The number of millennials who are enchanted with the idea of starting up a new company from scratch amazes me. As someone actively involved in financing business ventures since the 1970s, I can tell you that it’s the toughest and least productive way I know to get into business. Most of the successful entrepreneurs I know either came from a company they modeled their new company after or took over an existing company after working there for a while and figuring out how to rethink the operation.
I remember one twentysomething guy in the steel distribution industry I secured a Small Business Administration loan for. He was forced to grab his customer list and launch an operation in South Los Angeles after he was summarily fired from a major distributor. He was able to do that quickly because he duplicated systems for delivery, bookkeeping and purchasing from his former employer. He innovated by offering slitting services. His company now does more than $75 million a year.
Before the board of directors removed him, Dov Charney, the founder of American Apparel, computerized sales and created a lifestyle brand name for a small cut-and-sew operation he joined in his early 30s after he demonstrated his ability to generate sales online. The company still pops up as No. 1 on a Google search for “made in America T-shirt” thanks to search maximization engineering Charney did alone late at night. It became the largest vertically integrated garment manufacturer in America – after it went public – and created 5,000 jobs in downtown Los Angeles.
These entrepreneurs all understood that it’s much easier to build on something with a track record, even if change is needed.
I often get pitched for technological innovations – such as smartphone apps – by startups that have no demonstrated market (not even a wait list of customers), no beta-tested product prototype and no proven management structure. Talk about unacceptable risk. These requests are unbankable. Lenders look for deals that make sense and don’t demand them to be clairvoyant. They want a history that can be found in either the product, the management team, the market acceptance or some combination of all the above. Which is why I say forget pure startups. Seek to build on history.
Take the example of ETO Doors. Tal Hassid was a twentysomething kid whose dad asked him to clean up the mess left behind from a commercial door wholesaler tenant who folded up operations. Hassid walked into a mess of doors (off their hinges), loaded with dust, that no distributor or lumber yard wanted. Hassid had a product that was a building industry staple but no access to the marketplace. At home on the Internet, he thought of using his eBay account to try and unload the doors. He blew out the old inventory in no time and proceeded to revolutionize the door industry by putting doors online and customizing them with CAD/CAM software he innovated. ETO now offers the largest selection of doors west of the Mississippi, with virtually all of the sales being done with credit cards over the Internet – something unheard of in a wholesale business that always had to extend credit to dicey builders, developers and property owners who rarely paid on time.
There are countless other examples of old-line business models that can be radically changed with fresh thinking.
The companies I’m talking about aren’t the high-tech giants in the Bay Area. They’re small companies with sales of less than $5 million that are part of L.A. area’s manufacturing legacy as the largest manufacturing city in the nation.
These are the companies started by baby boomers in the 1960s and ’70s. Their aging owners are now headed for the exit. Transitions are occurring now. Seventy-five percent of all small business is owned by folks older than 55 years of age and every seven seconds a boomer is turning 65 and will do so for the next 15 years.
Time to recycle more than just tin cans, newspapers and coffee grounds – time to step up and recycle on a much larger scale. Forget about a startup, take a short cut and rethink an established, existing company. It takes a lot of imagination and hard work to do that but it really is much easier than a startup. Chances are you can even get you a loan to do it.
Bruce Dobb is a partner in Concerned Capital, a boutique investment house in downtown Los Angeles that helps businesses find government incentives. American Apparel and ETO Doors are among the firm’s clients.
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