WSJ.com: Small Business

Small Business

Obama to Elevate SBA Chief

Fri, 13 Jan 2012 15:02:03 EST

By Emily Maltby President Barack Obama said Friday that he will exercise his executive authority to elevate the head of the U.S. Small Business Administration to a cabinet-level position. The announcement came along with a broader proposal from Mr. Obama to combine the SBA with five other government offices that would become a single, streamlined agency. Under the Obama plan, the SBA administration would no longer be in the Cabinet once the reorganization is complete.One reason for the move might be to counter any perception that small business was being slighted in the broader reorganization. The White House didn't provide details concerning whether the SBA's current administrator, Karen Mills, would be granted a higher authority or additional responsibilities as a result of her elevated position. The move was greeted with applause by small-business owners who were at the White House Friday. "As of today, I am elevating the Small Business Administration to a cabinet-level agency," Mr. Obama said. "Karen Mills, who's been doing an outstanding job leading that agency, is going to make sure that small-business owners have their own seat at the table in our Cabinet meetings," he said.Senior administration officials said the decision speaks to her accomplishments at the agency, such as reducing lender paperwork for SBA-backed loans, enforcing stricter oversight of government contracting and rolling out several laws that facilitated more lending to small businesses.The announcement also follows accusations by some Republicans that Mr. Obama hasn't done enough to help small businesses. The National Federation of Independent Business, the small-business lobbying group in Washington, is fighting Mr. Obama's health-care law in a lawsuit that is now before the Supreme Court.Notable small-business advocates, including Sen. Olympia Snowe (R., Maine), the ranking member of the Senate Small Business and Entrepreneurship Committee, have urged Mr. Obama to restore the SBA to cabinet level, as it was under the Clinton administration. Previous administrations have elevated people to cabinet-level status, which is mostly a symbolic way of saying they and their subject areas are considered important. "On every small-business issue from day one, Karen has had the president's ear," said Gene Sperling, director of the White House's National Economic Council. "She is a tenacious, tireless and effective advocate for small business."Because banks tend to be reluctant to extend credit to risky small businesses, the SBA operates a program that makes such loans more enticing to lenders by guaranteeing a portion of each loan against default. A record $30.5 billion in these loans were extended to more than 60,000 businesses in the government's 2011 fiscal year, ended Sept. 30. Write to Emily Maltby at emily.maltby@wsj.com ...

RayWJ: YouTube's Top Star

Fri, 03 Feb 2012 12:34:00 EST

By Emily Glazer It doesn't take the media to make a media star any more.The new economics of entertainment have enabled a foul-mouthed performer working on his own to carve out a very lucrative business. He doesn't have the backing of a traditional media conglomerate. He's a lone comic with a YouTube channel. Ray William Johnson curses constantly, often gives his audience the finger and sometimes dresses up as a penguin, but he is attracting more than five million regular viewers to his twice weekly video commentaries, making him the biggest draw at Google Inc.'s online-video outlet.Known as RayWJ, the 30-year-old has morphed into an idol of the teen set at home and abroad by ranting about others' viral YouTube videos on subjects ranging from a hippopotamus defecating to people who staple the heads of co-workers.These days, YouTube's audience easily dwarfs the viewership for traditional TV networks, drawing more than 780 million unique visitors a month globally, according to comScore's most recent data. That audience is fragmented among 30,000 channels and millions of videos, but a handful of personalities like Mr. Johnson are drawing significant audiences, according to traditional media benchmarks."Look at some of these major YouTube stars, [who] aggregate two, three, four million views of their content. That rivals second- and third-tier cable networks," says David Cohen, the global digital officer of Universal McCann, a media-buying agency owned by Interpublic Group of Cos. "This is a microcosm of what's going on in the overall media landscape. We're moving from a scaled mass media to more hyper-local, niche media."Mr. Johnson, who spikes his dark-brown hair two inches high, is the poster child for how some performers can harness the viral power of the Web to build a career, bypassing traditional media. The Oklahoma native earns an estimated annual income of around $1 million, say two people familiar with the situation, partly by participating in YouTube's Partner Program, which gives him a cut of the ad revenue generated by his video commentaries. In addition, he sells merchandise like Ray William Johnson bobbleheads and mobile applications for the iPhone. His "Pimp Hand Strong" app, for example, sells for 99 cents on iTunes, where it's described as "your chance to finally slap Ray.""I produce a few shows. I'm also sexually attracted to women who look like Abraham Lincoln," Mr. Johnson's @RayWJ Twitter bio informs his more than 800,000 followers. Recently, one of his 2:26 a.m. Facebook posts notched more than 42,000 likes. "LOL," it read. "TRY THIS IT ACTUALLY WORKS! :) 1. Hold your breath for 20 minutes. 2. Die."Thirteen-year-old Bliss D'Andrea of South Adelaide, Australia, says she has never missed Mr. Johnson's YouTube show. She especially enjoys it, she says, when Mr. Johnson says "Geezus!" or "Zing!" during his raunchy riffs. "He may be inappropriate at times, but that's what makes it funny," she says.Mr. Johnson has been reluctant to confirm or deny information about himself. Some media outlets have described him as 23 years old. But he admitted that he is 30 after The Wall Street Journal confirmed he graduated from Norman North High School in Oklahoma in 1999. He later attended Columbia University's School of General Studies, where he was a history major, but didn't graduate, Columbia says.Mr. Johnson, now based in Los Angeles, declined multiple requests for an interview, but he did respond to some emailed questions. Asked about his career, he wrote, "Maybe someday, if I work hard enough, entertainment will be a career for me, but right now making videos and uploading them to the Internet is just a hobby." He also disputed the idea that he is making a lot of money. "I run advertisements and sell T-shirts to cover overhead costs and pay the few people who help me out behind the scenes," he says. "Anything left over is spent on production costs, animation costs, etc."People associated with YouTube, who have signed nondisclosure agreements, are tight-lipped about how much top performers there are paid. But people familiar with the matter say that for every two million views, performers who have partnered with YouTube receive $3,000 to $9,000, depending in part on the country and the platform where the video is viewed. To put that in perspective, Mr. Johnson has more than 1.5 billion total views.A Google spokeswoman says that "several hundred" of its partners made more than $100,000 in 2011, up 80% from the "couple of hundred" partners who made more than that in 2010. YouTube partners have also increased to 30,000 in 2011 from 20,000 in 2010, says Tom Pickett, YouTube's global director of content, operations and online creators.Ads from major marketers like McDonald's Corp. pop up during the videos of YouTube partners, including Mr. Johnson. The ad revenue is then shared between YouTube and the partner. "McDonald's wants to be where our customers are," a spokeswoman says. "Video is important to us, and YouTube is one of the many engaging digital platforms in our marketing mix."Other YouTube stars leverage their YouTube followings to sell music, get on television or produce movies. Kevin Wu (kevjumba on YouTube) has more than 2.2 million regular viewers and 56 million total views. Last year he collaborated with YouTube star Ryan Higa, whose channel has five million regular viewers, to make the song "Nice Guys." It eventually became one of the top 50 songs on iTunes alongside songs by Justin Bieber and Jay Z, Mr. Wu says with a laugh.He was also a contestant on CBS's "The Amazing Race" with his father, toured in Australia twice and is wrapping up a feature film that he plans to charge for, a strategy pioneered by comedian Louis C.K., an early YouTube star. People familiar with the matter estimate that Mr. Wu makes hundreds of thousands of dollars a year. Mr. Wu wouldn't comment on his earnings, but his YouTube channel is the Houston native's full-time job."Every waking moment of my life is thinking about how to build this empire," says Mr. Wu, who is now based in Los Angeles. "I'm sharing a personal connection with [my two million subscribers] so they feel like I'm their friend. Anything I do, they want to support."Some of the most successful Web comedian channels realannoyingorange and ShaneDawsonTV have secured partnerships with retail stores such as J.C. Penney and Hot Topic, respectively."Lots and lots of money is moving into this space," says Michael Green, chief executive of The Collective, an entertainment management and production company that represents the YouTube channels freddiew and realannoyingorange. "If it really works, if it really goes," he says of his clients, "it could end up being worth millions and millions and millions of dollars." Corrections & Amplifications A graphic that appeared with earlier versions of this article was removed because it didn't meet the Journal's standards for acceptable content. Write to Emily Glazer at emily.glazer@wsj.com ...

Want Press Coverage? Start Small. Really Small.

Tue, 22 Nov 2011 10:09:27 EST

By Mike Michalowicz Every business needs publicity, but very few entrepreneurs know how to get it. For years I followed the traditional methodology: Write a press release whenever I had a newsworthy development, post it online, send it to some local news outlets and hope for the best. This method rarely yielded so much as a tiny article in a local newspaper or a mention on a rarely visited blog. But then I stumbled upon a shortcut to getting press coverage – great coverage – while promoting my first book. After a speaking engagement at a college, a student journalist approached me with questions. She had been sent by her school's newspaper to cover the event. Later that week the newspaper ran an article about me in print and online, and it dawned on me: I could leverage this opportunity to get more press coverage for my book and my business.Over the years I've improved on this method with great results. Journalists from major business magazines, newspapers and TV news programs contacted me after reading articles posted online by college papers, garnering me amazing exposure on the issues I care about. I've gained clients from that exposure, and I know I've sold more books. More importantly, I've established myself as an expert in my field, which has helped me grow my business and expand my sphere of influence. How I go about it is simple: I start small. Think of it as "niche" press coverage. First, I book a speaking engagement at a college. How do I get the gig? I contact one of the many club leaders and offer to come and speak to their group. You can find a list of clubs on nearly every college website, with contact information. Some clubs have a budget for speakers, others don't, but that's not your chief concern. You're going for publicity, not a few hundred bucks. My focus was the marketing, entrepreneur, engineer and business-type clubs, because they relate to both my business and my book. Look for clubs that would be interested in hearing from someone in your industry. For example, if you're in the food industry, you might contact leaders of culinary, nutrition or fitness clubs, or even clubs focused on sustainable agriculture. The week before my speaking engagement, I would call the college newspaper and ask them to send a journalist to cover it. They always did. When the article came out, the online page would have back links to my website. Even better, the back links had a ".edu" extension, which in my experience, holds more weight with search engines. So the college newspaper not only drove targeted traffic to my website, it improved my site's search ranking. If the speaking engagement was open to the public, I would also contact the newspapers in the area and ask them to cover the event. Sometimes they would, sometimes they wouldn't, but newspapers are much more likely to send a reporter if the event is hosted by a college or university than if you organized it yourself.Repeat this process over and over, and eventually you will start getting calls from journalists who work for larger news outlets. You'll also become a respected authority in your field, which will help you build your client base, attract key partners and cement your business as a leader in your industry. ...

