Small Business

Start: Austin’s ‘Silicon Hills’ Builds on Its Infrastructure

July 17, 2013 by NewsMaker Leave a Comment

Courtesy of the Austin Chamber of Commerce Larry g(EE) at SXSW: Does music attract start-ups?

Start

The adventure of new ventures.

Several weeks ago we introduced a series that will run in this space, looking at start-up communities nationwide. In our first profile, we take a look at the scene in Austin, Tex., which established itself as a tech hub decades ago.

The city’s high-tech area adopted the name “Silicon Hills” in the 1990s. Since then the start-up infrastructure has expanded to bring along new companies and sustain old ones. Today, Austin is one of the top areas for venture capital investment in the country, garnering $621 million in 2012, according to the Austin Chamber of Commerce. Software and semiconductor firms received about 43 percent of that.

The region’s start-up ecosystem includes several venture capital firms, the Central Texas Angel Network, one of the most active angel networks in the country, groups that foster and encourage entrepreneurship and several well-known incubators. There’s plenty of talent in the area, both recent graduates from the University of Texas and refugees from Austin’s large tech companies, like ATT, I.B.M. and Dell. But it’s also not hard to get talent to relocate. Austin is a Colorado River town, with three lakes within the city’s limits, rolling hills, a relatively low cost of living for a metropolitan area and a great music scene.

“It’s a little hard to draw a line directly from music to the start-up community, but music is a part of the character of the city, part of the brand if you will, and that makes it an attractive place to start a company and easier to recruit talent,” said John Thornton, general partner at AustinVentures, the oldest and largest venture capital firm in the city. Last year Austin’s SXSW Interactive, which highlights emerging technologies as part of the SXSW festival, had a 15 percent increase in attendance over 2011.

Companies starting up in Austin used to build primarily software and silicon chip-related products and that is still largely true. “From a D.N.A. standpoint, Austin is very good at software, specifically enterprise solutions for business,” says Mr. Thornton, whose firm has about 80 active portfolio companies.

Isaac Barchas, director of the Austin Technology Incubator, says there are also a growing number of consumer-oriented Internet companies, like HomeAway and RetailMeNot. “They are creating tools that let the user explore the Internet more effectively,” he says.

Some have criticized the extensive attention that Austin’s tech industry has received when compared to other regions. The online publication PandoDaily, which covers technology start-ups, recently questioned whether Austin could live up to its hype, charging that the city has had just a few stand-out tech exits and that its consumer-focused sector was having a tough time finding success.

Gowalla, the article noted, was a much-touted Foursquare competitor acquired by Facebook in December 2011. That acquisition was largely for the talent — payment was rumored to have been made in Facebook shares — and it was shut down a few months later.

Yet there have been notable successes. Two Austin start-ups had successful initial public offerings recently, with Bazaarvoice raising $114 million in February 2012 and HomeAway’s offering raising $231 million in June 2011.

Austin also has a large and growing gaming industry. It’s is one of the top three cities in the country for game development, said Jennifer Bullard, executive director of Texas Game Lab. This fall, the lab will be starting a new conference for digital media professionals known as the Captivate Conference. The gaming sector is also one of the nation’s oldest, tracing its roots back to 1983 when Origin Systems was founded.

The industry has had its ups and downs in Austin. Many of the city’s game studios are owned by large publishers based outside the area, like Electronic Arts and Zynga. These satellite studios often develop a single game and if that game falters or fails, layoffs happen. Zynga, for example, made significant cuts to its Austin staff in June. Earlier this year, Vigil Games and Junction Point Studios (which was owned by Disney Interactive), were shut down. But Ms. Bullard also noted in an e-mail that independent game studios form regularly, making up for some of those lost jobs.

The Texas Film Commission, which administers the state’s incentive program for the video gaming industry, estimates Austin has more than 100 game studios. Since 2007, video game companies in Austin have received almost $10.3 million through the incentive program.

Various other associations, work spaces, accelerators and incubators have also spurred the growth of technology. Those include the Austin Technology Incubator, part of the University of Texas’ IC2 Institute; Center61; Startup Texas, a regional branch of the Startup America Partnership; Tech Ranch Austin; the Austin Technology Council; and Austin TechLive.

There are at least 15 incubators and accelerators in the city and the Austin Technology Incubator is often cited as one of the strongest in the nation. It admits less than 10 percent of its applicants and is focused on helping start-ups compete in the capital markets. “We get you funded,” Mr. Barchas, the incubator’s director, said. “In 2012, 18 of our 21 companies got funded. And those 18 companies have raised a total of more than $200 million.”

Over the past five years ATI has reviewed about 1,000 companies, said Mr. Barchas, who has seen a growing number of start-ups in the clean energy and biomedical industries.

