If it seems like 2016 was a booming year for small business, it’s because more entrepreneurs are going into business and staying in business. In fact, the survival rate for small businesses remaining in operation past their fifth year rose to 48.73 percent in 2016, compared to 45.95 percent in 2015.
That’s a 6 percent year-over-year increase, and the highest the survival rate has been since it started being indexed 30 years ago.
With over 28 million small businesses taking up residence on Main Street, my company, Guidant Financial, wanted to take a closer look at who today’s small business owners are. We surveyed more than 1,000 of our small business owner clients, asking about their lives as entrepreneurs, how their businesses are performing and what struggles they’re facing on a daily basis.
Here’s what we found to be the most noteworthy small business trends:
Small business owners are opportunistic — when they can afford to be
At 37 percent, the top reason our clients went into business for themselves was because they were dissatisfied with corporate America. Along with this, the No. 2 reason individuals chose to pursue business ownership was due to the right opportunity presenting itself.
The 2016 Kauffman Index of Start-up Activity refers to this as “opportunity entrepreneurship” and reports that 8 out of 10 entrepreneurs in 2016 started their business because they saw an opportunity rather than out of necessity (unemployment).
Despite business owners’ opportunistic nature, many are still having a hard time accessing the capital they need to take advantage of business opportunities. Guidant’s small business clients listed “access to capital/cash flow” among their top two challenges, and according to a report from the National Small Business Association, 31 percent of business owners said they were not able to obtain adequate financing in 2016, up from 27 percent the year before.
This has created a break for alternative small business funding methods to enter the market. My company, for example, saw a 5 percent uptick in the number of people who used their retirement funds to buy a business in 2016, which has primed them to take action when the time is right, rather than when money allows.
Baby boomers thrive in business ownership
Between 2015 and 2016, Guidant saw an 83 percent increase in entrepreneurs under 40 who used business funding to launch their new ventures, but there’s room on Main Street for entrepreneurs of all ages. Baby boomers between the ages of 51 – 69 were our largest group of business owners, representing just under half of all survey respondents.
Times have changed, and there’s no denying that people are working longer for a variety of reasons, from financial necessity to wanting to delay retirement. The 2016 Kauffman Index for Startup Activity shows that while the fastest growing group of entrepreneurs is those age 35 – 44, the age range for new entrepreneurs varies from 20 – 64, and these different age groups are represented almost evenly.
Twenty years ago, the largest group of new small business owners was in the 20 – 34 age range, accounting for 34.3 percent of total entrepreneurs. The smallest group was age 55 – 64, accounting for 14.8 percent. These groups are now represented almost equally at 25 percent of total new entrepreneurs each.
Related: 4 Tips On Hiring In A Small Business
Small business owners are happier in their new careers
Entrepreneurs in our survey reported high levels of happiness in their entrepreneurial careers — an average 7.52 out of 10 — with little variance depending on what industry they worked in, how long their business had been in operation, or across different socioeconomic groups.
A 2014 report from Manta revealed that small business owners feel empowerment in creating their own earning potential and feel additional satisfaction in turning their passions into their career. This echoes various reports that say small business owners are happier than those working in the corporate world.
Historically underserved groups are turning to alternative funding
Unfortunately, it’s been documented that racial minorities traditionally have less access to capital for purchasing a business. According to a report by the Minority Business Development Agency, “Minority-owned businesses are found to pay higher interest rates on loans. They are also more likely to be denied credit, and are less likely to apply for loans because they fear their applications will be denied.”
Small business owners are educated, but it’s not mandatory
A large majority of our small business owner clients had some college education, but it’s more common to have not attended college than it was to have earned a doctorate.
Eighty-two percent of Guidant’s survey respondents had an associate’s, bachelor’s or master’s degree, but 15 percent had only a high school diploma or GED. And an even lower percentage had a doctorate degree (3 percent). This signals that with the right experience, financing and support system, any aspiring business owner can pursue their entrepreneurial dreams, regardless of education.
