It’s Showtime!

Is entrepreneur fandom hurting business creation?

Back Longreads Mar 28, 2017 By Allen Young

Mike Mendelson is a modern-day prototype for the burgeoning tech entrepreneur. The high school math teacher-turned startup founder has made $35 since last June, when he left his teaching job to focus full-time on a peer-tutoring app that allows people to learn new skills by connecting with experts via video chat.

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When Mendelson isn’t working on his app, he meditates for 10 minutes a day and takes his toddler to the park in his hometown of Auburn. He was able to depart his job, he says, because he graduated debt-free from college and can temporarily live off the income of his wife, who is a product manager for a software company.

Mendelson saw his first break in the summer of 2015, when his business idea qualified him for Entrepreneur Showcase, a 10-week accelerator course hosted by Impact Venture Capital in Sacramento that mentors about a dozen budding businesses, most of them high-tech startups. At “Demo Day,” course graduates pitch their ideas to a room full of investors, entrepreneurs and engineers. It was the potential for millions of investment dollars that Mendelson says draped dollar signs over his eyes before he had created something of value. But after the pitch, investors did not spring to bankroll the business, known as Splor.

“I probably started thinking of my product as a business too soon,” he says. “I built a prototype when it should have been something I built for my own classroom.”

While Mendelson says he is grateful for his learning curve, he believes that public attention granted upon successful entrepreneurs fuels an “overconfidence in how fast you should go.” While the desire to become an overnight success isn’t new, Sacramento-area investors and business mentors say that young people are increasingly fixated on becoming entrepreneurs instead of learning the fundamentals of starting a company.

The trend coincides with Silicon Valley moving from global investment hub to pop-culture juggernaut. Consider the fanfare for the namesake HBO sitcom, plus the daily deluge of how-to articles on business news sites for dressing, eating and shaving like an entrepreneur. The Wall Street Journal advised parents last year on how to raise the next Zuckerberg, while USA Today and Inc. Magazine announced that “everyone is an entrepreneur.”

Winning the Lottery

Actual experts of business creation express concern that media’s flashy portrayal of handsome entrepreneurs, disruptive products and instant investment glosses over the unglamorous learning process vital to any new business. ABC’s “Shark Tank”, for example, features wealthy celebrity investor “sharks” judging an endless stream of innovative products pitched by hopeful entrepreneurs.

“’Shark Tank’ is the fake news of entrepreneurship. Real entrepreneurship is the guy that owns the cleaners or the corner store.” Pierre Balthazard, dean, College of Business Administration at Sacramento State

“’Shark Tank’ is the fake news of entrepreneurship,” says Pierre Balthazard, dean of the College of Business Administration at Sacramento State. “Real entrepreneurship is the guy that owns the cleaners or the corner store.”

Andrew Hargadon, faculty director of the Mike and Renee Child Institute for Innovation and Entrepreneurship at UC Davis, says he finds himself increasingly explaining to students that a twentysomething-year-old company founder is a statistical anomaly.

“I’m having this conversation more than I did five years ago,” he says. “Lots of people are saying, ‘I want to start a startup’ — part of our challenge is to reset expectations.”

A wiser aspiration for a young professional, says Hargadon, is to join a promising company in its infancy, where knowledge and skills can be rapidly gained along with a chance of an eventual big payout.

“One point we make is it’s not about being an entrepreneur, it’s about being the 50th employee in a rising firm,” Hargadon says. The average age for a startup founder is about 40 years old, according to Kauffman Foundation, a think tank. But the rise of Silicon Valley as the world’s foremost tech hub places social pressure on young people to “stomp out and start a new business,” Hargadon says. He compared the trend to the gravitational pull of Wall Street in the 1990s.

Jack Crawford, founder of the Entrepreneur Showcase and general partner at Impact Venture Capital, agrees that young entrepreneurs often overlook the value of experience. Investors are scanning for credibility in a startup, and that often comes from an advisory board full of experienced talent, he says. Once a team expands its network of experience, entrepreneurship flourishes as employees break away to develop ideas that the company lacked the bandwidth to pursue.

“That type of success reshapes the culture and starts to inform other budding entrepreneurs to think about starting their own company,” Crawford says.

“Shark Tank” has led to one rapid success story in Sacramento. In 2013, then 35-year-old Chris Johnson appeared on the show pitching a microwavable bowl that cooks ramen to perfect quality in four minutes. On the show, Mark Cuban invested $300,000 in the Rapid Ramen cooker for 15-percent equity. The appliance was eventually picked up in over 50,000 stores, including all 4,500 Wal-Mart stores nationwide. Rapid Brands currently employs 10 people at its sole site in Sacramento.

Listen to Mike Mendelson’s take on what Shark Tank didn’t show you about Chris Johnson’s strategy for success

Johnson believes the show inspires new businesses because it reinforces the idea that anyone can strike it big. “People think, ‘I can start my own business,” he says. “That’s what they get out of it.”