'Magic Room' Links Generations of Brides

Wed, 11 Jan 2012 10:14:26 EST

By Jeffrey Zaslow Wall Street Journal columnist Jeffrey Zaslow's latest book, "The Magic Room: A Story About the Love We Wish for Our Daughters," is set at a bridal store in Fowler, Mich., (pop. 1,100) that has outfitted generations of brides since 1934. A half-century ago, long before the word "bridezilla" was part of our lexicon, saleswomen at Becker's Bridal had a secret language they used to cope with unpleasant brides.If they liked a bride, they'd refer to her as "girlie." They'd say, "Girlie, that gown looks beautiful on you!" If a bride was difficult, they'd call her "sweetheart." That was a code between co-workers. "Would you help this sweetheart find a veil?" one saleswoman would say to another.Since 1934, more than 100,000 girlies and sweethearts have come to Becker's to find their wedding gowns, and in their journeys there, they formed a kind of sisterhood. All of them are linked not just to the eras in which they got married, but also to each other and to the wedding culture today.Brides and bridal gowns have always offered a measure of our longings and aspirations. Just 51% of American adults are now married—a record low—according to a report issued last month by the Pew Research Center. Pew also reports that 39% of Americans believe marriage is "becoming obsolete." And yet, in the story of this old bridal shop in a rural, one-stoplight town, it's easy to see why, despite everything, wedding gowns remain a symbol of hope. For 78 years, Becker's Bridal on Fowler's tired Main Street has been run by an unbroken family chain—a great-grandmother, grandmother, mother and daughter. Thanks to the Beckers, Fowler claims to have more wedding dresses per capita than any U.S. municipality; there are 1,100 residents and 2,500 bridal gowns stocked at the store.The store is housed in a century-old structure that was once a bank, and after brides select the dress they think is "the one," they step inside what used to be the old bank vault. A 10-by-8-foot space with mirrors carrying a bride's image into infinity, it's called "The Magic Room," and with good reason. Brides and their parents routinely melt into tears here.Fowler is a community where everyone knows each other. A good number of residents work at nearby auto plants. Many of their sons and daughters now serve in the military. Becker's is the largest business in Fowler, and for decades, residents have been accustomed to bands of roaming bridesmaids on Main Street.Becker's was founded by Eva Becker, described by her family as a short, stocky no-nonsense pioneering businesswoman who for decades oversaw employees and customers with a firm hand. Her first dresses were fastened with a complicated line of hook-and-eye closures. But on out-of-town buying trips in the late 1930s, she began seeing more dresses with zippers, and she embraced the concept. In the 1930s and 1940s, it usually took a Becker's bride an hour to find a dress. Eva had little patience for indecision. She'd offer three choices, maybe four, after which she'd say something like, "Well I think the first one looks best. Don't you?" The bride's mother would answer, "Yes, the first one was lovely, wasn't it?" And the sale was set.Eva died in 1975, and her son and daughter-in-law took over. Brides started showing up with photos torn from bridal magazines. The process of trying on dresses could stretch to three hours.By the 1990s, long shopping excursions with loved ones and bridesmaids had become a tradition. Now the search often stretches for weeks. "They just don't want the fun to be over. It can be wearying," says 46-year-old Shelley Becker Mueller, Eva's granddaughter. Even after Shelley and her daughter Alyssa, 25, have logged hours helping a bride, there's always the risk that she'll turn to the Internet to buy the dress for $50 cheaper. Shelley's mother, Sharon Becker, says when she ran the store in the 1970s, sales were sealed without much angst. "Mothers and daughters didn't argue the way they do today….Back then, a bride was just tickled to get a dress." Eleanor Klein began working at Becker's in 1935, at age 15, and stayed on the job for 72 years. Eva, the founder, was her aunt. In the early days, brides had no jobs and no money. Parents paid for the dresses and made the decisions. By the time Eleanor retired in 2007, brides were often paying for dresses themselves. "These days, the brides tell their parents what they want instead of vice versa," says Ms. Klein, now 90. When Becker's opened in 1934, dresses were expected to be multifunctional, rather than one-time-only fashion statements. Women would dye or hem them for other important occasions. After World War II, shoulder pads got bigger—and so did wedding budgets. In the 1950s, Elizabeth Taylor, starring in "Father of the Bride," and Grace Kelly, marrying a prince, helped usher in fairy-tale weddings. Department stores had 85% of the wedding-gown business nationwide in the 1950s, but Becker's stayed afloat through word-of-mouth in small Michigan towns. In the 1960s, thousands of mom-and-pop bridal shops opened up in suburban strip malls. Because Becker's had established itself so long ago, its customers remained loyal. The next big challenge came in the 1990s, when the David's Bridal chain began growing, selling gowns starting at $99. As a result of this and other pressures, the number of U.S. bridal shops fell from a peak of about 8,000 in 1990 to less than 5,000, according to the Bridal Association of America. Becker's held on. Last year, Becker's sold 1,650 dresses. The store has $1.8 million in annual sales, with 85% of that revenue needed to cover merchandise and salaries.Brides today say they're calmed by the personal touch they receive in the store's softly lighted Magic Room. When Meredith Maitner, a 39-year-old first-time bride, arrived at Becker's in 2010, she'd previously stopped at a bridal chain, and it was not an easy visit for her. "I had to share a pedestal with a girl half my size and half my age," she said.The dresses at Becker's are mostly modest numbers; current prices range from $680 to $2,600. The average bride in the U.S. now spends $1,289 on a dress, up 20% since 1999, according to the American Wedding Study conducted last year by Brides magazine. Shelley Becker credits the increase to TV bridal shows, which focus on upper-end gowns.Becker's brides are told that sales are final, given the alterations required. That explains why there's a room—beyond the view of buoyant brides—dubbed "The Dress Cemetery." It's a sad, crowded place where dresses are piled up after engagements are broken. Few brides ever return to claim them. Most of the dresses remain there forever; Shelley feels selling a gown with a sad history would be bad luck for another bride. Write to Jeffrey Zaslow at jeffrey.zaslow@wsj.com ...

Tips to Help You Claim a Home-Office Deduction

Tue, 24 Jan 2012 13:01:03 EST

By Barbara Weltman About 52% of all businesses are run from home. The number of teleworkers is growing annually.It's good to know that some tax savings can result from this work arrangement. A portion of personal expenses for your home can be turned into a business deduction -- if you meet certain rules.To claim a home-office deduction, you must use the space in your residence as a principal place of business, as a place to meet or deal with customers on a regular basis, or as a separate structure used for the business. You also must do the above regularly and exclusively for business.If you're an employee, you must use the space for your employer's convenience and not for your own preference. Working after hours at home rather than staying late at the office is probably your own choice and not for your employer's convenience. Usually, "employer's convenience" means that the employer does not have space for you on the company's premises.But while the home-office deduction rules are written in black and white, there are some uncertainties that could affect your home office deduction. Think of them as gray areas.One is the meaning of exclusive use. Clearly, the space must be available 24/7 for business and cannot be used by you or your family for personal reasons at any time during the day or night. Thus, if you use a TV room as an office during the day and your family watches TV there in the evening, you fail the exclusive-use test.But what about walking through a room? The Tax Court has said that even occasional use of space, such as using a bathroom by family or guests, means your business use is not exclusive. However, the court has also said that incidental use of space, such as family members walking through the office to get to another part of the home, is minimal and won't cause you to fail the exclusive use test. What's the difference between occasional and incidental use? This is a gray area, but it seems that passing through is not equivalent to using the space.Storage of some personal items in a space claimed as a home office won't violate the exclusive-use test. The court has allowed a home office deduction for a garage in which some personal items were kept. So, people, no. Things, yes.A common belief is that claiming a home office deduction is a red flag to the IRS, practically inviting an audit. There is no IRS data to support this belief and, unfortunately, the belief may be responsible for some taxpayers forgoing the deduction needlessly even though they are otherwise eligible for it. The best course of action is to talk over your personal situation with a tax advisor to make sure you meet the home office deduction rules.Keep good records of all expenses related to the home office, and take a photo of the space used as a home office. The photo can help in case the IRS questions your return after you've stopped using the space for business.To learn more about the home-office deduction rules, see IRS Publication 587, Business Use of Your Home. ...

Business Owner's Bankruptcy Disclosed to Supreme Court

Mon, 19 Dec 2011 18:36:06 EST

By Jess Bravin and Vanessa O'Connell The Supreme Court said today that oral arguments over President Barack Obama's health-care overhaul would begin March 26, and stretch over three days. The lawsuit, brought by 26 states and joined by the National Federation of Independent Business, a small-business lobby group, relies in part on claims by Mary Brown, an auto-repair-shop owner who argued in court filings she would have had to divert funds from her business to comply with the law's requirement that, beginning in 2014, most Americans obtain coverage or pay a penalty. The Wall Street Journal reported on Dec. 5 that Ms. Brown, an individual plaintiff in the case, filed for bankruptcy in September after her business failed. Because she no longer can claim the insurance requirement would interfere with her business, some legal scholars believe her standing to bring the lawsuit could be jeopardized.NFIB lawyer Gregory Katsas––who told the Journal he learned of the bankruptcy filing around Oct. 6––notified the court of Ms. Brown's changed circumstances in writing on Dec. 7.In this letter, Mr. Katsas, of the Jones Day law firm, said that Ms. Brown's lawyers would argue in their opening brief, due in early January, why her bankruptcy "does not affect her standing as a plaintiff in this case." Ms. Brown is still an NFIB member. The suit names another plaintiff, retired investment banker Kaj Ahlburg. The government has contested his standing.The parties challenging the health-care law are deciding now how they will divide up their time, NFIB spokeswoman Cynthia Magnuson said Monday. The states are represented by former Solicitor General Paul Clement, a partner at Bancroft PLLC.A typical case is allotted an hour for argument, but the court scheduled five and a half hours for the health-care case, reflecting how novel some of the questions are and the importance of a dispute that could define the limits of federal power for decades to come.The main part of the oral arguments will take place on Tuesday, March 27, with a two-hour argument over the minimum-coverage provision, which starting in 2014 will require most Americans to carry health insurance or pay a penalty.Challengers assert that Congress lacks authority to require individuals to maintain health coverage. The Obama administration maintains that Congress's constitutional power to regulate interstate commerce, levy taxes and enact "necessary and proper" laws covers health care financing mechanisms, such as the insurance mandate.To date, three federal appeals courts have rejected challenges to the health care overhaul, formally known as the Patient Protection and Affordable Care Act, while one has found the insurance mandate unconstitutional. The challengers, including the 26 Republican-controlled states, contend that if the individual mandate goes, the entire Affordable Care Act must also be thrown out.Write to Jess Bravin at jess.bravin@wsj.com. ...

