New businesses forced to adapt as they struggle for survival
Kevin Mickens waves goodbye to De'netta Benjamin at the Koko Latte's Coffee, Tea & Eatery in East Liberty. They both work in the medical building where the shop in located on the first floor.
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Zanetta Wingfield never aspired to serve hot dogs at her East Liberty coffee house. But if gourmet-style wieners served on toasted, panini-style buns keep the customers coming back, they'll remain on the menu at KoKo Latte's Coffee, Tea & Eatery.
"It's one of our bestsellers," said Ms. Wingfield, who originally envisioned her urban cafe offering only specialty coffee and tea drinks, hot chocolate mixed from scratch, and pastries.
But after she opened KoKo Latte's in November 2007, the regular clientele -- mostly office workers from the building where it is located -- requested heartier fare like soup and sandwiches along with the drinks and baked goods. So Ms. Wingfield diversified.
With the economy sputtering, she figures it's more sensible to serve what customers want -- even hot dogs.
"Everyone's in the penny-pinching mode," she said.
Like many entrepreneurs who own fledgling ventures, Ms. Wingfield is nervously weighing KoKo Latte's chances for survival. She wants to expand from daytime hours to evenings and weekends and possibly add concerts at the venue, but isn't sure her location, just off East Liberty's Penn Circle, can sustain enough business to operate seven days a week. There's also the pressure of rising costs for her food and drink supplies. But she hesitates to increase her retail prices because customers might go elsewhere.
She has good reason to worry. Only 66 percent of new businesses make it for two years and less than a third hang on for seven years, according to the U.S. Department of Commerce. And that's under typical conditions that don't take into account the turbulent financial markets, drastic credit tightening and overall uncertain economy that's been playing out recently.
All of those factors are causing optimism among small-business owners to decline, said a report released last week by the U.S. House of Representatives' Small Business Committee.
"In fact, few entrepreneurs expect to expand their business or take on new employees in the next three months," the report stated.
Despite bleak prospects for getting cash or credit to launch a new company or keep an existing one going, experts who advise small-business owners and entrepreneurs say there are ways to overcome current market obstacles.
"I tell them, 'Stay calm, realistic and keep enough cash to hang on ... Don't do anything drastic,' '' said Mary Riebe, professor of business at Chatham University and director of the Chatham Center for Women's Entrepreneurship.
Because the economy is a major focus of the presidential campaign, small- business owners are even more stressed out, she said.
But for people wondering whether to take the plunge and launch a business right now, Ms. Riebe said in some cases it can be the right thing to do.
"There tends to be a correlation between downturns and people starting businesses. Either they are laid off or they feel in more control of their own destiny."
Small businesses can look for opportunities in a shaky economy, too, she said, such as shifting their focus to Internet sales and away from high-rent retail space.
"[Customers] are concerned about spending money on gas so maybe they're doing more online shopping."
Cash is the key word in advising startups and would-be entrepreneurs, said Frank Demmler, adjunct professor of entrepreneurship at Carnegie Mellon University and director of the entrepreneurial executives team at Innovation Works, a seed-stage investment firm.
For his graduate class on entrepreneurial thought and action that started last week, Mr. Demmler on the first night introduced a series of slides that he typically doesn't present until several weeks into the course. They read: Cash is king. The absence of cash is death. Cash is more important than your mother. Happiness is positive cash flow.
"In today's environment, making that front and center is what I will be sharing with my students."
For the startups he advises at Innovation Works, Mr. Demmler said the lack of available credit and funding is forcing companies to find long-term solutions to stay afloat.
"In some cases it means reducing budgets, or not spending money in certain areas, or the payroll has to be reduced. In true entrepreneurial fashion, it might mean living on baked beans and perhaps forgoing income for a month or two."
Donna Myers, an Innovation Works client, is heeding that advice at TowerCare Technologies, a McCandless company founded in 2003.
TowerCare develops software that nonprofit organizations use to manage fundraising and donors. The company recently closed on a $2 million round of funding -- its first outside capital -- that was raised through the sale of preferred stock. The stock sale was so successful that the company's board has extended it to raise another $1 million.
Yet Ms. Myers, president of TowerCare, is trying to conserve cash as she drafts the company's 2009 budget.
"The cash we thought would last for six months must last 12 or even 18 months." So she's leasing furniture instead of buying it and trimming some marketing expenditures such as traveling to trade shows.
"I'd love to do [trade shows] but we have to be very smart on how we're spending those marketing dollars. Our most successful sales leads are coming from the Internet so we're making sure our dollars are funneled toward that avenue."
A $250,000 bank line of credit she once figured on obtaining probably won't come through, she said.
"Banks want lots of collateral ... like business owners' homes. We don't want to go that route."
And while TowerCare nearly doubled employment in the past year, from 13 to 22 full-timers, she doesn't expect to hire anyone else before sales increase.
"We need to face reality. We can't bury our heads in the sand and act like this stuff is not happening."
There's been an element of fear recently among the clients at Duquesne University's Small Business Development Center, said Mary McKinney, the center's director.
"Credit is going to be a problem and some have already experienced it. One client, who had good credit, was reworking debt to expand a retail location and two banks turned down [an application] for $50,000. For reasons not the fault of the business, they're not getting the money they need."
Businesses in the technology sector appear to be more confident, Ms. McKinney said.
"My theory is that people can turn to technology to help some other economic woes."
Some entrepreneurs and established businesses are turning to Web resources to help them market services "so the tech businesses are busy," she said.
At the annual Pennsylvania Business Technology Conference scheduled for Nov. 13 at Duquesne, the focus will be on utilizing online strategies to grow companies.
"Maybe people are realizing [technology] is the answer to hard economic times," said Ms. McKinney.
Judy Tobe has no employees besides herself at her Claro, an accent reduction firm that trains nonnative English speakers in how to produce a correct American accent and be more easily understood.
After working as a speech pathologist for 25 years, Ms. Tobe launched the business earlier this year and is funding it without outside capital. She retains consultants only when there is demand and has minimal overhead because she travels from her Monroeville home to work on-site with clients, many of whom work at local corporations and hospitals. For customers based elsewhere, including some that are international, she connects via video conferences.
But despite her low operating costs, she has concerns about the economy's impact on her company.
"It worries me because people are more cautious about how they're spending their money. A couple years ago, they might try more things like this. Now, they have to be convinced of the benefits of the service."
Mark Peterson, president of Bridgeway Capital, a Downtown firm that provided the startup loan to Ms. Wingfield for KoKo Latte's, said inquiries for funding jumped from $11 million in 2007 to $18 million this year.
Not all requests received financing, but, "That's a big jump and I think it reflects the restrictions in conventional sources of credit."
Bridgeway, which makes loans that range from about $35,000 to $1 million, continues to lend actively and encourages applications, he said. Its funds come from private investors, foundations, and the state and federal governments.
"People are knocking. And part of our mission is to help entrepreneurs in Western Pennsylvania. It's tough to find financing so people are working harder at finding it. If they keep looking and have a good idea, they'll find a loan. It's always been tough; it's tougher now."
First Published November 2, 2008 12:00 am