“Our portfolio is full of companies having a real impact on energy consumption,” he says. An example is Omni Water Solutions, a mobile system for water treatment and reuse. One of the ways it’s used is to purify water from hydraulic fracking, the natural gas drilling technique that has drawn controversy because of the potential for pollution in its process.

Local entrepreneurs praise the exceedingly collaborative and social nature of the tech sector in Austin. “It’s very easy for me to get advice or get people to help make introductions to partners, investors or developers,” says Bart Bohn, a co-founder of AuManil, a start-up focused on big data.

And although Austin is far away from the venture capital offices of Sand Hill Road in Silicon Valley, Mr. Bohn added that financing was never a problem for him.

“There’s a conversation about Austin that it doesn’t generate as many multibillion companies as Silicon Valley does, but it probably generates a lot more successful companies at a lower risk,” he says. “Entrepreneurs here are driven by revenue, that’s the mentality, so there may be less of a total valuation but the companies are successful at smaller valuations.”

You can follow Eilene Zimmerman on Twitter.

Article source: http://boss.blogs.nytimes.com/2013/07/17/austins-silicon-hills-builds-on-its-infrastructure/?partner=rss&emc=rss

You’re the Boss Blog: A Bakery Is Relieved to Have the Employer Mandate Delayed

July 16, 2013 by NewsMaker Leave a Comment

Courtesy of Baked in the Sun Rachel Shein: “I think most of my young and healthy workers won’t buy any insurance.”

Case Study

What would you do with this business?

With Congress pushing back an important start date for the Affordable Care Act, giving companies with 50 or more full-time employees an extra year before they are required to offer health insurance to their workers, we decided to check in with Rachel Shein and her wholesale bakery, Baked in the Sun.

In March, Ms. Shein and her bakery, based near San Diego, were featured in a case study that looked at what she would have to do to comply with the new health care law. With insurance companies still developing their offerings for businesses like hers, Ms Shein was delighted to learn that the employer mandate was being delayed. “I was thrilled when I heard we had the extra time to watch and wait,” she said.

At the time the case study was written, Ms. Shein had been quite concerned about the potential effects of the law’s implementation. “We saw it as a significant cost to our business, one we hadn’t built into our business model,” she said. Her participation in the case study led to appearances on several TV news programs, including on Fox Business and CNBC.

Initially, Ms. Shein estimated that she would have to pay $108,000 a year to include the 90 employees who are not currently covered by her company’s health insurance. Her insurance broker now believes that when the final rates are published for next year, the cost will be higher than that.

Ms. Shein, though, will have to pay for only those employees who sign up for the plan she offers, and so far, the plans she has seen have not seemed terribly attractive. One sample plan, she said, included a $4,500 deductible, which Ms. Shein said “is too high for low-wage workers, so my employees may be better off going to the state-run market for individuals, which seems to have more options and better prices.”

Insurance company offerings for businesses like hers are expected to evolve, Ms. Shein said, and she hopes better plans and choices become available, as they have on the individual exchange. Right now, Ms. Shein doesn’t know the final costs or how many of her employees will sign up, so she has not been able to estimate her expenses with any confidence. “It’s still very messy,” she said.

The delay is an opportunity for both companies and employees, Ms. Shein said, because it gives business owners more time to shop around and workers can take the year to see what is available on the exchange before they decide if they will take company-offered insurance.

Ms. Shein is also interested to see if the managers who are covered by her company’s insurance plan find a better deal on the state-run market. For the rest of her employees, she said, “the individual penalty for not carrying insurance is still low, so unless some better options come out, I think most of my young and healthy workers won’t buy any insurance — either through me or the exchange.”

For now, she plans to focus on running her baking company. “The recession has made us more efficient,” she said. “We’ve automated more and focused on the most profitable parts of the business. I can’t control the insurance rates, but I can make a great espresso mocha scone.”

Article source: http://boss.blogs.nytimes.com/2013/07/16/a-bakery-is-relieved-to-have-the-employer-mandate-delayed/?partner=rss&emc=rss

Filed Under: Small Business Tagged With: affordable care, employer mandate, time employees

You’re the Boss Blog: My Second Chance in My Second Job

July 16, 2013 by NewsMaker Leave a Comment

Building the Team

Hiring, firing, and training in a new era.

Last week, I wrote about my experience and missed opportunities in my first job, at Trilogy, a software company based in Austin, Tex. Today, I want to discuss how I tried to learn from my mistakes to achieve success at Callidus Software, my second job in two years.

My “miss” at Trilogy drove me to completely reassess how I approached this second experience. I was ready to do whatever it took to be successful.

