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Square one: Serving the inexperienced entrepreneur

by Meredith Erlewine

August 1999

When Vaneese Johnson went to a San Francisco bank to apply for a commercial loan, the loan committee didn't see her drive and her clear aptitude for business. They apparently never got beyond the facts. Johnson is a single mom who grew up on public assistance in a single-family home. On top of that, she had no previous experience running a business, no clue what a financial statement was, no collateral, a blemished credit history and paltry start-up sales. In the bankers' eyes, Johnson was not entrepreneurial material. They turned her down.

Johnson considered her economic disadvantages and inexperience irrelevant. Fortunately for Johnson and her business, On the Move Staffing Service, the Renaissance Entrepreneurship Center concurred. Renaissance staff saw a very different picture of Johnson than the bankers: She already had taken the initiative to start a temporary staffing business in her home, had one client with repeat business and was motivated. Confident that she could tap into a niche of the temporary staffing business in which she had spent five years as an employee, Johnson knew that she just needed to learn – something Renaissance staff could help her do.

"When Vaneese came in, she demonstrated that she had some experience and that she was already making money," says Paul Terry, the consultant who has developed Renaissance's training programs. "But she had no experience running a business or generating financials." Renaissance staff provided Johnson intensive resources and information to get her up to speed on business fundamentals. "Their finance counselor helped me set sales goals, identify where my clients were going to come from, plan for what I would do if I didn't meet those goals, and gave me the resources I needed to figure out how much it actually costs for me to provide my service and to determine how much profit I'm making after expenses," she says.

Johnson is like many entrepreneurs whose life or work factors – including income, education and business or professional literacy – leave them too inexperienced to launch a company without some extra hand-holding. Yet they have plenty of the right raw materials. Even environmental factors can be disadvantageous, says Sandy Bourne, president of the Pasadena Enterprise Center (PEC) in California. Bourne noted that an aspiring entrepreneur who comes from generations of history professors may be less ready to start a company than an entrepreneur who grew up sweeping floors in his parent's third-generation mom-and-pop flower shop. "Being from a nonbusiness family is a disadvantage because it's just not the mentality of daily life in those households," she says.

Incubator managers and staff have found several tried-and-true ways to help prepare inexperienced entrepreneurs to compete with others who have stronger entrepreneurial skill sets. Many of these tactics go back to the very basics of incubation, providing an excellent opportunity to take a peek at how some incubators are assisting entrepreneurs through fundamental business assistance. Following are incubation program features from incubator staff whose programs focus on helping entrepreneurs who enter the game at square one.

Tough-love evaluations

To see the potential behind a company whose principals lack some of the basics, incubator directors toughen up the due diligence process. At the Entrepreneurial Center in Birmingham, Ala., Executive Director Susan Matlock serves 30 entrepreneurial firms from a wide variety of backgrounds. When Matlock meets with a potential client for the first time, she spends about an hour discussing the business idea and assessing how much thought the entrepreneur has put into the business. "If they have a plan, I'm going to be sure it's their work and that they truly understand it," she says. Matlock wants to see that the client has taken the time to prepare month-by-month cash flow projections – not quarterly or annualized. "This is the most important tool they'll ever have," she says. "And depending on whom they're selling to, the cash will flow differently. Also, are they looking at seasonality? Average numbers could hurt them, if so. You challenge them on those things." (For more on teaching the importance of financial projections, see "Finance 101" below)

At Advocacy for Community Action Programs (ADVOCAP) in Fond du Lac and Oshkosh, Wis., Incubator Manager Morton Gazerwitz routinely must challenge clients to perform basic due diligence that would be second nature for clients at many other incubators. All of Gazerwitz's clients have inexperience of the economic sort – the center's mission is to help people whose earnings do not exceed 150 percent of the federal poverty level. At a first meeting with a client, Gazerwitz puts the client on the spot to assess the viability of his or her business idea. He often discovers that it is the first time the entrepreneur has even considered the possibility that the business might not be a good idea.

