Is It Easier Than Ever To Start A Business?
STORIES HAVE A WAY OF BECOMING more dramatic in the retelling. War stories: "The enemy had us surrounded." Fish stories: "He was so big we couldn't haul him in the boat." School stories: "I used to walk 10 miles to school every day. Through blizzards. With no shoes."
Start-up stories have something of the same quality about them. Remember the bad old days when the enterpreneur was considered something of a social deviate, not a hero fit for the cover of Time magazine; when business plans were scratched with No. 2 pencils during long nights at the kitchen table, not farmed out to some freelance consultant with a personal computer; when Big Eight accountants laughed in your face rather than tripping over each other to lure your business with free advice and reduced fees? It used to be you couldn't beg, borrow, or steal seed capital. Today, there seems to be a bevy of angels and bankers and venture capitalists chasing the newest new business idea.
By all appearances, America has gone soft on start-ups.
Or has it? It's true, of course, that the number of businesses being started in the United States has more than doubled during the past decade, to 675,000 a year. But the percentage of those that survive has remained the same (according to Massachusetts Institute of Technology economist David Birch) or gotten worse (according to Dun & Bradstreet). Either way, figure that roughly 50% of the companies so bravely launched this year will close their doors by 1991, out of money or energy or both. In the face of such odds, it's hard to argue that the climate for start-ups is any milder than it used to be.
And what of the other 50%? The smart ones? The lucky ones? By 1991, managing growth will be their main concern; their gaze will be on the future. And by then the start-up will be only a bittersweet memory from the mid-'80s, an era, they will likely tell us, when things were really tough.
Minneapolis on the morning after a snowstorm is inspirational. Here is one city that has made its truce with winter. The roads are plowed before rush hour; traffic moves smoothly through the downtown grid of one-way streets as cars, buses, and police officers all cooperate with a midwestern bonhomie. Above, people move from parking garage to office, or from shop to shop, in heated glass walkways that connect most everything downtown. On the streets below, pedestrians bundled in down coats move briskly, heads bent into the wind. No one jaywalks: at crosswalks, they'll stop, stamp the snow from their boots, and smile to keep warm.
In much the same spirit, Minneapolis and her twin city across the river, St. Paul, have set about remaking their economy into a hothouse for entrepreneruship -- a haven for new companies from the cold winds of the marketplace. Colleges and universities run advisory management services for would-be founders. Public and private agencies vie for the title of the entrepreneur's friend. Incubators are everywhere. New businesses, once ignored, now have become a regular feature of the local business page, watched closely by an active community of academics, venture capitalists, and service providers. If launching a new company is getting easier anywhere, it should be getting easier here.
Like most things in Minneapolis, the newfound dedication to the business start-up is understated. You won't find anything like the cowboy-boots-and-Cadillac atmosphere of Texas or the open-shirts-and-gold-chains culture of Orange County, Calif. Other models inspire. George Pillsbury and Will Cargill both started here. More recently, William C. Norris's Control Data Corp. and Winston Wallin's Medtronic Inc. have provided the city with some of its entrepreneurial lore, to say nothing of the computer (Cray Research Inc.) and medical (Cardiac Pacemaker Inc.) firms that have grown up around them. By one estimate, one out of every 100 Twin City residents has helped start a new firm.
"This has been a good start-up town for 20 years," says John Kostouros, editor of CityBusiness, a local publication. "But now the support for start-ups is becoming institutionalized."
The institution most often cited is the Minnesota Cooperation Office. Founded in 1979 by Bill Norris and Willis K. Drake of Data Card Corp., the Cooperation Office collects $250,000 each year from local corporations, foundations, and law and accounting firms, which it uses to provide consulting services to half a dozen start-ups chosen from among the 300 that apply annually. Preference is given to companies with proprietary new technology and the potential to create 500 to 1,000 jobs within 10 years. And for an equity position of less than 5%, the Cooperation Office provides the start-ups with a year of intensive business counseling, helps with product testing and executive recruitment, and organizes an advisory board of local business luminaries.
Perhaps most important to its client companies, the Cooperation Office will fashion a financing package for the launch and help in the search for backers. "Our name usually makes something look good to the venture guys," says executive vice-president Ross Boerhave. That squares with the experience of Charles McNeil, who says his medical-products company, Surgidyne Inc., was "getting nowhere" with skeptical venture capitalists until the Cooperation Office was able to smooth the way for two private placements that raised the $1.6 million he needed. Now McNeil's company has 15 employees and posted revenues of $400,000 in its first five months; he expects sales to reach $2 million by the end of this year.
Of the 26 companies assisted by the Cooperation Office during its first four years, 23 are up and running. The group clusters tightly around high tech, but one of the start-ups produces feature films, while another markets chopped corn husks as animal bedding. President Ted Johnson boasts that the Cooperation Office will help create at least 22,000 jobs during the next decade. At the same time, he predicts the agency will soon become self-sufficient by cashing in each year on one of its 5% shares.
