The Unasked Question: Should You Open a Business?

There's been a lot of cheerleading for entrepreneurship the past couple of years. Many people laid off from corporate America have plunged into starting their own businesses -- driving the start-up rate to its 15-year high.

But is that necessarily a good thing? No-nonsense business advisor Carol Roth says not really. The downturn is prompting many people to start businesses, she asserts, who probably could save a lot of money and aggravation if they just skipped it.

In her new book, The Entrepreneur Equation -- Evaluating the Realities, Risks, and Rewards of Having Your Own Business, Roth asks the question that is the 500-pound elephant in the room of most entrepreneurship discussions since the downturn: Should you start a business?

Historically, the vast majority of startups end in failure. Unemployed people starting businesses now out of desperation because they can't find a job will likely fare even worse, as many just aren't cut out for entrepreneurial life, Roth says. She's hoping her book can help guide would-be entrepreneurs into better business decisions -- because if we can improve the success rate of entrepreneurs, it would really ignite the economy.

"We can't have entrepreneurship be the engine that drives our country if nine out of ten people don't succeed at it," she notes.

One common flub is deciding to turn a personal passion or hobby into a business, without considering how that will change your relationship to the activity. Not every hobby should be your full-time activity, Roth says. Try to work in the type of business that interests you before you take the leap to see if you'd really like it.

"I had a woman in financial services working for a major Wall Street firm tell me, 'I'm passionate about healthy fast food, so I want to open a Subway franchise,'" Roth relates. "I said, 'That's nice. Go work nights and weekends in a Subway franchise and see if you like it.' A few weeks later she came back to me and said, 'If I never see another $5 foot-long in my life, that'd be fine. You just saved me from wasting a six-figure investment.'"

Too many people are plunging into entrepreneurship without assessing their skills, Roth says. Do you have management experience? Work well with others? Are you really ready for the 24/7 responsibility of launching a new enterprise?

Besides taking a hard look at your abilities, personality type is another factor to consider, Roth says. The perpetually broke will have a tough time getting a business off the ground, as will those with poor money-management skills and those who are too risk-averse.

Franchises a Draw for Minority Entrepreneurs

Franchises appear to be an increasingly strong draw for entrepreneurs from minority racial groups.

A greater percentage of Asians, African-Americans and other minorities are buying into franchised businesses, as opposed to starting their own independent businesses, says a recent study from the International Franchise Association.

And while white franchise owners remain dominant in the industry, their ownership percentage declined from 2002 to 2007 while minority representation edged higher.

"The rise in minorities is a reflection of demographic changes," IFA spokesman Matthew Haller said. "As more minorities establish themselves in the U.S., they are looking to control their destiny through business ownership." Franchising, he adds, "offers some stability that you may not get, going it yourself though a start-up."

Many minority owners have become multi-unit franchise operators, Haller said.

In 2007, minorities owned 20.5 percent of franchised businesses, compared with 14.2 percent of non-franchise businesses, according to the report, prepared by PricewaterhouseCoopers, using data from the U.S. Census Bureau's 2007 Survey of Business Owners.

In 2002, minority entrepreneurs owned 19.3 percent of franchises, the report said.

The survey defines businesses at least 51 percent owned by those from a non-white racial group or of Hispanic ancestry as minority-owned.

Franchises accounted for 3 percent of minority-owned businesses in 2007, slightly more than in 2002 and more than the 1.9 percent of non-minority owned businesses that were franchises in 2007.

White entrepreneurs, meanwhile, owned 73.3 percent of franchised businesses and 80.6 percent of non-franchised businesses in 2007. They owned 79.2 percent of franchised businesses in 2002, so their large representation declined.

Breaking the numbers down a bit:

• Asians owned 10.4 percent of all franchises and 4.9 percent of non-franchise companies in 2007.
• Blacks owned 4.9 percent of franchises and 3.6 percent of non-franchised businesses.
• For Hispanics, the representation was roughly even, with ownership of 5.2 percent of franchised businesses and 5.4 percent of non-franchised businesses.