"A guy will say, 'Well, I don't have any [competition],' and I say, 'Yes, you probably do,'" Gazerwitz says. He often starts them off with a fundamental sourcebook for market analysis: the phone book. His clients must identify the existing market, assess it, and then prove to Gazerwitz that the proposed business will command a proprietary position. "If they tell me, 'My advantage is that I'm going to be cheaper,' I say, 'That's not an advantage. A, you're not going to be making the profit you should, and B, your business should be built on quality and service, not price.'" Gazerwitz's probing usually results in a bit of natural selection. Some clients decide they are not cut out to be self-employed, while others choose to press on – with a new perspective of their strengths and weaknesses and the work that will be involved. Gazerwitz has helped clients create 70 businesses and 248 jobs.

Business basics in plain language

Hosting preincubation or pre-self-employment workshops is an efficient way to bring potential entrepreneurs up to speed on business basics. A classroom setting is most common, mainly because it allows for the dissemination of lots of information in a clear format while at the same time promoting the first, valuable round of networking among the potential entrepreneurs. The course must be planned with the audience in mind – people moving off of public assistance into entrepreneurship will need to address different topics than scientists leaving the world of laboratories for the world of sales and marketing (for a list of topics offered at several incubators, see "Business 101" below.)

Deciding what topics budding entrepreneurs need to learn is easier than devising innovative methods and clear language appropriate to the end user. These adult learners also need different presentation methods than the conventional classroom offers. Managers and staff who routinely work with inexperienced entrepreneurs have found that using such tools as relevant examples, interactive lessons and customized study guides help people with little or no business background understand concepts like pro formas, cash flow and balance sheets. Business school textbooks often are not the best choice.

In Minneapolis, the American Indian Business Development Center (AIBDC) offers a 16-week course for a targeted audience: Native American entrepreneurs who have no business experience but do have the drive to succeed. Minneapolis has the largest concentration of urban American Indians in the United States, with 8,500 Native Americans living in the low-income Phillips neighborhood. "That's bigger than most reservations," says Tony Genia, AIBDC CFO and director of training.

Genia faces many challenges, not the least of which is helping clients reconcile the traditional American economic system with the American Indian community's traditional social and economic system. While the U.S. economic system is based on wealth accumulation, Genia explained, the American Indian community's traditional economic system is based on generosity: sharing, caring and giving to others. "We have to convince [our clients] that the better good of the long term is to be profitable so you can create jobs and improve your community," Genia explains.

Genia uses examples meaningful to his clients. He begins with a basic discussion of economics and where the individual fits into the context of being in business. "To them, finance is a foreign language. I have to break things down and give examples. There's a language of business: assets, accounts receivable, accounts payable, the difference between marketing and sales, market niche, etc.," Genia says. "I try to talk about market in terms of ecology. I talk about a fish pond, how it's in ecological balance, much like the competitive market a new business enters – the established firms are in balance. When you set up your business and go into that environment, a lot of that competition is going to be aimed at you, trying to force you out. So I stress that you have to convince people that your firm is unique above all of the competition, so you'll be able to survive." AIBDC has assisted 40 businesses in starting up or relocating in the incubator, which has resulted in the creation of 300 new jobs in the Phillips neighborhood. Genia expects the completion of more incubator space in October to bring 20 new businesses and at least 70 new jobs to the neighborhood.

A 50-hour course on business fundamentals at The Enterprise Center in Philadelphia, includes an interactive lesson on cash flow. "For people who are struggling with balance sheets and income statements, staff will run the financial classes as a store," according to Matt Bergheiser, vice president, entrepreneurial programs. Instructors lead students through different types of transactions to illustrate how each affects cash flow and income statements. Staff try to keep all of the business training as down-to-earth as possible. "We'll focus on real-life situations, and come up with solutions. We'll bring in current tenants who are further along in the start-up process. They may have a marketing problem, for example, and we'll have the students come up with marketing ideas for the client, who will critique the ideas on the spot, pointing out why some ideas would be good and others would be bad,” Bergheiser says.

