Ground Zero

An ambitious new study aims to uncover what <i>really</i> happens in the start-up stage.

Magazine Contributor

December 1, 1996 11 min read

This story appears in the December 1996 issue of Business Start-Ups magazine. Subscribe »

A business idea crosses your mind that seems to be, dare you say it, inspired. Excitement bubbles, brainstorming ensues, notes are scribbled. Convinced this is exactly what the marketplace has been waiting for, you conclude that you are no less than a genius.

All this self-congratulation, of course, happens before the business is even started. And knowing the ratio of discarded ideas to that of successful businesses, we are left to wonder: What is the difference between people who contemplate becoming entrepreneurs and those who actually start businesses? What occurs in the gestation period before start-up that makes people decide either to toss an idea or to persevere?

The Entrepreneurial Research Consortium has undertaken an ambitious effort to uncover answers to those questions. A temporary international association of 27 academic research centers, foundations and government agencies, the consortium plans to track almost 1,200 start-up entrepreneurs for two to five years, pooling the efforts of more than 100 analysts to analyze information on some 3,000 different variables of these businesses. The goal: to get to the bottom of "the single most important and yet most poorly understood" period of a business's life, says Paul Reynolds, coordinator of the consortium and a professor of entrepreneurial studies at Babson College in Babson Park, Massachusetts.

"We're trying to figure out what these people do, what sequence of events they pursue, how rapidly they complete them, and how this affects whether they get the business started," Reynolds explains. "Then we'll look at how all this start-up activity affects the growth pattern of the business once it gets going."

In pilot studies, Reynolds has found that about 4 percent of American adults are trying to start businesses; however, about half of them never see their start-up come to fruition. Preliminary research also shows:

people between the ages of 25 and 34 are more likely to start businesses;

women are less likely to make it through the start-up period;

while households with annual incomes of $10,000 or less are least likely to start a business, there is little other correlation between wealth and entrepreneurial aspirations; and

the more education a person has, the less likely he or she is to make it through the start-up period.

"We're talking about very small samples and very powerful patterns," says Reynolds. "The ideas we've been getting from [preliminary research] are so unexpected, we're not quite sure what to do about them until we get a larger sample. Age, gender, confidence in the economy, where they live, how long they've lived there, household income--each one of these factors is interesting in itself, but the real question is, how do these things in combination have an impact [on whether someone starts a business]?"

Eventually, Reynolds sees the study, which is being mirrored by similar studies in five other countries, as having important policy implications. "If you're in government, should you encourage people to get involved in the entrepreneurial process or spend your resources helping those who are already in it?" he asks.

"No one ever bothered to collect this data before," Reynolds continues. "They didn't think it was important. But clearly, there's been a dramatic shift in the way the economy operates. We're getting smaller businesses that are more focused and more interdependent with other businesses. We need to look at [this segment] much more carefully."

Under Inspection

SBA loan programs revamped

By Karen Axelton

Two major Small Business Administration (SBA) loan guarantee programs will face closer scrutiny, and borrowers will be charged higher fees, under legislation President Clinton signed into law at press time. The 7(a) program, which guarantees a variety of loans, and the 504 program, which involves loans for the purchase or improvement of buildings and equipment, will be affected.

Politicians had criticized both programs because default rates were higher than expected, as were projected losses for 1997. The new law establishes a risk-management database to help spot problems earlier. It also allows some lenders to sidestep the SBA and take the initiative to liquidate collateral when borrowers default on 7(a) guaranteed loans. A study by the National Association of Development Companies showed the SBA takes an average of 18 months to foreclose on borrowers who default.

For the 504 program, the bill institutes new fees for the lender, borrower and go-between development companies.

Small-business groups reluctantly supported the bill to save the two programs. One program that did not survive, however, was the Minority Small Business Investment Company (MESBIC) program. The bill forbids establishing any more of these
venture capital firms, which are licensed by the SBA to lend to minority-owned businesses and have lower capital requirements than standard SBICs. Existing MESBICs will be absorbed into the regular SBIC program.