Thanks to its success, the Cooperation Office has become something of a national model. What it does, it does well. But in a state that generates approximately 8,000 start-ups a year, an agency that boosts the "best" 6 hardly changes the entrepreneurial climate. The weakest 7,994 are left to succeed, or fail, on their own.
As president of the Women's Economic Development Corp. (WEDCO), another privately funded Minneapolis agency, Kathryn Keeley casts a wider net. Rather than the 20-year engineer at Honeywell Corp. or the former marketing manager at 3M Corp., it is novices -- 2,500 so far -- who stop in on Keeley, mainly women with little more than an idea about starting a business. And by Keeley's lights, the prospects for start-ups are every bit as daunting as they have always been.
"If you're a white male engineer in a technology-related field with a proprietary product, the climate for starting a business is pretty good," Keeley says. "But if you're in service or food, if you're not while or not male, you'll have a difficult time of it."
To half its clients, WEDCO offers sound and practical business advice, everything from managing cash flow to choosing a lawyear. But Keeley is just as proud of the service she offers to the other half: convincing them to give up their dream of launching a company, at least until they can come up with a better idea.
If any program would seem to have had a broad effect in helping start-ups, it is the Small Business Development Center at College of St. Thomas, one of 27 such centers around Minnesota. At St. Thomas, 100 new businesses are linked up each year with students eager for the experience of conducting market research or setting up an inventory-control system. Another 1,000 owners come in for short-term business-counseling sessions. Thousands more attend the college's seminars and workshops.
Ed Berris is thankful for St. Thomas's efforts. Berris started a consumer-electronics sales company last winter after watching a part-time business go under. At St. Thomas, counselors helped him write his business plan and set up his books, and generally provided "a good sounding board." And it helped: within eight months, he had accounts throughout the region. But did all this make his start-up any easier? After eight months, he was still working out of his basement, without a bank loan, without a sales staff. For Berris, as for most new business owners, easy is a relative term. Easier than what?
The impulse to help the business start-up springs from different motivations. Schools such as St. Thomas, for example, hope to provide business students hands-on experience with new ventures. WEDCO has a social purpose: to help women climb the ladder. The Cooperation Office, like many government programs and private development efforts, looks to create jobs and expand the local tax base.
And then there is profit.
Like their counterparts all across the country, the Minneapolis offices of the Big Eight accounting firms are eager recruits to the cause of new business formation. Besides offering planning advice and introductions to bankers and venture capitalists, your friendly Big Eight accountant may even give a cash-poor start-up a break on the bill, "although we prefer to think of it as an investment, not a reduced rate," says Coopers & Lybrand partner Jim O'Donnell.
Call it prospecting. "We're looking for a company that can grow into something substantial," says Tom Winkel of Arthur Andersen & Co. "It's not the corner grocery store we want -- it's the company that has the potential to be another Control Data." Arthur Andersen and everybody else.
One prospector who is much less picky is Norm Stoehr, one of Minneapolis's many Control Data alumni. On a snowy night in November, I met 80 men and women who made their way along freeways littered with fender benders to attend a meeting of Stoehr's The Entrepreneur's Network. "I can tell that you're entrepreneurs," Stoehr says as he warms up the crowd. "Big-company people probably wouldn't venture out on a night like this."
They are an eclectic group arranged at tables around the Minneapolis Hilton Ballroom: high-tech, low-tech, and no-tech company founders, veterans with 20-year histories and a corporate jet, and first-timers with a home office and a subscription to Corporate Report Minnesota. Men in pinstripes sit next to men in jeans, a kilted college student next to a grandmother in tailored Ultrasuede. Stoehr holds them as spellbound as a Chautauqua preacher -- part evangelist and part group therapist, and every bit the entrepreneur.
The Network is itself a start-up -- for Stoehr, his 15th. And at its heart is a simple and commonsense premise: that nobody can better understand the problems of an entrepreneur than another entrepreneur. And so for $450 a year, anyone who owns 20% of a company can sign up for the chance to talk things out with their peers at The Network's tightly structured monthly meetings. After the half hour of cocktails and the hour or so of introductions, each table of eight transforms itself into an ad hoc board of directors, thrashing out such issues as how to deal with an employee's alcohol problem or how to delegate authority to a new controller. Although scheduled for three hours, these sessions often last far into the night.
Not surprisingly, Stoehr's business is booming. What started as a 9-member network has now expanded to nearly 300. By 1990, Stoehr expects to be nationwide, not only with The Network, but with a full complement of entrepreneurial self-help programs, ranging from The Entrepreneur's Resource Group, selling seminars and consulting, to The Inner Circle, offering daylong skull sessions once each month, to Upstarts, targeted to the person "who is on the threshold of going into business." If start-ups were getting any easier, you would never know it from Norm Stoehr.