In E-Books, a New Player

Tue, 22 Nov 2011 15:16:07 EST

By Jeffrey A. Trachtenberg Mark Cuban has 335,000 friends on Facebook and 760,000 followers on Twitter. Monday, the Internet billionaire and owner of the Dallas Mavericks basketball team will test just how friendly those fans really are.Mr. Cuban has written a 30,000-word e-book, "How to Win at the Sport of Business: If I Can Do It, You Can Do It." Culled from blog postings Mr. Cuban has made over the years about his business career, it will be available for $2.99 through online digital-book retailers. To drive sales, Mr. Cuban plans to tap all his online followers."All I have to do is get them to pay attention and hit a link," he says, estimating that his blog posts attract anywhere from 50,000 to one million readers.Publication of the book shows how the growing popularity of e-books, and the rise of social media, is altering the publishing landscape. Mr. Cuban, who made his fortune selling a company to Yahoo Inc. amid the dot-com boom, says that over the years he has been offered a "ton of money" to write his life story. He always said no, unwilling to take on the requirements associated with traditional publishing."I wasn't up for doing a bookstore tour, nor did I like the financial risk reward of promoting a physical book," said Mr. Cuban, via email. But this book is being published through Diversion Books, a digital publisher owned by his literary agent, Scott Waxman. Mr. Waxman declined to discuss financial details.Whether Mr. Cuban's work will generate big sales isn't a slam dunk. Much of "How to Win at the Sport of Business" has already appeared online free of charge so it is unclear how many readers will be willing to pay for it. Mr. Cuban, who notes he has refocused the work, isn't worried.Asked how many copies he would like to sell, Mr. Cuban responded: "As many as people want to buy. Which is hopefully one billion copies."Most writers want their readers to pore over every word. Mr. Cuban, though, feels differently. "Don't feel you have to read it like a book," he writes in the book's foreword. "Use it as a way to get fired up. A way to get motivated."Mr. Cuban said he is also hoping for reader feedback. He provides his email address in his foreword and urges his readers to write to him. He adds that the chances of a response "will certainly improve if you tell me how brilliant you found all of this." ...

Sold! More Small Businesses Exchanged Hands Last Year

Thu, 19 Jan 2012 10:05:20 EST

By Sarah E. Needleman The small-business-for-sale marketplace picked up again last year, for the second year in a row, thanks in part to better business performance. Sales of businesses with roughly $360,000 in annual revenue rose 3.3% in 2011, according to BizBuySell.com, a San Francisco-based online marketplace for small-business acquisitions. The median revenue for small businesses sold last year rose by 6.7%, its data show. But the median sale price inched up only 3.3% to $155,000, suggesting that it's still largely a buyer's market. Sellers are still being "a little bit conservative with their sale price to get things done," says Curtis Kroeker, a BizBuySell general manager. Slight improvements in small-business lending conditions could be one factor helping to boost transactions, Mr. Kroeker says. But many sellers are continuing to help finance deals for buyers who are unable to secure sufficient funding otherwise, he adds."Everyone's seeing growth in revenue," says Tom Gottlieb, managing partner at VR Mergers & Acquisitions LLC, an Austin, Texas brokerage. But he believes that "banks are holding things back from really going well," adding that "even when the banks are involved, you have to do seller financing in many cases."The firm, which mostly handles deals in the $1 million range, closed 15% more transactions in 2011 than it did the year prior, and selling prices were up about 10%, he says. In healthy economies, seller financing typically accounts for about 20% to 30% of a small-business sale, says Joseph L. Caffrey, president and CEO of Worldwide Business Brokers LLC, a brokerage based in Virginia Beach, Va., with locations throughout the East Coast. But in recent years and still today, sellers are finding that they need to put up as much as 50% to 70%."Everybody's beginning to understand the economy is not going to see a fast turnaround," Mr. Caffrey says. "This recovery is going be a long slog." At Sunbelt of Greater Louisiana, a brokerage serving the Baton Rouge area, sales last year included a few that exceeded $1 million, unlike the year before. The firm managed 33 small-business transactions in 2011, up from 22 in 2010, according to Robert Bourgeois, chief executive officer. "It's all a matter of confidence, primarily on the buyer's part," he says. "We're getting brisk activity already." BizyBuySell's Mr. Kroeker believes that the business-for-sale market is poised to grow even further in 2012 as the overall economy recovers. "Barring a global economic shock, we expect a continued steady slow path to improvement," he says.In 2010, small-business transactions rose 2.9%, according to BizBuySell, but that small increase had followed the whopping 28% decrease in such transactions during 2009. ...

Web Start-Up Helps Neighbors Meet

Thu, 01 Dec 2011 15:04:11 EST

By Ty McMahan Miles McCann-Robinson, a 16-year-old resident of Woodside, contracted a highly contagious case of meningitis in June. To prevent the potentially fatal virus from spreading, his mother, Nadya McCann, needed to quickly spread word of the illness throughout the community.So Mrs. McCann turned to a new social network run by Nextdoor Inc., a start-up that aims to connect people to their neighbors. She posted on Nextdoor that it was important for anyone who had spent time with Miles to obtain the proper antibiotics.Within minutes, neighbors responded via Nextdoor with positive thoughts and prayers for her son, while others asked questions about the meningitis strain and whether their children who had spent time with Miles should take antibiotics. Through Nextdoor, Mrs. McCann wrote back that the meningitis vaccine wouldn't adequately protect them from the virus strain Miles had and referred people to San Mateo county health professionals who were trying to contain the outbreak. "I don't know if posting on Nextdoor saved anyone's life, but it could have," said Mrs. McCann, who added that care packages appeared on her doorstep from neighbors after her post. After a three-week stay in the hospital, Miles recovered and no other cases of the virus were reported. The meningitis episode is one example of how Nextdoor hopes to stand out from the plethora of other social networks that have sprung up online, including Home Elephant LLC, which offers a similar service. The San Francisco-based Nextdoor, which Silicon Valley entrepreneur Nirav Tolia officially launched in October, piloted its service in several Bay Area communities earlier this year, including in Portola Valley and Menlo Park. Today, Bay Area neighborhoods are the most prevalent in the service, followed by Seattle, according to the company. Overall, Nextdoor has 539 neighborhoods in 40 states, with more than 100 neighborhoods in the Bay Area alone.Nextdoor enables neighbors to ask questions, get to know one another and exchange local advice and recommendations. To join a Nextdoor neighborhood, consumers must verify their address with the company and sign in with their real names. Only logged-in neighbors can see information shared on Nextdoor and the company doesn't share content with search engines.The company, with 25 employees, raised an undisclosed amount of funding from Benchmark Capital and Shasta Ventures in 2010. While the service is free for users, Nextdoor plans to make money by working with local businesses to provide special offers to neighbors. Nextdoor's concept is compelling enough to stir a fight over who had the idea first. According to a lawsuit filed last month with the Superior Court of California in San Jose, entrepreneur Raj Abhyanker said he pitched a neighborhood site that he planned to call Nextdoor to Benchmark in 2007 and that his idea was stolen. In a statement, Nextdoor denied the allegations. Benchmark declined to comment. Mr. Abhyanker's attorney said his client was seeking damages and a 25% equity stake in Nextdoor.In Woodside, Nextdoor launched its service in January. To date, the mid-peninsula town has approximately 600 verified members from more than 450 households registered with Nextdoor.In the last nine months, there have been almost 2,000 posts by neighbors, including almost 500 in the last month alone. More than 400 of the posts related to recommendations for service providers while another 400 or so related to classifieds for buying and selling items."Someone was looking for a gardener, so I promoted my people on the site," Woodside resident Nicole Perkins said. "They've come back to me and said, 'Oh my God, I've gotten so much business.'"Jessica Hope, who also lives in Woodside, said she has used the service to post about stray horses who showed up on her street and to find a flute teacher for her daughter."You just don't see your neighbors right out the door like in a city," Mrs. Hope said. "I feel like I know more people even though there are some I've never actually spoken to." Write to Ty McMahan at ty.mcmahan@dowjones.com Corrections & Amplifications An earlier version of this article incorrectly stated that Mr. Tolia was an entrepreneur in residence at Benchmark Capital at the time Mr. Abhyanker says he made his proposal for a neighborhood site to Benchmark; Mr. Tolia was not at Benchmark at the time. It also incorrectly stated that Nextdoor had raised funds in 2009; it was 2010. In addition, it said Nextdoor has representation in 426 neighborhoods; the updated number is 539 neighborhoods. ...

Sales-Tax Measures 'to Cost Us Big'

Mon, 05 Dec 2011 09:52:42 EST

By Angus Loten Amazon.com wants to bring order to the way online retailers collect state and local taxes. And that has Web entrepreneur Stacy Strawn feeling anxious.Under a 1992 Supreme Court ruling, online retailers including her aren't required to collect sales tax for purchases made in states where they do not have a physical presence.But Ms. Strawn, and others like her who operate with just a dozen or so employees, would have to begin collecting and remitting taxes for the more than 40 states that currently charge sales and use taxes, along with thousands of cities and counties across the country, as set forth by a Senate proposal unveiled last month. That proposal, which has the support of Amazon, includes an exception for small-business retailers with less than $500,000 in annual "remote" sales—a sum so low that it wouldn't even cover Ms. Strawn's employees' wages. "These are the most small-business-unfriendly measures I've seen in years," said Ms. Strawn, whose Waynesboro, Va., store, Silver Gallery, sells sterling-silver bowls, cups and jewelry. "This is going to cost us big."Ms. Strawn isn't entirely sure what the cost to her business would be. A 2006 PriceWaterhouseCoopers study found local and state tax compliance costs small retailers 13.47% of all sales tax collected, compared to 2.17% for large retailers. The concerns voiced by Ms. Strawn and other small online retailers highlight a new point of contention in the debate over taxing Internet sales—the so-called small-business exemption in federal proposals is now so small that even many small fry aren't protected. "The Internet is the only place where someone like us can be next door to an Amazon," Ms. Strawn said. "If they don't do something, the big retailers will eventually take over online shopping. And that would be a huge loss."Nearly all of the Silver Gallery's $3 million in revenue last year came from online sales. The store currently has seven full-time employees, but she may have to cut some jobs as a way to deal with the added costs. Legislation that would require online retailers to collect state taxes has been proposed in each of the past seven Congresses, including House and Senate bills in 2007 that set the small-business exemption at a much more generous $5 million in annual sales.Amazon's willingness to get behind the proposals—combined with pressure from states for new sources of tax revenue, and bipartisan efforts in the House and Senate—has given the movement more traction this year.Last month, the world's largest online retailer expressed support for a Senate bill calling for standardized federal rules that would require online retailers to collect out-of-state sales taxes—with a $500,000 exemption for small retailers. Paul Misener, Amazon's vice president of public policy, said at a House Judicial Committee hearing Wednesday that any small-business exemption must be kept low to protect states' rights to collect taxes, while leveling the playing field between online retailers and their brick-and-mortar competitors that already collect state taxes—typically reflected as higher sticker prices. "No one should want these online sellers to take advantage of a newly created un-level playing field over small Main Street businesses, and no one should want government to pick business-model winners and losers this way," Mr. Misener said."Amazon is prepared to make its technology available as a service to help sellers by collecting sales tax for them," he added. Other supporters of the proposals include brick-and-mortar-only retailers who believe the standardization will help create a more level playing field overall in the retail industry. Without a state sales tax, online retailers "have nearly a 10% discount automatically," contends Maggie Jetter, owner of Tweed Baby Outfitters, a baby goods and apparel store in Nashville, Tenn., that doesn't sell its wares online. "We're doing the same thing, offering the same products, so the law needs to be reformed and updated," she says.Online retail sales in the U.S. grew 13% to $176 billion last year, and are expected to grow by 12% to $197 billion in 2011, according to Forrester Research.The University of Tennessee estimates that states and local governments will lose up to about $12 billion in 2012 from uncollected sales taxes. Tod Cohen, vice president, eBay Government Relations, said in testimony Wednesday that the company believes the U.S. Small Business Administration should be the one to determine which small business retailers would be exempt. Forcing small businesses to take on the same costs and tax burdens as national retail businesses is unrealistic, unfair and will "unbalance the playing field" between giant retailers and small-business retailers on the Internet, Mr. Cohen said at Wednesday's hearing. The SBA defines most small retailers as those making less than $7 million in annual revenue. In some categories, businesses such as women's clothing, book and games stores are considered small businesses if they have revenue of less than $25 million, according to the agency.Some small and midsize retailers argue they may have to raise their prices to cover the costs of complying with a slew of new state taxes, under the proposed standardized federal rules. The risk is that shoppers looking for the best prices may then move their purchasing to larger sites that can absorb the added costs, said Joe Sponholz, president of BabyAge.com, a Wilkes-Barre, Pa.-based online baby products retailer with 29 full-time employees."It's not the start-ups or the Amazons of the world you have to worry about here. It's all the guys in the middle," said Mr. Sponholz, whose company recently built a distribution center in Nevada rather than California, to avoid paying state sales taxes. He says the $500,000 sales limit will only help very small retailers who have yet to develop a truly national reach. A House bill introduced in October is also limited in the number of small businesses it would exempt. It makes an exception for those whose out-of-state sales are less than $100,000 in any one state, or a total of $1 million nationwide. Write to Angus Loten at angus.loten@wsj.com ...

