jobs, thereby strengthening the economy.  If more business succeed, the FICA taxes that the government could collect in year three would be greater than the current solution.

I think a plan like this is politically feasible, as it helps both tech startups and small businesses alike, especially with the need to for stimulus during the current recession.  I think it could have broad support from both sides of the aisle nationally, but it may be too big for Congress to act nationally.  It would be interesting if a state would offer a plan like this that offered rebates on FICA taxes for businesses located in the state.  It would be another incentive to get business to stay or move to the state that would not cost much.  I am hopeful that government will think about incentives like this plan to help entrepreneurs of all types succeed.