Small business needs to be freed of excessive and punitive taxation and regulation. If you have an environment hostile to business, then there is no incentive to seek success.
If small businesses are successful, the economy benefits, America enjoys higher rates of employment, better conditions for workers and a better market for the consumer. But government has got to free it's grip first.
Most small businesses are taxed as individuals. In every case if you want to drive hypergrowth of our economy you ought to be considering a change from income taxation which punishes productive behavior to end use only consumption taxation, which taxes people only on the amount they choose to consume from our economy. The whooshing sound you would hear would be investment dollars and seed money pouring into the US to fund productive businesses that can now compete on price due to the removal of all or part of the embedded taxation inherent in the price of goods and services in an economy where income and/or value added activity is taxed.
The passion for entrepreneurship and innovation burn brightly, as always. Government just needs to get out of the way.
Small businesses pay ten times more proportionally than do large corporations to comply with regulations and tax codes, according to my friend Charles Wilson, a risk management consultant. If compliance costs a big company 1% of revenues, it costs us 10%. And that’s just doing the paperwork, not paying the taxes, fees, and premiums.
The time and money it takes a small business to deal with taxes (fed, state, payroll, local), insurance (health, liability, workers comp), employment compliance, etc. adds up to a sizable proportion of our annual hours. Every hour we’re answering a query from the IRS or the payroll tax people is an hour we’re not being productive, generating profits, creating jobs, providing products and services wanted by our clients.
All these government agencies pay lip service to the importance of small business as the engine of job creation and innovation in our economy, but their policies toward small business say just the opposite.
The cost: tax revenue lost on the profits we don’t earn, and payroll taxes on the jobs we don’t create. Multiply this by millions of small businesses, and I bet it’s a double-digit hit to the nation’s productivity.
While discussing the challenges of small business ownership with a friend and advisor, he equated the challenge of limited access to capital with starting a fire. He said, "To start a fire, you need two things: A spark and some wood. Unfortunately, in today's world, the higher value perception is placed on providing the wood."
The passion of U.S. innovation and entrepreneurship is not dead. It never even dimmed, despite the current economy. The challenges facing entrepreneurs are more centered in limited education, access to relationships and the costs of customer acquisition than in a downward facing economy.
While passion and innovation may fuel a business, they are rarely sufficient to grow and sustain a business. Experience, capability, quality products and services and the ability to compete - and to win - are essential to business success.
Sure, favorable tax policies would certainly help but they would also dramatically increase the number of competitor companies. What's needed are policies that do not punish the small business owner for being small and provide for a "period of sustainment" during which the small business owner is freed from excessive capital gains or other taxes that result from successful execution of business fundamentals.
I also think that we, as entrepreneurs, need to learn some lessons from our big business counterparts:
1. We need to band together and partner more often.
2. We need to seek out alternative means of financing, including bartering of products and services. Starting off with or acquiring huge debt means having to make a lot more money before you can turn a profit.
3. We need to work more closely with local Chambers of Commerce, elected officials and the media to bring more attention to small business issues.
4. We need to arrive at the discussion with real and achievable solutions that are applicable to a broad range of business types. After all, we don't want to necessarily remain small forever.
5. Finally, we have to learn when it is appropriate to set passion aside and apply old-fashioned common sense to the situation. One of the hardest things for a passionate business owner to do is to accept when we're in over our head, close up shop and try again.
Showing posts with label Small Business Innovation. Show all posts
Showing posts with label Small Business Innovation. Show all posts
Monday, October 10, 2011
Monday, July 18, 2011
The Coming Brick Wall in Venture Capital & Why This is Good for US Innovation
The author of the below article (see link) argues that the venture capital business itself is going through an even more fundamental change than just the entry of a new category at the earliest stage. That the industry is shrinking back to a mid-90′s level in terms of both dollars and numbers of firms. What do you think of that argument?
