November 18 and 19, I attended the NC Entrepreneurial Ecosystem Summit hosted by NC IDEA FOUNDATION and CEO Tom Ruhe. It was the first year for this meeting and yet it was well attended by over 200 organizations and 450 people.
The discussions focused on education, entrepreneurship, and the NC Entrepreneurial Ecosystem we live in. We have all the education resources any state could want but the question is “do they do a good job of teaching entrepreneurship and if so at what level of education are we doing the best job”? I have read that only about 2% of us are born with entrepreneurial DNA and that doesn’t mean you are going to start a business.
In fact, it is quite noticeable that many young people do not want to take over their mother or father’s small business. If we want to grow the number of entrepreneurs from the other 98% it stands to reason that we have to teach them to be entrepreneurs and business people. I do not think that is an easy task and in my opinion, is one of the reasons new startups fail at an 80% rate between their 6th and 24th month after startup.
When you think across the country we may be starting 600,000 new businesses a year (those who registered for an EIN) and at the same time 500,000 are failing (those were Tom Ruhe’s numbers from the Summit), we are grinding through a tremendous amount of energy, money, and passion each year—what a WASTE of inferior, untrained entrepreneurial energy.
Tom Ruhe said the 600,000 counts came from the number of company’s nationwide who had registered for an EIN number. Getting an EIN number is not a decision gate, it is a mail shoot. In my opinion, three of those four EIN recipients were not ready to be startup businesses.
As Co-Founder of EntreDot, a 501c3 Main Street Company entrepreneurial training and mentoring accelerator, between 2008 and 2018 we interviewed or had some level of conversation with about 4,000 people who wanted to start their own company. Our grading process which had subjective and quantitative elements found only one in four really had a good business idea, had done sufficient market research, knew how to fund it if they got started, and had the management skills to be a multi-tasking entrepreneur.
Sure all these people could get an EIN, some even had a business plan which was just a bunch of word, and I would say they all had some passion for their idea, but they weren’t ready to start a business yet they would be counted in the 600,000 new startups each year.
Last week the News and observer announced NC had had 29,000 new business startups in the first quarter of 2019, an all-time record. That should make everyone who attended the SUMMIT say we have turned the corner on starting new businesses. It would be great if we have but my guess is you but those 29,000 new EIN’s to a true business test and 75% of them will fail. This startup number for real businesses is highly inflated and leads to the awful conclusion that 80 % of new businesses fail between their 6th and 24th month.
The reality is they shouldn’t have been started in the first place and certainly not counted in our annual statistics. What if the REAL annual numbers were 150,000 new businesses were started in the nationwide (15,000 in NC) and 30,000 failed (3,000 in NC). To me, that is a much better business model. Let me give you my idea of what the characteristics of a real startup business are:
- Not a proprietorship or hobby
- Incorporated as an Inc or LLC—and of course has an EIN
- Have a governance plan—legal structure, ownership defined, management plan
- You intend to grow sales and profit and be sustainable
- Not afraid of being a multi-million-dollar business
- You will have employees and contractors with management needs
- You will create work processes and systems
- You have a REAL estimate of the money required to fund business the first two years
- You have identified sources of this capital or debt and you have the collateral and credit score (at least 680) to back
- You know what you know and what you don’t know—you have budgeted and plan to bring in skilled functional support to cover marketing, accounting, legal, HR, and insurance
- This business idea has been baked for at least a year and you have researched in-depth at least 5 of your competitors to see what they do right and wrong
- You have looked at the indirect competition—usually a new app or some kind of technology
- You know it will take 40 hours a week minimum to start this new business (and you may want to keep your day job as a source of stability and income)
- When you jump in full time (sink or swim) it will take 60 hours a week and you may be income-poor for a few months
- Your family is on board and understand the commitment you are making
- You have advisors and mentors to help guide you through the minefields
- You are committed to some kind of structured business training from a book, online, or provided by a mentor or Business Coach
To make my point about grading the startups more harshly than just getting an EIN, look at NC IDEA’s own bi-annual grant program. They get about 200 applications who know what the grant criteria are ahead of time (much like my 17 characteristics listed above) and at the end of the competition they grant 6 grants—and they do that twice a year. The way I look at that outcome 400 REAL businesses made application and 12 got the gold ring—with the mentoring and structured support that goes with it.
That’s one winner out of ever 33 applications. In short, we are counting a lot of so-called startups in the number of 600,000 that don’t qualify. Make that number real, apply the right training and mentoring to those who do get through the startup gate, and you will flip the numbers to 80% of new businesses started are alive and growing after their second anniversary.