How I Became a Best-Selling Author

Mon, 12 Dec 2011 10:44:34 EST

By Alexandra Alter This summer, Darcie Chan's debut novel became an unexpected hit. It has sold more than 400,000 copies and landed on the best-seller lists alongside brand-name authors like Michael Connelly, James Patterson and Kathryn Stockett.It's been a success by any measure, save one. Ms. Chan still hasn't found a publisher.Five years ago, Ms. Chan's novel, "The Mill River Recluse," which tells the story of a wealthy Vermont widow who bestows her fortune on town residents who barely knew her, would have languished in a drawer. A dozen publishers and more than 100 literary agents rejected it."Nobody was willing to take a chance," says Ms. Chan, a 37-year-old lawyer who drafts environmental legislation for the U.S. Senate. "It was too much of a publishing risk." This past May, Ms. Chan decided to digitally publish it herself, hoping to gain a few readers and some feedback. She bought some ads on Web sites targeting e-book readers, paid for a review from Kirkus Reviews, and strategically priced her book at 99 cents to encourage readers to try it. She's now attracting bids from foreign imprints, movie studios and audio-book publishers, without selling a single copy in print.The story of how Ms. Chan joined the ranks of best sellers is as much a tale of digital marketing savvy and strategic pricing as one of artistic triumph. Her breakout signals a monumental shift in the way books are packaged, priced and sold in the digital era. Just as music executives have been sidestepped by YouTube sensations and indie iTunes hits, book publishers are losing ground to independent authors and watching their powerful status as literary gatekeepers wither. Self-publishing has long been derided as a last resort for authors who lack the talent or savvy to hack it in the publishing business. But it has gained a patina of legitimacy as a growing number of self-published authors land on best-seller lists. Last year, 133,036 self-published titles were released, up from 51,237 in 2006, according to Bowker, a company that tracks publishing trends. A handful of self-published authors have achieved blockbuster status, selling more than a million copies of their books on the Kindle. While they represent a tiny minority of independent authors, the ranks of the successful are growing. Thirty authors have sold more than 100,000 copies of their books through Amazon's Kindle self-publishing program, and a dozen have sold more than 200,000 copies, according to Amazon. The program, which Amazon launched in 2007, allows authors to upload their books directly to Amazon's Kindle store, set their own prices and publish in multiple languages. Barnes & Noble followed suit in 2010 with a similar program for its Nook e-reader. Self-published titles have been buoyed by an explosion in digital book sales. E-book sales totaled $878 million in 2010, compared to $287 million in 2009, according to the Association of American Publishers. Some analysts project that e-book sales will pass $2 billion in 2013. The march of self-published authors has put publishers and literary agents on guard. Publishing houses like Penguin and Perseus have recently launched their own digital self-publishing programs in an effort to capture a slice of the mushrooming market. Some agents, including Scott Waxman, have started their own digital imprints. Digital self-publishing still has serious drawbacks. Though e-books are the fastest-growing segment of the book market, they still make up less than 10% of overall trade book sales, according to the Association of American Publishers. Book reviewers tend to ignore self-published works, and brick-and-mortar bookstores have long shunned them. And very few authors have a marketing and advertising budget equal to a publisher's.Several successful self-published authors have gone on to cut deals with major publishers. After selling around 1.5 million digital copies of her books on her own, 27-year-old fantasy writer Amanda Hocking signed with St. Martin's Press. She won a $2 million advance for a new four-book fantasy series called "Watersong"; St. Martin's will also reprint her best-selling self-published "Trylle" trilogy about attractive teenage trolls. Self-published thriller and Western writer John Locke, whose 13 books have sold more than 1.7 million digital copies, signed an unusual contract with Simon & Schuster in August. The publishing house will print and distribute his books—the first title comes out next month—while allowing Mr. Locke to remain as the publisher. Mr. Locke is paying for the printing, shipping and marketing costs himself, according to his agent. The print editions, which will sell as mass-market paperbacks for $4.99, won't be edited. "The opportunity to get into bookstores, Targets, Wal-Marts, Costcos, airports—I can't do that as an independent author," Mr. Locke says. J.A. Konrath, a mystery writer who has sold 400,000 digital copies of his self-published books, earning some $500,000 a year, signed a contract with Amazon's new mystery imprint to publish his novel "Stirred," co-written with Blake Crouch, digitally and in print. It recently hit No. 1 on the Kindle top-100 list. Mr. Konrath says he was won over by Amazon's powerful marketing machinery. "They can really blow my books up," he says. Ms. Chan lives in a spacious, two-story house on a quiet street in Cortlandt Manor, N.Y. She and her husband, Timothy Chan, met in high school, at a national science competition. They reunited in Maryland, where he attended medical school and she completed a law degree at the University of Baltimore.For the past 15 years, she's worked for the federal government on the natural-resource team for the Senate's Office of the Legislative Counsel, where she drafts legislation concerning clean air and water, highway infrastructure and climate change. She works remotely, from her home, from 9 to 6, and then takes care of her toddler son until her husband gets home. She squeezes in a couple of hours of writing each night.She started writing fiction in 2002, when she suddenly had a lot of time on her hands. Her husband, an oncologist and cancer researcher at Memorial Sloan-Kettering, was spending long hours at the hospital at the beginning of his residency, so she spent her nights alone writing.She came up with the story of a wealthy, agoraphobic Vermont widow who makes anonymous gifts to the townspeople who ignore and fear her. Ms. Chan says she was inspired by the true story of a resident of Paoli, the small Indiana town where she grew up. "The Mill River Recluse" takes place in a fictional Vermont town with a quirky cast of characters—a kleptomaniac priest with a spoon fetish, a dotty woman who tries to sell her neighbors love potions, a bad cop whose off-duty hobbies include stalking and arson.The novel took her 2½ years to write. After seeking feedback from family and friends, she sent queries to more than 100 literary agents. Most rejected it as a tough sell. "It didn't really fit any genre," Ms. Chan says. "It has elements of romance, suspense, mystery, but it falls into the catch-all category of literary fiction, and of course that's the most difficult to sell."She finally landed an agent, Laurie Liss at Sterling Lord Literistic in New York, who represents cable-news host Rachel Maddow. Ms. Liss submitted the manuscript to a dozen publishers, all of whom turned it down. Ms. Chan stashed the manuscript in a drawer, and buried herself in her legislative work.Five years passed. Then, this past spring, she started reading about the rise of e-book sales and authors who had successfully self published, and decided to give it a shot. She fashioned a cover image out of a photograph her sister took of a mansion in Paoli, and she and her husband used Photoshop to add some gloomy ambience. Then she nervously uploaded her manuscript to Amazon's Kindle self-publishing program. She sold a trickle of copies. A few weeks later, she started selling it on Barnes & Noble's Nook and through SmashWords, a self-publishing program that distributes to major e-book retailers including Apple's iBookstore, Sony and Kobo. Her first royalty check from Amazon was for $39.She noticed that a lot of popular e-books were priced at 99 cents, and immediately dropped her price from $2.99 to 99 cents. The cut would slash potential royalties—Amazon pays 35% royalties for books that cost less than $2.99, compared with 70% for books that cost $2.99 to $9.99. But sales picked up immediately. "I did that to encourage people to give it a chance," she says. "I saw it as an investment in my future as a writer." The strategy worked. Several reviewers on Amazon said they bought the book because it was 99 cents, then ended up liking it.She checked her sales several times a day, obsessively refreshing her Amazon page. In the first month, it sold 100 copies. When Ms. Chan saw the sales figure, she danced in her kitchen with her husband and toddler."We were saying, 'Wow, this is really cool. What if you sell 1,000? That would be awesome,' " her husband recalls.Then, at the end of June, "The Mill River Recluse" got a mention on a site called Ereader News Today, which posts tips for Kindle readers. Over the next two days, it sold another 600 copies. Ms. Chan realized she might be able to drive sales herself. She spent about $1,000 on marketing, buying banner ads on websites and blogs devoted to Kindle readers and a promotional spot on goodreads.com, a book-recommendation site with more than six million members. After learning that self-published authors can pay to have their books reviewed by some sites, she paid $35 for a review from IndieReader.com (IndieReader no longer offers paid reviews). She paid $575 for an expedited review from Kirkus Reviews, a respected book-review journal and website. The review service, which Kirkus launched in 2005, gives self-published authors the option to keep the review private if it's negative. Ms. Chan decided to have hers posted on their website. Kirkus called the novel "a comforting book about the random acts of kindness that hold communities together." She used blurbs from the reviews on her Amazon and Barnes & Noble pages. "I hoped it would lend some credibility," she says. "Most other reviewers won't touch it."Sales kept climbing. In July, it sold more than 14,000 copies. That month, it was featured on two of the biggest sites for e-book readers, generating a surge of new sales. In August, it sold more than 77,000 copies and hit the New York Times and USA Today e-book best-seller lists; it later landed on the Wall Street Journal list. In September, it sold more than 159,000 copies. To date, she has sold around 413,000 copies.Ms. Chan and her agent decided to resubmit the novel to all the major imprints, citing robust sales figures and rave online reviews. Some publishers have responded warily. A representative of one publishing house feared the book had "run its course," Ms. Liss recalls. Others worried about the novel's bargain basement price, arguing that an e-book that sells for 99 cents likely won't command a typical hardcover price of around $26.A few major publishers made offers, but none matched the digital royalty rates of 35% to 40% that Ms. Chan makes on her own through Amazon and Barnes & Noble. Typically, most publishers offer print royalties of 10% to 15% and digital royalties of 25%. Simon & Schuster offered to act as a distributor, but Ms. Chan wants the book to be professionally edited and marketed.Ms. Liss says that the offers from U.S. publishers so far don't improve much on what Ms. Chan is making on her own. She's made around $130,000 before taxes—substantially more than a standard advance for the average debut novelist—and she's getting a steady stream of royalties every month. "I told Darcie, at this point you're printing money. They're not. Go with God, we'll sell the second book," Ms. Liss says.In the meantime, there's interest from other corners of the industry. Multiple audio-book publishers have made offers. Six film studios have inquired about movie rights. Two foreign publishers bid on the book. Ms. Chan is holding off on such deals, for fear they might sabotage a potential contract with a domestic publisher.Ms. Chan still wants to see her book in print. Several librarians have contacted her seeking print copies after patrons requested her book. "I have people writing me begging me for a hard copy, book clubs and libraries calling me, and I don't have a hard copy to provide for them," she says. Ms. Liss advised her to work on a sequel set in the same town, with some of the same characters. Ms. Chan has written two chapters. While she would love to write full time, for now, she still sees writing as more of a hobby. When people ask her what she does for a living, she says she's a lawyer. But she's still holding out hope that a publisher will buy "The Mill River Recluse," edit it and sell it in brick-and-mortar stores."The hardest part for me is uncertainty," she says. "I deal better with rejection than uncertainty." Write to Alexandra Alter at alexandra.alter@wsj.com ...