Here is a link to the article I am talking about: Brick Wall
A couple of thoughts around that:
1. The economies of starting a company today are different than what they were in the mid-90's. Cost of acquisition is lower and technologies such as cloud computing and methodologies as A/B testing and agile development brought down the cost of development & IT. Given that comparing the total capital available is not necessarily the right metric.
2. Given that economies have change and given that we are starting to see more medium size acquisitions(<$40M) (and sometimes quick talent acquisitions), large funds (north to $150M) are struggling. There are fewer blockbusters and the good deal flow for growth stage rounds is centered about the top 5-6 VC (Accel, Sequoia, DFJ etc.). The rest settle for lower quality deal flow which is expected to impact their ability to achieve target returns and raise another fund.
A $250M VC fund trying to target a 20% IRR in 5 years needs to reach $500M of exits. If they have 20% of each exit then they need to target total exits of $2.5B. If you are invested in Facebook, LinkedIn or GroupOn then you are set. Otherwise it is challenging to meet those returns.
3. Like with any industry, you need to keep an eye on the market and change constantly. The VCs that noticed the change early on (USV, First Round Capital) changed their investment strategy & fund size. The ones that failed to recognize the change, might struggle.
Mark Suster wrote a nice article summarizing these trends: Venture Capital
Here is a link to the article I am talking about: Brick Wall
A couple of thoughts around that:
1. The economies of starting a company today are different than what they were in the mid-90's. Cost of acquisition is lower and technologies such as cloud computing and methodologies as A/B testing and agile development brought down the cost of development & IT. Given that comparing the total capital available is not necessarily the right metric.
2. Given that economies have change and given that we are starting to see more medium size acquisitions(<$40M) (and sometimes quick talent acquisitions), large funds (north to $150M) are struggling. There are fewer blockbusters and the good deal flow for growth stage rounds is centered about the top 5-6 VC (Accel, Sequoia, DFJ etc.). The rest settle for lower quality deal flow which is expected to impact their ability to achieve target returns and raise another fund.
A $250M VC fund trying to target a 20% IRR in 5 years needs to reach $500M of exits. If they have 20% of each exit then they need to target total exits of $2.5B. If you are invested in Facebook, LinkedIn or GroupOn then you are set. Otherwise it is challenging to meet those returns.
3. Like with any industry, you need to keep an eye on the market and change constantly. The VCs that noticed the change early on (USV, First Round Capital) changed their investment strategy & fund size. The ones that failed to recognize the change, might struggle.
Mark Suster wrote a nice article summarizing these trends: Venture Capital
Monday, May 16, 2011
How Can Government Promote More Small Business Innovation??
First ask yourself this question .... are US small businesses really innovators? Than ask a much larger question .... is the US staying competitive with other nations?
My personal opinion is the answer to both is ... NO. You may disagree and that's OK. I encourage you to leave a comment.
For my 1st question .....
"Small business innovation" is a myth. Truly innovative businesses are those that grow large very quickly.
Between 1980 and 2005, 7,454 American companies went public. Of these, 2,019 have gone out of business, 5,048 have not reached $1 billion annual revenue threshold, and 387 have reached $1 billion annual revenue threshold and as of 2005, accounted for 56% of employment and 64% of market value in the group. Translation: 5% of all companies in the group created 56% of all employment and 64% of the market value created by the group.
So the answer appears rather obvious. The policymakers need to realize that "small business innovation" is a phantom goal. There are many good things that can be said about small business (and there are many good reasons to support small business), but innovation simply isn't one of them. If you want to support small business, you need to do something about the cost of environmental compliance (which tends to be much heavier on the small business) and the cost of health insurance (which many small businesses can't afford to provide even to owners, not to mention rank-and-file employees).
One problem has been the general reallocation of resources away from investment, accentuated by dramatic reduction of American investment into research and development. This below average innovation and loss of competitiveness has diminished America’s international standing.
To address these losses policymakers could do a couple things. Reducing taxes on or providing grants for R&D/investment at a small business level. This could be an effective avenue to immediately generate growth at a local level.