Popular Industries are poised for success
Our clients are opening up shop in every arena from pet grooming to computer repair. The most popular industries for small business owners in 2016 were food and beverage; health and fitness; and business services. For more information on the health of these industries, we looked at the Kauffman Index of Growth Entrepreneurship.
This report looks at the high growth of young companies, which is an important indicator for sustained growth in the industry as well as job output. Both health and fitness and business services were listed in the top five high-growth industries, while the food and beverage industry saw its highest year for growth since 2008.
Franchising is a popular option
Regardless of industry, many entrepreneurs are opening the door to small business ownership through franchising. About 40 percent of our clients used our business funding services to purchase a new or existing franchise.
The cost of acquiring a franchise starts as low a few thousand dollars for home-based companies and can reach into the millions for larger, well-known brick-and-mortar establishments. The majority of our clients who purchased a new franchise spent between $50,000 – $100,000, while existing franchises usually cost between $101,000 – $175,000.
Going into business can be affordable
Buying a small business can easily turn into a multi-million-dollar deal, and many Guidant clients who secure an SBA small business loan obtain close to the $5 million maximum limit. But it is possible to start a business with a lower price tag for business owners on a tighter start-up budget.
We found that almost 30 percent of our clients spent less than $100,000 total to acquire their business. Although this is no small price, there are now more funding options than ever before, and entrepreneurs don’t need to be millionaires to afford making their dreams of business ownership a reality. In fact, the combined household income for the majority of new entrepreneurs is less than $150,000.
Small businesses are looking to expand in 2017
The top two challenges small business owners faced in 2016 were recruiting and retention of employees and lack of capital/cash flow. Over 30 percent of respondents also indicated they struggled with time management, as well as marketing and advertising.
Even though small business owners do have concerns over lack of capital, they are looking to grow. We asked our clients how they would invest additional business capital, and 48 percent indicated they would use it to expand.
Despite the recent uncertainty about us the U.S. economy following President Donald Trump’s election, the dust is beginning to settle and entrepreneurs are able to focus their attention toward their business’s success.
This article was originally posted here on Entrepreneur.com.
The Art Of Pivoting: How To Know If The Time Is Right
Keep the vision, change the strategy to serve the market according to what they really need.
The word “pivoting” has become as over-used as the phrase “disruptive innovation”, but much like innovation, businesses have been pivoting for many decades (if not centuries) before the word became an everyday verb. You only need to look at Twitter, which started as a podcasting business, or Nintendo, which started by selling vacuums, or even Youtube, which was supposed to be a dating site for some inspiration.
These businesses may have all changed their product, service, or even target market in a major way, but they survived and have been thriving ever since. They kept their vision of achieving successful sustainable businesses, despite a change in strategy. And that, my friends, is pivoting: Keep the vision, change the strategy to serve the market according to what they really need.
Ask the right questions to your market: Are you solving a problem?
If you haven’t done user testing, user interviews, focus groups, or called anywhere between 10 and 50 of your highest value possible clients, you might want to take a step back and get that done to define if you actually have a problem to solve.
Many founders start by speaking to a handful of family members, and a handful of friends about their business idea, and are met with unbridled excitement and encouragement that you would expect of people in your life who unconditionally love you.
The reality is, these people have to live with you everyday – they don’t want to risk offending you and shattering your dreams. They basically have to tell you that your idea is great. Get tangible proof from real-world customers or clients that they see the problem you see, and that the problem is as big as you think it is.
Set your vision
What are you really trying to achieve in your business? In other words, what is your “why”? If you set this in a very clear one liner, you will quickly realise that there are many ways to achieve that vision, if you are able to take emotion out of the equation.
This will take you away from the detail to the big picture. For example, a vision along the lines of “To save people time” could be achieved in hundreds of different ways, and your current offering could be tweaked to increase your market size and save people much more time than your current offering, even if it wasn’t that idea you initially got so excited to tell your dog and three cats about.
To paraphrase Eric Ries of Lean Startup, pivoting is simply a change in strategy, not a change in vision.
How do I know when to pivot?
If you’re going through difficult times in the business, I would recommend going back to the most important people in your business – your clients / customers. Get their thoughts and opinions on what’s working; what’s not working; is your offering solving their problem adequately; what would they like more of, etc.