For more details on these changes, see next month's "Capitol Issues" column.

Cool To Be Kind

Group simplifies the act of giving

By Heather Page

It's that time of year again when business owners' thoughts turn from receivables and marketing strategies to philanthropy. But few entrepreneurs we know have the time to organize a fund drive. Fortunately for entrepreneurs like Jeffrey Silverman, there's a way to give back without doing all the legwork. Silverman, owner of The Custom Foot, which makes fine made-to-order Italian leather shoes, donates returned footwear to local charities in Westport, Connecticut, with the help of Gifts in Kind International.

Alexandria, Virginia-based Gifts in Kind sets up charitable donation programs for businesses. Rather than having to find the charity, discuss the details and deliver the goods themselves, entrepreneurs have Gifts in Kind handle it free of charge.

Since 1983, participating companies have donated products such as ceramic tiles, office supplies, children's toys and clothing to more than 50,000 charities and schools worldwide. "Companies feel really good about contributing," says Susan Corrigan, founder of Gifts in Kind.

And while many people only think about donating during the holidays, Gifts in Kind makes donations possible year-round. Says Corrigan, "It's always a good time to give."

For more information, call (703) 836-2121.

All Aboard

Seminars at sea mix work and play.

Who says you can't mix business with pleasure? On The First Annual Entrepreneur and Small Business Cruise, sponsored by Entrepreneur and Princess Cruises, you can enjoy a seven-day Caribbean vacation while also learning how to boost your business.

Network with other entrepreneurs and attend on-board seminars and programs as you visit Nassau, St. Croix, St. John and St. Thomas, culminating with a full-day private beach party and picnic at Princess Cays in the Bahamas.

Seminars by small-business experts such as sales guru Danielle Kennedy and Entrepreneur editor in chief Rieva Lesonsky will cover topics including goal-setting and motivation, sales and client retention, homebased business, women entrepreneurs and more. There will also be networking sessions and a trade show featuring franchise and business opportunities, plus services and products for small business.

The cruise sets sail from Ft. Lauderdale, Florida March 16-23, 1997. Prices start at $989 (air fare not included). For more information, call (800) 962-7847.

Bright Idea

Eureka! Now there's a formula for success.

Truly great business ideas seem to come along once in a blue moon. If only you could bottle a formula to create them more often. Well, some people believe you can--or you can at least concoct a formula that increases your chances of fostering bright ideas.

Doug Hall, founder and CEO of Richard Saunders International, a think tank of strategic inventors in Cincinnati, and author of Jumpstart Your Brain (Warner Books), has formulated the Eureka! Stimulus-Response method. It goes something like this: E = (S + BOS)^F. This means Eureka! (or the big idea) equals Stimulus plus Brain Operating Systems raised to the Fun power.

Say what? We'll explain in plain English: First, add sensory stimulation to your brainstorming sessions. Blast loud music, play with gooey substances, chug coffee--do anything that appeals to your senses, even if it's unrelated to your product or business.

Next, mix in multiple brain operating systems (that is, people) to offer assorted viewpoints. As for fun, try taking your shoes off, going outside, or getting everyone out of the office for a picnic to "purge the old ideas out of their minds and open themselves up to real thoughts," says Hall.

Still feel funny burning incense or taking the staff sailing? Consider this: A University of Oklahoma study recently found that the Eureka! method generated 558 percent more quality ideas with above-average marketplace potential than traditional brainstorming methods.

Bungee jumping, anyone?

Read All About It

What are business owners reading these days? The top 10 business books at press time (based on net sales) were:

1. The Dilbert Principle, by Scott Adams, $20 (HarperBusiness)

2. Wall Street Money Machine, by Wade Cook, $24.95 (United Support Association)

3. Mean Business, by Albert Dunlap, $25 (Random House)

4. What Color Is Your Parachute--1996, by Richard Nelson Bolles, $14.95 (Ingram)

5. Investing for Dummies, by Eric Tyson, $19.99 (IDG Books Worldwide)

6. Get a Financial Life, by Beth Kobliner, $11 (Simon & Schuster)

7. Black's Law Dictionary Standard, by Henry C. Black and Stephen Hicks, $38.35 (West Publishing Co.)

8. Beardstown Ladies' CommonSense Investment Guide: How We Beat the Stock Market and How You Can, Too, by the Beardstown Ladies' Investment Club, $10.95 (Hyperion)

9. Wave Three: The New Era in Network Marketing, by Richard Poe, $14.95 (Prima Publishing Co.)

10. The One-Minute Manager, by Kenneth Blanchard, $10.95 (Berkley Books)

Kid Stuff

Profits are couched in kids' furniture.