The reduction of available money (credit) for small US businesses was hampering many and I am glad to see the new administration addressing this.
Now I’m not talking about big sums, millions, for “bigger” small businesses. I propose smaller sums, tens of thousands, for the little small business the mom and pop general store, the construction worker turned contractor, etc…
Those that can afford to invest into their own businesses themselves should be rewarded with tax savings and incentives to do so. Those without the capital should be given direct access to R&D/investment funds or grants.
I know that some programs are out there for the small guy, but we need to overhaul/simplify accessing these and increase public awareness and use of the programs to improve innovation and competition at a local level. This will radiate out and improve the United States standing worldwide.
For my second question .....
I think a major part of the problem is the lack of education at the secondary school level on such things as personal finance and the social skills required for effective marketing.
At one time children could learn frugality and the skills to be frugal from parents or grandparents, but today with instant gratification through easy credit, credit cards, enabling parents and a sophisticated marketing techniques that seduce children into their social purpose as consumers, those skills are being lost.
The reliance on technology to make the kind of calculations to manage and account for money, have produced a generation which has difficulty making change change in simple transaction.
I realize the second point might seem out of place in the world of MySpace and FaceBook, but electronic social skills are very different from face to face interpersonal skills. Marketing and sales require a long range perspective and not just the short range sales cycle perspective.
I have met too many "salespersons" who attempt to sell their product before they have taken the time to sell themselves as trustworthy persons representing a trust worthy company with a trustworthy product. They usually fail more times than they succeed. Yet this is the model most innovators have of the sales process, which is why they fail to move their idea forward to commercialization.
Basic training in interpersonal skills is critical, especially for innovators and entrepreneurs who really have only themselves to sell to an Angel or VC investor. Communication skills (both sending and receiving information) are another part of this. Learning to listen is as much a business skill as pitching a line.
The point here is that we need to start at an earlier age preparing the next generation be become more entrepreneurial and innovative. We can do this by giving them the skills needed to transform an idea into a concept and concept into a business.
It is not just a matter of changing the environment for financing or regulation, it is training those who will depend upon and be subject to them to be better prepared at managing this part of their small business that is important.
At the Federal level, the best I think we can expect is promote attitudinal change on a generational scale which begins with at the secondary school level.
Another equally important point affecting competitiveness is ..... I can tell you requiring US companies to operate under restrictive rules and regs and then encouraging big companies to go to third world companies is crazy. Personally, I think NAFTA and CAFTA were stupid - there have been hundreds of thousands, if not millions, of good paying jobs go to Mexico and Central America. If we want to maintain a standard of living that is the class of the world we can't cut our own throat and let jobs go to Vietnam, China, and Cambodia because of cheap labor that the government ought to raid if it was in this country for labor violations.
Now here's my personal rant (errr editorial comment) .......
Government should abolish most of the business related legislation written after the year 1929. Then go away.
The Feds must stop choking American business for God's sake. Stop the insane taxation, stop moronic regulation, stop telling people how to run their business. I mean, put down your portfolio and step away from the voting button, Mr./Ms. Policymaker!
My personal opinion is the answer to both is ... NO. You may disagree and that's OK. I encourage you to leave a comment.
For my 1st question .....
"Small business innovation" is a myth. Truly innovative businesses are those that grow large very quickly.
Between 1980 and 2005, 7,454 American companies went public. Of these, 2,019 have gone out of business, 5,048 have not reached $1 billion annual revenue threshold, and 387 have reached $1 billion annual revenue threshold and as of 2005, accounted for 56% of employment and 64% of market value in the group. Translation: 5% of all companies in the group created 56% of all employment and 64% of the market value created by the group.
So the answer appears rather obvious. The policymakers need to realize that "small business innovation" is a phantom goal. There are many good things that can be said about small business (and there are many good reasons to support small business), but innovation simply isn't one of them. If you want to support small business, you need to do something about the cost of environmental compliance (which tends to be much heavier on the small business) and the cost of health insurance (which many small businesses can't afford to provide even to owners, not to mention rank-and-file employees).
