Colorado Center for Innovation in Community Capital

The CC4ICC Approach to Recovery – Wealth Restoration

by Ron Stites

Executive Director, CC4ICC

COVID-19 has destroyed many small businesses. This is a huge blow to the US economy since small business provides a disproportionate share of US job and innovation. The situation is even worse for minority business owners and leaders. Small business has historically been one of the most effective means for minorities to accumulate wealth. Hence, small business failures hit our minority communities especially hard.

Setting aside for the moment the unprecedented human cost of the COVID-19 crisis, from a long-term economic viewpoint, the pandemic can be viewed as a temporary accelerator of normal small business “churn.” For many decades small businesses have started and failed at a surprisingly constant rate of about a 20% success rate over a 10-year period. This “rule of thumb” has persisted through the post-war boom years of the ‘50s, the hippy ’60’s, the “stagflation” ‘70’s, the roaring ‘80’s, the dot com bust of the ‘90’s and the financial crisis of the ‘00’s.

During downturns, many small businesses go out of business, but many new ones are also started. Furthermore, a surprising number of good small businesses adjust to circumstances and flourish while (and sometimes because of) the downturn. The COVID-19 crisis has seen some surprising winners – especially those already positioned to take advantage of accelerated dependence on the Internet.

This has long been the case with small business. I once worked for a Dr. Walt Langston who had founded a small scientific testing laboratory. He was always hoping for a recession because the big companies cut back on in-house testing to “save money.” They contracted the work to his labs. During good times, the bigger companies fattened up their staffs and pulled the testing work back in-house to “save money.”

Through all the ups and downs, that rule of thumb has persisted. Why? I believe there are several factors including:

• Good small businesses are nimble enough to adjust and often find a way to flourish in changing circumstances.
• Many small businesses are started that don’t have much of a chance of success in good times or bad.
• Many small businesses are life expectancy constrained by the effective working life of the founding entrepreneur.

These factors are mostly about entrepreneurs rather than business ideas. work together to create a constant “churn” of small businesses. Entrepreneurs are a surprisingly resilient and persistent lot. They may go broke today but are planning to reopen tomorrow. The absolute numbers of that “churn” change based on economic conditions, but the percentages remain cannily the same. If we want to increase the efficiency of business capital, we need to move the needle on quality rather than quantity.

So, what is a “good” small business? More importantly, how would one pick a “winner” before that business has demonstrated “success?” This is the big question. Most investors make almost no effort to try to do this. They try to find the business that already has sales and buy a chunk of that business (the “Shark Tank Model”). Some will give a little support to the business to improve success rates, but most just buy a small piece of a bunch of companies and hope for the best. They depend on their “winnings” of a few to outweigh their “losings” of the many. That is a strategy that demands high returns on a few to offset the losses on the many. No wonder they “demand” 3X return in five years.

At CC4ICC we look at several key factors. We require all candidate companies to fill out exhaustive questionnaires before we will engage with them. We ask the usual questions about their history, technology and financial performance. We would like to know if they have gotten any traction, but our primary purpose is finding out if management understands their business and their customers. It is amazing to discover how many small businesses are not businesses at all but are some type of “hobby” or “technology” that the owner/founder “loves” and wants to promote.

We insist on seeing a business plan that demonstrates that the owner/leader understands what needs they are fulfilling for their potential customers and why those customers would be willing to pay for their product or service. If this is missing, then the owner either doesn’t have a business or doesn’t understand what his/her business is. In the first case we walk away. In the second case we will dig deeper and try to determine if the owner is willing to “discover” what business they are in and adjust their plans to make that business successful.

If we can get past that first hurdle, we will dig deeper to see what the small business needs to grow. We also try to assess the ability and willingness of the owner and the management team to work on known deficiencies. We have walked away from several businesses that had some traction but appeared to be unwilling to consider doing anything different. These folks are unteachable and, frankly, a giant pain in the butt.

Throughout this whole process we keep in mind the “rule of thumb” that 80% of who we are talking to are not going to be around for long. We don’t want to be working with them. We try to push the rule a bit further and take on less than 10% of the folks we talk to. That means we have to talk to a lot of folks. That is why we have automated the process and are working to perfect an AI evaluation program. We want to work with the winners. It is way more fun and way more profitable.