First, I was ready and willing to start at the bottom. At Callidus, I really did start at the bottom, literally. Right before I was hired, the company leased a second floor in a building in San Jose, Calif. They put their current employees on the original floor (the top one) and the new employees (me) on the bottom floor. My desk was the only one occupied amid a sea of empty cubicles. Needless to say, it was not the most welcoming of office environments, but I didn’t care. (I’ve written previously about more welcoming environments.) I was ready to make my mark.

Second, I was ready to go to great lengths to achieve success. In this case, it meant driving long distances. I had moved to San Francisco from Austin, but Callidus was based in San Jose — 50 miles away. It didn’t matter. I commuted every day, 50 miles each way, and didn’t mind at all. It’s helpful that Highway 280 between San Francisco and San Jose is absolutely gorgeous.

Third, I was ready to work hard and long. Even though I was driving a long way, I was usually the first to arrive (getting there early helped to avoid normal rush hour). I would work through the day, and then, when everyone else left for the evening, I would go to the gym down the street to work out. This would allow me to re-energize so that I could return to the office in the evening to do a couple more hours of work before heading home.

Fourth, I went in search of revenue. I learned from Jason Wesbecher at Trilogy that revenue is the lifeblood of a start-up and that the people who generate revenue are highly valued. So I did what I had watched him do: cold-call and e-mail potential customers, follow up doggedly to schedule meetings, consult with these potential customers to begin to understand their processes and uncover their problems, devise presentations and proposals that illustrated how our software could solve their problems and the benefits that would be gained, and push to close new deals.

Fifth, I realized when I started that I didn’t know how to do sales, so unlike my time at Trilogy (when I missed the opportunity to learn from Joe Liemandt, Ajay Agarwal, Jason Wesbecher and many others), I sought out mentors early at Callidus. Reed Taussig, the chief executive, was extremely helpful. He took an interest in me from the start and helped me chart my career path. My day-to-day mentor was Chris Cabrera. Chris and I were hired around the same time, but he had more than a decade of experience in the industry. I learned a tremendous amount from him — essentially everything I know about sales. I would schedule lunch or coffee with both Reed and Chris, and constantly ask questions.

Sixth, I was prepared to achieve success and then do it all over again. When I started at Callidus, I was told that I was too young to be a salesman for the company. We were selling multimillion dollar software applications. What company would buy that product from a 24-year-old who wasn’t old enough to rent a car? Undaunted, I started doing what I had seen Jason do at Trilogy. I reached out to potential customers with the goal of filling the sales pipeline. Eventually, I cultivated a qualified lead in Miami, but we didn’t have any sales people on the East Coast. So Reed told me that I should go there myself. And I did.

Thankfully, that first trip turned into another and then another, ultimately culminating in a multimillion dollar deal. I marched into Reed’s office and said: “I’ve sold a deal. I’m ready to be a full-fledged account executive.” He responded without hesitation: “You’re right. Now become our No. 1 salesperson.” So that was my new goal. I worked hard the rest of the year, signing many more customers and achieved the goal. I marched back into Reed’s office, and he said: “Great job. Really well done. But anybody can do it once. Really talented people do it two years in a row.” So I focused my efforts on repeating the feat. And I did.

Seventh, I was ready to go anywhere and do anything at any time. From Christmas to New Year’s Day of 2001, Reed, Chris and I met at the Callidus headquarters in San Jose. The mood was somber: we had built a software product to sell to banks, insurance companies and telecommunications companies, the majority of which were on the East Coast. But the locus of our customer activity was on the West Coast. We had hired experienced sales professionals on the East Coast, but none seemed to be effective. So in the meeting in 2001, Reed argued that we needed to “take someone from headquarters and move him to the East Coast.” I leaped at the chance. I didn’t care where I lived or where I had to move. I just wanted the opportunity to prove myself. When I moved to New York, the company’s revenue had plateaued in the mid-20 millions. One year later, after we got the Eastern half of the country working, the company’s revenue jumped to more than $70 million.

Finally, it’s important to point out how luck plays a role in these things. Because Callidus grew relatively quickly, it afforded me the opportunity to increase my responsibilities. I was lucky that it was a terrific vehicle for me to redeem myself. In the course of my time at Callidus, we expanded the business from start-up to more than $100 million in revenue and an initial public offering in 2003. (The company is still publicly traded today.)

So this is my message to this year’s college graduates: I hope you avoid the mistakes that I made at my first job at Trilogy and embrace the philosophy that I adopted at Callidus. If you do, and if you are lucky enough to land a job in the first place, I am confident that you will make the most of the opportunity.

Bryan Burkhart is a founder of H.Bloom. You can follow him on Twitter.

Article source: http://boss.blogs.nytimes.com/2013/07/16/my-second-chance-in-my-second-job/?partner=rss&emc=rss

Filed Under: Small Business Tagged With: bottom floor, long distances, rush hour

Building the Team: My Second Chance in My Second Job

July 16, 2013 by NewsMaker Leave a Comment

Building the Team

Hiring, firing, and training in a new era.

