The downturn has created two classes of business owners. Those with the drive to keep their business growing despite the difficult economic scene, and those who are struggling. Research firm Anchor Advisors dubbed them “movers” and “head-shakers.”

In a newly released study, Anchor talked to more than 130 mostly founder-led small businesses, the majority with under $10 million in revenue. The goal was to identify the common traits of thriving small business owners, and the behaviors that might be preventing the head-shakers from doing better.

So what does it take to be a recession-era mover? (more)

There is a universe of other businesses that have no access to bank lending. The maxim that “don’t go to a bank until you don’t need money” applies to millions of entrepreneurs with ideas about a new business—a great new opportunity, in their minds—that will transform how Americans live their lives and catapult them into the ranks of the 1% of wealthy Americans. These worthies have only a few ways to finance their business startups—personal savings and borrowing from friends and family.  If you are George W. Bush, you family’s friends are extremely wealthy and you can ask them for millions of dollars for risky drilling for oil in West Texas.  But the average American can only raise smaller sums and when those funds run out, their business will fail, unless it “clicks” immediately.  Some do well from the start. Others fail and the entrepreneur’s will to succeed is tested. Few come back for another startup—at least right away.

Why are Americans limited to financing new enterprises from investments from friends and family?  The “New Deal” reforms of almost eighty years ago included restrictions on non-registered stock.  If a young business person creates a stock corporation or a limited liability company and offers stock or membership shares to others, he must first make that offer effective with the U.S. Securities and Exchange Commission.  That procedure will require attorneys, accountants, and registration fees far in excess of most entrepreneurs have at their disposal. If they choose to market non-registered securities that may sell them only to “accredited” investors.  An accredited investors is a person with net assets of $1 million—excluding his personal residence.

This well meaning provision of the Securities and Exchange Act of 1933 has been, of course, an eighty year drag on business creation that should no longer be federal law. One of the reasons that the wealthy grow in wealth and everyone else remains less wealthy can be attributed  to the prohibition against investing in non-registered securities—if you are not an “accredited” investor.  Continue this provision of the Securities and Exchange Act another eighty years, and one-tenth of one percent of all wealth in the United States will be held by accredited investors—and the rest of us will live on welfare.

Fortunately, a bright Congressman from North Carolina, Patrick McHenry,  has co-sponsored legislation to allow entrepreneurs to raise financing using social media. Finally, someone has figured out that a seventy-eight year old New Deal “reform” kills jobs.

Wall Street Journal

NOVEMBER 1, 2011 

When ‘Friending’ Becomes a Source of Start-Up Funds

By SARAH E. NEEDLEMAN And ANGUS LOTEN

Social networking is pretty good for keeping abreast of far-flung friends. Could it work for entrepreneurs looking for investors?

Critics say the idea is dangerous for investors, and even dicey for the entrepreneurs. Yet, it is gaining traction with small-business owners from the Bay Area to New York, who say they eagerly await an opportunity to sell stakes in their businesses through social networking—a process known as crowd funding.

The House Financial Services committee last week backed legislation that would make it possible for small businesses to use crowd funding to raise money from investors in exchange for equity stakes.

Under the proposal, investors would be able to buy stakes of up to $10,000 a year, or 10% of their annual income, whichever is less. Companies would be able to sell up to $2 million in equity—but must provide audited financial statements if the total exceeds $1 million.

If it becomes law, the proposal would enable Brian Lamb, co-founder of a Belmont, Calif., start-up, to overcome the longtime “general solicitation” ban on advertising sales of equity without registering with the Securities and Exchange Commission, among other restrictions.

“I’m optimistic—it’s another source of capital,” says Mr. Lamb, whose company, Satarii Inc., makes a motorized mount for cameras and smartphones that tracks the movement of someone being filmed. He and his business partner haven’t been able to land sufficient financial backing through venture capital and other channels, he says.

The legislation is expected to go to the House floor for a vote late this week. The measure also would have to pass the Senate and could face opposition from state regulators.

Under the proposal, investors would be able to buy stakes of up to $10,000 a year, or 10% of their annual income, whichever is less. Companies would be able to sell up to $2 million in equity—but must provide audited financial statements if the total exceeds $1 million.

If it becomes law, the proposal would enable Brian Lamb, co-founder of a Belmont, Calif., start-up, to overcome the longtime “general solicitation” ban on advertising sales of equity without registering with the Securities and Exchange Commission, among other restrictions.

“I’m optimistic—it’s another source of capital,” says Mr. Lamb, whose company, Satarii Inc., makes a motorized mount for cameras and smartphones that tracks the movement of someone being filmed. He and his business partner haven’t been able to land sufficient financial backing through venture capital and other channels, he says.

The legislation is expected to go to the House floor for a vote late this week. The measure also would have to pass the Senate and could face opposition from state regulators.