The Top 10 Business Plan Mistakes

It’s been nearly seven years since I posted Top 10 Business Plan Mistakes on this site. Looking back and reading the post again today, I think the list holds up very well. Still, I can’t resist making a few changes. So here is my revised version for 2012, incorporating what I wrote back then that still holds true.

1. Misunderstanding the purpose: It’s the planning that matters, not just the document. You engage in planning your business because planning becomes management. Planning is a process of setting goals and establishing specific measures of progress, then tracking your progress and following up with course corrections. The plan itself is just the first step; it is reviewed and revised often. Don’t even print it unless you absolutely have to. Leave it on a digital network instead.

2. Doing it in one big push; do it in pieces and steps. The plan is a set of connected modules, like blocks. Start anywhere and get going. Do the part that interests you most, or the part that provides the most immediate benefit. That might be strategy, concepts, target markets, business offerings, projections, mantra, vision, whatever. . . just get going.

3. Finishing your plan. If your plan is done, then your business is done. That most recent version is just a snapshot of what the plan was then. It should always be alive and changing to reflect changing assumptions.

4. Hiding your plan from your team. It’s a management tool. Use common sense about what you share with everybody on your team, keeping some information, such as individual salaries, confidential. But do share the goals and measurements, using the planning to build team spirit and peer collaboration. That doesn’t mean sharing the plan with outsiders, except when you have to, such as when you’re seeking capital.

5. Confusing cash with profits. There's a huge difference between the two. Waiting for customers to pay can cripple your financial situation without affecting your profits. Loading your inventory absorbs money without changing profits. Profits are an accounting concept; cash is money in the bank. You don't pay your bills with profits.

6. Diluting your priorities. A plan that stresses three or four priorities is a plan with focus and power. People can understand three or four main points. A plan that lists 20 priorities doesn't really have any.

7. Overvaluing the business idea. What gives an idea value isn’t the idea itself but the business that's built on it. It takes employees showing up every morning, phone calls being answered, products being built, ordered and shipped, services being rendered, and customers paying their bills to make an idea a business. Either write a business plan that shows you building a business around that great idea, or forget it. An idea alone does not a great business make.

8. Fudging the details in the first 12 months. By details, I mean your financials, milestones, responsibilities and deadlines. Cash flow is most important, but you also need lots of details when it comes to assigning tasks to people, setting dates, and specifying what's supposed to happen and who's supposed to make it happen. These details really matter. A business plan is wasted without them.

9. Sweating the details for the later years. This is about planning, not accounting. As important as monthly details are in the beginning, they become a waste of time later on. How can you project monthly cash flow three years from now when your sales forecast is so uncertain? Sure, you can plan in five, 10 or even 20-year horizons in the major conceptual text, but you can't plan in monthly detail past the first year. Nobody expects it, and nobody believes it.

10. Making absurd forecasts. Nobody believes absurdly high “hockey stick” sales projections. And forecasting unusually high profitability usually means you don’t have a realistic understanding of expenses.

Mark Cuban's 12 Rules for Startups

Anyone who has started a business has his or her own rules and guidelines, so I thought I would add to the memo with my own. My "rules" below aren't just for those founding the companies, but for those who are considering going to work for them, as well.

1. Don't start a company unless it's an obsession and something you love.

2. If you have an exit strategy, it's not an obsession.

3. Hire people who you think will love working there.

4. Sales Cure All. Know how your company will make money and how you will actually make sales.

5. Know your core competencies and focus on being great at them. Pay up for people in your core competencies. Get the best. Outside the core competencies, hire people that fit your culture but aren't as expensive to pay.

6. An espresso machine? Are you kidding me? Coffee is for closers. Sodas are free. Lunch is a chance to get out of the office and talk. There are 24 hours in a day, and if people like their jobs, they will find ways to use as much of it as possible to do their jobs.

7. No offices. Open offices keep everyone in tune with what is going on and keep the energy up. If an employee is about privacy, show him or her how to use the lock on the bathroom. There is nothing private in a startup. This is also a good way to keep from hiring executives who cannot operate successfully in a startup. My biggest fear was always hiring someone who wanted to build an empire. If the person demands to fly first class or to bring over a personal secretary, run away. If an exec won't go on sales calls, run away. They are empire builders and will pollute your company.