My “miss” at Trilogy drove me to completely reassess how I approached this second experience. I was ready to do whatever it took to be successful.

Bryan Burkhart is a founder of H.Bloom. You can follow him on Twitter.

Article source: http://boss.blogs.nytimes.com/2013/07/16/my-second-chance-in-my-second-job/?partner=rss&emc=rss

Filed Under: Small Business Tagged With: bottom floor, cubicles, office environments

You’re the Boss Blog: A Social Entrepreneur Transforms a Nonprofit Into a Profit-Making Enterprise

July 15, 2013 by NewsMaker Leave a Comment

Case Study

What would you do with this business?

Matthew Staver for The New York Times Saul Garlick, ThinkImpact.

Last week, we published a case study about a social entrepreneur, Saul Garlick, discussing what kind of legal structure would be best for his enterprise, ThinkImpact, which encourages entrepreneurship in third-world communities. He fundamentally had three options: continue as a nonprofit, go commercial, or find some sort of hybrid route.

We asked three experts which option would be best. Pamela Hartigan, director of the Skoll Center for Social Entrepreneurship at Oxford, who is constantly advising aspiring social entrepreneurs, suggested that Mr. Garlick hop off the “treadmill of donor dependency.” Jonathan Lewis, a lecturer at the University of California, Berkeley, and a social entrepreneur himself, also suggested going commercial. Lastly, Shivani Siroya, an entrepreneur who runs InVenture, a hybrid organization, noted that it was possible to raise revenue even as a nonprofit and thus suggested that ThinkImpact should not dismiss a nonprofit model too quickly.

Many commenters agreed with Ms. Siroya, suggesting that Mr. Garlick use revenue streams as a nonprofit to raise money rather than going purely commercial. Others, however, noted that the nonprofit field is evolving and a profit-making enterprise can be driven by social impact and not the bottom line. Several readers pointed to new legal structures like a benefit corporation or L3C, which incorporate social impact into the core mission of a company.

We contacted Mr. Garlick for a follow-up conversation, which has been condensed and edited, to see which option he chose.

Which of the three viewpoints could you relate with most?

Jonathan Lewis’s. I think he appreciates the reality around donor fickleness and also, rightly, notes that the nonprofit/for-profit debate is overestimated and really just about structure. I believe both structures can work, but they come with different requirements for how people prioritize their time. I found the other comments interesting but ultimately not really solving the problem. The nonprofit was generating earned income, but we were not optimizing our efforts to create value through that type of transaction. I think people make the mistake of distinguishing for-good vs. for-money. The notion that nonprofits are the right — or even, better — vehicle for doing good in the world is no longer true. That may have been the case at one time, but today, ethical, well-run businesses with products that make life better are remarkable at improving lives at scale.

So, you decided to go the for-profit route. Why?

Ultimately, the decision came down to shareholders versus donors and vision. While I realized that shareholders can be demanding, I was able to identify impact investors who believed in the mission of the company and were willing to be patient. I also wanted to dedicate more time to the value we were creating, and as a for-profit with debt or equity financing, I could dedicate my team’s and my time to building great products and services.

What would you say to nonprofits and nongovernmental organizations, or NGOs, that have been in existence and continue to operate on donations and grants?

I am a huge fan of nonprofits. I serve on several boards and feel inspired by the work they do to improve lives every day. But I also know of countless failed NGOs that are unsustainable and are shrinking or dying due to a broken model. This is particularly true in the international nonprofit world. There are expenses: think of flying around the world for programs, while there are also pressures not to spend money on flights to ensure low overhead expenditures to look good for donors! It is a system that deserves review. I also am far more skeptical of the true value these organizations have in the communities where they work. Some are remarkable but far too many are disconnected and dishonest. This is perpetuated by a broken feedback loop. If your beneficiary is not a customer, they may never tell you that what you are providing is unhelpful.

Are investors and shareholders not as demanding as donors and grantees?

It is extremely different. I find donors to feel owed some emotional reward that is intangible and constantly burdensome because as a nonprofit director you never know if they are really satisfied. Plus, each donor has a different need, from special projects to more colorful pictures. Investors, especially ones who believe in your vision, are pretty cut and dried about their expectations — deliver something great and do it in a way that is growing and eventually makes money.

Do you think that people are more generous with their time and energy as a for-profit or nonprofit? Does it make a difference?

People are pretty generous in both cases. Nonprofits are definitely better positioned to get unpaid volunteers, and rightly so. One common perception is that for-profits are rich, so they have plenty of money to pay people. While that is certainly not the case, it impacts the expectations of the individuals involved.