When we find what we think are the winners, we are happy to help them improve their business and get them ready to raise money to make their dream a reality. There is still a lot of work to do, but in most cases, businesses that know what they are doing and are willing to work at it can find the mix of equity, debt and grants to fund the growth of their business.

If you think that you are among the winners, feel free to contact us by email (see below) or visit us at: https://www.cc4icc.com/consulting-1 . There you can find a list of our services and a form to request more information.

You can also contact me at:  [email protected] or visit our website at:  www.cc4icc.com.

 

Ron Stites is an inventor and serial entrepreneur. His specialties are start-ups and early capitalization – especially with high-tech and “deep-tech” businesses. His is a founder of the Colorado Center for Innovation in Community Capital (CC4ICC) as well as several other businesses serving various facets of business improvement, growth and technology development.

Wealth Distribution – Storm Clouds on the Horizon

by Ron Stites

Executive Director, CC4ICC

In his 2017 book, Capital in the Twenty-First Century, French Economist, Dr. Thomas Piketty, describes two important factors that contribute to the widening wealth gap. That is, the gap that exists between the richest members of society and the bulk of society. These factors are:

1. Unfettered increasing salaries for large company executives, and
2. High returns on capital combined with low economic growth rate.

The first of these is an especially important problem peculiar to the US and, to a lesser degree, Britain. Unprecedented consolidations, mergers, and organic growth has resulted in larger and larger businesses being controlled by a smaller percentage of the population. According to Piketty, this has resulted in top managers being able to “set their own remuneration, in some cases without limit and in many cases without any clear relation to their individual productivity….”

The second factor is more ubiquitous. In fact, Dr. Piketty dedicates much of his book to chronicling the relationships between high return on capital, low economic growth and wealth inequalities. Those with money (especially historical wealth) can demand high returns on that capital. Venture Capital (VC) funding is especially high cost funding. In their search for “unicorns,” VC’s demand IRR’s of 25% or more. Their rule of thumb is “at least triple my money in 5 years.”

VC’s frequently get promised such returns because capital is so tight but, paradoxically, they don’t often achieve those kinds of returns in any sustainable way. On average, return on capital runs around 6%, well below historical highs of 10% during the 1950’s and far below VC “expectations.” The typical VC strategy is to invest relatively small amounts of their money into a number of “highfliers” with lots of promise, bring in later investors and get most of their money out to reduce their risk. while hoping that a few of the “highfliers” come through.

The result for the VC is:

1. Low losses for them on many of the “highfliers” that turn out to be losers and
2. Big gains for them on the very few winners.

The impact on the capital market is that a bunch of “suckers” are left holding the empty bags of the crashed “highfliers,” a lot of useful capital getting wasted on poor risk versus reward deals and VC’s poisoning the market by bragging about the obscene amount of money they made on the 1 in 20 deals that succeeded. Capital ends up even more scarce and capital “demand” for high yields goes up even higher. Real capital returns never come close to meeting expectations, but expectations continue to rise. And finally, only the few, high-risk, overly hyped plays are funded.

This gigantic game of VC liars’ poker contributes little to economic growth. The serious growth that does occur is low risk, high volume expansions, mergers and acquisitions. In many ways this is a zero-sum game when it comes to economic growth. The companies involved may increase their value, but the economy doesn’t grow. In fact, it may tend to shrink due to layoffs and closures. The beneficiaries of this form of “growth” are the investment banks and the high-level managers who propose and implement the expansions, mergers, and acquisitions. Those managers benefit from another round of inflated salaries and other compensation perks.

And where is small business in all of this? Where is the real engine of economic growth? Where is the economic institution that has given women and minorities significant opportunity to grow their wealth? Nowhere…small businesses are not significant players in the “high flying” VC scene nor the low-risk, high volume scene. Our capitalization processes do not favor small business and haven’t done so for many years. Despite all the rhetoric to the contrary, changes in banking, investment and other regulations since the 1970’s have favored large, easily taxed and controlled large businesses. What’s worse, COVID-19 has destroyed much of our existing small business.

It is little wonder that inequality in the distribution of wealth has been a problem that has become consistently worse beginning in the 1970’s. It is a “baked in” result of numerous government policies that have been harmful to small business. But we ain’t seen nothin’ yet!

The next few years will likely see inequality in the distribution of wealth explode. The collapse of small business will further erode economic growth and reduce direct woman and minority owned business participation in our economy. The perception of increased business risk will further concentrate capital into narrower segments of perceived high returns. The new US Presidential Administration will find it difficult to meet the expectations their coalition of supporters once the economic consequences of COVID become clear. They could find themselves trying to respond to exploding poverty in our minority communities – a political nightmare for them.