By Holly Celeste Fisk

A frustrating shopping experience nudged husband and wife Jim Goswiller, 46, and Laura Lind, 44, into creating a line of safe, pint-sized furniture in patterns so kid-friendly they may jump-start the next generation of couch potatoes.

When Lind and Goswiller went shopping for furniture for their two kids, they couldn't find anything fun. So the partners founded Manhattan Beach, California-based Fun Furnishings in 1992. Their squishy foam sofas and chairs are covered in bright-colored patterns; there's even a chair shaped like a dinosaur. Sold through catalogs and more than 100 specialty children's stores nationwide, Fun Furnishings expects this year's sales to reach $400,000.

The start-up company offered Lind and Goswiller the flexibility their corporate careers didn't. "Now I have time to chaperone a field trip," says Lind, "although that may mean I'm doing invoicing at 1 a.m."

The children who inspired Fun Furnishings are the prime consultants to their parents' business. "We lay samples all over the floor," says Lind, and Kimberly, 8, and Christina, 6, peruse potential patterns. "They test the furniture; they help pick the fabrics." Now that's fun.

Sugar Beat

A sweet tooth led to a sweet deal.

By Holly Celeste Fisk

When a pregnant friend had a craving for cotton candy last year, Adrienne Workman, 35, didn't just run out and buy her some. Workman called another friend, Cathy Rogers, 36, and suggested they start their own cotton candy business.

Workman doesn't sugar-coat the story of Not Just Cotton Candy's start-up. No one would finance the company, so the enterprising partners maxed out their credit cards and Rogers took out a home equity loan to finance their first batches.

"We were living on two hours of sleep [a night]," Workman recalls. The two created batches of Not Just Cotton Candy in Workman's house at 4 a.m. each day, then distributed it themselves to stores, lugging garbage bags of cotton candy to refill near-empty racks in Mentor, Ohio, convenience stores.

Then a distribution company gave them a sweet deal, allowing Not Just Cotton Candy to move production out of Workman's home and hire 25 employees. Today, the company's candy can be found in stores throughout Ohio and three other states.

With seven colors and 12 flavors, including watermelon, chocolate and piña colada, the partners expect to bring in sales of more than $250,000 in 1996, their first full year in business.

Fan Club

Enthusiasts open rock 'n' roll store

By Holly Celeste Fisk

Trying to find your favorite band's concert T-shirt is like trying to find a guitar pick in a haystack. When Alan Hirsch, 38, couldn't find the Rolling Stones T-shirt he wanted, he wondered why there wasn't a shop that carried such items. So, with partner Robert Wilkis, 47, he opened one himself.

GigWear, the world's largest rock 'n' roll store, opened its doors in New York City's SoHo district a year ago. Other die-hard fans must have shared Hirsch's frustration: GigWear Co. Inc. is poised for sales of $3 million next year.

"It's a kinetic atmosphere," says Wilkis, who, like Hirsch, was a financier before starting GigWear. A sort of record store on steroids (sans the records), GigWear is 8,000 square feet of T-shirts, posters and hard-to-find music memorabilia such as the gold bustier Madonna wore on her Blonde Ambition tour.

Two 30-foot screens show videos, while go-go dancers keep up the frenetic pace in a cage above the cash register. A fake tattoo parlor lets wanna-be rock 'n' rollers feel like part of the show.

The GigWear Web site should be up and running by the time you read this. Further down the pike: GigWear stores in London, Tokyo, Los Angeles and Long Island, New York.