Article source: http://boss.blogs.nytimes.com/2013/07/15/a-social-entrepreneur-transforms-a-nonprofit-into-a-profit-making-enterprise/?partner=rss&emc=rss

Filed Under: Small Business Tagged With: fickleness, hartigan, legal structures

You’re the Boss Blog: This Week in Small Business: Hire an English Major

July 15, 2013 by NewsMaker Leave a Comment

Dashboard

A weekly roundup of small-business developments.

With Gene Marks on vacation, we present a truncated version of his usual roundup of articles that small-business owners should be reading. Gene will return next week.

Start-Ups

According to Wired, it just became a lot easier to finance a start-up: “The long-term impact will be even deeper, bringing the process of funding of start-ups onto the Internet, where it can be demystified, atomized and mechanized in the sort of digital transformation so many start-ups have themselves brought to other industries. ”

Richard Florida writes about the relationship between venture capital and the density of start-up communities: “Venture capital investment reflects America’s red/blue divide. It is positively associated with the share of Obama votes (.40, .28) and negatively correlated with Romney’s share (–.40, –.29). This result likely reflects that fact that more liberal political orientations are also associated with more educated, diverse metros.”

Social Media

A study finds that customers who find you through social media are not as valuable as those who find you through search: “For all the fuss made over social media, customers visiting from these sites can actually represent relatively low lifetime customer value for e-commerce.”

Expenses

You can expect to start paying more for gas: “The national average for a gallon of regular gasoline, which has been hovering around $3.50, is expected to spike by 25¢ to 30¢ over the next few weeks.”

Health Insurance

It turns out that small businesses may be able to offer their employees a choice of health insurance plans in 2014 after all: “As new marketplaces prepare to open for enrollment Oct. 1, it appears that most of the states creating their own online marketplaces are going ahead with ‘employee choice’ for small-business workers.”

Immigration

David Brooks makes the conservative case for the Senate’s immigration bill, asserting that it will increase economic growth, reduce deficits and reduce illegal immigration: “These are all gigantic benefits.”

Women

A study finds that the United States has the most welcoming environment for female entrepreneurs of 17 countries measured: “Social norms are a frequently hidden barrier: lifting the cultural veil that can restrict a woman’s entrepreneurial vision is critical to unleashing female entrepreneurial potential.”

Hiring

Here is why the new trend is for businesses to hire English majors: “A major part of what business owners do to gain clients has to do with writing, whether it’s writing an advertisement or a marketing brochure, a good sales letter or an e-mail sales campaign. Businesses also need people who can create powerful content for the company blog, develop a strong social media presence and craft a compelling description of products and services for the company Web site.”

Management

Does your business need someone who knows more about, well, business? Julian Lange, a professor at Babson College, says that the person who develops a product or service is not necessarily in the best position to move it forward: “While cost may be a barrier for entrepreneurs with limited start-up capital, Mr. Lange says one way to get around this is to seek out people who’ve already achieved great success in starting or leading a business and are more attracted to an exciting career opportunity than pay — at least in the beginning.”

Finance

Laura Zander writes about how she built an $8 million yarn business without taking on debt: “Growing the business organically means that it will grow more slowly than a business that can afford to hire 100 people on Day 1. That can be good, especially if you’re like me and have absolutely no idea what you’ve gotten yourself into.”

Growth

Mike McCue, chief executive of Flipboard, says that if you are going to start a company, you might as well think big instead of going for a niche: “It’s going to take the same amount of life force. You’re going to get up in the morning, work 12 to 15 hours every day. You’ll make huge, hard decisions, hire and fire people and build teams. It literally takes the same amount of energy.”

Competition

The founder of DuckDuckGo talks about why so many other search engines have failed and how he competes with Google: “We focused on doing things the other guys couldn’t do.”

This Week’s Question: Have you hired any English majors? How did it work out?

Article source: http://boss.blogs.nytimes.com/2013/07/15/this-week-in-small-business-hire-an-english-major/?partner=rss&emc=rss

Filed Under: Small Business Tagged With: business workers, capital investment, online marketplaces

You’re the Boss Blog: My Competitors Don’t Seem Interested in ‘Coopertition’

July 12, 2013 by NewsMaker Leave a Comment

Fashioning Change

A social entrepreneur tries to change the way people shop.

I recently had a conversation with a man from Spain whose wife runs an e-commerce company that is based here in the United States but serves the Spanish market. The business sells car accessories. He was telling me about a time when she ran out of a particular item and called up her competitors, who supplied the inventory she was missing.

Not only did they supply the inventory, they declined to charge her for it. And it was understood that she would return the favor someday. I asked him if this kind of cooperation — sometimes known as coopertition — was unique to his wife and the competitor or a common practice in Spain. He said that working with a competitor is not uncommon in Spain. In fact, he said, he finds it weird that businesses in the United States do not try it more often.