One problem has been the general reallocation of resources away from investment, accentuated by dramatic reduction of American investment into research and development. This below average innovation and loss of competitiveness has diminished America’s international standing.
To address these losses policymakers could do a couple things. Reducing taxes on or providing grants for R&D/investment at a small business level. This could be an effective avenue to immediately generate growth at a local level.
The reduction of available money (credit) for small US businesses was hampering many and I am glad to see the new administration addressing this.
Now I’m not talking about big sums, millions, for “bigger” small businesses. I propose smaller sums, tens of thousands, for the little small business the mom and pop general store, the construction worker turned contractor, etc…
Those that can afford to invest into their own businesses themselves should be rewarded with tax savings and incentives to do so. Those without the capital should be given direct access to R&D/investment funds or grants.
I know that some programs are out there for the small guy, but we need to overhaul/simplify accessing these and increase public awareness and use of the programs to improve innovation and competition at a local level. This will radiate out and improve the United States standing worldwide.
For my second question .....
I think a major part of the problem is the lack of education at the secondary school level on such things as personal finance and the social skills required for effective marketing.
At one time children could learn frugality and the skills to be frugal from parents or grandparents, but today with instant gratification through easy credit, credit cards, enabling parents and a sophisticated marketing techniques that seduce children into their social purpose as consumers, those skills are being lost.
The reliance on technology to make the kind of calculations to manage and account for money, have produced a generation which has difficulty making change change in simple transaction.
I realize the second point might seem out of place in the world of MySpace and FaceBook, but electronic social skills are very different from face to face interpersonal skills. Marketing and sales require a long range perspective and not just the short range sales cycle perspective.
I have met too many "salespersons" who attempt to sell their product before they have taken the time to sell themselves as trustworthy persons representing a trust worthy company with a trustworthy product. They usually fail more times than they succeed. Yet this is the model most innovators have of the sales process, which is why they fail to move their idea forward to commercialization.
Basic training in interpersonal skills is critical, especially for innovators and entrepreneurs who really have only themselves to sell to an Angel or VC investor. Communication skills (both sending and receiving information) are another part of this. Learning to listen is as much a business skill as pitching a line.
The point here is that we need to start at an earlier age preparing the next generation be become more entrepreneurial and innovative. We can do this by giving them the skills needed to transform an idea into a concept and concept into a business.
It is not just a matter of changing the environment for financing or regulation, it is training those who will depend upon and be subject to them to be better prepared at managing this part of their small business that is important.
At the Federal level, the best I think we can expect is promote attitudinal change on a generational scale which begins with at the secondary school level.
Another equally important point affecting competitiveness is ..... I can tell you requiring US companies to operate under restrictive rules and regs and then encouraging big companies to go to third world companies is crazy. Personally, I think NAFTA and CAFTA were stupid - there have been hundreds of thousands, if not millions, of good paying jobs go to Mexico and Central America. If we want to maintain a standard of living that is the class of the world we can't cut our own throat and let jobs go to Vietnam, China, and Cambodia because of cheap labor that the government ought to raid if it was in this country for labor violations.
Now here's my personal rant (errr editorial comment) .......
Government should abolish most of the business related legislation written after the year 1929. Then go away.
The Feds must stop choking American business for God's sake. Stop the insane taxation, stop moronic regulation, stop telling people how to run their business. I mean, put down your portfolio and step away from the voting button, Mr./Ms. Policymaker!
Friday, June 19, 2009
Does It Make Sense To Start-Up A Business During This Recession??
In times of economic turmoil and consequently higher unemployment, it is usual that some of the professionals that were laid off may take the initiative of beginning a new career path ..... as an independent consultant or as entrepreneurs by beginning a small business.