Finding out how to improve your offering from your existing client base will almost certainly not only help you retain your existing client base, but also grow a new client base by helping you solve the problem more effectively. This process can also reveal if your clients see something in your product that you didn’t – ie.to help you pivot. You will find out what your target market really wants and what your product could be if you weren’t so attached.
This requires extreme open-mindedness, and willingness to implement your learnings, even if what your market wants isn’t as “sexy” as your initial offering. On the flip side, if you can keep improving your current offering without changing direction, and if you still have cashflow and clients in the pipeline, it may not be necessary to pivot yet.
Pivoting is often necessary when the current offering reaches a glass ceiling, it’s impossible to close sales, and when cashflow becomes a problem. However, if you realise that your offering is so far removed from what your customers want that you would have to change your strategy and your vision – that, my friends, could be the time to quit and apply the learnings to the next venture. The key lesson from that eventuality is to do more extensive product-market fit research in the beginning next time, and make sure your product is meeting an actual market need.
What if things were different?
I have an experiment for you to apply within your own business. Remember, open-mindedness is essential to break through the glass ceiling:
- What if you kept the exact same product / service, but changed your target market? What would the new target market be?
- What if you changed your product / service, but kept the same target market? What would your new offering be?
- What if you kept the exact same product / service and the exact same target market, but pursued that market in other cities or countries? If your market were the whole of Africa / North America / Europe etc, would that make a difference? Is it feasible? What would have to happen for it to be feasible?
- What if you changed your business to a social business? Would partnerships with NGOs open new opportunities in the market?
- What about the impact you could have and the exposure this could bring to your business?
I highly recommend creating a “what if” business model canvas or pitch deck based on this alternate reality for each of the questions above. This could be a fun activity to do with the team on a weekend away over multiple cups of warm coffee. Good luck, and remember, there is no shame in adapting your business to provide people with what they really need.
An Innovative Culture Absolutely Requires This Unique Capability
What you need is a ‘chaos pilot’ on board at your company. If you don’t have one, think about adding one.
In my line of work, I have the privilege of mentoring and working with start-up entrepreneurs who often offer unique and remarkable ideas that, in my opinion, have the potential for significant commercial impact.
Unfortunately, many of these ideas end up in the dust heap of forgotten businesses that never get traction.
Why do so many great ideas fail? The reality is that many promising new ideas are derived from products or services or systems that have yet to be considered. They are disruptive in nature and typically exist only in the abstract.
Dealing with these ideas therefore demands a unique set of skills that differ from general management capabilities typically associated with running a company.
In a recent article at Harvard.com, Nathan Furr, assistant professor of strategy at INSEAD and coauthor of Leading Transformation: How to Take Charge of Your Company’s Future, explained that a critical, and often missing, element for innovative teams is the capacity to function in the abstract. Furr referred to this capacity as negative capability.
To understand the concept, consider what Robert French of the Bristol Business School has called “positive” capabilities. These skills, as they pertain to new ideas, have been connected with successful general managers, because they can:
- Understand the complexities of new ideas
- Understand and manage the process by which new ideas are executed
- Understand and manage the necessary roles within an organisation or team needed to execute on new ideas.
These characteristics are typically technical skills that involve structure and discipline. They are valuable for managing any company, especially one operating in a business environment requiring constant innovation. Such innovation is needed to iterate new and bold ideas, but these skills alone are not enough.
The reason is that, to stay ahead and execute on a regular basis, new ideas, especially disruptive ones, often take a team and the entire organisation into unchartered territory where there exists no precedent, historical structure or “road map” to guide them. In these cases, positive capabilities based on structure fall short of execution.
As French explained, this type of change “always arouses anxiety and uncertainty,” and teams that are unprepared tend to move toward avoidance tactics – defaulting to known structures, which then lead to the collapse of the new project.