I’m friendly with some of my company’s competitors and reach out to them every six months or so to see how they are doing, to discuss challenges, and to see how Fashioning Change might be of help. The conversation I had with the Spanish owner reminded me that I had been wanting to get several of the other “shopping for good” marketplaces on a call together to discuss the landscape, to review opportunities to work together and to see what we might do together to help sustainable and fairly made clothing brands.

Because my company provides a platform for sales of emerging brands, it is important to me to make sure they understand the risks they take when they start discounting aggressively. I’ve chatted with some of these brands, and, of course, they understand the need to build their brand identities. But there are also times when they feel the need to clear inventory so they can go back to their fair-trade factories and produce another collection that will feed their workers’ families.

While this approach is understandable, I fear it can damage a business model. And this is what I wanted to discuss with the owners of other social marketplaces. I thought that we could talk about how to help these emerging brands. And that’s why I sent an e-mail to three chief executives in my industry. I heard back from only one — after the date of the proposed call. We set two dates to speak, and I was stood up both times. I know the e-mails were received by the other two chief executives because I spoke on a panel with one of them, where he acknowledged that he owed me an e-mail, and because the other has made multiple visits to Fashioning Change since the e-mail was sent out.

Personally, I believe there is more to be gained from building friendly bridges than working in opposition. The majority of online shoppers buy products that are not made fairly or sustainably. There is much social justice (and profit) that can be achieved by four companies with overlapping visions that work together — especially if we take market share from the thousands of e-commerce companies selling goods that are mass-produced in sweatshops with little concern for the workers or the environment.

The chief executives I reached out to are all running social ventures. For Fashioning Change, operating in this space means we pursue the so-called triple bottom line: people, planet and profit. As a result, we often do things that typical companies may perceive as crazy. When I first suggested reaching out to our competitors, Kevin, my co-founder, was skeptical but hopeful that the other companies would respond.

Given our experience, I’m wondering if coopertition in the United States is a pipe dream. What do you think? Have you tried anything like this with a competitor? If one of your competitors approached you, would you be open to the concept?

Adriana Herrera is chief executive of Fashioning Change. You can e-mail her at adrianah@fashioningchange.com, and you can follow her on Twitter at @Adriana_Herrera.

Article source: http://boss.blogs.nytimes.com/2013/07/12/my-competitors-dont-seem-interested-in-coopertition-2/?partner=rss&emc=rss

Filed Under: Small Business Tagged With: brand identities, six months, social entrepreneur

You’re the Boss Blog: The Questions to Ask Before Adopting an ESOP

July 11, 2013 by NewsMaker Leave a Comment

Creating Value

Are you getting the most out of your business?

When I talk with a business owner about succession planning, the idea of an employee stock ownership plan, or ESOP, always comes up.

It’s a method of leaving a business that many business owners are fascinated with, and one that could potentially leave a business in the hands of those who have a deep-seeded interest in maintaining its prosperity: its hard-working employees. Gar Alperovitz, a professor at the University of Maryland, recently extolled the virtues of ESOP’s in an Op-Ed in The New York Times. As he describes, companies in which employees have a direct ownership stake typically have higher productivity, profits and other benefits.

The bottom line, however, is that the structures of such programs are complicated. The Web site of the National Center for Employee Ownership, which endorses ESOPs, can give an overview of just how complicated they are. That’s not to say that business owners should shy away from such plans. But before settling on starting an ESOP, there are several factors to first consider:

Is you company big enough? An ESOP is expensive to put in place. It will likely cost at least $150,000 and can easily cost $250,000 to establish. For an ESOP to be a cost-effective transaction, you need to have a company that has at least 40 employees and has over $5 million in annual sales.

To establish an ESOP, a company is going to need at least two lawyers, a valuation expert and a trustee for the program. Then, there are continuing compliance and costs for extra tax returns and annual valuations. This is not a strategy for an owner who just wants a simple exit.

Are you ready to share your financials? At the very least, you will have to allow your employees access to the annual valuation of the company. And companies that use best practices go much further than the minimal requirement.

For example, King Arthur Flour, which converted to an ESOP in 1996, spend lots of time and money teaching employees to be financially literate. Steve Voigt, chief executive, says he believes that effort is one of the drivers of the company’s success. He believes that when you combine employee ownership with financial understanding employees take steps to make a better and more sustainable company.

Does your company have growth prospects? Mr. Voigt feels strongly about this point. Employees are beneficiaries of the stock value of the company. If your company isn’t growing and doesn’t increase in value, the ESOP could become a negative in the eyes of your employees.

Do you have a good nonfinancial reason to form an ESOP? ESOPs are strong financial tools, and they have great tax benefits. But companies that undertake them for financial reasons only will often run into trouble.