8. As far as technology, go with what you know. That is always the most inexpensive way. If you know Apple, use it. If you know Vista, ask yourself why, then use it. It's a startup so there are just a few employees. Let people use what they know.

9. Keep the organization flat. If you have managers reporting to managers in a startup, you will fail. Once you get beyond startup, if you have managers reporting to managers, you will create politics.

10. Never buy swag. A sure sign of failure for a startup is when someone sends me logo-embroidered polo shirts. If your people are at shows and in public, it's okay to buy for your own employees, but if you really think people are going to wear your branded polo when they're out and about, you are mistaken and have no idea how to spend your money.

11. Never hire a PR firm. A public relations firm will call or email people in the publications you already read, on the shows you already watch and at the websites you already surf. Those people publish their emails. Whenever you consume any information related to your field, get the email of the person publishing it and send them a message introducing yourself and the company. Their job is to find new stuff. They will welcome hearing from the founder instead of some PR flack. Once you establish communication with that person, make yourself available to answer their questions about the industry and be a source for them. If you are smart, they will use you.

12. Make the job fun for employees. Keep a pulse on the stress levels and accomplishments of your people and reward them. My first company, MicroSolutions, when we had a record sales month, or someone did something special, I would walk around handing out $100 bills to salespeople. At Broadcast.com and MicroSolutions, we had a company shot. The Kamikaze. We would take people to a bar every now and then and buy one or ten for everyone. At MicroSolutions, more often than not we had vendors cover the tab. Vendors always love a good party.

How to Raise Money for Your Startup -- Now

LONG BEACH, Calif. -- Raising capital for a startup venture during these difficult economic times has been a major obstacle for many aspiring entrepreneurs. But it's not impossible.

There are several steps budding business owners can take to get in front of prospective investors and to help make sure they pony over the cash you need, says Asheesh Advani, author and co-founder of CircleLending, a peer-to-peer lending service that was acquired by Virgin Money USA in 2007. He now serves as CEO of asset management services company Covestor. Advani was a speaker at Entrepreneur's Growth Conference here on Jan. 11, 2012.

Here are Advani's best tips for landing the money you'll need to get your business off the ground:

Know the different types of investors. There are three types of people who might invest their money in your business idea: friendly investors, hobby angels and professional investors. Friendly investors are the people you know personally, namely friends and family. Hobby angels are individual investors who are most likely professionals themselves who have some money to spare. Professional investors, of course, include venture capitalists, angels and banks. "Professional investors care most about the economics of your business," Advani says. "Whether they understand your business or not, they're required to consider your business idea, as well as countless others."

Make a list of prospects. Scour your industry and your professional network to put together a first group of people and test your business pitch, he says. If the people in this initial group appear to be interested, expand your list of prospects from there.

"When I started my businesses, I wound up raising money from 75 different investors," Advani says. "Not because I wanted to. I needed to."

Related: Highlights from the 2012 Entrepreneur Growth Conference

He suggests keeping track of your contacts, your meetings and your goals for each of the meetings. Keep in touch with the contacts throughout the pitching process.

Set a closing date. Determine a specific, official date for when interested professional investors need to get you the money they promised -- and hold them to it. When dealing with friendly and hobby angels, Advani suggests a "rolling closing date," meaning that you'll accept the investment money as soon as they're willing to give it. Also, be sure to be clear with friendly investors about what happens if the money they invest isn't paid back on time or at all.

"These are people who are close to you, so do everything you can to maintain a good relationship," Advani says.

Use middle men carefully. Third-party groups can be great for two things, Advani says. They can help connect entrepreneurs to individual investors they didn't otherwise know. Examples include peer lending and investing sites Lending Club and Prosper.

Crowd funding sites are another option. These services -- including Pro Founder andPeerbackers -- can help entrepreneurs collect numerous investments from people via social networks.

But be careful about sharing your business idea online, Advani warns. "Before you post a profile on any of these sites, remember that everyone will know what you're planning to do," he says.