IN DEPTH: Successful startups utilize resources, capital and some luck
Half of new businesses in America fail within their first five years, according to U.S. Small Business Administration.
Two Rivers Coffee opened five years ago in downtown Portage and is not among them because husband and wife owners Nate and Jerusha Smith have learned from others and from their own mistakes.
“You need to be willing to run the business yourself and grow into staffing it,” Nate Smith read from the top of his list of advice for other startups, much of which will be shared April 25 at the next Innovation Champions panel discussion in Portage.
He served customers in between his answers about the success of Two Rivers on March 1, getting some help from their 14-year-old daughter, Anna. Together they roasted coffee that’s also enjoyed as far north as the Twin Cities, as far west as Colorado and as far south as Tampa, Florida.
They’ve experienced 50 percent sales growth in every year, thanks in large part to successful wholesaling efforts the Smiths launched under the name Life Beans Coffee 2 1/2 years ago, Smith said.
Innovation Champions formed about three years ago because Smith wanted entrepreneurs in the area to help each other succeed.
“It just made sense,” he said of the idea.
Stacy Jax of Baraboo presents at the same meeting. Her business, Trinity Gunshot Alarm System, made the top 20 out of more than 200 entries in last year’s Wisconsin Governor’s Business Plan Contest. The success helped her to find an investor, and she’s now on track to start producing her alarms later this year, she said.
Jax has never concerned herself with the fact that Wisconsin was ranked 50th among the 50 states in startup activity as measured by the Ewing Marion Kauffman Foundation in reports it released in 2015, 2016 and 2017, she said.
Ever since the Sandy Hook shootings in Newtown, Connecticut in 2012, Jax has worked to develop technology that instantaneously can detect the sound of a gunshot when fired inside a building.
“It’s hard to offer specific advice because you’ll go through ups and downs all in one day,” Jax said of what she’ll discuss at Innovation Champions. “You’ll get good news one minute and then bad news the next, and I think it’s really more of a yo-yo than a roller coaster.
“For any startup,” she said, “I really think it’s about finding support — the places where people can share their ideas, learn about resources and get encouragement.”
In the March “Kauffman Indicators of Early-Stage Entrepreneurship,” Wisconsin still is ranked near the bottom at 46th out of 50 states and the District of Columbia. The new report, which studied startup activity in 2017, replaces Kauffman’s “Index of Startup Activity,” which was discontinued in 2018 as the foundation retooled its research.
Kauffman’s studies have for years been disputed by local and state business leaders, including Tom Still of the Wisconsin Technology Council, whose organization offers the business plan contest in which Jax has excelled.
“I’m not suggesting Wisconsin is first,” he said of annual Kauffman studies, “but we’re certainly not last.”
Alisa Neumeier said Wisconsin could provide more access to capital for startups to improve the state’s rankings in startup activity, but her business, Firefly Fibers in downtown Beaver Dam, is experiencing success in spite of early strikeouts in financing.
“Everybody kept telling me that there would be grants, but we could not find anything we were eligible for,” Neumeier said of the retail business she opened in 2010. “My husband and I financed it ourselves, and not many people can do that.
“We were lucky.”
Experiencing some luck can be important for a startup’s survival, but entrepreneurs won’t get far without the capital and hard work, Neumeier and other business owners said.
Firefly Fibers — which deals in natural fibers, mostly yarn and nothing synthetic — doubled its retail space in November, and her business keeps growing, in part, because of success in online sales.
It’s something she more or less stumbled into.
“It happened during major road construction about four years ago,” she said of downtown repairs that began in the spring of 2015 and continued for several months. Construction made it difficult for customers to access her store and prompted Neumeier to start offering her products online, which she’d earlier resisted because she prefers customers to see the fabrics in person.
“There’s also a certain momentum that happens in your fifth year,” she said of a period that followed years “without much financial reward or much time off.”
Her online offerings began conservatively — as almost everything in business probably should, Neumeier advised — but today she makes between 15 and 30 online sales per day. Factoring in both in-store sales and her online sales, she sells as much as 200 pounds of fabric per week, and there’s room for growth, she said.
Launching Firefly nine years ago cost about $60,000 — two-thirds of which was inventory and also involved the purchase of a point-of-sale system and remodeling of the space she initially rented downtown.
“Our rent was stupid cheap,” Neumeier said of the store she outgrew last year — a space that cost only $500 per month and now sits empty in the building next to her new one. “Finding a good rate was important because that’s usually a big expense for startups.”
Beaver Dam city leaders have been meeting with local banks, hashing out the details for a revolving loan fund, which would provide to startups the kind of grant opportunities that Neumeier sought without success nine years ago, Mayor Rebecca Glewen said. This would help startups to get their space ready for business, providing funds for signs, renovations and more.
Low-interest loans for local businesses, similar to what the city of Portage offers businesses through its participation in the Wisconsin Community Development Block Grant Program, is important to Glewen because she considers what more businesses like Neumeier’s might accomplish for Beaver Dam on the whole.
“Her business attracts knitters from Madison, Milwaukee, Chicago and that impacts our local economy,” Glewen said. “They come here and get something to eat, they visit other places nearby, and we want to continue to build on that success.”