One key to success will be investment capital efficiency. The consensus is that government intervention will be needed to recover from COVID. Throwing money at small business will relieve some immediate pain but will have the downside consequence of devaluing our money. Targeted investment in small businesses that can be economically sustainable would be far better. I would urge every group interested in economic development (including serious investors) to carefully vet companies before investing valuable and scarce resources.

At CC4ICC we have developed methods to evaluate small businesses and determine their readiness for receiving investment. Furthermore, our process allows us to focus on specific weaknesses that, once remedied, make small businesses more attractive to serious investors. We have worked with government agencies to assist them in selecting good candidates for economic support and directly with small businesses to improve their chances for success.

For more information contact Ron Stites at:  [email protected] or visit our website at:  www.cc4icc.com.

 

Ron Stites is an inventor and serial entrepreneur. His specialties are start-ups and early capitalization – especially with high-tech and “deep-tech” businesses. His is a founder of the Colorado Center for Innovation in Community Capital (CC4ICC) as well as several other businesses serving various facets of business improvement, growth and technology development.

Solving the Wealth Creation Conundrum – The Small Capital Acquisition Approach

Small businesses provide a unique opportunity to grow wealth. In fact, they are the primary mechanisms for growing wealth AND distributing that wealth broadly throughout society. Unfortunately, small businesses suffer from poor access to capital. Furthermore, growth strategies are hindered where a starting wealth base is lacking. This is especially problematic for the economically disadvantaged, whether that be individuals or areas.

We believe we have discovered at least one approach to help small businesses, including those that are economically disadvantaged. We call this the Small Capital Acquisition Approach (SCAA). We believe that it has wide application to existing small business, start-ups and even for the economically disadvantaged. We have been testing this approach through the Opportunity Zone Accelerator Program sponsored by the Colorado Office of Economic Development and International Trade (OEDIT).

Wealth grows based on three things:

1. A base of wealth to grow – the basis
2. A mechanism for increasing the value of the wealth base – the growth curve
3. A willingness to “re-invest” a significant part of the increased wealth into the wealth increasing mechanism – the feedback loop

The “secrets” are:

1. Finding the people with the “right stuff”
   1. Bright, dedicated, energetic and motivated about creating wealth and not just consuming it
2. Creating a starting position for wealth growth
   1. Primarily a non-profit or government funded piece
3. Building a wealth growing machine – a for-profit business
   1. The higher the growth rate, the faster the starting point can grow
   2. In partnership with other for-profit partners and investors (including debt and equity partners)

There are many problems with existing wealth growth formulas – including most “incubator” business models. They are especially difficult for start-ups and economically disadvantaged entrepreneurs. These include:

1. Investing in the wrong people

Resources put into the wrong people are wasted. Those who haven’t the discipline or drive to work hard and forgo immediate gratification cannot grow wealth. As soon as the non-profit support runs out, the wealth generating machine collapses.

2. Investing in the wrong ideas

Resources put into the wrong ideas are wasted. Frequently “cool,” “noble,” or “fun” ideas are not economically sustainable. They suck up scarce investment resources because they sound good but never amount to anything. Unless the ideas can be made profitable and self-sustaining, they collapse as soon as the non-profit support runs out.

3. Expecting unrealistically high returns

VC’s and similar “high-risk” funding mechanisms are terribly inefficient sources of capital. Money is thrown at all kinds of nice sounding ideas in the hope that there are a few, quick “winners” to make the investors quick money. They get their money out early on and leave other folks holding bags full of expensive, high-risk losers.

4. Tolerating inappropriately low returns

Far too many “incubators” and government funded economic development activities fund hobbies rather than businesses. The creation of wealth is either non-existent or simply is too low for reasonable investment appetites.

5. Expecting minorities and underprivileged to quickly “bootstrap” to success

The beginning wealth basis is a key success factor. Doubling a very small number is still a pretty small number. An appropriate, at-risk investment is needed for minorities and the underprivileged to get anywhere in a reasonable length of time. It is unrealistic to believe that for-profit investors will make appropriate investments in most minority and underprivileged programs. The risk for them is too great. It is also rare that non-profit and government programs make an appropriate investment. The level of investment is too great for them.