The Minneapolis Business and Technology Center -- "where office space is just a beginning" -- is a solar-heated concrete and glass bunker that squats across the street from the domed stadium of the floundering Minnesota Vikings, at the far edge of downtown. For 68 fledging businesses -- most of them service companies, most younger than three years old, most with fewer than 10 employees -- this is home.
The communal word-processing center is just off the front hall to the left. To the right are a shared conference room and a newsstand doing a brisk trade in Rolaids. Behind the switchboard, an electronic message display pitches small-business consulting services in flashing red letters.
"One of the things we offer is courage," says general manager of operations John Black as he guides his visitor down a Spartan office corridor. "People may not have the guts to start, and we offer them an easy way to take that step." Easy? Well, less expensive, anyway: with space renting for 30% less than at downtown locations, 20 to 30 companies make inquiries each month. What most often distinguishes the 5 that move in is that they have enough cash to afford a damage deposit and the first month's rent.
Between 150 and 200 of these incubators and innovation centers now dot the national landscape, including 12 in the Twin Cities alone. All but a handful were created in just the past three years by universities, governments, nonprofit consortia, and venture capital firms. But no two were created equal. Some are merely bare-bone buildings with low rent and a communal coffeepot. At the other end of the spectrum are lavish facilities whose owners provide equity capital and sit on boards of directors. Most, like the Minneapolis Business and Technology Center, fall somewhere in between, mixing lower rent with shared facilities and a dose of business advice.
Actually, the full name is the Minneapolis Control Data Business and Technology Center, another outgrowth of Bill Norris's campaign on behalf of start-ups. Helping entrepreneurs and creating jobs for the local economy have always been part of the rationale for this center and for two others like it in the Twin Cities area. But from the beginning, these facilities were also expected to turn a profit. The original plan was to spawn new customers for Control Data products. But the strategy changed when the bulk of the tenants turned out to be service businesses. Now, Control Data is a landlord that collects rents; a consulting firm that charges competitive fees for consulting programs, financial-planning software, and small-business manuals; and a franchisor that has taken the concept nationwide. There are now 23 Control Data incubators up and running, and according to the company, all but one are making money.
Not surprisingly, nonprofit agencies tend to cast a mary eye on for-profit incubators. "The people at that level require a high degree of counseling, so the for-profit incubators have to spread themselves too thin to do much good," argues St. Thomas's Daryl Erdman, careful not to mention the Control Data centers by name. In response, John Black points to the 90% survival rate for companies that have taken space at Control Data's three Twin City incubators, along with the 3,800 jobs he claims they have created for the local economy.
Control Data's start-up tenants, it must be said, are nearly universal in praise of their incubator. "I wanted to create a professional image," explains Helen R. Lowe, who started her dental-staffing franchise in the Minneapolis incubator; she appreciates her short-term lease. Barbara Armajani still marvels that she was in business within a day after moving in, without having to buy phones, rent a copier, or hire anyone to run them. And movable walls made it possible for her business to grow from 4 employees to more than 33 without having to relocate.
"If it hadn't been for the Control Data Center, I would have been off my rocker," says former 3M research scientist Gene Sparrow, who has a space across the river at another Control Data incubator in St. Paul. "It's good to know that there are 50 other businesses here sweating it out just as I am."
Sparrow,in fact, has been sweating it out in the incubator for seven years, which really begs the fundamental question that needs to be asked about incubators: are they hothouses and schools for entrepreneurship, or are they merely friendly, convenient spaces for small service firms? Among those holding the more skeptical view are the founders of several other Minneapolis start-ups who have managed quite well outside of an incubator. One such entrepreneur hs heard stories of accountants, attorneys, and venture capitalists who stalk the halls of incubators looking for clients and taking up lots of time. "The obscurity of a garage may be better," he quips. Another recalls the incubator started by California's Nolan Bushnell that became famous for its camaraderie but notorious for the number of tenants that didn't survive: "Who is to say that the guy across the hall has a good idea?"
Control Data's incubator in St. Paul connects by heated walkway to just about any service a start-up might require -- office-supply stores, photocopying services, coffee shops, bars, restaurants. But to get to a bank that can lend you money, you have to brave the cold.
The metaphor is telling. No matter how many new services there are to ease the task of starting a business, raising seed capital is still difficult and unpleasant. And banks remain the foremost object of the entrepreneur's frustration.
According to sociologist Paul Reynolds, fewer than 5% of the new businesses started in Minnesota each year secure smallbusiness loans from a local banker. In part, that has to do with the types of businesses being started: with no inventory, no receivables, no building or equipment, start-up service companies have never offered any more collateral than an idea and a founder's reputation. But now, even if you have the collateral, it may not be enough. A rash of bank failures across the country has prompted bank regulators to require still more stringent lending requirements.