While Birmingham's Entrepreneurial Center does not offer a formal pre-incubation or pre-self-employment workshop, Matlock has written a business plan guide that she uses with all new clients to teach them the basics of business. A major focus in the guide is cash flow. "I take a great deal of pride in demystifying that process. I have deliberately used little bitty numbers so they can see it's just arithmetic," says Matlock, who believes that if you break it down into very small numbers, "anybody can understand cash flow." She provides one example that deals with the service business, and one that deals with light manufacturing, to illustrate that two different kinds of businesses will look completely different on paper. "Don't take an annual number and divide by 12, because that's not how the money's going to flow," Matlock stresses to her students.

Getting a life

Some business beginners need to learn that before they can successfully run a company, they must organize their personal lives – and this can be even more relevant to entrepreneurs running single-parent households, juggling serious money problems or the like. Bourne has noticed that new incubator clients sometimes feel frustrated because they often are working hard but not necessarily smart. "Entrepreneurs need to receive some guidance on deciding how much time to focus on their businesses, and how to structure their personal lives to allow for that focus," she says. To help with this, Bourne asked business development consultant Richard Reardon to present a roundtable session to her incubator firms on taking care of your personal life while starting a business.

Reardon, president of PEC client R&R Business Development, said that whether he's providing business coaching to a new entrepreneur or to a seasoned corporate executive, he's found that he must "get into the personal side, because you can only go so far [in business development] without it." Reardon looks at characteristics such as how a person lives, whether he or she is organized or surrounded by clutter, how much he or she plans ahead, and whether the person is a good money manager. "When you look at the big picture," Reardon explains, "those are all personal foundation issues that have to be addressed."

In Philadelphia, The Enterprise Center staff helps clients set personal goals, such as getting a certain type of training or pursuing a college degree. "We spend a lot of time working on personal development, household budgeting and presentation skills, things that are applicable to more than their businesses," Bergheiser says. "[Clients] need to get their personal financial situation and goals in order before they can handle a business plan."

Group activity

Groupwork promotes cooperation, peer critiques and brainstorming sessions, say many incubator managers. Pamela Richardson, manager/consultant at the York Business Opportunities Centre in Toronto, Canada, works with budding entrepreneurs who are receiving Canada's employment insurance (assistance provided for one year in Canada for people who are leveled by blows such as corporate downsizing or layoffs), as well as those taking steps to move off the country's public assistance program. The incubator's umbrella organization offers an eight-week entrepreneurship course, during which the students are required to form Success Teams of four to six people. The teams are expected to meet for an hour outside of class each week and discuss a predetermined topic, which can be generic, such as sales or marketing skills, or focus on one of the group members' proposed businesses.

"[If] we get our clients to work together with each other, as opposed to having a reliance or dependency on trainers and staff, it really gets people moving along," Richardson says. "We acknowledge that we don't have all the answers, and that there's a lot of great stuff that's inherent in the group itself that needs to be shared."

Richardson was particularly pleased with one Success Team, which turned a roundtable discussion into something more tangible – start-up cash. A group of four clients who met for a number of months decided to apply together to a community loan fund that only accepts group applicants. "The group acts as each other's guarantors," Richardson explains. The four clients decided that since they each were operating businesses that were similar in scale and required relatively little collateral ($1,000 to $5,000 each), they could make a strong application. "They turned their Success Team into a credit vehicle and applied to the loan fund and did quite well," Richardson says. The team twice went back to the fund for additional amounts, all four businesses are still operating, and the entrepreneurs have paid back the follow-up loans and are no longer using the fund.

A benchmarking system

Inexperienced entrepreneurs who are making the jump into the incubator (and simultaneously into business) stand to benefit from setting clear goals for their companies from the outset. This provides a framework for measuring success and for making necessary changes along the line.

