What Affects Small Business Growth? Part III: Industry Experience and Education

It’s been a couple of weeks since I last wrote.  In my defense, a few things have happened in those two weeks:  I had a baby (the adorable and already charming Kai Yoo Whitmore), bought a new house, and had six family members come in for the holidays.  Oh, and I got pink eye somehow and couldn’t open my eye without massive amounts of pain and tears for several days.  Now that I am able to see again, I thought I would post another entry continuing on the topic of small business growth.

So far, we’ve seen research that showed that aspiration and intention are key in small business growth as are general management and leadership skills.  That is all well and good, but how about specific knowledge about your industry and product?  To what extent does that matter?  Relatedly, how about education?

Specific experience in same/closely related industry

Is industry experience important?

In their study comparing rapid- and slow-growth firms,  Barringer, Jones and Neubaum found that 76 percent of founders in the rapid-growth group (with an average compound annual growth rate of 167.29 over three years) and 1.55 percent over three years, respectively) had worked in the same or close related industry while only 24 percent of founders had similar experience in the slow-growth group (with an average compound annual growth rate of 1.55 percent over three years). In explaining how previous experience in the same industry affects growth, they suggested that in addition to knowledge, experience in the industry gives access to a network of contacts who can provide resources for the growth of the current firm.

Similarly highlighting the important of industry experience, Stam and Wennberg, in their a study of over 600 firms, found that the greater the industry experience of the founder, the greater the employment growth of the firm in the first six years of their lives.

Education

Will your years of education pay off in growing your business?

Barringer, Jones and Neubaum discovered that more founders of high-growth firms had a college education compared with founders of slow-growth firms.    Researchers Fairlie and Robb showed that compared with business owners who are high school drop-outs, college graduates have  25 percent higher sales. Owners who have completed graduate school have sales that are roughly 37 percent higher than college graduates.   Education can provide founders with technical skills relevant to their businesses while the process of getting educated in formal group settings can entrench the owners in networks that later prove to be useful in the growth of their ventures.

Education can have an indirect effect as well.  Wiklund & Shepherd show that education, like management experience, magnifies the positive effect of growth aspiration on actual growth. 

The moral of these studies:  Knowledge = growth.

-Mina

Coming up next: Financial and social capital and business growth

Sources:

Barringer, B. R., F. F. Jones, et al. (2005). "A quantitative content analysis of the characteristics of rapid-growth firms and their founders." Journal of business venturing. 20(5): 663.

Fairlie, R. W. and A. M. Robb (2007). "Why are Black-owned businesses less successful than white-owned buinesses?  The role of families, inheritances, and business human capital." Journal of Labor Economics 25(2): 289-323.

Stam, E. and K. Wennberg (2009). "The roles of R&D in new firm growth." SBU Small Business Economics 33(1): 77-89.

Wiklund, J. and D. Shepherd (2003). "Aspiring for, and Achieving Growth: The Moderating Role of Resources and Opportunities  *." Journal of Management Studies 40(8): 1919-1941.

3 things to look for when choosing your co-founders

This post was inspired by an article I read recently in VentureBeat, with the same title, "3 Things to Look for When Choosing Your Co-Founders".  It's quite eerie and amazing, again, how similar the three things you look for when choosing your co-founder for your business, aka the person you will go into business with – are to the things you ought to look for when choosing the co-founder for your own family and your future, a.k.a. the person you will grow your family with. 

1.       Choose a “friend” – not because they are your friend, but because they have the right combination of absolute loyalty to you and the team, and die hard trustworthiness and trust in you and the team.  Faith.  Commitment.  When the tough get rough, the bank is in the red and the world seems to be against you, will they stand by you?  Will they stick up for you?  Trust is an absolute must-have and without it, a deal breaker.  Take the time to get to know the person, grow the relationship and the trust.

2.       Choose your mirror, not your clone – choose a co-founder with the right combination of skills that complement you and the team. 

Click here to read the rest of the post.

~Arry

life of the unemployed - what's life like outside of the corporate job?

Imagine this: not having to drive your painfully long commute to work, or having time to finally meet up with your friends for a 5PM happy hour at that cool downtown bar you’ve always wanted to check out.  I always imagined that my life of unemployment would be great: sleeping in, vacationing, eating ice cream, watching lots of television, partying it up …   I imagined all this plentiful free time I would have to do all the things I never get to do.  It’s supposed to be great.  I thought how lovely it would be to have time to do groceries and cook at home, how clean my place would be, how happy my dog would be to have me around more often. 

It is great.  It’s awesome.  …   Just the part about the plentiful amounts of free time to play and hang out, that part is a myth.  Well, at least for me, I'm busier more than ever.