Although it is too soon to say whether the proposal will be enacted, several crowd-funding services say they are gearing up. “It could be a major game changer,” says Slava Rubin, co-founder and chief executive of IndieGoGo.com Inc. So far the site has been limited to helping businesses solicit contributors for specific projects, taking a 4% cut of the donations.

Crowd funding involves using a social-networking service, such as Mr. Rubin’s, to obtain funding for a specific project, such as an independent film. (Please see accompanying article.) Because of current restrictions, contributors can get token gifts but they don’t expect to make a profit in exchange for their donations. The legislation would lift those restrictions.

“Anything that can help with getting a first round of capital is a good thing,” says Catherine Mangan. She recently asked her attorney if she and her business partner could use Twitter to solicit investors for their health-snack start-up, Chia Charger Inc. in New York, but learned that the move would run afoul of federal laws. She says she is “thrilled” at the prospect of tapping her social network to buy equipment, add staff and relocate to a private kitchen from a shared space.

“This is going to help someone like me,” says Rosston Meyer of Lake Worth. He runs Sponsorist Inc., an online service that helps nonprofit organizations and others find sponsors, with only the help of friend. Crowd funding could help him hire a programmer and a sales and marketing team, he says. “I can bootstrap only for so long.”

Critics fear the crowd-funding legislation could breed fraud, undermine market discipline and place unsophisticated investors at risk.

“It’s dangerous,” says Heath Abshure, the commissioner of the Arkansas Securities Department. Successful investors in small businesses tend to be savvy investors with deep knowledge of a business and its market, he says. “Mom and Pop investors on the Internet don’t have the ability to make the right kinds of assessments.”

And because the crowd-funding proposal requires not only an overhaul of federal securities laws but pre-emption of state securities laws as well, unscrupulous business promoters could find it easier to fly under the regulatory radar, Mr. Abshure says.

“The issuer I see is a guy with four or five computers in his basement who’s going to wire that money overseas as soon as he gets it,” Mr. Abshure says. And if honest business owners are overshadowed by people committing fraud, he says, investors could lose trust in crowd funding and it could become more difficult for honest business owners to raise capital.

“This is tailor-made for Internet fraud,” says Mercer Bullard, a law professor at the University of Mississippi who testified against the bill before the House panel in September. The measure would allow someone living solely on Social Security to invest $1,500 in an unregistered offering sold through a website that wasn’t subject to regulation as a broker, he says.

The measure could also prove problematic for entrepreneurs. Most small businesses lack the resources to deal with outside stakeholders.

“I wouldn’t see this as a boon for small business, because there’s a lot attached to that money,” says John Torrens, who teaches entrepreneurship at the Whitman School of Management at Syracuse University in upstate New York. For example, entrepreneurs would need to manage cash flow for dividend payments, he says. Owners with outside shareholders are often forced to “take their eye off the ball” of day-to-day operations.

Ilya Pozin, the founder of 34-employee West Hollywood, Calif., marketing firm Ciplex LP, hopes he will be able to sell stakes through crowd sourcing. “A thousand shareholders are going to promote the hell out of your business and it’s going to spread virally,” he says.

Mike Schoettle, a 42-year-old commercial airline pilot in Tequesta, Fla., says he would consider buying a stake in a start-up through a crowd-funding site. “It’s about finding new ways to make money and potentially finding that home run,” says Mr. Schoettle, who valued his stock portfolio at just shy of $500,000. “It’s taken a beating,” he says. “Most of it’s tied up in mutual funds that have not done well.”

—Vanessa O’Connell contributed to this article.

 

Crowd-Funding Platforms

IndieGoGo

Launched: January 2008
Total projects: 45,000
Sample of projects at any given time: 8,000
Typical project length: 30 to 70 days
Pledged since inception: “millions each month”
Typical goal: $3,000 to $20,000
Fee: 4%
Typical user: entrepreneurs, creatives and causes

Kickstarter

Launched: April 2009
Total projects: 13,500*
Sample projects at any given time: N/A
Typical project length: between 1 and 60 days
Pledged since inception: more than $100 million
Typical goal: N/A
Fee: 5%**
Typical user: musicians and filmmakers

Peerbackers

Launched: January 2011
Total projects: 815
Sample projects at any given time: 150
Typical project length: 45 days
Pledged since inception: won’t say
Typical goal: $5,000
Fee: 5%
Typical user: entrepreneurs

RocketHub

Launched: February 2010
Total projects: more than 3,000
Sample projects at any given time: 300
Typical project length: 60 days
Pledged since inception: more than $1 million
Typical goal: $4,000
Fee: 4% to 8%
Typical user: artists, filmmakers, musicians, scientists

*counts those meeting or exceeding funding goal,
**Amazon.com also takes 3% to 5% of each pledge.