6. Expecting any small business to grow without “sweat equity”

This never happens effectively. The entrepreneur MUST create wealth based, in part, on personal commitment and personally added value. This wealth basis can be “leveraged” with outside investment (debt and equity) to speed growth, but without the personal wealth nest egg the entrepreneur will have to give up too much ownership and will “sell” too much of their personal wealth potential to the first investor that comes along.

7. Ignoring the “feed-back loop”

Early consumption of the wealth generated by business frequently kills that business. Economic growth is always spotty and economic downturns are frequent. A significant percentage to the wealth generated must to re-invested in the business – especially in the early years – to grow it into a healthy, self-sustaining business. This requires owner vision and discipline.

The unique SCAA solution:

1. Create non-profit or government funded programs/organizations that:
   1. Pick the right people
   2. Pick the right ideas
   3. Fill any “gaps” for the people/idea combination
   4. Provide adequate seed money/resources to get the people/idea to a point ready for investment
   5. Assist the entrepreneur in making an effective wealth generating transition from personal investment to outside investment (debt and equity).
2. Create a for-profit organization that:
   1. Takes the investment ready business and finds investors for the for-profit entity. This can be a mix of direct investment and find other investment partners. It should also be a mix of debt and equity designed to grow the business and multiply the wealth generating potential.
   2. Graduate the business to a self-sustaining, highly efficient, wealth generating machine.

We at CC4ICC have applied the SCAA approach quite successfully. One example is the ODEIT OZ Accelerator Program. In our partnership with OEDIT, we developed several unique tools. Many of these were inspired by needs arising from the COVID-19 crisis. These tools resulted in lower costs and higher success rates. Among the tools were:

• Online business data collection through sign-up surveys that made the selection process simpler, cheaper, faster, more objective, and more accurate.
• Online training courses that reduced costs, made review and retraining simple and focused efforts on the key, practical points.
• Consistent online follow-up with businesses in the program to ensure deadlines and milestones were being met.
• Simplified valuation strategies that made it easier for business owners to communicate with potential investors

All these tools are being continuously improved. They can be readily deployed to other economic and business development programs.

For more information contact Ron Stites at:  [email protected] or visit our website at:  www.cc4icc.com.

 

Ron Stites is an inventor and serial entrepreneur. His specialties are start-ups and early capitalization – especially with high-tech businesses. His is a founder of the Colorado Center for Innovation in Community Capital (CC4ICC) as well as several other businesses serving various facets of business improvement, growth and technology development.

Do Not Let This Dark Night Pass Without Realizing Its Blessings

En una noche obscura,
con ansias en amores imflamada,
¡oh dichosa uentura!
sali sin ser notada,
estando ya mi casa sosegada….

So began the great poem by Saint John of the Cross. While locked in an attic cell by his superiors and in grave danger of martyrdom at the hands of the Spanish Inquisition, John wrote of how this calamity caused his heart to soar.

Many of us are now in undeserved confinement. Some of us are in grave danger. Let us not pretend things to be otherwise, but do not let this confinement of the body become a poison to our souls. Take the time to reflect, imagine and even dream. Reach out, as did St. John, to things beyond yourself and your current condition. Reconnect with who you are and why you have chosen your current path. Rewrite your story and prepare for the dawn that is coming.

Small business owners, you will be hurt economically by what has happened. Nevertheless, this could be your opportunity to rethink everything and start many things anew. Give thought to:

• Why did you start your business anyway?
• What has fundamentally changed with you or your circumstances that might make your mission look vastly different?
• What has pulled you away from your real mission – the real you?
• What do you have to throw overboard to get you back to your real intent?
• Who will help you do that and who will not?

Write these things down. Don’t write a business plan yet…there will be time for that later. Rather, write your epic poem. Pour out your soul and then read it aloud. I think you will be surprised with what you say to yourself. Be careful, however, that you don’t let the past define who you are. You may have become an Accountant because you liked understanding numbers, working with business owners, understanding taxation or helping people build wealth. It is not likely that you became an Accountant because you were born one or destined to be one. Hence, your future might include giving up your CPA and moving on to something else that actually expresses your personal mission even more than being a CPA.

Too often we let events, the fear of consequences and short-term “opportunities” steal our dreams from us. More often the effects are more subtle. Our business and the messages we use to describe our businesses drift away from original intents and passions. We are no longer able to describe what we do. Not because we don’t believe in our mission but because the day-to-day has become filled with the tasks and the people that don’t exactly match that mission.

