SURVIVING THE WASHOUTS 
Start-Ups: Not even the New Economy can repeal the rules of entrepreneurship.

By Linda Stern
NEWSWEEK

HALF of all new businesses will be gone within five years of their creation, and in today’s environment of what the great economic theorist Joseph Schumpeter called “creative destruction,” most of them don’t make it even that long.

The reasons for any particular failure are rooted in local circumstance, but some common elements stand out. Competition grinds the owner down. Liquidity crises erupt. Fatigue or boredom sets in. Other pursuits beckon. It’s been harder to explain the half of entrepreneurs who do survive. But there are eternal truths of business success that transcend even the New Economy, and experts are beginning to figure out what they are. People who stay for the long haul tend to have a clear and succinct vision of what they want to do. They’re smart enough to know what they’re bad at, and objective enough to admit it. And they refuse to give up.

Mainly, it’s the latter. Ask Pamela Adzima, a nurse turned owner of Laser Link Inc., a Boyertown, Pa., toner-cartridge remanufacturer with $1 million in sales. She had so many dark days she numbered them. The first was the day in 1995 when she bought the company and promptly found that the books had been cooked and she was $20,000 in the red. The mother of four hauled laser cartridges around while she drove the nursery-school car pool until Dark Day 2, when she ended up in the hospital with the dreaded strep A virus, the infamous flesh-eating bacteria. Her husband took vacation time to make the deliveries, and she hired some friends and neighbors to help her through. Dark Day 3 arrived when she discovered many of her hires were draining the business, either by not working or by flat-out faking quality-assurance tests. She had to fire half her 12-person staff. If failure had been an option, Adzima would have taken it. “There have been times when I should have thrown in the towel,” she says. “The only reason I’m here now is that I’m stubborn.”

Many entrepreneurs fail when they start a company and flit from one type of service to another, or don’t have a clear vision of where they want to end up.

Vision. Of course, it takes more than mulishness to build a company; it takes direction and a plan. Many entrepreneurs fail when they start a company and flit from one type of service to another, or don’t have a clear vision of where they want to end up, says Joseph Hadzima, a venture capitalist and senior lecturer at MIT’s Sloan School of Management. If you can’t explain the philosophy of your business in 25 words or less, don’t even bother, says Nelson Davis, head of Nelson Davis Productions, a Los Angeles television-production company that specializes in shows that promote economic empowerment of minorities.

Davis, a former NBC producer, has his mission statement hanging over his desk and printed on cards that he gives to his employees: “The purpose of Nelson Davis Productions is to be a leader in promoting personal and economic empowerment in minority communities.” That mission may sound high-minded, but it’s kept Davis on message for 13 years. He has a tight focus on only two shows: a small-business program called “Making It” and a school quiz show called “Campus All-Star Challenge.” This clarity about goals has helped him not only to line up sponsors, but also to motivate his employees. And for himself? It gives him the tenacity to work through the troughs of low sales and workday frustrations.

Cash. You can’t start a company free of charge, but the people who make sustainable businesses tend to use innovative ways to find money and be really frugal with it. Davis found money by talking a television station into lending him a studio, camera crew and editing room for a couple of days so he could make the pilot that he shopped around for sponsors.

Or take Chere Estrin, who started her Los Angeles legal-staffing firm, the Estrin Organization, by pairing up with a friend who had a secretarial-services firm. They shared offices, phones, insurance and a chief financial officer until they could afford to go their separate ways.

Or Rochelle Balch, an unemployed, newly relocated single mother in Phoenix, Ariz. She began her computer-consulting firm with a $5,000 severance package that she mainly spent on marketing. “I put my name on everything: pens, pencils, paper cups, paper-clip holders. I went to every luncheon and volunteered to speak whenever possible. I sponsored local charities.” The flurry of marketing brought her enough customers to take to the bank, and she talked one into lending her $10,000, most of which she used to continue marketing her business. That still wasn’t enough, so she took a personal line of credit and a second mortgage on her house, and cut personal expenses so close to the bone that her 8-year-old daughter once asked if they could afford the 50 cents she needed to attend a school picnic. Eight years later, Balch’s firm is a $3.1 million operation with 25 employees and no debt.

Most entrepreneurs are a lot better with ideas than they are with numbers, but it takes a solid numbers person to move a company from its first flurry of cash to solid, long-term profitability.

Good accounting. Most entrepreneurs are a lot better with ideas than they are with numbers, but it takes a solid numbers person to move a company from its first flurry of cash to solid, long-term profitability. To sustain a company, you need to know how much you are spending on various aspects of the business, how much each piece earns, where the losses mount and where the profits come from. Only good records can do that, and in most cases that means bringing in someone else to do the books. Balch started by doing her own accounting with Quicken, a personal-finance program. She moved up to Quickbooks, but found that she made mistakes every time she filed her tax reports. As soon as she started earning a profit, she hired a full-time accountant. “It’s hard to start spending the money just as soon as you start earning it, but there’s no way I could have growth if I kept doing the bookkeeping myself,” she says. “The accountant has allowed my sales to jump because I could concentrate on selling and marketing.”

Flexibility. Most companies don’t end up where they set out to be, despite what George Bush the elder disparaged as “the vision thing.” It’s important to start with that mission, but you have to be willing to tinker with it as the market demands. Balch, who built her company on computer consulting for large businesses, now finds after eight years that it’s getting harder to sell those services, and she is shifting a greater part of her business to small-business services. Davis is expanding his television-programming company by moving into Internet programming that is tangential to the programs he already produces.

Adzima is adding computer-consulting services to her toner-cartridge business; her customers were demanding it. But you have to be careful: there’s a fine line between accommodating changes in the marketplace and trying to be all things to all people. The latter is a prescription for failure.

Transition. Most businesses fail when they get too big for their owners to be in charge of everything themselves, observes Joseph Mancuso, who has studied entrepreneurship for more than 20 years as founder of the Center for Entrepreneurial Managers, a research and venture-capital organization. It’s so hard he calls it “the impossible transition,” and it usually occurs when a company reaches $20 million in sales. Before, a company’s table of organization tends to be what he calls a classic entrepreneurial chart: one top manager and a horizontal line listing many employees who all report directly to the chief. To be successful, the entrepreneur must switch to a company that looks more like a family tree: small at the top and with levels of sub-managers branching out and having responsibility for different aspects of the business.

In short, you must give up direct control of every aspect of the business and focus on your core skills. That’s hard, because it requires knowing your own weaknesses well enough to hire people who can fill them. “Most entrepreneurs fail because they tend to select people just like themselves; they need to hire people who are the opposite of themselves,” says Mancuso.

Exit strategy. Finally, entrepreneurs with staying power know the end of the story. To what end are they building the business? Estrin wants to build her firm up, sell it and go on to the next venture. Balch wants to be self-employed for a long time. Adzima hopes to build her business into a viable entity that she can sell when she and her husband want to retire. Davis isn’t so sure; he’s planning a personal retreat so he can mull his endgame. There are a variety of results that allow an entrepreneur to leave a company without spelling failure. But unless you pick one and shoot for it, you’ll never get there at all.