Note: Fees may vary depending on whether a project meets its fundraising goal. Sites often use a payments processor, which may incur additional fees.

Source: WSJ research

According to a report by the federal government’s Small Business Administration, bank lending to small businesses fell $15 billion nationally in the first quarter of this year. I am reminded of Tom Hanks’ character Josh Baskin in the movie “Big”. He exposed a lot of business problems by simply asking “Why?” So, I repeat the question at hand: Why are banks making fewer loans?

First, one must examine the point of the banking business. Banks are profitable when they make loans that are repaid with interest. If the bank cannot reasonably expect to be repaid, it won’t make the loan. While holding money is bad, it beats the heck out of sending money into an uncertain situation. And small business loans can certainly be risky.

Josh Baskin might say, “Why? They used to make lots of loans!”. And he would be right! Unfortunately, several well-intentioned government interventions in the loan market became unsustainable. The biggest of these government failures was Fannie Mae. Fannie Mae (official name: Federal National Mortgage Association) was founded during the latter years of the Great Depression as part of President Franklin D. Roosevelt’s New Deal. Fannie Mae’s goal was to expand overall lending and reduce market reliance on savings and loans. To do this, Fannie created packages of loans known as mortgage-backed securities.

The real problems with this practice arose when the real estate market became saturated. When the stuff hit the fan back in 2008, it became hard to separate the good loans from the bad loans in these packages. And – most importantly – since the federal government had guaranteed these packages, it became the federal government’s responsibility to bail them out.

Okay, a couple more “whys”. Why did the market become saturated? Many economists blame the Federal Reserve for keeping interest rates too low for too long. Banks were more than eager to loan this money and, in many cases, less than eager to scrutinize loan recipients. Why? When real estate prices were on the rise, banks could simply foreclose and recover the default costs in the resale of the foreclosed home or business. However, when real estate prices dropped, the banks were now taking losses on these properties.

I can’t leave out the most important component: people. Some were certainly irresponsible in their financial dealings. “Show me the money!” was a popular phrase a few years ago. Jerry McGuire’s client Rod Tidwell equated money with love, which has a lot of truth. Unfortunately, there was a lot of unrequited love in our financial system.

On Wednesday, President Mary Sue Coleman announced that Michigan is launching an initiative to invest some of the university’s endowment money directly in start-up companies developed through university research when they seek venture capital funding.

While other institutions have sought on a limited basis to invest in (and reap rewards from) promising companies created as a result of faculty members’ or students’ ideas, and many higher education leaders have argued that taking a greater stake in companies’ futures can help spur local development and ensure companies’ success, Michigan’s new policy is an unconventional bet on the future of its ideas. The norm in endowment management is to focus strictly on the best possible investment from a financial perspective, without going out of one’s way to favor one category of business over another. And that can mean wealthy institutions do very little local investing.

The initiative will not only support fledgling companies, but it could also provide financial returns for the university’s endowment. The effort also shows that the university is serious about entrepreneurial initiatives and supporting start-ups, which could help attract top talent, officials said…Continue reading A Good Investment >>

Then someone like Steve Jobs comes along and sets a standard of excellence in Business that is unparalleled.

If you ever started a business, struggled to make it succeed, or just to make payroll, you know how much Steve Jobs has accomplished.

Like many entrepreneurs, his company came to the point that they thought they needed a “manager,” not an entrepreneur at the helm of Apple. He was kicked upstairs; a marketing “genius” from Pepsi was brought in—and nearly killed the company.

Back came Steve Jobs who turned the company around and grew Apple into the highest capitalized company in America.

If you live long enough you come to realize that there are no straight lines in human life. We set out to accomplish one thing and make frequent course corrections. Steve Jobs, Bill Gates, Michael Dell and others like them experienced immediate success and built important corporations that employ hundreds of thousands of employees.

Most do not. It takes years of hard work and sacrifice that may require a series of startups before one clicks.

When you’re on that road and look at how difficult the U.S. government makes it for those who create jobs for others, you come to admire men like Steve Jobs. Jobs was adopted by Armenian parents, so maybe that had something to do with his entrepreneurial success.

In 1915 when an Islamic mullah in Turkey issued a fatwa calling for the killing of Armenian Christians, Armenians living in Turkey ran for their lives or were killed. Many got away and came to America where they were hit by the Great Depression and then World War II.

On my office wall at Yorktown University is a registry from Ellis Island where my Armenian grandfather arrive a few weeks after the sinking of the Titanic. Even the prospect of death at sea didn’t deter him from getting out of Turkey—before the genocide. My grandmother was less fortunate and fled to Egypt where her family was broken up, her fourteen year old sister married to an Egyptian, and she made her way to America.

