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As Long as We Remember...

January 4, 2005

Entrepreneurship: Frederick's Silver Bullet

Chris Charuhas

Wells Fargo Mortgage has outsourced your call center job to India.

You spend two hours in the morning driving down Route 270 to your job in Washington, D.C., and then you do it again at night.

Your employer, Alcoa, is cutting your pay: aluminum fabrication is much cheaper in Russia than in Buckeystown, and they have to make staying worth their while.

What's the solution to all these problems? Entrepreneurship! According to the National Commission on Entrepreneurship, startup companies create more than half of all new jobs. Also, jobs at new, growing companies tend to pay well.

Starting new companies here in Frederick County can give us secure jobs, more time, and better salaries. So why isn't entrepreneurship touted as the cure for all our economic ills? Because in order for us to use this silver bullet, we first have to catch it - in our teeth. Starting a new company is a grinding, uncertain proposition.

According to the U.S. Department of Commerce, 80 percent of all startups fail within five years. The Small Business Administration says that 80 percent of new companies fail in their first year. Joe Adler, a startup veteran who teaches entrepreneurship at Stanford University, says that 19 out of 20 startups fail.

Considering how tough it is to make a startup company viable, this failure rate makes sense.

First, you've got to sell something that customers want. This is harder than it seems. For instance, when Philips Electronics once asked a group of people what color its new radio should be, most said yellow. Then, when choosing a radio as their thank-you gift on the way out, they all passed over yellow radios to pick up silver ones. The only way to be certain people want to buy what you're selling is to show them a model, which can take a lot of time and money to develop.

Once you've got something to sell, you must structure the company correctly. Every year, thousands of entrepreneurs enter equal partnerships with friends. This is a crippling structural mistake. Thousands of equal partnerships dissolve each year when partners disagree, get lazy, etc. Frederick Beste, of NEPA Venture Funds, calls it "The 50-50 Deathtrap."

Then you must get the company off the ground. Unless your company is blessed with Google-like money from the start, as few startups are, the company's founders must understand and do marketing, accounting, management, and technology. Learning and doing all these things simultaneously takes tremendous effort: startup founders often work themselves into nervous breakdowns.

Even if you can do it all, you've still got to generate adequate cash flow. Starting a business is a race against insolvency: can you generate enough sales to pay your bills before your grubstake money runs out? The more people you hire to share the workload, the greater your risk of running out of money. But if you hire too few people, vital things won't get done. If you spend time raising more investment, that takes you away from making sales.

Finally, you have to get lucky. You can resist the temptation to establish a 50-50 partnership, prove that customers like your product, prove your business model is profitable and still go bankrupt when a recession wipes out your market.

Starting a company is a daunting prospect and a grinding proposition. However when the people who start companies get good training and strong support, their chances of success go way up.

Next week I'll write about how Frederick can attract entrepreneurs, speed up their learning curve, cut their startups' failure rate in half, and use that silver bullet.

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