For that reason, it is critical to have members on the team who can handle uncertainty and unknown outcomes and also have the fortitude to pivot when necessary. These types of leaders are what Furr calls “chaos pilots.” To be an effective chaos pilot yourself, you need more than technical management skills. Here are the three other skill sets he lists:
1. Divergent thinking
To think divergently, Furr explains, individuals need to be able to synthesise a multitude of information and “uniquely connect new information, ideas, and concepts that are usually held far apart.” This skill requires the ability to stay constantly focused on a mission while constantly processing new information.
Leaders who operate as divergent thinkers often surround themselves with talented individuals who can handle the day-to-day operations; that capability frees up the leadership team to collaborate and collect valuable data.
2. Convergent action
According to Furr, great chaos pilots do more than just take in new information. They “execute on new ideas in order to create something tangible.” In other words, they synthesise all the information and leverage it to effectively execute on new ideas.
Far too often, entrepreneurs fall short here, getting consumed by FOMO (fear of missing out) and failing to prioritise, or at least balance, output time with input time. Doing so creates an entrepreneur with a wealth of information, but ultimately provides very little value.
3. Influential communication
Finally, thinking divergently and being able to “connect the dots” are great skills, but if a chaos pilot is unable to communicate new ideas effectively and, as Furr states, “inspire other leaders and decision-makers to believe, support, and act on a novel idea or opportunity,” the idea will stop short of execution, no matter how well synthesised.
Over the years, I have been a part of innovative teams (at times leading them) whose sole priority was developing new ideas for clients. I recall a few times leading those teams through a comprehensive mind-mapping process meant to spark new ideas. In these situations, we inevitably would stumble on a truly remarkable idea or two, but like our team, those ideas weren’t rooted in a stable and established process; sometimes they weren’t comparable to what we were already doing.
Our ideas would also sometimes get lost in the insecurities and anxiousness of the group and never even be presented.
Great management skills are clearly needed to lead a company and execute ongoing operations effectively, but to consistently generate and see great new ideas through to execution, it is critical to have an effective change manager – or chaos pilot – on your team. And while these skills cannot be taught, they can be learned and nurtured through experience and an environment that encourages and supports risk taking and failure.
This article was originally posted here on Entrepreneur.com.
How I Built A Company The Lean Way – By Using The Scientific Method
Starting a company is one of the most irrational acts you can do as a human being. That’s why employing hypotheses and experimentation is crucial.
In the past five years, the cloud management company I founded has grown from a one-person business into a global employer of over 300 people. Recently, VMware, the most important provider of infrastructure and technology in our industry, purchased us – an exciting milestone as we look to the future and continue to execute on our vision.
In spite of all the twists and turns I’ve experienced, there’s been one thing I did right in the early phases of building this business: Committing to continuous experimentation.
When I left my previous company, I had an idea of where I could bring the most value in the market, based on my previous experiences in cloud computing. But I’d also been inspired by Stephen Blank’s The Four Steps to the Epiphany and indirectly by the Lean Startup movement. As a result, I knew I would start my business from the top down: By devoting myself to a market (cloud management) and to the scientific method for entrepreneurship – dispassionately testing all assumptions and hypotheses, and following where they led.
So, where did I begin? And where do you begin? Here are the steps.
Develop your initial hypotheses
The process of entrepreneurship starts with a set of hypotheses to identify the product or service you will bring to your customers. A good hypothesis is that it answers critical questions regarding your initial business concept that can be proven only through experimentation.
I started my own journey by putting a poster on the wall and using sticky notes to capture the critical hypotheses I needed to test. Every two weeks, I selected a set of hypotheses and designed experiments to prove or disprove them.
En route, I thought about the ecommerce company Zappos – a supporter of the Lean Startup movement – and its initial hypothesis that people would buy shoes online. For the file-sharing company Dropbox, the hypothesis was that users needed a radically simplified way to share files. For the coffee retailer Starbucks, it was that Americans would embrace the Italian coffee culture.
Design an experiment
Next, choose a set of hypotheses to test, and design an experiment to test them. A good experiment should eliminate all ambiguity from the hypothesis to the answer. It should also prove or disprove the hypotheses with the least possible investment.
I was inspired at this stage by stories from entrepreneurs like Dropbox’s Drew Houston, Zappos founder Nick Swinmurn and Starbucks’s Howard Schultz. To prove his hypothesis, Houston didn’t invest in building yet another file-sharing app; he instead created a video that demonstrated the ease of use of his idea for Dropbox and how it could be a differentiator.