"In order to minimize the incubator's risks and maximize its efforts, you need to have some way to assess a client's level of proficiency coming in, track it, and set benchmarks for different aspects of growing his or her business," says Tracy Kitts, assistant director of the Appalachian Center for Economic Networks (ACEnet) in Athens, Ohio. ACEnet's mission, to help low-income people move out of poverty through employment or business ownership, means staff often works with disadvantaged and inexperienced entrepreneurs.

"We'll help the entrepreneur set clear, short-term benchmarks, with a long-term plan for the business," Kitts says. "We'll explain that it's necessary for them to complete those steps before we can help the client and his or her business move to the next step." Kitts offers the example of a farmer who sells cherries at the local farmer's market and wants to use ACEnet's commercial kitchen to begin making gourmet cherry specialty foods. ACEnet staff might ask the client to track responses from all outgoing promotional materials, implement a system to track cash sales at the farmer's market and apply for a vendor's license – all within a month. If the client takes the steps, ACEnet helps set the next range of goals. "We give everyone a shot, but tell them, 'In order for us to continue working with you, you need to do this first, and here are the resources you'll need to do it,'" Kitts says. "Then we see if they follow through. If they do, we'll assist them with the next step."

Motivation as foundation

Less experienced entrepreneurs are taking on a process that is inherently scary and full of blind curves. They may feel also that others with more education or experience won't take them seriously, making their road harder. They can become disillusioned with the process, or their self-esteem can suffer. Because of that, The Enterprise Center has worked motivation into the very foundation of its incubation program. "In the first year [of owning a business], clients don't see a lot of successes. They're really struggling," Bergheiser says. "We give them things to strive for, have them set some goals." Reaching those goals does more than keep the business on track; it makes the business owner proud and recharged.

The goals set at the Enterprise Center aren't necessarily based on revenues, since at an early stage revenues aren't always rolling in. A goal could be finishing a business plan, making marketing calls or securing a sought-after contract. Two monthly ceremonies recognize different achievements: A sales award is presented to the company with the highest percentage of sales growth from one month to the next (avoiding potentially discouraging comparisons to nationwide standards), and an employee-of-the-month award focuses attention on outstanding employees of client firms. "So much of the attention in an incubator is on the principals of a firm," Bergheiser notes. "It's important to keep their employees motivated to succeed as well.

The center also employs a client ranking system modeled after minor league baseball and capitalizing on motivational tactics so important in team sports. Businesses are ranked in three different levels as they grow: A, AA and AAA. Within each of those levels, client firms are evaluated on more than 10 subjective characteristics, such as employee management techniques, cash management skills or how the firm employs technology. Single A firms, for instance, may have no employees or a high employee turnover rate, but AAA firms may have several management levels and a more complete management team. A business's rating is achieved cumulatively – points are earned in each of the dozen or so characteristics.

When a firm makes the jump to the next level, the achievement is publicly recognized on Move-Up Day, which is usually tied to another big incubator event, so outside recognition is involved (not just other clients). A highly visible scoreboard inside the incubator boasts aggregate monthly revenues, jobs created and the number of client firms that have achieved A, AA and AAA status. The scoreboard serves as a success indicator for incubator visitors and clients, and allows clients to keep track of their status compared to other client firms.

"It gives people things to strive for. A lot of times, when you're just starting out, there are a few areas of recognition," Bergheiser says. "[Clients] talk about who's going to win this month, when they'll move up to AA, etc., so there's team spirit mixed with healthy competition."

TLC

The final component of any program that helps inexperienced entrepreneurs is support in the form of one-on-one business counseling paired with understanding. "The answer to a lot [of hurdles entrepreneurs face] is really loving, hands-on care," Gazerwitz observes. All managers seem to agree that no matter how complete a business basics foundation is, nothing can take the place of a face-to-face discussion about whatever problem an entrepreneur is having – followed by assistance with creating a plan to solve the problem.

In Vaneese Johnson's case, one-on-one assistance helped On the Move Staffing Service move up. After being turned down at the bank, she applied for a loan from the San Francisco mayor's office. While she waited for a decision, Renaissance staff coached her on financial management and kept her hopes up. "I was in the mindset of, 'I'm going to get this money. And when I get this money, what am I going to do with it?'" Johnson says. Getting a loan is one thing, she notes – after receiving one, "you have to manage that money."

