SURVIVAL OF THE FITTEST: AMERICAN SMALL BUSINESS OWNERS

By the mid 2000’s the online marketing gold rush was on.  Many traditional advertising shops were making the transition into the digital sphere, but the flood of prospectors were mainly the mathematicians and number-crunchers from the financial industry.  Dan Goldin and his business partner Robert Elroy were quantitative analysts from a major private equity firm in Midtown Manhattan.  Using their salaries and bonuses as seed capital, they launched Iskra Multimedia, a digital marketing agency that would use data mining and mathematical models to connect customer with small businesses.  There were already several key competitors in the lead generation space in New York City; Yodel, Inc. having just received its first round of venture capital funding.

Dan and Robert would spend the first year and a half bootstrapping their startup to support a team of coders, graphic designers and copywriters, while perfected their business model and building their reputation.

Their first clients were dentists, personal trainers, life coaches, and real estate agents.  They offered an affordable package of storefront websites and search engine marketing that would be scalable once the larger accounts materialized.

Year one showed almost 300% revenue growth; impressive for any startup.  They signed their clients to monthly and annual contracts and became know for reliable results.  While they continued working 60-hour workweeks at their day jobs, they filed patents on their methods and began shopping for venture capital firms: they were ready to leave the financial industry behind and work for Iskra full time.

Then it all came crashing down.

In early fall of 2008, the U.S. housing market imploded, taking some of the largest financial institutions with it.  Both Dan and Robert were laid off from their jobs.  It would seem like a blessing in disguise, but as the effects of a cratering housing market rippled through the economy, fear spread like an icy flood.  One by one, their small-business clients cancelled their contracts and let their own startups fall by the wayside.  Established companies slashed their marketing budgets, severed relationships with 3rd party ad agencies, and moved their efforts in-house.

By March of 2009, it was over.  Iskra was formally dissolved with almost $100,000 in unpaid taxes and other business liabilities.  Drowning in personal debt, Dan and Robert joined the 1,000’s of unemployed Americans seeking work in a depressed job market.

A common adage states that 80% of U.S. businesses fail within the first year.  But what, if any, are the warning signs that can point to either a flop or a home run?

According to the Bureau of Labor Statistics, the risks of failure are high but the numbers aren’t quite as grim as the 80% rule: about two-thirds of business startups will survive the first 2 years with another half surviving to their fifth anniversary.  As one would expect, after the first few volatile years, survival rates tend to level out.

Surprisingly, trends are similar regardless of industry; manufacturing, retail, hospitality, and construction.  One persistent myth points to the state of the economy as the main culprit of business failures.  However, the housing crash of 2009 had little impact on survivability of construction-industry startups and the odds for a new business in the hotel and food service world remained relatively unchanged in the sagging economy that followed.

But what are other factors which can make or break a company during those early, volatile months, even years, when many startups are operating in the red?  Often, it’s the mindset of the entrepreneurs themselves and their ability to see opportunity which makes the difference between failure and success.

Eric Morse of West Orange, NJ had spent a decade working for a large pest control company in the New York, Tri-state area when the opportunity to start his own company presented itself:

“I was working 90 hours plus a week and I got burned out.  I actually ended up in the hospital for stress.  I had to get out and took a job for a pesticides distributor.  I did that for about a year when an opportunity kind of fell in my lap.”

One of Mr. Morse’s customers had failed to obtain necessary registration to provide pest control services in New York State and was being put out of business.  “He made me an offer to take over his clients; not a huge volume but enough that I could manage on nights and weekends.”

The business grew through referrals and Mr. Morse eventually faced the decision to leave his day job and devote all his energies into growing his new business.  “You can’t dedicate 100% while you’re doing something else.  For me, it was ultimately the fear of not being comfortable.”

Thanks to good credit, Mr. Morse was able to hire several employees, stay afloat and make it two years until he got his first, six-figure account:

“Everything I know about the business, I learned with my first, big client.  I learned how to manage expectations of the customer, and how to tell the customer no when their expectations couldn’t be met.  And mostly, I learned to manage my employees.”

Some business owners enter their venture with a plan laid out before them only to have their resolve tested father down the road.

Holly Elkin of Monterey, Tennessee left a successful career in the mortgage industry for an opportunity that seemed hard to pass up.  “A friend had a successful chain of weight-loss clinics and was looking to retire.”

Ms. Elkin began working as a salaried manager in 2012 to learn the ropes and bought the business outright a year later.  She already had the bookkeeping and legal experience from her prior career to make sound business decisions and a well-trained staff of 13 to run day-to-day operations on four busy clinics.

It was when she made the decision to open a fifth location that things became uncertain.  “We had tripled our business in two years but, it took a full year before our new clinic could support itself.  There were many nights I looked at the numbers and had to decide if it was time to call it a loss.”

She didn’t give up though, and she credits discipline, a loyal staff and self-confidence to carry her until the new location stood on its own, and then began to turn a profit:

“You can’t let fear of failure prevent you from expanding.  If I’ve learned anything, it’s that it’s always going to be difficult.  You surround yourself with good people and let them do their job.  If you treat them well, they’ll stand by you even when you’re second-guessing yourself.”

Sometimes though, no amount of luck, planning and hard work can assuage unforeseen disasters that could easily spell doom.

After 6 years of steady growth for his pest control company, Mr. Morse suffered a series of debilitating setbacks.  Emergency back surgery came the same year as the economic downturn and tectonic shift in the tried and true advertising practices with which he had built his clientele.

“Almost all our new business came from the Yellow Pages.  In 2009, print advertising virtually ended.  Everything went digital and I was completely behind the curve.  There were so many companies who were already established online and I had to fight for every new customer.”

Shifts in the business landscape aren’t the only thing a small business owner has to adapt to.  For Ms. Elkins, the Department of Justice is continually reviewing the distribution of the controlled weigh-loss medication that serves as her core service to her clients:

“Phentermine is always under scrutiny because of its potential for abuse and resale on the black market.  We have access to a database of patients’ prescriptions of controlled substances.  I’ve had to discontinue treatment for customers who were obtaining it from multiple doctors.  I have to protect our license.”

Even careful precaution doesn’t guarantee the future for prescribers like Ms. Elkin.  “If (the DOJ) suddenly takes Phentermine off the market, we would have to close shop.  Out whole business is based on it.”

And should the unthinkable happen?

“I would go back to working in mortgage.  You always have to have a plan B.”

For Mr. Morse though, success and failure has more to do with the willingness to embrace the uncertainty of starting your own venture:

“When you invest in a business, it’s an investment in you.  There’s no guarantee.  I compare it to people who invest in education.  Just as when someone goes to college, whatever major they pick, if they’re going to spend $80,000 or $100,000 in a college education, there’s no guarantee that they’re going to have a return on it.  It’s the same with a small business.  You can invest $500,000 in a business, and get no business or be closed in a year.  Either you marketed it wrong or you’re not the right person for that business.  There’re numerous reasons why it can fail but, at the end of the day, its personal responsibility and it’s you’re burden to bear, and if it takes off, you’re fortunate enough to enjoy the success.”