Leasing property is just one topic that’s discussed at Innovation Champions events held twice a year, said Nate Smith, who often warns entrepreneurs against getting locked into “triple-net-lease” agreements.
These agreements make tenants responsible for the ongoing expenses of a property including maintenance and building insurance, in addition to paying the rent and utilities.
“There are a ton of those in this area,” Smith said of triple-net-leases. “People often don’t know what it means until they get a surprise bill in the mail, and the extra costs could be the equivalent of one to two months of rent.”
Participants of Innovation Champions might also ask Smith for tips in controlling waste, learning how Two Rivers offered lunch from 2015 to 2017 but stopped because it resulted in too much waste and additional staffing without much profit.
“We changed because we finally stepped back and looked at it with fresh eyes,” Smith said of the vacation he and his wife took about two years ago. “We need to take a trip out of town regularly because it gives us better perspective.”
Getting out of the “daily grind” now and again is important to the Smiths, who each work 40 to 50 hours per week in coffee and another 10 to 20 hours per week for side efforts including real estate brokerage and the management of commercial properties, Nate Smith said. Two Rivers has a staff of six, including the Smiths, their daughter and 17-year-old son.
Getting good tips from Innovation Champions makes perfect sense, Smith said, when you consider its committee of 12 consists of professionals from Columbia, Sauk, Marquette and Dane counties. It offers panel discussions in the spring and a “boot camp” in the fall, where speakers from local universities or banks might share information about financing and resources.
Its committee has leaders from Madison College, University of Wisconsin-Madison Small Business Development Center, Cheryl Fahrner of Columbia County Economic Development Corp., Ed White of Sauk County Development Corp. and more. Fahrner and White help to organize and host the committee meetings, Smith explained, where they often promote block grants available to entrepreneurs, and Michelle Somes-Booher, director of the development center, organizes the boot camps.
“This is open to anyone,” Smith said of Innovation Champions, “and I hope it keeps growing.”
White had introduced Jax to Somes-Booher in the early stages of Trinity Gunshot Alarm Systems. The development center ultimately helped Jax define her market geography, develop business strategy and to “consider issues I’d never even known of,” Jax said.
But the center is one of more than a dozen resources she’s utilized for her business. She found a mentor in Portage native Doug Fearing, who owns Fearing’s Audio Video Security in Madison and helped her feel confident in the product she wanted to offer and encouraged her to participate in last year’s state business plan contest. She’s participating in it once again and recently advanced to the second of four rounds.
The Wisconsin Technology Council holds informational sessions and supporting events during all four phases of its competition, helping Jax and the other competitors to submit “first-rate documents,” she said.
The contest, in its 16th year, has attracted more rural entrepreneurs such as Jax, who’s among 18 of the 50 semifinalists residing outside of Dane County, Still said.
“This used to be a Dane County phenomenon,” Still said, “but parts of rural Wisconsin are getting better connected” to resources.
Other resources for Jax include but are not limited to the Service Corps of Retired Executives, a national group of retired executives who offer classes where Jax gained even more mentors; gBeta, an accelerator group in Madison whose program director had linked Jax to many useful resources, including attorneys; Doyenne, a Madison business management consultant that offers Evergreen Funds for businesses owned by women; and Qualified New Business Venture, a program from Wisconsin Economic Development Corp. that helps startups raise capital by offering tax credits to investors.
Trinity’s business venture status is a big reason Jax secured an investor, she said, since it allows investors in new companies to write off up to 25 percent of their investment.
“It’s amazing how connected people are in the startup community,” Jax said of what she’s learned, “and it would be awesome if Sauk County would provide similar opportunities in mentorship as I’ve found in Madison.”
‘No magic bullet’
The business venture program is one of eight programs Wisconsin Economic Development Corp. offers in entrepreneurship and innovation and sometimes it’s challenging to explain to people all of the opportunities without “overwhelming” them, said Aaron Hagar, the group’s Vice President of Entrepreneurship and Innovation.
“The key takeaway is there are resources for every individual and business,” he said, “and we’re making great strides.”
Hagar said 2018 was a record year in terms of investments made in Wisconsin startups at $252.5 million compared to $133.7 million in 2017, according to data compiled by PitchBook.
Still, in a recent column, notes how Wisconsin ranked 50th out of 51 in Kauffman’s “opportunity share” measurement, an important reason why the state finished near the bottom in Kauffman’s March study. Kauffman in that portion of the study aims to measure how many entrepreneurs start a business in pursuit of opportunity rather than necessity, data that Still questions in part because Wisconsin has one of the lowest unemployment rates in the U.S.
Portage’s director of business development and planning, Steve Sobiek, said Wisconsin’s low overall ranking in the Kauffman studies obscures the fact the state ranks favorably in the survival of young companies. It ranks 23rd out of 51 within that subcategory of Kauffman’s latest study.
“There’s no magic bullet and generally there are fewer resources in rural areas,” said Sobiek, whose office is located inside the Portage Enterprise Center that’s currently housing and assisting six startup businesses, two of which just moved out into permanent facilities.
“Successful startups see the obstacles and address them.”
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