Entrepreneurs Give Kodak's Hometown a Lift

Tue, 27 Dec 2011 11:39:23 EST

By Dana Mattioli Rochester, the New York home of Eastman Kodak Co., ticks many of the standard Rust Belt boxes.Crumbling corporate benefactor? Check. Acres of vacant lots? Check. Soaring unemployment? Well, no.Even after a quarter century during which Kodak wiped out nine of every 10 jobs it had in the city, greater Rochester's jobless rate is running well below the national average—at 7.3% in October, the most recent available, compared with a national rate of 9% at the time.Rochester has managed this feat with a resurgence of entrepreneurial activity that has filled the void left by its shrinking corporate giants, among them Kodak, Xerox Corp., Bausch & Lomb Inc. and General Motors Co.Many of the people laid off by the large companies in Rochester are highly trained engineers who have started their own companies and live in the upscale neighborhoods of Pittsford, Penfield and Brighton. Some have left the engineering world behind as they made the transition from company man to entrepreneur.Don Olson, 54 years old, is one former Kodak employee who has landed on his feet. Back in 1979, the chemical engineer passed up 17 job offers in hopes of moving to Rochester and working for Kodak, then a film powerhouse. He slept outside the career-placement office of his college, Michigan Technological University, for a shot at the interview. "Kodak was the Apple back then," he says.Kodak, more of an imaging company these days, laid off Mr. Olson last year after 32 years of employment. He now runs an antique business from his home in Brighton, where he displays parts of what he calls his "rotating collection" —such things as unsigned paintings dating back to the 1800s that hang on his walls and Indian artifacts.Losing the stability of a paycheck and benefits has been an adjustment. "It's tough right now," he says, admiring a American-Indian ash burl bowl he keeps in his living room. "I'm selling luxury goods in a down economy."The city's boosters like to say Rochester is reclaiming its entrepreneurial past. The western New York city on the Erie Canal got on the map because of business-builders such as George Eastman, who founded Kodak in 1880. It was Rochester native Joe Wilson who transformed Haloid, a small paper company, into Xerox Corp. As these businesses flourished, the spirit of small-scale entrepreneurship faded, local residents say. In the 1980s, more than half the Rochester-area work force was employed by the big corporations or their suppliers, says Mark Peterson, chief executive of Greater Rochester Enterprise, a nonprofit founded in 2002 to attract multinationals and start-ups to the area. As of 2010, the same corporations employed less than 10% of the local work force, Mr. Peterson says. Alex Zapesochny, co-founder of Rochester-based medical start-up iCardiac Technologies Inc., says area residents ignored his booth at job fairs as recently as 2006. "They worked at large companies, and it made them risk averse," he says. Now, the company, which measures cardiac side effects of prescription drugs, has grown to 50 employees and receives a steady stream of resumes during these times of high unemployment nationwide, many from current and former Kodak employees. Jaimie Cole joined iCardiac after Kodak laid him off in 2006 following a 21-year career. The 48-year-old considered hopping to another big company, but decided it was time for a change. He is now iCardiac's senior director of technology. Sitting in his boss's office, Mr. Cole says he has taken a pay cut but is more stimulated and appreciated. "The biggest adjustment is I no longer live waiting for that ax to drop every day," he says.Declining pay is a fact of life in Rochester. In the 1980s, average income per job exceeded those of New York state and the U.S., according to data compiled by the Center for Governmental Research. In 2010, at $47,333, Rochester's average lagged behind the state's $66,327 and the nation's $51,739. Jobs aren't evenly spread around, either. While much of Kodak's highly educated work force was able to land jobs, its unskilled workers face a harder reality, local business leaders say. In the city itself, where much of Kodak's laid-off industrial workers still live, unemployment in October was running at 9.6% on a nonseasonally adjusted basis. Rochester's inner neighborhoods change quickly. Blocks of Victorian-style homes with painted shutters on large pieces of property abruptly give way to boarded up shacks, convenience stores and tattoo parlors. Vacancies are so prevalent that the city has put murals of Rochester's former glory along stretches of multiple empty storefronts to hide the eyesores. Some gaps are harder to paper over. Midtown Plaza, the country's first indoor shopping mall and once the pride of the city, has been knocked down and is an inactive construction site. The area around Kodak's headquarters is a ghost town. The city is working to attract new business. Fedex Corp., Alpina Foods and DataPhysics Research Inc. have moved some operations to Rochester and created jobs.Harris RF Communications, part of communications-technology provider Harris Corp., has grown from 500 employees in Rochester in 1980 to 2,300 today by scooping up former Kodak engineers and employees who worked in manufacturing and logistics, says Dana Mehnert, group president of RF Communications.Rochester-based private-equity firm Trillium Group has helped fund a number of start-ups, including iCardiac and Thermal Gradiant Inc., a molecular diagnostic company started in 2004 by two people who worked at a Kodak spinoff bought by Johnson & Johnson. Four of Trillium's six senior executives worked at Kodak at some point, says Kevin Phelps, a general partner who once was director of financial planning for Kodak's bioproducts division."As big businesses like Kodak or Xerox were downsizing, we acknowledged the fact that we're going to be a small-business community," Mr. Phelps says. Write to Dana Mattioli at dana.mattioli@wsj.com ...

Online Pawn Shops Lend Cash Fast

Sat, 17 Dec 2011 22:10:36 EST

By Sarah E. Needleman Less than a year after launching Little Big Farm Foods in September 2010, Fern Phillips received an order five times larger than any she'd gotten previously for her private-label dry-baking mixes.But joy quickly turned into panic as Ms. Phillips, 57 years old, realized she didn't have enough start-up capital to pay for the ingredients and packaging she needed to fill it. She says her credit cards were maxed out and she'd already spent a loan and line of credit from her bank on other business expenses.Ms. Phillips shared her plight with a friend, who told her about Pawntique.com, an online pawn shop that offers short-term cash loans in exchange for collateral. She decided to give the alternative lender a try and offered up a James Robinson sterling flatware set—a family heirloom dating back three generations that she valued at about $30,000. Less than 48 hours later, she received a $20,000 loan valid for three months at a service fee of 3% per month, or roughly $1,800 total. She managed to pay it off in slightly less than two months for a reduced service fee of $1,100."It certainly saved us," says Ms. Phillips, a former independent consultant whose business is located in Portsmouth, N.H. If you need a quick cash infusion for your start-up, a pawn shop may be able to help—and for less than you might expect. Pawn shops provide immediate short-term loans in exchange for collateral and a service fee, which is usually a percentage of the amount borrowed. While that fee has historically been substantially higher than what most traditional lenders require, a more affordable type of pawn shop has emerged in recent years on the Internet. New Web-based pawn shops, including Pawntique.com, Pawngo.com and Pawnup.com, demand less capital to operate than their bricks-and-mortar counterparts because they lack retail storefronts. As a result, they can charge monthly service fees as low as 3%—far less than the industry's overall average of 10% to 20%, according to a September report from market-research firm IBISWorld. In general, borrowers complete an online form describing the items they wish to offer as collateral. In some cases, they can upload photos. Next, the online pawn shop makes an assessment, which is ideally followed by an offer.If a loan agreement is reached, the borrower is shipped packaging materials, often at no cost and with insurance included. The borrower then mails the items that he or she wants to pawn. Once the shop receives those goods, it will wire the loan amount to the borrower, usually within 48 hours, providing the collateral received meets the shop's expectations.A benefit to pawn loans, whether conducted online or in a store, is that no credit check is required. And if the loan can't be repaid, the collateral is relinquished and the transaction is complete, unless an extension is requested and granted. In most cases, borrowers aren't penalized for repaying pawn loans early. Pawn loans typically run for one to three months. Commonly pawned items include jewelry, precious metals, fine art and collectibles, according to shop owners. But they say they're also accepting more business assets, such as computers, printers and construction equipment.Of course, small-business experts say entrepreneurs should carefully consider all their borrowing options before taking out a pawn loan, given pawn shops' high fees and the potential for losing the collateral.If bank financing isn't possible—often the case for first-time entrepreneurs—ask relatives or friends for a loan, or try selling unwanted items outright for cash, says John K. Paglia, a finance professor at Pepperdine University in Malibu, Calif. Other alternative lenders, such as peer-to-peer services like Prosper.com and LendingClub.com, may offer better rates than pawn shops or even banks. "Put the pencil to the paper," Mr. Paglia says, adding that if an entrepreneur feels he or she has no choice but to risk losing personal assets to keep a business afloat, it's possible the venture is better off being put to bed. Jennifer Diederich of Norwalk, Conn., determined that a pawn loan was essential and affordable for her start-up, Advanced Facial 3D Imaging, a provider of medical and dental imaging services. The 55-year-old says she needed the money to buy two pieces of equipment and had been denied a loan from her local bank. She also unsuccessfully tried to borrow money from family before deciding in October to pawn 70 gold and silver coins and six diamonds.Ms. Diederich says she launched her business because she has struggled in recent years to find steady full-time work in her field—dentistry. The equipment she needed cost roughly $70,000 and she got a three-month loan for about half that amount from Pawngo.com, for a service fee of 4%. She paid for the difference with her savings."I never thought about pawning anything," says Ms. Diederich, adding that her start-up is now up and running. Write to Sarah E. Needleman at sarah.needleman@wsj.com ...