"We do very few start-ups," admits David Cleveland, president of Resource Bank and Trust. "Supervising authorities are much more critical of those kinds of loans, and they're asserting pressure on banks to move away from them. To make loans on the basis of collateral is usually not considered good enough. The company has to be able to demonstrate an ability to pay back the loan from profits."
Stan Gove, a vice-president of FirstBank Minneapolis, is widely considered the dean of small-business lenders in Minneapolis. And he always finds a way to offer encouragement and advice to those who seek his counsel. But rarely money.
"They throw themselves at my mercy," Gove says. "We talk to 100 people, and if we can get one or 2 customers out of that, we've done a good job."
Gove states the banker's first principle of new-business lending: "Sure, there are banks that will lend money for a start-up, but only if the customer doesn't need it." It has been true since the start of start-ups, and no doubt it will be true throughout the ages.
Let's face it: the goal of the banker these days is to collect a respectable service fee for processing a loan and transfer the risks to somebody else. In Minnesota, bankers support the recommendation of the Governor's Council on Entrepreneurship and Innovation for a joint public-private loan-loss reserve fund, like one already in place in California, that would partially cover a bank's loss when a start-up goes under. But no matter what mechanisms they may develop to pass the risk, bankers will never become venture capitalists.
However, until just recently, even venture capitalists have not been venture capitalists, at least as far as start-up companies were concerned. From 1984 to 1986, a quarter of the country's $20 billion in venture capital was tied up in troubled technology companies hit by an industry shakeout. Now that those investments have begun to pay off, or have been written off, venture money is loosening up for everybody else.
Minneapolis has always been something of a venture capital center, and CityBusiness recently reported that of the Minneapolis/St. Paul area's 25 venture firms, 80% will now at least consider first-stage deals again, if only for a small part of their portfolios. A few new firms have even been started to concentrate exclusively on start-ups.
One of them is Minnesota Seed Capital Inc. (MSC), founded in 1981 by a group of local business leaders as a for-profit venture fund. MSC was conceived of "in idealistic and philanthropic terms, to create jobs and build the tax base," says vice-president Tom Neitge. But before long, Neitge and his colleagues realized that "you can't be philanthropic as a venture capitalist." Even with a more hard-nosed attitude, however, Neitge says he is still very much bullish on new ventures. The original $5 million of seed capital was planted in 16 local companies in the medical, electronics, and communications industries. And all but one has survived.
At Pathfinder Venture Capital Funds, a six-year-old firm with $73 million to manage, Gary Stoltz and Andy Greenshields say they started looking more actively at start-ups again in July of last year. And like Neitge, they, too, are bullish on Minnesota companies in growing industries that have claim to proprietary products. But for would-be entrepreneurs, they warn, the news is not all good. For just as there are more venture capitalists willing to consider start-ups, there are even more start-ups competing for the attention of the venture capitalists.
"Before, we saw principally late first-or second-stage companies," says Greenshields. "Now, there are more start-ups out there looking for money: 250 of the last 286 deals across my desk were at very early stages." Adds partner Stoltz: "There is lots of money out there. It's the time of the venture capitalists that the entrepreneur is competing for today."
So, has America gone soft on start-ups? Is it easier now than ever before?
From one perspective, the kinds of support available in Minneapolis -- and, to some degree, in every metropolitan area -- have made it easier for some companies to get off the ground. Some of the new companies that have availed themselves of the networks, the venture funds, the incubators, the consulting services, and the community and academic support probably would have made it anyway. But other new ventures would not have succeeded, and they represent the tangible benefits of a more congenial start-up environment.
From another perspective, however, it looks to be larger societal forces that account for the ease with which so many companies are started. The dramatic downsizing of the nation's large corporations, the rise of the two-income family, even the allure that now surrounds the entrepreneur -- these, perhaps, have more profound effects even if they are harder to quantify.
Perhaps the question itself is flawed. The dramatic increase in the number of start-ups is probably all the circumstantial evidence needed to make the case that starting up is easier, for whatever reason. But is easier better? More new businesses, after all, means more competition -- more entrepreneurs chasing capital, customers, and employees. And for all the ways people have come up with for making it easier to start a company, statistics show that we haven't yet come up with any formula for making it easier to succeed. As WEDCO's Kathryn Keeley told me, "Nowadays, it's simply easier to fail."
In the end, one presumes that the marketplace will settle the question once and for all. In an economy that eventually winnows out the weak and lets only the strongest survive, the difficult start-up has served as an effective test of courage, endurance, and ingenuity. Only good things will come from opening that start-up process to large numbers of would-be entrepreneurs who might otherwise have been excluded. But making the start-up dramatically "easier" could, in the long run, only serve to raise false hopes and deny the economy the strength it needs in an ever more competitive world marketplace.