Similarly, Swinmurn didn’t choose to buy inventory for his new online shoe store, instead, he took pictures of shoes. He posted them on a website and purchased the shoes from the store only after receiving a customer order.
Schultz, meanwhile, chose to cram his early concept for delivering Italian coffee culture to American consumers into 300 square feet, inside another retail store.
Experiment and observe
My experiments ranged far and wide – from driving an advertising campaign, to creating an A/B test website, to performing customer interviews with large financial institutions, to delivering professional services.
For example, one of my sticky notes asserted simply that, “Cloud cost management is a feature and not a market.” The experiment I designed to prove or disprove this statement was built around helping five local businesses optimise their cloud costs.
As an early-stage entrepreneur, you have to be willing to conduct these sorts of tests to determine what works, what doesn’t and how you can identify real and durable problems in a market. You need to to take risks, to be willing to fail and understand that you’re always learning.
Dropbox’s own critical video experiment resulted in its beta user requests growing from 5,000 to 75,000 users, validating critical hypotheses without investing in a single line of code. Starbucks’s first store attracted 1,000 visitors per day to a location that had previously never seen more than 200. Zappos’s website resulted in actual sales of shoes, which were fulfilled with purchases – at list price – from a local store.
Discuss results with advisors
Before starting the company, I created my own informal board of advisors, who included a venture investor, two technology CEOs, a business development executive and a technology founder. All were dedicated to my success, with no strings attached.
I met with them for coffee throughout the experimentation process, and always discussed with them what I was learning. Having talented colleagues to provide feedback and advice frequently produced new insights.
Rinse and repeat
Once you secure answers to your first hypotheses, it’s time for you to go back to the drawing board and create new hypotheses, design another experiment and test it. A hypothesis without an experiment does no good. You gain the most knowledge when you’re testing the ideas you propose.
Start the business
I equate the start of my company to an experiment I called “the sale.” After several months of developing hypotheses and running experiments, I had a good sense of where I could add strong and durable value for customers in the market. But what I hadn’t tested was price.
I hypothesised that a prospective customer would need to be willing to spend $50,000 annually – roughly the average price required to sustain the business model – on my product, to support the inside sales-driven model I was projecting. So, I designed an experiment around cold calling a handful of prospective customers and trying to convince them to purchase my minimum viable product for $50,000 per year.
In the process of being rejected, I hoped to learn about the additional features these companies needed to justify purchasing a product at that price point.
As part of the exercise, I first spoke with the CFO of a fast-growing technology company. While the CFO understood the problem I was addressing, he had almost no input on features, and no interest in paying for a solution. But then he surprised me by asking for another call the next day with his vice president of engineering and members of his team.
The assembled team not only had deep knowledge in the area in which I had built my MVP, but had already built many of my features themselves.
By the end of the call, the vice president of engineering made the surprising statement: “Sure, we’ll buy.” When faced with the potential for a sale, the first instinct of every good engineer is to do exactly what you shouldn’t: keep talking. Instead, I proceeded to explain how the CFO was hadn’t been convinced the previous day, and that maybe the engineering VP should talk to him before agreeing to a purchase.
“Our CFO is in the room right now,” the VP said. “We’ll buy. Just send us the contract.”
As I hung up, my excitement at having a first customer was tempered by the reality that I had no contract to send, nor a business entity under which to extend it. Since my experiment had been designed for failure, I hadn’t given much thought to what to do when confronted with success. Thus began my next challenge: Creating a business entity and onboarding a first customer – fast.
Reach a conclusion and communicate it with peers
Starting a company is one of the most irrational acts you can do as a human being. You are taking great personal and professional risk for an unknown outcome. While there is no foolproof way to manage this uncertainty, there is a way to minimise the risk: cContinuous experimentation in the presence of customers. My company exists as a direct result of a commitment to experimentation, a route you should seriously consider when you start down your own entrepreneurial path.
This article was originally posted here on Entrepreneur.com.