Small Business: A Bit of Cheer Turns Sour

Fri, 25 Nov 2011 08:18:02 EST

By Emily Maltby First there was Black Friday, then Cyber Monday. Now, there's the second annual Small Business Saturday, when consumers are urged to show support for local retailers by shopping "small" in exchange for a $25 credit provided by sponsor American Express Co. for purchases charged to the card.But there's a backlash brewing against this year's well-hyped event, and some entrepreneurs—such as Sissy Blanchard, owner of Gourmet au Bay, a wine and gift shop in Bodega Bay, Calif.—say they won't participate.At issue: the merchants' newly divided loyalty to a grass-roots movement supporting small businesses known as the 3/50 Project LLC.The nearly three-year-old group's mission is to encourage consumers to spend $50 monthly in total at three independent businesses. Based in Minneapolis, its supporters connect primarily through Facebook and other social media. It is funded almost entirely by contributions to its virtual "tip jar" and sales of coffee mugs and T-shirts with messages such as, "Saving the Brick and Mortars Our Nation Is Built On."Last year, the organization agreed to ally with American Express for the first Small Business Saturday, according to 3/50 founder Cinda Baxter, who became the official spokeswoman for Small Business Saturday. She declines to say how much she or the organization received from that arrangement.She says American Express led her to believe it also would provide longer-term funding, though her 2010 contract with the credit-card issuer didn't include any such agreement.She says she began to reach out to American Express to discuss funding for a broader variety of small-business projects. But, she says, American Express showed little interest in funding joint projects, aside from Small Business Saturday."She did a great job. Her mission aligned nicely with Small Business Saturday," says Rosa Alfonso, a vice president for public affairs with American Express. "We would have liked her involvement in 2011 as well, but we weren't able to reach an agreement."Ms. Baxter says that after several attempts to negotiate funding for the 3/50 Project, she gave up. Late last summer, when she formally broke off her dealings with the issuer, she posted an essay on the Web, linking to the 3/50 site, setting out her version of the group's brief relationship with American Express and subsequent breakup."They needed to date someone credible from within the circle of influence," Ms. Baxter wrote, sharing her view of why American Express sought her out. "Someone well-liked by small business owners, with loads of positive press.… Someone highly visible in the pro-local movement who could introduce them to the family, then stand up to Mom and Pop in their defense."Her message resonated with a number of small business owners, some of whom already were wary of American Express. During the depth of the credit-crunch, several credit-card companies, including American Express, slashed or pulled lines of credit that the businesses relied on. Some business owners also regard its merchant fees, recently about 2.5%, as too high. Now, some small-shop owners including California's Ms. Blanchard are boycotting the Saturday event. "The reason I'm not participating is because it's not affiliated with the 3/50 Project," Ms. Blanchard says. For American Express, "it's a monetary boon if they can get more people to use the card," she adds. "But there's been no reciprocal kindness back to the merchants. The 3/50 Project looks out for the interests of the merchants." Leah Shelhorn, owner of Studio 41, a gallery and gifts store in Benicia, Calif., came across Ms. Baxter's essay and now has plans to hand out flyers promoting the 3/50 Project on Saturday. "I wish it had all worked out," she says. "I wish it had been a happy marriage."More than 230 small-business advocacy groups nevertheless are supporting Small Business Saturday this year.Ms. Alfonso, of American Express, says the issuer offers a number of free tools to help support and increase merchant sales. "It's not about us. It's about small businesses," she says. Small retailers received an estimated 28% sales increase on American Express cards on the Saturday after Thanksgiving last year compared with a year earlier, she says.Last year, about 10,000 small merchants used the card-issuer's Facebook ads to promote themselves for the event, American Express says, and so far this year, about 15,000 used the ads. About 100,000 small merchants downloaded promotional signage from its Small Business Saturday website last year. Lori Webster, owner of Webster's Fine Stationers LLC in Altadena, Calif., says she was drawn to participate in last year's event in part because "Cinda brought credibility to it." She says she hopes to see a small boost in her store's bottom line from this year's event, as she did last year, though, "I tend to wince when it's a small purchase like a greeting card and the customer whips out an American Express card."Meanwhile, the 3/50 Project continues with its own holiday promotion. The motto? "Keep the Cheer Here." Write to Emily Maltby at emily.maltby@wsj.com ...

Franchises, on a Smaller Scale

Thu, 12 Jan 2012 00:59:37 EST

By Stephanie Simon Entrepreneur Rob Israel believes he has found a winning recipe. The founder of Doc Popcorn, which sells fresh-popped snacks in flavors such as "sinfully cinnamon" and "hoppin' jalapeno," has supervised the opening of 54 franchise outlets in five years and says he is working with another 200 in development.Mr. Israel would like to credit his product's popularity for the steady growth. But he also attributes his success to a flexible franchise system that allows local entrepreneurs to buy into the brand at a level that fits their budget. Franchisees can open a full-scale store for an investment of up to $150,000, or they can opt for a mall kiosk at a cost of about $100,000. A mobile cart requires an initial investment of about $70,000."It's efficient, very simple and affordable," Mr. Israel says.It's also a fast-growing trend in the franchise world. Franchise consultants say they are seeing more corporations offering potential investors an array of business models, at different price points. In an era where credit is tight and investors are cautious, both franchisers and franchisees say this type of flexibility is the key to expansion."Many investors have difficulty finding credit to build out full-size stores," says Steve Caldeira, president of the International Franchise Association, a trade group. "There has been an explosion of different franchise models within the same brand."Huntington Learning Center, a tutoring service, recently began offering prospective franchisees two tiers of investment. For a franchise fee of $10,000 (plus build-out expenses and a 9.5% royalty fee), investors could open a "standard" tutoring center in a retail space of about 1,200 square feet. For a franchise fee of $59,000—and a lower, 8% royalty—they could open an "expanded" center, with more room to tutor not just in the traditional subjects of math and reading, but also in science and other academic fields."This has not been a strong year for us in terms of new sales," says Raymond Huntington, the company's chairman, who attributes the slump to tough competition in the tutoring industry, tight credit and the shaky economy. He hopes the lower up-front costs of the standard option will encourage more entrepreneurs to give the Huntington brand a try. For franchisers, one risk of the tiered model is losing control of the brand image. A successful company will take the time to spell out precise standards for customer interaction, product presentation and corporate oversight—and do this well before launching a new business model, says Benjamin Litalien, who runs the consulting firm Franchise Well LLC.Franchisers likely already have detailed standards for lighting, signage, product display and sales patter in a traditional store, but those rules don't necessarily translate well to a mall kiosk or a food truck, Mr. Litalien says.When the truck is emblazoned with the brand name, everything from how the driver navigates traffic to where he pulls over to sell his wares can affect the product's image.Mr. Litalien also warns franchisers to think through the implications of new formats on loyal, long-time franchisees. Someone who has invested $500,000 in building a standalone donut shop may not be pleased to see a rival selling the same brand from an inexpensive mobile cart, especially if they compete for the same customer base.Prospective franchisees, meanwhile, should take a hard look at whether corporate executives have the expertise to help them pioneer a new means of reaching customers, Mr. Litalien says. "They may not have the field support," he says. Nazrul Islam says he recognizes the risks but was still happy to hear that a food vendor he enjoys, BannaStrow's Crepes and Coffee, was offering a tiered franchise system that let him choose whether to launch with a food truck, a kiosk, a food-court counter or a traditional restaurant.Mr. Islam found a location he liked at the entrance to a mall food court in Ft. Lauderdale, Fla., invested more than $200,000 and recently opened for business. "In the economic downturn, I thought it was better to open in a mall," at a location with heavy foot traffic, he says.Doc Popcorn franchisee Nate Godo also started small, with a mobile cart that he wheeled to events at the convention center in his hometown of Knoxville, Tenn., in 2010. Retail sales were new to Mr. Godo; he had spent his career up to that point managing an automotive business. So he wasn't about to invest a fortune in popcorn without first testing out the viability on a small scale, he says.Mr. Godo's mobile cart did so well that he moved into the popcorn business full-time a year ago; he recently stationed a second cart in a local mall.He likes the way the tiered system "allows me to gradually ramp up," he says. Write to Smalltalk@wsj.com ...

Window for 2011 Deals Set to Close

Mon, 28 Nov 2011 10:48:53 EST

By Lynn Cowan November turned out to be the most active month for initial public offerings in the U.S. since July, with 13 deals launching, including a couple of consumer Internet companies.After three months of sluggish activity amid market turmoil—there were two IPOs each in August and October, and none in September—November felt like a near bonanza. It helped that two brand-name Internet companies, daily deals issuer Groupon Inc. and consumer-reviews specialist Angie's List Inc., launched IPOs during the month, gaining 31% and 25% on their first days, respectively. A mix of IPOs from different sectors also were able to get done, from fertilizer maker Rentech Nitrogen Partners LP to mattress retailer Mattress Firm Holding Corp. Even two unprofitable biopharmaceutical companies, Clovis Oncology Inc. and NewLink Genetics Corp., floated shares. But 13 IPOs is slim pickings for a typical November. Last year, there were 18 listed in the U.S.; in 2007, there were 30. Companies continue to file for new deals, however, including consumer-reviews site Yelp Inc. last week; its offering won't be ready to launch until 2012. This week is the final period in which a company can launch a roadshow and expect to price in 2011. How many ultimately go public before the year ends likely will be determined by the broader market's activity, which has been trending down in recent weeks. The Standard & Poor's 500-stock index is down 7.6% this month. Write to Lynn Cowan at lynn.cowan@dowjones.com ...