Johnson got the loan, and monthly follow-up sessions at Renaissance help her make sure she's managing the money appropriately. A year and a half after moving to Renaissance, On the Move has expanded from a cubicle to a full office and Johnson keeps very busy servicing 10 clients. In the past year, she has placed about 200 people in short-term assignments, about 10 in long-term assignments and has found permanent jobs for five people. "And I'm generating a 40 percent profit after operating expenses," Johnson says. Though her success may surprise the bankers who originally denied her loan request, it comes as no surprise to her. "I knew if I wanted to succeed in this lifetime," she says, "I needed to educate myself."

Higher-risk clients, like Johnson, can and should be part of the incubation community, according to NBIA Executive Director Dinah Adkins. "We must strive to make sure we all have the tools in place to make these clients as successful as anyone else," she says, adding that she'd like to see growth in this segment of business incubation. "The only disadvantaged entrepreneurs should be those who have the raw materials to be in business but don't have an incubator in their community to give them the business fundamentals that will level the playing field."

Finance 101

Instinct can be an excellent reason to start a business, but it won't balance a startup's checkbook. Incubator managers agree that clients absolutely must understand and value financial concepts such as cash flow, profit and loss statements and balance sheets. They also agree that these concepts often are difficult for inexperienced entrepreneurs to grasp and don't always generate immediate interest.

At the Entrepreneurial Center in Birmingham, Ala., Executive Director Susan Matlock first helps clients understand why it's necessary to spend lots of time working on cash flow before she teaches them how to track it. "I tell my clients, 'You're not doing this for me, and you're not doing it for the bank. You're doing it for you. You need to see, to the best of your ability, what's going to happen to you. If you have negative cash flow in six months, it's too late to figure it out then,'" she says.

Tracy Kitts, assistant director of the Appalachian Center for Economic Networks (ACEnet) in Athens, Ohio, agrees with Matlock. "It helps to continually relate the importance of financial statements back to how they directly affect profitability and growth – two areas entrepreneurs are always interested in," he says. "When we want to see if a kitchen client's food costs, labor costs or production efficiency are going up or down, or if the client is getting product into larger distribution chains, we can't do that if the client is not producing monthly financial statements. Maybe a salsa maker's product is already in a store, but isn't moving off the shelves, so we instigate a label change. Monthly financial statements will help us determine whether that was an effective thing to do."

To encourage a client to begin working on cash flow, Kitts helps him or her prepare a very rough draft of the company's financial health, so the client can see on paper how making some seemingly small changes could increase the growth potential or profitability of the business. "When you have clients go through a long, drawn-out procedure on cash flow right from the start, they may not be very interested if they can't quickly see how it could help," Kitts says. "But if you prepare a rough cash flow, do a quick breakeven analysis and show the client that making one small change could affect the business' profitability, it usually sparks interest in a hurry."—M.E.

Business 101

Many incubators teach the basics of business in one way or another, whether it's through informal roundtable discussions, one-on-one counseling or through partnering programs with community colleges. Whatever the vehicle, many incubator managers have found that there is strong demand for many of the same beginner topics.—M.E.

  • Letter writing
  • Assessing your own personality
  • Organizing a home office
  • Networking
  • Niche marketing
  • Common-sense finance
  • Using word processing software
  • Using spreadsheet software
  • Print advertising
  • Selling skills
  • Using a reference library
  • Designing business cards, letterhead and logos
  • Time management
  • Taxation
  • Licenses, legal forms and fees
  • Finance
  • Marketing
  • Personal budgeting
  • Presentation skills
  • Internet access
  • Using accounting software
  • Human resources
  • Business writing v
  • Negotiating
  • Accounting

Keywords: benchmarking clients, client selection/admissions, coaching clients, entrepreneurial pool, microenterprise, professional development -- client, seminars and training programs, social entrepreneurship, woman-owned business

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