Entrepreneurs will face just as many opportunities as hurdles in 2022. The biggest opportunities will be, hopefully, the unfettered re-opening of the global economy and the resulting increased demand for businesses. There will also be unicorn opportunities for growth-seeking entrepreneurs in the emerging industries.
As for hurdles, the most important one is likely to be inflation. In addition to macro-economic issues, such as the practice of increasing the money supply at the slightest sign of economic discomfort (especially to the stock market), here are some other reasons:
· Production moving out of China due to geopolitical risks, and raising costs
· Baby boomers demanding more health care as they age
· Millennials increasing consumption as their families grow
· And the 600-pound gorilla – the increase in the national debt to around $29 trillion now.
Consider the impact of this debt – a 1% increase in the federal interest rate will increase the annual interest payments by about $290 billion – and further increase the annual federal deficit from its current level of about $2.8 trillion. Adding this amount to the federal deficit, since neither political party seems to be interested in cutting the deficit, will only lead to a spiral of more borrowing.
Despite our economists assuring us that this is not a problem, it means that the federal government will be a competitor for the limited funds available, which could especially hurt entrepreneurial firms. More savings could flow to bonds, possibly reducing the demand for higher-risk equity, which could mean the end of the cornucopia for IPOs and SPAC, more selectivity in funding for ventures, and higher costs of financing for ventures and small businesses.
So how can entrepreneurs fight back? Here are 5 suggestions:
1. Start with the basics
· Continue to cut waste: The pandemic has brought financial discipline to many firms. Now would be good time to find more ways to do more with less. Glen Taylor built a multi-billion-dollar business. He started out in a printing shop and showed how to cut waste. In three years, he went from the bottom of the company to the top.
· Add value for higher margins: When Steve Jobs returned to Apple, the company which he co-founded, it was on life support. He first cut waste and wasteful products. And then focused his attention on building one of the world’s great arsenals of high-margin products and platforms.
2. Seek more low-cost financing and cut financing costs
· Government financing can be a great source of cheap financing for business. Even the great Sam Walton benefitted from government financing. You can too.
· Crowds and angels v. VC: For those with insufficient equity from savings, family or friends, crowds and angels can be a lower cost of equity so long as you know how to get it and avoid sharks. Get it when you qualify and don’t wait till the last minute when you are desperate. Investors often smell desperation and avoid it – or exploit it.
3. Raise more internal financing
· Get paid before you pay. Companies like Dell and Wayfair built unicorns by getting paid before they had to pay. Sounds simple. It is not. You may need to change your business model.
· Improve cash flow. Bob Kierlin built Fastenal into one of the country’s great companies by growing at the rate of his cash flow He found that he could grow at 30% per year if he focused on gross margins, controlled assets, and trained employees. With this brilliant, finance-smart business-model, he built Fastenal into a multi-billion-dollar company starting with $31,000 and with no other financing till his IPO. That’s right – no additional debt or equity.
4. Use smart driver-focused sales
· One of the biggest problems in new businesses is getting sales and spending too much to get it. Joe Martin learned how to sell online and sell more with less – and built Boxycharm.com into a unicorn cosmetics company – starting with $375.
5. Make your strategy finance-smart
· Many entrepreneurs pick a business strategy and then seek financing based on this strategy. Unicorn-entrepreneurs evaluate the financial impact of their business strategy – and adjust if they need to do so. This could mean selling direct to consumers, selling more value at high margins, and growing with emerging trends rather than fighting them. A great example – Elon Musk of Tesla.
MY TAKE: As the cost of money increases, and it is likely to do so with the higher rate of inflation and the increased demand from the federal government, funds will flow from the high-risk, high-potential ventures and business opportunities to proven businesses and lower-risk financial instruments. Plan for the new reality.