When the Home Bank Closes

Wed, 01 Feb 2012 16:20:43 EST

By Robbie Whelan Keith Mullin's start-up snack-food company, Gamer Grub, needs cash to become a player.The San Diego company, which makes bags of high-energy snack food for videogame fanatics, recently struck a promotional partnership to sell its product at stores across the U.S. as part of the launch of "Call of Duty: Modern Warfare 3," the country's top-selling videogame. While more than 3,000 stores have agreed to sell the snacks, Mr. Mullin can't get the funds he needs to hire workers and launch a marketing campaign.In prior years, Mr. Mullin tapped his home-equity line of credit to inject cash into the business. But the credit line was canceled by his lender after the value of his home plummeted. That set off a chain of events that ended in Mr. Mullin losing his home. Now his business can't find the funds to grow."On one side of the coin, things are great," he says. "But on the back side of the coin, it's fire and brimstone, and it's just totally brutal."It is well known that the housing bust has taken a devastating toll on American families, nearly three million of which have lost their homes to foreclosure. Less known is the impact that the housing collapse is having on owners of small businesses, which have often relied upon home-equity borrowing to finance the early stages of growth and development. American business history is packed with stories of company builders, from Wal-Mart Stores Inc.'s Sam Walton to Sam Adams beer brewer Jim Koch, who got key early funding from their homes. Nearly one in three small-business owners has borrowed against the equity in his or her home, or used the home as collateral for a loan to fund the business, according to a 2009 survey conducted by Gallup for the National Federation of Independent Business.In recent months, there have been some signs that the housing market is bottoming out. That included three straight months of gains in single-family home construction, and a report in January showing that the inventory of for-sale homes is at its lowest level since 2006. But home prices, which need to rise briskly to revive home-equity lending, fell again in November, tumbling 1.3% from the previous month, according to the S&P/Case-Shiller index released Tuesday. They are likely to fall further over the next year. The balances of home-equity lines of credit and second mortgages have tumbled 27.5% since the end of 2007.That leaves cash-strapped small businesses in a jam. Without the ability to borrow against their home, thousands of potential entrepreneurs will sit out the recovery. Most don't have enough cash flow to get a traditional business loan from a bank. A recent study from Pepperdine University showed that 64% of start-ups were turned down by banks when seeking loans. Mark Zandi, chief economist at Moody's Analytics, estimates that small-business owners extracted around $75 billion from their homes to fund their businesses in 2006. That has fallen to as little as $20 billion now, and isn't likely to rise much through 2012, he predicts. Mr. Zandi took out a $40,000 business loan using his home in suburban Philadelphia as collateral in 1991 to start a predecessor company to Moody's Analytics. These days, it would be difficult for others to follow in his footsteps, he says. "That is one more reason to be nervous that small businesses won't be the source of job growth they have in past economic recoveries," he says.The situation could get worse. Owners of start-ups are believed to have taken out risky mortgages at a higher rate than typical homeowners, putting them at a higher risk of losing their homes and their businesses over the next couple of years. Samuel Bornstein, an accounting professor at Kean University in New Jersey, and private consultant Jung Song have done research that suggests 3.7 million small businesses took out exotic loan products such as option-adjustable rate mortgages and interest-only loans. They estimate more than 500,000 are at risk of defaulting in the next few years as their monthly mortgage payments spike after these loans reset and require both principal and interest payments. Adrian Pelkus, a San Marcos, Calif., business owner used home-equity loans to fund at least six start-up businesses in the past 15 years. He started his flagship company, A Squared Technologies Inc., which makes circuit boards for electronics manufacturers, with a $10,000 loan against his home in 1985. But Mr. Pelkus has been thwarted by the housing bust. In 2008, he says, he hit on his best idea yet—to generate power from ocean waves. He patented the idea and produced a prototype for the product, and planned to borrow against his home to do lab tests and market the idea to investors. But by 2009, Southern California prices had declined so far that Mr. Pelkus was underwater by more than $100,000 on the three houses he owns near San Diego. He gave up on wave power, let his patents expire and moved on to other things—developing electric cars and medical devices with his old company. He is unsure of where his next round of funding will come from, and he can't afford to hire the 12 engineers and technicians he needs for A Squared to bid on new technology projects. "Without being able to tap home equity, it's hard take an idea far enough to get traction," he says.Many small-business owners see their home-equity lines of credit pulled or reduced when home prices fall. In its quarterly survey of about 400 small to midsize businesses, conducted this past fall, Barlow Research Associates Inc., a Minneapolis-based business data provider, found that 41% of small businesses reported seeing their home-equity credit level decrease in the previous year. Bill Brown, a financial planner from Clarkston, Mich., had to slash his staff after his line of credit was yanked. In 2006, he borrowed $415,000 against the equity in his home, then appraised by the bank at $1.4 million. In 2009, his lender, Chase Home Mortgage, sent him a letter saying that based on the depressed value of the house, the bank would no longer honor any draws against his home-equity loan. Chase declined to comment. Mr. Brown had to lay off seven of his 12 employees, cut back on marketing materials for his business and hold off on buying financial software. Selling the home isn't an option. Mr. Brown's daughter is disabled, and the home is outfitted to her needs. The home's value also is underwater. It is worth about $556,000, according to real estate website Zillow, and has a total of approximately $950,000 in mortgage debt on it. Some entrepreneurs have been able to hold on to their home-equity lines by convincing banks that their businesses are safe risks. Brad Alcock owns a small company in Missouri that imports a food packaging product from Taiwan, which he sells to suppliers who use it to seal bags of vegetables and other foods. In 2009, Bank of America revoked the line of credit he was using to fund his Taiwan purchases. He was able to convince the bank to reinstate it two weeks later. "There's a period of time where I owe Asia, but I'm not paid yet," he says. "It had me in about a two-week panic." Bank of America confirmed that Mr. Alcock's credit line was frozen in January 2009 because of "decreasing equity in the market" but said it was reinstated a month later "based on the broad customer relationship with the bank."Other entrepreneurs have turned to the U.S. Small Business Administration, which guarantees bank loans to entrepreneurs. For the year that ended Sept. 30, 2011, the SBA guaranteed more loans, measured by dollar amount, than in any previous year. Mr. Mullin, the founder of Gamer Grub, drained his savings, took out $60,000 in loans backed by the SBA and borrowed from friends and family. Still, it wasn't enough to expand as rapidly as he needed to. Last year, he began traveling and meeting with angel investors in an effort to raise $1.5 million to help the company grow. So far he has had three investor groups "kick the tires" on Gamer Grub, but had no luck in raising funds. He has been paying bills to his manufacturers using money left over from a previous business he started, which makes pet supplies. "As an entrepreneur, it's your job to basically pull a rabbit out of your hat on a daily basis," he says. "That's how hard it is right now." Write to Robbie Whelan at Robbert.Whelan@wsj.com ...

Small Signs That Small Business Lending Is Up

Wed, 04 Jan 2012 09:51:20 EST

By Angus Loten There are signs that more banks may be loosening the purse strings for small firms, as business conditions improve and as borrowers become more willing and able to take on debt.Small-business lending hit a four-year high in November, according to the latest Thomson Reuters/PayNet lending index, for instance. The total volume of small-business financing increased by 18% over the same period last year, and reached the highest level since Feb. 2008, its latest data show. Fewer small firms were falling behind in loan repayments, with delinquencies of 30 days or more down five basis points to 1.5%, and "severe delinquencies" of more than 90 days down 1 basis point to 0.39%, according to the index.Rohit Arora, chief executive of Biz2Credit, a small-business lending broker based in New York, says demand for loans from small firms is picking up as sales improve and businesses become more creditworthy. But these are small signs at best. For some small firms, significant barriers to credit remain.Bank of America Corp. is requiring some small-business owners to pay off their credit line balances in a lump sum, rather than monthly installments, or face higher interest rates – a move that appears to buck the industry-wide trend of easing access to credit for small firms.According to this story in the Los Angeles Times on Monday, the move stems from a corporate overhaul launched by the bank's new chief executive Brian Moynihan, who has promised to "address losses caused by loose lending and rapid expansion by reining in risks and shedding investments deemed non-core."Jefferson George, a Bank of America spokesman, told the Wall Street Journal Tuesday that the move impacted a "very, very, very small percentage" of small-business clients in a single lending portfolio that had lines of credit without maturity dates. More than 90% of those clients have since renegotiated terms with the bank, he said. The bank currently provides lines of credit to more than 1.5 million small businesses, he added.Access to credit tightened dramatically for small firms in the wake of the financial market crisis and a plunging in housing values. A study by Pepperdine University found that more than 60% of small-business loan applications last year were denied. According to the National Federation of Independent Business, a Washington, D.C.-based small business lobby group, most small-business owners have either foregone seeking investment capital from banks due to weak prospects for growth, or simply given up trying after being rejected multiple times.One in five of more than 500 small firms recently surveyed by SurePayroll, a Chicago small-business payroll firm, said they were planning to borrow to grow their business in the months ahead.Still, some caution that ongoing weaknesses in the housing market, along with uncertainties about the federal budget and the Euro zone crisis, among other issues, could derail any renewed optimism among borrowers and lenders alike in the coming year."If there's too much uncertainty, no one will want to take the first step," John Paglia, a small-business researcher at Pepperdine University, says of kick-starting the cycle of credit, spending and growth.Fred Graziano, head of regional commercial banking, government banking and small business at TD Bank, says while loan demand from small firms is getting stronger, it won't increase significantly until "there's more of a predictable environment." Write to Angus Loten at angus.loten@wsj.com ...

Serfing the Web: Farming Out Chores

Mon, 28 Nov 2011 11:10:44 EST

By Emily Glazer "Manage our worm bin!"That was the help-wanted note new mom Rachel Christenson posted a few weeks ago at online marketplace TaskRabbit Inc. Neither she nor her husband wanted the "gross" job of dealing with an overflowing compost bin, so she clicked her mouse in search of someone who would do her dirty work.After about 11 hours and a few crazy questions like, "Are your worms nice?" Ms. Christenson, 27 years old, found a taker. Douglas Ivey, a 45-year-old research scientist, drained the "worm juice" from the bin, put back the compost, mixed in newspaper and hosed it all down. The price? $31. "That guy was bold," says Ms. Christenson, of San Francisco. "He just jumped right in.""It was completely disgusting," says Mr. Ivey, who added, "I don't mind. Actually, I find the really gross jobs pay pretty well."A new crop of websites and smartphone applications are allowing people to farm out chores to a growing army of temporary personal assistants. These micro-employees are taking the division of labor to once-unthinkable extremes. One recent advertisement on TaskRabbit sought someone to play a joke on a friend who's a customer-service representative. "It's his bday today, and we need someone that will make a prank call multiple times each hour for a 4 hour time period," read the ad. "The goal is to keep him on the phone as long as possible."Thousands of unemployed or underemployed workers have parlayed one-off job requests into part- or full-time work. The gigs are especially popular with stay-at-home moms, retirees and students. Workers choose their jobs and negotiate their own rates. Erika Dumaine, 24, logged onto TaskRabbit this April and saw the following plea for help: "Buy me shoes ASAP. I stepped in dog poop." So Ms. Dumaine, now a full-time nanny, bought and delivered a requested new pair of navy blue Toms shoes from Nordstrom's to the poster, Guillermo Rauch. (Her payment: $17.) Aura Montano, a 21-year-old nursing student, stood on the Brooklyn Bridge holding an "I heart Anie Lewis" sign one Friday evening in August so she could attract the attention of Eric Lewis's wife and hand her flowers as she walked home from work. (She earned $19.)Some investors see dollar signs. Zaarly Inc., an online marketplace for micro-labor and goods based in San Francisco, recently raised $14.1 million from Google Inc. investor and venture-capital firm Kleiner Perkins Caufield & Byers. Actor Ashton Kutcher and clothing designer Marc Ecko have also put in money. In October, Hewlett-Packard Chief Executive Meg Whitman joined the company's board.After launching six months ago, Zaarly is processing more than 1,000 transactions a week for jobs that cost around $50 a pop. Chief Executive and cofounder Bo Fishback, 33, says about half the requests involve tangible goods, and the rest involve some sort of service. One of his favorites: a person who hired someone to buy a Michael Jackson-themed dog costume for a puppy.Sometimes the situation can be dire. John Burks, a 30-year-old actor who also runs an arts organization in Chicago, accidentally dropped his keys in a sewer during a rainstorm over the summer. To replace all the keys—including ones to his home, office and Mercedes—could cost well over $100. After Googling "lost keys down sewer" to see what tactics others had used, Mr. Burks thought he could recover his keys with a fishing rod and a magnet, but had neither. His girlfriend at the time knew someone who worked at Zaarly, so he posted the job on its site. Liz Langer, a 27-year-old neuroscience graduate student and top Zaarly "fulfiller," spotted the job and within an hour arrived with the needed tools. Fifteen minutes later, they fished the keys out of the sewer. (Price: $80.)"It's like stranger than fiction," Mr. Burks says. "I thought there was a very small chance that anything like that can happen."Mr. Ecko, founder of his namesake billion-dollar fashion company, posted a request for a cake resembling a can of Barq's Famous Olde Tyme Root Beer for his now seven-year-old son's birthday. His son got the cake "and I came off like a hero," he says. Mr. Kutcher, 33, who has received Hebrew lessons and cups of coffee through Zaarly, says every request he's posted—anonymously, he emphasized—has been fulfilled. "Companies like this are really tackling things like unemployment in an efficient, viable way," Mr. Kutcher says. Some micro-laborers find a lot of little tasks can add up. Alanna Greenham, 56, was cash-strapped and unemployed in San Francisco. Then last April, while sending in her 30th job application, she came across a TaskRabbit ad. After submitting an online application, completing a video interview and going through a Social Security number trace and a federal criminal background check, Ms. Greenham joined the San Francisco-based company's crew of about 2,000 "TaskRabbits." She does odd jobs via the service every day, aiming to clear at least $25 an hour. So far, she's completed about 250 jobs and has racked up around $1,500 a month.Recently, Ms. Greenham drove a truckload of goods from San Francisco to a warehouse in San Bruno, Calif., where they were shipped off to the Burning Man Festival in the Nevada desert. Her cargo? A big silver tricycle, a batch of Jester clothes and a large, tent-like dwelling called a yurt. Her price? $100. TaskRabbit won't disclose specific revenue per task, but says its average service fee is 15%, paid by the person posting the job.Amazon Mechanical Turk, a service of Amazon.com Inc., lets people work from home, like virtual temps. Companies such as Microsoft Corp. and LinkedIn Corp. place jobs on the service, often to help them manage or categorize content, says Sharon Chiarella, vice president of Amazon Mechanical Turk.About a year ago, Chris Berry, a special-education teacher in Granite Bay, Calif., began actively using the service, launched in 2005, in hopes of making extra money to support his wife and four children. Mr. Berry, 39, earned more than $10,000 from tasks that paid as little as 10 cents a pop. He says he sometimes completed more than 1,000 jobs a day, ranging from writing golfing tips to doling out parenting advice."I don't see myself stopping any time soon," he says. "I could be on Facebook playing games or something, but this is kind of fun." Write to Emily Glazer at emily.glazer@wsj.com ...