Few Armenian immigrants spoke English, even fewer were college educated, so they were forced to survive by their wits. Since few employment opportunities were available to them, they started businesses. The lucky ones were sponsored by Protestant religious denominations that were active in Turkey at that time. Any way they could, this generation of refugees made their way to a new and strange country, learned English, found a way to make a living and started families. Their children were old enough to serve in World War II and after the war these first generation Americans made their way in life.

One such family adopted Steve Jobs. Steve Jobs is responsible for the good fortune of tens of thousands of Americans who work for Apple. And now, the end has come not because Steve wants to retire or because he’s bored. There are no straight lines in life and if there were, Steve Jobs would be around for future decades of opportunities to make decisions that would make Apple even greater than it is today.

Thank you, Steve. You have earned our respect, admiration and gratitude.

The Forbes family has poked itself in the eye with its “capitalist tool.”

Like many publishers, Forbes Media has struggled during the financial crisis. But according to nonpublic documents made available to Fortune, the company has been under more financial strain than previously believed. Forbes Media violated covenants on a revolving credit line that it took out in 2006, according to a letter sent to the company by J.P. Morgan. The loan, which was part of a series of transactions that allowed the Forbes family to cash out more than $100 million from the company, is due next July. Some lenders have been selling pieces of it at a discount from face value.

Since the death in 1990 of Malcolm Forbes — the unreconstructed tycoon who turned Forbes magazine into a celebration of business victory and its spoils — his children have held a decades-long yard sale of the family’s outré trophy collection. The island in the Fiji archipelago was sold to Red Bull founder Dietrich Mateschitz. A grand ranch in Colorado was picked up by hedge fund executive Louis Bacon. A sultan-worthy palace in Tangier, a custom Boeing 727, helicopters, the world’s largest private collection of Fabergé eggs, and stacks of Victorian art have all been auctioned off. Even the publishing company’s Fifth Avenue headquarters were sold to New York University.

But the Forbeses have held on to the asset that made them rich and famous in the first place: Forbes Media, the company that currently owns Forbes magazine (which dubbed itself the “capitalist tool” and has been a fierce competitor of Fortune’s), the Social Register, a stake in American Heritage magazine, and the websites Forbes.com and RealClear.

Holding on to that asset, however, has proved to be a gargantuan headache. The company went into technical default on some $90 million worth of revolving credit. The family and the minority owner, Elevation Partners, began an emergency plan to restructure the business and get back in the good graces of its lenders. They went so far as to hire Alvarez & Marsal — a firm that works with companies in dire financial straits or in bankruptcy to restructure their businesses — to bless the plan that Forbes Media’s board came up with…Continue reading on Fortune >>

…Plan B, it turns out, is a lot harder than it seems. But that hasn’t stopped cubicle captives from fantasizing. In recent years, a wave of white-collar professionals has seized on a moribund job market, a swelling enthusiasm for all things artisanal and the growing sense that work should have meaning to cut ties with the corporate grind and chase second careers as chocolatiers, bed-and-breakfast proprietors and organic farmers.

Indeed, since the dawn of the Great Recession, more Americans have started businesses (565,000 of them a month in 2010) than at any period in the last decade and a half, according to the Kauffman Foundation, which tracks statistics on entrepreneurship in the United States.

The lures are obvious: freedom, fulfillment. The highs can be high. But career switchers have found that going solo comes with its own pitfalls: a steep learning curve, no security, physical exhaustion and emotional meltdowns. The dream job is a “job” as much as it is a “dream.”…Continue reading Maybe It’s Time for Plan C >>

• Achieving Dominance
• Supply the “missing ingredient”
• Finding and occupying a specialized “ecological niche”
• Changing economic characteristics

Read the full story on Human Resources IQ.

With the economy still struggling, it may seem like an impossible time to start a do-good social venture. It can be hard enough to operate any business profitably — let alone one that also tries to improve the world. But some observers believe that the tough times may be increasing interest in social ventures.

[...]

To those looking to start such ventures, social entrepreneurs and investors offer the following pointers.

IT’S O.K. TO MAKE MONEY If you choose the profit-making model, stick with it — without apology. A few years ago, Assaf Shafran founded a nonprofit in Israel that offered a smartphone-based dispatching system for first responders, like firefighters and emergency medical technicians.

But his social venture, called IsraeLife, had an impossible time giving the system away to volunteer organizations, largely because the organizations were suspicious of giveaways — they demanded exclusive rights or they got mired in red tape related to receiving gifts. Mr. Shafran decided he could do more good by selling the systems. In 2008 he and his team formed a profit-making division, called NowForce, which has expanded into the United States. The business has raised $2.5 million from private investors, and Mr. Shafran expects sales to surpass $3 million this year.

Proudly embracing a profit-making model may require focusing on the balance sheet before unleashing the social mission. “You can’t pay employees a livable wage if you don’t have money in the bank,” said Lisa Lorimer, former chief executive of the Vermont Bread Company, which started making organic cookies in 1978….(Read the entire article on NYT)