The entrepreneur is the modern-day hero, lauded for creating successful startups that enrich founders almost beyond the imagination. That’s why publications have popped up with names like “Success,” “Inc.,” and, of course, “Entrepreneur.”
But there are no glossy tabloids entitled “Failure,” or “Five Years Down the Drain.”
Many experts advise that, before taking the plunge, would-be entrepreneurs might consider that they could be headed for a cold bath.
Every year, about one-third of small businesses in the United States cease operations, according to the U.S. Small Business Administration. About one-half of those are taken over by “successor” businesses, and one-half simply disappear, based on a 10-year study ended in 1992.
Data from Dun & Bradstreet Inc. suggests many younger companies are experiencing tough times. In the first nine months of 1997, 844 companies in L.A. failed, citing combined liabilities of $575 million. That compares with 685 companies failing in the like period in 1995, with $1.2 billion in liabilities.
The increase reflects that “more people are going into business and finding the market is tougher than they thought,” said Jack Kyser, chief economist of the Economic Development Corp. of L.A. County. “It also suggests they are experiencing wider seasonal swings than they anticipated.”
Other local business observers stressed, however, that going out of business is not synonymous with failure.
“If someone leaves a business to start another, or retires, or they may have taken on a limited project just because a business disappears doesn’t mean someone failed,” said Kathleen Allen, professor of entrepreneurship at the USC Marshall School of Business, who herself has started up three businesses.
Citing Dun & Bradstreet data, Allen said that of companies started in 1985, more than two-thirds 69.7 percent were still in business in 1994. “And of companies no longer operating, the majority had been discontinued. There was not a declaration of bankruptcy,” she said.
The D & B; figures were filtered a bit, conceded Allen. “These were businesses that had incorporated, or were limited partnerships, or sole proprietorships. These were businesses that filled out forms and were legal entities. Little home-based businesses, or hobby businesses, were not a part of the sample.” Such businesses have traditionally suffered higher failure rates.
Allen herself had a business venture that fizzled and lost $1 million in the early 1990s, when a city in the San Joaquin Valley rezoned land for agricultural use where she had planned to build a shopping mall. “It was my first really big lesson that you can be vulnerable to losing your sunk costs, if a business fails,” she said. “It can be very stressful.”
A challenge for entrepreneurs is gathering together enough dough to ensure survival long enough that a business can become consistently profitable.
Very often, entrepreneurs fancy they will begin making money to finance growth right on schedule only to learn that even growth (if achieved) can cost money.
“Many (entrepreneurs) do not fully understand the capital requirements, the startup money and the working capital (needed) for growth,” said Jim Siegfried, partner in charge of the Coopers & Lybrand LLP entrepreneurial advisory services group in Los Angeles. “When you read the press, everything is success stories. People have a misconception about how easy it is to get financing.”
But on a startup level, there usually is no financing available for entrepreneurs other than what can be raised personally from savings, friends and family or credit cards, said Siegfried and other startup experts.
Growing companies need to hire people, lease larger quarters, buy equipment and inventory in short, incur additional expenses before the bigger money starts coming in.
Underfinanced, many startups perish, said Siegfried. And many of the entrepreneurs who do secure financing are forced to give up a majority of equity in their companies to financiers.
Allen pointed to one of her former students, who recently started a line of “pop-up” greeting cards. As the company grew, the ex-student realized it would take too much capital to sustain. He instead chose to sell the company’s line of cards, for a small royalty on future card sales, and has become an investment banker instead.
If there is a theme that advisers and real-life entrepreneurs are united on, it’s that starting a successful business is slower, harder, costlier and more time-consuming than first envisioned.
Michael Spencer left a six-figure job at Hewlett Packard Co. as a technical marketing specialist when he heard money could be made importing jewelry and handicrafts from Brazil.
After expensive marketing efforts in the United States trade shows, advertising, personal sales calls Spencer thought he was ready to push through to profits. “Then the Brazilians stopped delivering,” he recalls. Retail accounts won after years of work were burned in a few months when the promised product wasn’t delivered. The business failed.
Bloodied but unbowed, Spencer switched to importing goods from Chile. But he had a sense of deja vu. “The capacity for irresponsibility on the part of the Chileans (involved in manufacturing) was infinite,” said Spencer.
Along the way, Spencer, 45, gave up a house in Southern California, saw his marriage dissolve, and was hounded by creditors in court. Spencer figures he lost more than $250,000, not counting accrued interest or lost equity in the house, or countless hours of his own free labor.
Finally, in 1995, Spencer began domestic production for himself, in partnership with an ironworker he met in Mexico, in a business called Lost City Ironworks Inc. that provides furniture to the hospitality industry. After a tough start, business has been good, and he recently traded in a 16-year-old car for a new Ford Taurus. His advice to entrepreneurs?
“Choose your partners very carefully, and if you think you are dealing with unreliable people, you probably are,” he said.
One Los Angeles-based airplane engine rebuilder who failed in the early 1990s after getting bank loans said he had to restart his enterprise in recent better times without the help of banks, venture capitalists or anything other than savings and credit cards.
“It was a really bad experience,” he said. “I thought I was getting into a growth industry. Instead I was making payroll by borrowing. Every job shop was cutting employment, underbidding to get work.”
Like many entrepreneurs, the rebuilder had pledged personal assets his house as collateral to get bank loans. But his house dropped in value, meaning he never actually paid off the loans. He is unsure whether the bank that lent to him will press its case in the future.
“Let’s put it this way,” he said. “I haven’t called them to remind them that I owe them money, plus (accumulating) interest.”
Putting too much dependence on a generally good economy (the engine rebuilder’s situation), or on suppliers and subcontractors (as with Spencer) is endemic for entrepreneurs, said Allen of USC. “Often, when you are a startup, you have to outsource everything to job shops, and you are not the only person they are working for,” she said. Indeed, an entrepreneur is likely to be a small, and unimportant, account.
Thus entrepreneurs providing products are often at the mercy of others to deliver in a timely fashion to them, so they can in turn deliver in a timely fashion to others. “You are dependent on the good will, or time performance of others,” said Allen.
Bill Cockrum, professor of entrepreneurial studies at UCLA’s Anderson School of Management, said entrepreneurs often are dealing in an environment of uncertainty, and making decisions more by the seat of the pants than by reasoned analysis and solid research.
“You must make decisions based on partial or incomplete information, and you must make them very rapidly,” he said. “You are trying to grab market share from others. Not everyone is comfortable operating in this environment.”
Obviously, when people make decisions without all the data or information they might need, they can and do make mistakes, said Cockrum. “And when you run out of money, the game is over,” he said.