Will Raap, the former owner of Gardener’s Supply Company, a gardening company that sells products through mail order and the Web, wanted to keep the jobs he had created in Burlington, Vt. He knew that if he sold the company to the suitors that were knocking on this door, there was a good chance the jobs would leave the state.

Mr. Raap started out having the program owning a minority of the shares. He hoped the ESOP would work well enough that he would feel comfortable having the ESOP take control of the company and keep the jobs he created in Vermont. As of December 2009, the company became 100 percent employee-owned.

I believe one of the reasons Gardener’s ESOP is successful is because Mr. Raap had more than a financial reason to start an ESOP at his company.

Do you have good management in place to take over? A successful ESOP should last for more than one generation of managers. The owner needs to establish a method for identifying and training the next generation before starting an ESOP.

Chris Mercer from Mercer Capital had a good reason to find a new shareholder for his company. He had a partner who had reached retirement age and needed to be bought out. Mr. Mercer, an expert in business transition issues, chose an ESOP as a good way to buy out his partner and start moving management of his valuation and advisory firm to the next generation of managers.

Like Gardener’s Supply, the ESOP at Mercer Capital became a minority shareholder. This allowed him to test his new managers to see whether they could run the company. It turns out Mr. Mercer is happy with the next generation of mangers, and he’s now thinking about having the ESOP buy more of his stock so he can start his own transition out of the company he founded.

Do you have managerial training in place? An ESOP is intended to last for several generations. This will only happen if there is an active training program to help create future managers.

Mr. Voigt of King Arthur Flour has instituted several programs to address this. Cross-training across various job functions is the norm. Management seminars are offered to employees who want to advance.

Mr. Voigt points out that a good reason to grow the company is to provide opportunities for younger employees who want to grow into more responsible positions, and thus creating a deep bench for leadership.

Are you in a rush? King Arthur Flour, Gardener’s Supply and Mercer Capital – three very different businesses – all started out by having their ESOP’s take minority positions. This allowed them the opportunity to unwind the structure if the ESOP’s weren’t working out.

An ESOP is not a quick succession strategy for selling shareholders. In all three cases, the owners took years, sometimes more than 20 years, to complete the sale of the company to the ESOP. You must have patience and time to make such a plan work. Many owners I’ve spoken with have decided against ESOP’s simply because of the time necessary for them to separate from their business. If you want a fast exit, an ESOP is probably not for you.

Many business owners who start a business make all of the decisions by themselves and don’t want to share information with anyone. These owners are not going to try an ESOP. But those who like the idea of including employees in the success of the company and are willing to get more people involved in decision-making should explore the strategy.

Do you think an ESOP would work for your company? Have I missed any questions that should be asked?

Josh Patrick is a founder and principal at Stage 2 Planning Partners, where he works with private business owners on creating personal and business value.

Article source: http://boss.blogs.nytimes.com/2013/07/11/the-questions-to-ask-before-adopting-an-esop/?partner=rss&emc=rss

Filed Under: Small Business Tagged With: esop, new york times, tax returns

You’re the Boss Blog: Should a Social Enterprise Go for Profits?

July 10, 2013 by NewsMaker Leave a Comment

Matthew Staver for The New York Times Saul Garlick: Looking for a sustainable business model.

Case Study

What would you do with this business?

We just published a case study about a young entrepreneur, Saul Garlick, who is debating which business model to adopt for his social enterprise, ThinkImpact.

In high school, Mr. Garlick started a nonprofit organization called Student Movement for Real Change. By the age of 23, he had graduated from college, and the nonprofit had evolved with a new name, a new mission and a small team of employees. The organization, ThinkImpact, was coordinating trips for young adults to go to South Africa where they gained firsthand experience developing community projects and social businesses. But as the nonprofit grew, Mr. Garlick felt overwhelmed by financial burdens. Rather than focusing on the operations, he spent the bulk of his workweek connecting with potential donors and trying to raise money.

As a result, he is debating whether he should keep ThinkImpact a nonprofit that is dependent on donors or transform it into a commercial organization — or possibly some sort of hybrid that combines both.

Staying a nonprofit would mean Mr. Garlick would have to continue his constant fund-raising. On the other hand, converting to a commercial business would give Mr. Garlick a blank slate. He would gain the ability to take on debt, raise equity and build a sustainable business model. But it would also mean rebranding the organization, which can be tricky. Would other individuals and organizations be as responsive to ThinkImpact if it were in business to make a profit?

As a hybrid, the organization might keep its nonprofit status but develop a commercial offshoot. This way, the company could continue to apply for grants and take donations but also obtain debt capital. This would allow Mr. Garlick to ease off on fund-raising and build the business.

Below, you will find the recommendations of an academic and expert, a nonprofit executive and a social entrepreneur. Please read the case study and use the comment section below to tell us whether you agree or disagree with their advice — and to offer your own suggestions for Mr. Garlick. Next week, we will publish a follow-up.