There is a sad tale about what happened to western farmers in the dust bowl days. Many of them defined themselves as farmers and not as husbands, fathers, mentors, leaders or many other basic attributes. Many dust bowl farmers held onto shattered land dreams so long that they we virtually incapable of doing anything but fall into poverty. Others moved on to California to start over before they were completely exhausted. Still others found other work in the growing oil and gas or services industries. They didn’t “remake” themselves. They redeployed their talents and renewed their dreams.

So, let the words you have written be a guide to your thoughts. Get comfortable with who you really are and then try to squeeze them into action plans. Think about what the “daily grind” has crushed out of you in the past few years and how you might regain your enthusiasm. Once you get some of these things in writing, share them with one or more friends in honest conversations. Frequently our close friends see our strengths and weaknesses far more clearly than we do. By the way, cherish such friends as these.

A time is coming, and it will only be a few months, when this sweet madness, this glorious sadness, will be but a memory. We will soon be back in the day-to-day. Don’t let this time pass without taking stock of who you are, where you wanted to go and what you will do when new opportunities arise.

 

The Colorado Center for Innovation in Capital (CCICC) helps small businesses raise capital. For more information visit www.cc4icc.com or email [email protected].

Recovering from the Pandemic

Everyone’s first priority in the COVID-19 pandemic is physical health. We all need to do what we can to protect ourselves, our families, our friends and neighbors from the virus and speed their physical recoveries. We also need to deal with the emotional impacts as well by working with our social, neighborhood and religious organizations to maintain our mental and spiritual health.

After we deal with these top priorities we will want to deal with economic recovery. Our businesses are going to be hurt. This is not just our airlines or car manufacturers, but also our health care industry and many others. The list could go on and on. It is not just the big players like Delta, GM or UnitedHealth Group, but also thousands of small businesses, clinics, doctors and dentists. All these groups will be dipping deeply into reserves, inventories, credit limits and personal savings during this time to serve others and weather this storm. They will need our help to recover.

This is not a matter of avarice. We need a healthy economic environment to have the services and reserves to provide healthy environments and good health care during “normal” times and especially in “extraordinary” times.

We at the Colorado Center for Innovation in Community Capital (cc4icc.com) applaud the efforts now being made by government agencies and private industry to not only protect physical health, but also for developing extraordinary programs to assist in financing economic recovery. Individual states are developing programs right now that are often tailored for local needs. You should check with your state’s economic development group for what is happening locally. The Small Business Administration and the US Department of Agriculture are also working on some very aggressive programs that small business owners should link into immediately and watch for new developments.

As much as we feel the pain of the COVID-19 pandemic, we need to, as soon as practical, turn our attention to the future. Right now is a great time to think about rebuilding and improving your business. The current crisis has certainly shown you some weaknesses in your business, but it probably has also shown you some new opportunities. These could include opportunities to allow employees to work at home, ways to communicate with customers and prospects digitally, new ways to deliver your products and services and new ways to reduce costs while keeping quality and service high in difficult circumstances.

The COVID-19 pandemic is likely to change working and buying habits. It is hard to know what will change and what changes will persist. There will be a lot of charlatans out there that will be trying to sell you on the idea that they can tell you what will change and how to get ready for it. All you need to do is join their forum, buy their book or pay for their seminar. Frankly, they don’t know. They especially don’t know how general trends will impact you and your business.

The keys for your business recovery are:

• Identify what weaknesses showed up during this crisis
• What opportunities do you think or have you heard might have shown up
• Ask your customers, suppliers, regulators and investors directly about these

The most important issue is the last one. Ask you stakeholders what they think and what they need. When habits are changing the most important thing to do is to keep in contact with your customers. Direct two-way communication is best, but it is time consuming. Digital communication/marketing is a great tool to initiate the conversation, get general feedback and set the agendas for one-on-one discussions.

If you need help setting up digital communications/marketing, we would be happy to help. In any case, don’t wait on us. Start talking now to all your stakeholders – that is your customers, suppliers and investors. Call them or email them now and find out how they are faring through this mess. Ask them what they are thinking and how you can help them as a supplier, a customer or as a friend.

The Colorado Center for Innovation in Capital (CCICC) helps small businesses raise capital. For more information visits www.cc4icc.com or email [email protected].