I’ve been deep in a small local biz (revenues < 500K annually) and it has given me a good view on some specifics of why small business is so difficult. I’ll put high on the list the challenge of not being able to afford full-time people. Instead, small business is a cobbling-together of part-time and volunteer labor. Volunteer labor is particularly important, I have yet to encounter a small business or startup that does not in some way utilize it: the founder working for no or low pay for starters! Usually a family member or good friend will pitch in, and frequently dedicated customers as well. I have yet to see any studies on this, and I was saddened to see KIRO try to make a fuss over the use of volunteer labor in a local NW business. That business was able to go back and pay everyone minimum wage, but most businesses would not be able to. It’s part of what makes a local business connected to and accountable to the community.
The part-time labor is also a challenge. Coordinating tasks and turning things around get more complicated when the designer only works on Mondays and the Project Manager for a particular project only works on Tuesdays. There’s pretty much a minimum one-week turnaround to get anything done because it takes that long for all the relevant staff members to cycle through! Need to contact a small business? Try to have a little patience when they’re not online 24/7, and realize they probably don’t have all your info and transaction history in a database at their fingertips. We’ve been trained to expect that by larger companies.
Both an upside and a downside is that jobs really are about individuals and not pure roles. In this manufacturing business, labeling is not a bottleneck because of Josh, he’s a champ. However nobody else can label as fast as he can, so should we budget for a labeling machine or should we budget for a food processor? Credit is very personal at this level as well – a startup doesn’t have the history or credit for formal bank lending. Credit is the personal credit of the founder – in a formalized way through personal guarantees or personal assets, and in an informal way by getting favors from other vendors based on personal relationship – being able to delay a payment, or borrowing equipment, or negotiating a lease.
I’m really noticing how growing a business is about steadily reducing risks – growing to hire people full time so they’re more likely to be there for you when you need them; having buffer room in the budget so unexpected expenses hit the balance sheet and not the owner’s pocket; being able to experiment more on product or placement innovation; being able to sign more contracts and get preferred pricing. Those are the efficiencies of scale – it’s about negotiating power more than just about volume, and about focused attention and commitment from stakeholders & partners that reduces frictional costs.
One way to get past many of these things quickly is to raise a bunch of equity and start operating at a higher level, but food businesses tend to be low-margin and can’t promise a return on significant equity. The steady risk-mitigation of organic growth seems to be a necessary path. Luni of the Fledge Accelerator refers to these as “earners” vs “burners”. Earners being the organic growth path, and burners being the quick equity and try to scale quickly path. A frustrating trend we’re starting to notice is that high-risk money is coming into the food/ag sector where the business models can’t justify it. In the 3-5 years it’s going to take to lose enough money that risk-takers stop flooding it in, those “burners” that get funded will distract partners and resources from the “earners” that could actually sustain and thereby starve them in the short term. It’s yet another example of how our capital funding system is broken.
Shaulablog 
What are three possible solutions? I’m seeing what are probably similar holes in other areas of financing, and starting to believe the solutions are in aggregates of capital vs. trying to fund each SME and startup one by one by one.
Have you blogged your ideas around holding companies vs. funds. I think it’s time to start fleshing out that idea. A Conscious Hathaway as the 21st Century replica of Berkshire Hathaway. 🙂
I do think that as we’re investing in enterprises, there’s the idea, there’s the infrastructure and there’s the people, and it seems ideally as providers of capital we’d figure out how to roll forward created value – move that entrepreneur into another position where their lessons learned can provide benefit to all, or combine resources, or repurpose assets. I imagine that successful investors do that – when I see Whole Foods making equipment loans to their small vendors – they’re truely investing because they can also provide access to market and they provide marketing training. But in the worst case if they have to repossess that Modified Atmosphere Packaging machine, they likely have a next company to hand it to. If you look at my post about the capital market feedlots it’s kindof that idea. Angels are too individual and scattered, we need a container (like Fledge!) that can provide a whole package and move companies to the next level or make the most of what’s left of them (or, with the revenue based financing, make the most of what they managed to accomplish w/o being a cause of their failure!)