Although it is probable that most entrepreneurs will fail 2 years after having begun ..... and angel investors with the willingness of contributing with capital will be scarce ..... past history has taught us that many of the innovations that generated new and revolutionary products were initiated in times of economic uncertainty, market instability, and financial restrictions. And were consolidated once the economic landscape began to experience a healthy and sustained recovery.
Being so, the adagio that says that "Necessity is the Mother of the Invention" appears to be true.
In my humble opinion, this wave of innovation happens when talented professionals .... after being laid off from companies where they worked unhappily in the past and without a promising professional future .... feel compelled to be creative, to develop an innovative mindset, and explore beyond their comfort zones to survive, grow, and succeed.
In the long term, small businesses are key for the financial recovery. Irrespectively of the extent and depth of the current economic turmoil .... there are always likelihoods of success in developing an entrepreneurial venture.
In a nascent business, the experience of being an entrepreneur is a role highly emotive and gratifying when its founders are smart, disciplined, and persistent. Plus, when they assume a passionate attitude, build a sense of purpose, share an inspiring vision, and create an exhilarating climate for young professionals who are willing to accept the challenge of growing professionally with a small, although promising company.
A small business offers the unique and valuable opportunity of building from the personality traits, business vision, managerial style, and professional experience of their leaders and founders. The values, principles, policies, and beliefs that are inherent to the organizational culture must be shared in such a way that they become a key factor of success ..... and propel organic growth for the company for the long term.
Small businesses that are successful in creating customer loyalty, are smart in managing their finances, and provide the means to assure employee satisfaction .... may experience the unique opportunity of enjoying extraordinary patterns of organic growth that increase and multiply their valuation as an ongoing business. And the likelihood of being acquired or merged by a bigger company in such a way where all the involved parties greatly benefit.
Highly motivated "former" employees who are close to their customers, and have the willingness to learn, capacity to innovate, and desire to integrate multidisciplinary teams to work hard and with proved efficiency ...... can transform a dream, a project, and illusion into a highly profitable business.
So the short answer .... is yes.
Although it is probable that most entrepreneurs will fail 2 years after having begun ..... and angel investors with the willingness of contributing with capital will be scarce ..... past history has taught us that many of the innovations that generated new and revolutionary products were initiated in times of economic uncertainty, market instability, and financial restrictions. And were consolidated once the economic landscape began to experience a healthy and sustained recovery.
Being so, the adagio that says that "Necessity is the Mother of the Invention" appears to be true.
In my humble opinion, this wave of innovation happens when talented professionals .... after being laid off from companies where they worked unhappily in the past and without a promising professional future .... feel compelled to be creative, to develop an innovative mindset, and explore beyond their comfort zones to survive, grow, and succeed.
In the long term, small businesses are key for the financial recovery. Irrespectively of the extent and depth of the current economic turmoil .... there are always likelihoods of success in developing an entrepreneurial venture.
In a nascent business, the experience of being an entrepreneur is a role highly emotive and gratifying when its founders are smart, disciplined, and persistent. Plus, when they assume a passionate attitude, build a sense of purpose, share an inspiring vision, and create an exhilarating climate for young professionals who are willing to accept the challenge of growing professionally with a small, although promising company.
A small business offers the unique and valuable opportunity of building from the personality traits, business vision, managerial style, and professional experience of their leaders and founders. The values, principles, policies, and beliefs that are inherent to the organizational culture must be shared in such a way that they become a key factor of success ..... and propel organic growth for the company for the long term.
Small businesses that are successful in creating customer loyalty, are smart in managing their finances, and provide the means to assure employee satisfaction .... may experience the unique opportunity of enjoying extraordinary patterns of organic growth that increase and multiply their valuation as an ongoing business. And the likelihood of being acquired or merged by a bigger company in such a way where all the involved parties greatly benefit.
Highly motivated "former" employees who are close to their customers, and have the willingness to learn, capacity to innovate, and desire to integrate multidisciplinary teams to work hard and with proved efficiency ...... can transform a dream, a project, and illusion into a highly profitable business.
So the short answer .... is yes.
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