Pamela Hartigan, director of the Skoll Centre at the University of Oxford, England, said, “ThinkImpact has to get itself off the treadmill of donor dependency and create a revenue stream through a fee-for-service approach. This does not mean morphing into — or separately setting up — a for-profit venture. After all, ‘nonprofit’ is not synonymous with ‘no revenue.’”

Jonathan C. Lewis, founder of MicroCredit Enterprises, which converted from a commercial business to a nonprofit, said, “The distinction between nonprofit and for-profit in my estimation is overestimated. The test should be what works in any given situation.” In the case of ThinkImpact, Mr. Lewis said he would recommend starting a new commercial company because it would “allow ThinkImpact to grow at its own pace, based on revenues, while avoiding donor fickleness.”

Shivani Siroya, founder and chief executive of InVenture, a mobile technology social enterprise that incorporates both structures, said, “Neither entity type constrains their efforts to earn revenue. As a nonprofit they can earn revenue and bring in donor funds that can additionally support their work until they become sustainable or potentially support the work that they may not earn revenue from. I think deciding to be a nonprofit is more about marketing and the way that you discuss your work with the public and your supporters.”

What do you think?

Article source: http://boss.blogs.nytimes.com/2013/07/10/should-a-social-enterprise-go-for-profits/?partner=rss&emc=rss

Filed Under: Small Business Tagged With: acade, developing community, young entrepreneur

Case Study: A Social Entrepreneur’s Dilemma: Nonprofit or For-Profit?

July 10, 2013 by NewsMaker Leave a Comment

Over the last two years, Mr. Garlick and his team have produced some 50 such “microenterprises” — including one that finances water projects in Kenya, one that sells charcoal and stoves in Rwanda and a cocoa nursery in Ghana.

THE CHALLENGE By 2009, Mr. Garlick’s social enterprise, renamed ThinkImpact, was raising about $400,000 a year to support the cause. But along with running the enterprise, it had to raise funds, monitor and evaluate programs, and provide transparency. Its employees were paid below-market wages, the hours seemed endless and the organization would soon be missing payrolls. “Nothing about that scenario was sustainable,” Mr. Garlick said. “And scale depended solely on fund-raising ability.” He was convinced there had to be a better way.

THE BACKGROUND In 2007, Mr. Garlick started taking a salary. He was 23, out of school and working full time for his organization — mostly to find supporters for the cause. The workload grew and he hired another recent graduate to run daily operations.

“I thought that was going to make everything easier, but it didn’t,” said Mr. Garlick, expressing a common frustration for nonprofits: the endless pressure to raise funds takes away from time spent doing the organization’s work. “Many of the aspirational young nonprofit employees become beggars. They are seeking a way out of a tortuous financial reality where they are building the plane while flying it.”

Adding to the pressure was the way Mr. Garlick and his team were encouraged to raise funds. They were advised not to “place all their eggs in one basket,” by relying on a sole funder or a single government agency. Instead, ThinkImpact diversified its reach and sought donations in smaller denominations. Eventually, Mr. Garlick realized that trying to please hundreds of stakeholders was a rather chaotic way to raise money and run a business. “In actual fact, unless you’re running for president, or have a team that exists to raise small dollars, you can’t meet payroll that way,” he said. “People give $20 and think they own your decision-making.”

On the ground, ThinkImpact broadened its reach. More than 100 young people worked with the organization in Africa, primarily in South Africa and Kenya, where they established a strong presence. In addition to developing a curriculum for social enterprise educational experiences, they were adapting to local needs, providing health workshops that reached hundreds of villages in Kenya, and building more than 50 homegrown development projects with the participation of the local community.

But in 2010, after attending a weeklong workshop where he met fellow social entrepreneurs and investors, Mr. Garlick started asking serious questions about his own business model. The questions included: What is our specialty? What value do we produce in people’s lives? How big can we get? How do we arrange for sufficient financing to let us focus on our real work?

THE OPTIONS After missing a couple of payrolls in 2010, Mr. Garlick concluded he had three options.

Option 1: Remain a nonprofit. With contracts from two universities for about $50,000 and funds from donations, grants and foundations expected to bring in $25,000 to $100,000, Mr. Garlick felt constricted. To really grow, he estimated that he would need $200,000 to $250,000 more. But raising that money would be exceedingly difficult using traditional methods and would keep the company almost endlessly locked into fund-raising mode.

Article source: http://www.nytimes.com/2013/07/11/business/smallbusiness/a-social-entrepreneurs-dilemma-nonprofit-or-for-profit.html?partner=rss&emc=rss

Filed Under: Small Business Tagged With: financial reality, funder, government agency

Recent News

Partners