Periodically we will present commentaries on topics of interest to community and economic developers across rural Minnesota. Below is a list of all commentaries with the most recent listed first.
Understanding Rural Business Success
Trying to understand the factors that lead a local start-up company in your community to succeed is never easy. With more than half of all small business ventures never successfully emerging from the survival stage (typically the first five years), it seems like the deck is stacked against them from the start. Yet, from the viewpoint of an economic development practitioner, you want to assist small business owners in your community grow, but clearly you can't assist them all.
While there is no "secret sauce" that can be identified to easily predict business success, the EDA Center at the University of Minnesota, Crookston wanted to further explore this question. So instead of identifying probable factors that might lead to business success and examining their importance, the EDA Center took an inductive approach and first identified successful rural businesses and then sought to understand what factors they might have in common.
With the help of the Regional Development Commissions across rural Minnesota, we identified close to 70 rural businesses that met our criteria of "success." First, we wanted businesses that have cleared the survival stage of development and were ready and poised for growth. This meant that we wanted companies that were at least 5 years old, but no older than 15. And second, we wanted to identify companies that were clearly growing in sales and employment. Using these criteria we collected information from 62 successful rural businesses (including a few in south central Minnesota).
Of the 62 companies examined, the average number of years in business was 7. The overwhelming percent (75%) were incorporated or were structured as a limited liability company (LLC); with only 22 percent reporting being structured as a sole proprietorship. The average annual sales were approximately $1 million, but 12 percent of companies reported sales of $10 million or more. And most importantly, the businesses represented a wide range of industries; from manufacturers to information technology, to construction, to food processors. It was a diverse group of businesses with no specific industry clusters identified. Clearly, if you were trying to identify a specific industry to build your economic development plan around, you would have a difficult time. What however was more easily identified were the characteristics of the business owners and founders themselves. Here in many ways the similarities were unmistakable. Below are some of the most salient characteristics:
The Business Pedigree: Two-thirds of our successful business owners reported having other family members/parents who also owned businesses; and half of them reported having previously started a business prior to the one they are currently operating.
Value Experience over Education: More than 80% of these successful business owners had over a decade of experience in their current industry prior to starting their own business. And while they valued education, 52 percent reported having an Associate's degree or less; and 88 percent reported having no higher education beyond the Bachelor's degree. Clearly, they valued experience and industry knowledge over formal education.
Be Invested from the Start: More than 90 percent of the business owners reported investing their own capital into the business before their start-up; and more than half indicated that they devoted themselves full-time to the business before even registering it. More than 70 percent reported that they had a formal business plan in place; 75% formed a legal entity and 46 percent even organized a team of employees prior to registering the business. Equally interesting, in a time when it appears that many businesses and business start-ups seek government funds or tax breaks to launch their business, more than two-thirds of these successful owners reported that they never even sought government support in the development of their business.
Look for a Hands-on Owner: It was also equally clear that these successful business owners were not hands-off managers. Rather they were completely invested in the financing, operations and management of their companies. 90 percent reported that the business was either moderately or extremely dependent upon the owners' technical/operational skills; and 92 percent reported being dependent upon the owners' managerial skills.
Growth-Oriented and Optimistic: It is also evident that these successful business owners are both growth-oriented and optimistic about the future. Approximately 70% report plans to introduce new products and services in the next 12 months; 48% report plans to increase their number of full-time employees; and two-thirds report plans to purchase additional capital equipment.
And lastly, their while some economic pundits report an atmosphere of economic uncertainty holding back businesses from hiring new employees, these business owners were asked how they would react to a 100 percent increase in their number of employees over the next 5 years? Not surprisingly, 19 percent of owners reported that such rapid employment growth would be looked upon negatively; however, 60 percent reported such a growth scenario as either "positive" or "very positive".
So what's the secret sauce to business success? Well I'm not sure if this study sheds enough light to answer that question, but it suggests that it has more to do with the orientation and characteristics of the business owner than the business itself. As some point out, "you don't put your money on the horse race, you bet on the horse."
Geller is professor & head of the Arts, Humanities & Social Sciences at the University of Minnesota, Crookston. He also serves as the director of the federally-funded EDA Center at UMC. He can be reached at firstname.lastname@example.org