Asked how to give young people a holistic picture of entrepreneurship (for those who will never swim with the sharks) Johnson called on other types of entrepreneurs to speak in front of classrooms and other public events. Broadcasting a personal success story inspires entrepreneurship, the tycoon says. It’s easy to imagine Johnson, who is boisterous and theatrical over the phone, activating a classroom.

“The entrepreneur starting that tire company needs to explain his platform. Just be that example,” he says.

Tech-First

While it’s essential to promote local entrepreneurialism for innovative products that could attract lots of investment, such as the Rapid Ramen cooker, Balthazard from Sac State underscores the importance of encouraging startups in industry sectors less focused on innovation and more on providing essential services, like corner markets and gas stations, in order to give young people a holistic picture of where jobs are being created.

“Most people are not educated on how you start an unsexy business. On TV you see the sexy ones, but usually the unsexy ones are the ones that succeed,” he says.

While it’s widely recognized that tech jobs are vital for Sacramento to grow a strong economy, the capital city is still dominated by less sexy industries. The leisure and hospitality sector, which includes bars and restaurants, is the region’s third-fastest growing private industry after health care and construction.

It isn’t easy to track which types of businesses have the best potential for success in Sacramento. “Business starts” are not monitored by the state or federal government. Tallying numbers of approved business licenses would seem like an obvious starting point, but the data is imprecise because some proprietors pull a license and never actually launch their startup.

But loan data from the U.S. Small Business Administration suggests that Sacramento startups largely reflect the makeup of the existing economy, which is 90 percent service sectors as opposed to goods-producing sectors. The largest industries in the four-county Sacramento region are health care, government, construction and hospitality.

The Sacramento SBA district office made 276 loans for startup businesses over a year-long period that ended in September 2016. In a trend that mirrored prior years, service and retail were by far the dominant sectors to receive startup loans, with 20 percent of loans going to new bars and restaurants. Another 12 percent of the total loans went to more traditional retail stores, and 10 percent delivered to “other personal services,” a miscellaneous retail category that includes barber shops, dry cleaners and other small-scale retail. The remaining loans were scattered across myriad industries.

Also note that Sacramento’s startup economy is thriving, even if the gains aren’t concentrated in disruptive high-tech sectors. Funding for non-tech industries has recently seen a record-high. Loans to the Sacramento metro area from the U.S. Small Business Administration grew by 30 percent from 2015 to 2016, allowing Sacramento to eclipse the overall state of California for the pace of small business loan approvals.

The Reality of Entrepreneurship

Balthazard says he isn’t worried about people like Mendelson, the math teacher who quit his job to focus on his peer-tutoring app, because people who enter into a business school or mentorship program eventually figure out what they need to become successful.

The dean worries about those from underrepresented backgrounds who never make it into an MBA program — or even university — and may only see the made-for-television, “American Idol” version of entrepreneurship. They may come to view business creation as out of reach for themselves, he says.

Statistics back up Balthazard’s concern: The Kauffman Foundation finds that entrepreneurs in the U.S. are still over 80 percent white and over 64 percent male. Other research from the Global Entrepreneurship Monitor finds entrepreneurs are more likely to be affluent and highly-educated.

Be that as it may, the U.S. Small Business Administration offers multiple resources to help anyone start a business in any sector. One of them, the Small Business Development Center in Sacramento, provides free consulting to fledgling entrepreneurs across the Capital Region. The center is funded by the SBA and operated by the Sacramento Metro Chamber. Wannabe business owners can learn about financial and legal issues, business plan development and loan-readiness.

Kate Gonzalez began working at age 19 at the Arthur Murray Dance Studio in Carmichael. At age 21, Gonzalez began developing the idea of purchasing her own Arthur Murray franchise and owning a studio. She went to the SBDC at age 23 but realized she lacked management skills related to handling both money and personnel. “It was like a reality shock,” she says.

Over the next eight years, she worked up to 60 hours a week at her day job at the studio and in competing in national dance competitions. On days off, Gonzalez would read books on leadership and jot down business plans in a diary.

At age 30, she opened an Arthur Murray franchise in Folsom after receiving assistance from the Small Business Development Center. Gonzalez believes other young people may not understand the resources available to them. “There are resources out there that people just don’t utilize,” she says.

Mendelson, the former math teacher and founder of Splor, is now considering taking a job with a large technology company while he continues to refine his business idea. He predicts that the work experience will help him develop a customer base and marketing plan for his app.

“I’m thinking about how the project will serve the larger goals of the company and the world,” he says. “Like how you tweak it and improve it until it’s something that people want.”

Editor’s note: This article has been updated to note that Impact Venture Capital is located in Sacramento.

Comments

visitor (not verified)March 30, 2017 - 11:44am

Sad to see voices of Sacramento encouraging students and youth to take less risk and marginalize their aspirations. This seems to be a poorly explained excuse for why Sacramento isn't San Francisco.

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