What have I been doing?  Well…  I left my nice salaried job back in July 2010, and for that first month afterwards: 1) I did an independent contract gig at Expedia for a month, 2) I went to Hawaii for the first time in my life for a week, and 3) then came back to a to-do list as long as the Nile River (I brought my trusty notebook with me to Hawaii and jotted notes down while there).  The second month, ...  Click here to read more

~Arry

[6] marathon

The world of startups and the world of love have so much in common, and I'm starting to realize that it comes down to two main things:

1) the world of startups + the world of love are based on the foundational pillar of Faith.  Faith is the main pillar.  Without it, everything else is nothing.  It's a must.  Faith in the dream, in the past/present/future, in each other.  Assure your partner (whether it's business or love) with your words and behavior that s/he can have complete faith in you.  Be open - whatever you do, do it openly and honestly.  Don't play games.  Don't do it.  Look out for anything that'll weaken this pillar - kill any inkling or tiny bit of suspicion early and quickly. 

2) the world of startups + the world of love is like a marathon.  Assuming you've got Faith as a pillar that you are actively maintaining and growing - then it's about the marathon.  Pace.  Breathing.  Stretching.  Training.  Growing.  Working.  Persevering.  It takes diligence, hard work, and a common vision.  If you've ever run long distances before, you'll totally get what I mean.  Undeniable, unwavering focus.


Yours,
Arry

[4] like a marriage proposal?

Marriage to Me:
I totally want to be married some day - to the right man - who is honorable, respectable, and respectful.  I hope he sees me as honorable, respectable, and respectful, too.  In searching for Mr. Right - I'm super careful about who I will sign on with to be my lifetime partner.  Is he good to his family?  Is he thoughtful?  Does he open doors and have good manners?  Is he strong willed and independent?  Is he caring and does he ask me how I am?  Is he dependable?  Is he secure with himself?  Does he want kids?  Does he smell good?  :)  ... I'm so excited to enter that chapter of my life some day - totally looking forward to it.


Choosing a Business Partner(s):
When choosing a partner to go into business with - it should be taken with the same kind of gravity and seriousness as a marriage proposal.  I've literally been proposed to more than three times in the past few weeks - to go into business with people I know (flattering, really - but it's made me really think a lot about this lately).  When asked, I literally think in my head (and sometimes, my inside voice comes out and I literally say it aloud): "are you proposing to me?"  Going into business with someone is very much like marriage (minus the feelings of the romantic love and tingling excitement down my spine when I see my boyfriend/husband - for me, that's reserved for the relationship-kind-of-a-marriage. Lots of hearts and warm fuzzies spinning above my head). 

My Current Partners:
I look at my business partners today and we've had our ups and downs.  We fight sometimes, we get frustrated, we have fun, we miss each other, ...  and at the end of the day no matter what, I see them as honorable, respectable, and respectful people.  We've signed up to be partners in the business sense - and in the human-person sense.  I trust that their intentions are good for the team and our investment - you can't do it any other way.  Consider your current and potential business partners very seriously - it's serious business, like a marriage.

I welcome your comments and feedback,
~Arry

controlled growth

One of the greatest perks of my day job is that I get to meet all kinds of entrepreneurs, investors and VCs in the Seattle community.  Many of these meetings lead to "Aha" moments where I furiously write mental notes regarding what to do or avoid doing in a business.  A recent meeting I had was with a woman entrepreneur who instantly became my hero because not only did she grow the revenues of her business by 50 times in 10 years (from $500,000 when she bought half of the company for $15,000 to $20,000,000 now), she did all of this while working part-time (so she could spend time with her family).  How cool is that?

Her secret?  Controlled growth.  As she showed us the graph of the revenues of her companies, rather than the hockey stick that all entrepreneurs seem to hope for, hers was more like a very deep staircase -- upward movement followed by a period of flatness, followed by upward movement.  The periods of flatness are the times that she deliberately did not take new customers so that she could focus on making improvements in operations and in building up her cash supply (yes, she agrees that cash is king).  As a B2B business serving large corporate clients, part of her controlled growth strategy was to diversify her portfolio of clients so that no one business would become an 800-pound gorilla with the power the make demands that are not in line with what is best for the company.

One company that comes to mind when considering what can happen when a company grows too fast is homegrocer.com, the enormously well capitalized company from the 1990s that is now used as an example of a most spectacular failure in every business school.  OK, so homegrocer might have had a few other things going against it, but trying to grow too fast -- before it had figured out how it is going to operate, who its customers are, and the checks and balances of financial statements -- was definitely a major factor.

So grow, but be smart about it.

Mina

did you know? part I

Since I come across a lot of studies and statistics on various aspects of entrepreneurship, I thought I would start a series of posts highlighting some of the more interesting ones (me being the judge of what is interesting, of course). To start off, let's start with how important start-ups to the economy.

Number of businesses in the U.S.: 6 million + businesses with employees; 29.7 million self-employed

Size of businesses: 60.9% have <4 employees; 89.7% have < 20 employees; 99.7% have <500 employees

Number of businesses started each year: 649,700 new employer firms (another 2 million struck out on their own) (in 2006)

Number of closures each year: 564,900 (in 2006)

VC money received: In 2007, a little less than $30 billion in VC was given to 3800 firms. Of these, 415 were for seed funding (about .06% of new firms)

Angel money: About 50,000 businesses receive $20-25 billion angel money per year

These numbers are from the SBA, the NVCA and the last number is from a magazine article I read (can't remember the source now).

-Mina