Angel Investors Play Big Role For Start-Ups, Think Tank Says

Tue, 24 Jan 2012 18:18:27 EST

By Angus Loten Angel investors—wealthy individuals who provide capital to start-ups with the potential for fast growth—are an increasingly important source of capital to early stage companies, including in Europe, one recent report says. The report by the Organization of Economic Cooperation and Development is among the first to gauge angel investing activity around the world. Calculations by the Paris-based think tank suggest that the total amount of capital raised from angel investors in the U.S. was $17.7 billion in 2009, compared to $18.7 billion for venture capital. The bulk of the venture capital money went to companies that were at later stages in their growth cycles, the report notes. In Europe, the angel market in 2009 reached $5.5 billion, surpassing all venture capital funding by some $250 million, according to the report, which is based on interviews with roughly 100 investors, entrepreneurs and business leaders in 32 countries. With banks reining in all but the safest loans since the recession, and venture capital firms now targeting less risky late-stage business startups, angel investors are nearly alone in backing young, fast-growth companies, the report says.The VCs tend to target high-tech hubs, like Silicon Valley. But angels are more prone to support entrepreneurs in their own back yards, with typical funding rounds ranging from $25,000 to $500,000, the report says. At the same time, they're less sensitive to ups and downs in the economy and tend to invest in a "much wider range of innovation" than VC investment firms, the OECD report concludes. In the U.S., angel investors are now putting more cash into biotechnology and health-related ventures, rather than IT, which was an investor magnet for decades, for instance. That's partly due to the rise of angel investing groups over the past decade. By pooling smaller sums together into big funding rounds, these groups are able to spread the risk of betting on promising ventures in less hot sectors. As a result, angel investing itself is becoming a more formalized process – complete with more rigorous due diligence. Beyond cash, angels play an often overlooked but crucial mentoring role for new business owners as successful entrepreneurs themselves, offering hands-on experience and a network of valuable contacts, the report notes. But policy makers have tended to focus efforts on the higher profile venture capital market, however. To better drive the global economic recovery, the OECD recommends tax incentives for angels and angel groups, co-investment programs, or even public funding for national angel associations.Many fast-growth, entrepreneurial ventures that attract angels are the same start-ups that create jobs. Led by start-ups, small firms have generated 65% of net new jobs over the past 17 years, according to the Small Business Administration.Still, some critics say wealthy investors shouldn't need costly tax incentives to back promising ventures, especially as many countries enact tough austerity measures aimed at balancing national budgets in the wake of the financial market crisis. Others worry tax breaks will draw in institutional investors. Institutional investors may not provide start-ups with the business-management expertise or potentially valuable contacts as the typical individual angel investors might provide. Of the $8.9 billion in total investments by angels in the first half of 2011, 39% went into seed and start-up ventures, up from 26% of $8.5 billion in total investments over the same period in 2010, according to data from the University of New Hampshire's Center for Venture Research. It hasn't yet released data for 2011's second half. Write to Angus Loten at angus.loten@wsj.com ...

With New Law, Profits Take a Back Seat

Thu, 19 Jan 2012 01:42:48 EST

By Angus Loten A brownie supplier to Ben & Jerry's ice cream, a skateboard maker and a payday lender are among the hundreds of existing businesses that plan to incorporate as "benefit corporations" in coming months.They will be taking advantage of a new and untested corporate charter, available in only a half dozen states, allowing a company's governing board to consider social or environment objectives ahead of profits. The legal structure is intended to shield the board from investor lawsuits.That anything other than maximizing shareholder value should be considered in a company's decision-making normally can open the door to investor suits. But in the past two years, lawmakers in seven states, including Maryland, Virginia and New Jersey, passed legislation to create benefit corporations as an alternative business model. California opened up the option Jan 1. New York will do so as of Feb. 10. Outdoor-apparel company Patagonia Inc., which places high priority on sustainable and renewable production methods, incorporated under the new structure in California this month. "We're trying to preserve for the long-term the way our company is run," says Casey Sheahan, chief executive of the Ventura, Calif., company, which was founded in 1972 and had nearly $500 million in revenue in 2011.In Mr. Sheahan's view, traditional corporate structures don't encourage boards of for-profit companies to sacrifice shareholder value for a public good.The benefit corporation isn't tax-exempt, nor is it a nonprofit. It is one of several new legal structures to emerge alongside the rise of "social entrepreneurship" in recent years. Some proponents of the benefit corporation believe its biggest value may come at the time of the sale or breakup of a business, because directors might be able to consider factors other than maximizing shareholder value. The legal structure "tells directors that it's their duty to consider other interests, rather than say they 'may' consider them," says William Clark, a partner at Drinker, Biddle & Reath LLP, who helped draft model benefit-corporation legislation.This was an issue for Ben & Jerry's Homemade Inc., the ice cream company sold to Unilever PLC in 2000, despite the objections of co-founder Ben Cohen and some directors. "There was a lot of pressure from the lawyers to sell," says Jeff Furman, a Ben & Jerry's director since the 1980s and its current chairman.If benefit corporations had existed back in 2000, the board probably wouldn't have agreed to the Unilever deal, Mr. Furman says. Ben & Jerry's now plans to incorporate as a benefit corporation in Vermont within the next few months, he adds, through pressure from its current board. Unilever declined to comment.By law, a benefit corporation's social and environmental goals must be laid out in the bylaws and the company must publish an annual "benefit report" to measure itself against those goals. The idea has its share of critics. "For an investor, this is a terrible idea," says Charles Elson, who teaches corporate governance at the University of Delaware. "The structure creates a lack of accountability," he adds, so if the management of a benefit corporation makes a bad decision, "there's very little you can do about it as a shareholder." Others say that companies can simply add specific goals into their articles of incorporation under existing corporate codes, making a benefit-corporation designation unnecessary.It costs about $30 to incorporate as a benefit corporation, not including fees paid to outside lawyers. The incorporation isn't to be confused with "B Corp" certification, which is a privately administered program to label companies aiming to tackle social and environmental problems. B Corp certification can be obtained in any state, for fees ranging from $500 to $25,000 annually, depending on revenue, according to B Lab, the Berwyn, Pa., nonprofit that developed benefit corporation legislation and oversees the certification process for about 500 firms. While B Corp certification can be used for do-good marketing purposes, it wouldn't hold up in an investor lawsuit. Jonathan Harrison, chief executive of Emerge Workplace Solutions, says it plans to incorporate as a benefit corporation in New York next month. He sees the new legal structure as a tool to help his 18-month-old San Francisco business stand apart from other payday lenders that charge higher interest rates and fees for workers needing fast cash between paychecks."It's really important for us to have a designation that we're the good guys," he says. His six-employee firm offers short-term emergency loans to hourly workers at annual interest rates from 9% to 19.99%, in contrast to the 400% typically charged by payday lenders. Emerge also provides financial coaching and other services to help the working poor.The company's seven investors include a national bank. They support the move to become a benefit corporation, Mr. Harrison says. Mike Brady, the president of Greyston Bakery, a Yonkers, N.Y., supplier of brownies to Ben & Jerry's, says benefit corporations "add another level of accountability and transparency."The bakery, which had $8 million in sales last year, and has 50 full-time employees, hires from its local, underprivileged neighborhood. It also supports affordable housing and child care for low-income earners through a separate nonprofit foundation.Comet Skateboards, Ithaca, N.Y., has been preparing the paperwork to incorporate as a benefit corporation since early last year, according to Jason Salfi, owner of the 10-employee firm, which uses eco-friendly materials and recycles old skateboards that are brought back. Mr. Salfi says the company's B Corp certification has already earned points with customers. "You'd be surprised how much people care about these issues," he says. Write to Angus Loten at angus.loten@wsj.com ...

Merchants Swipe New Debit Fees

Fri, 25 Nov 2011 11:40:12 EST

By Robin Sidel Merchants have been eagerly awaiting the promised savings from a new law that slashed their fees for accepting debit-card payments, but many are finding the early results disappointing.Business owners, who are receiving their first bills since the new rules took effect on Oct. 1, say in some cases they are now paying more than before—further reducing the already-slim chance that consumers would see lower prices as a result of the changes. Bill Hardee, owner of the Warehouse Saloon & Billiards in Austin, Texas, says he recently tallied up his savings. The grand total: $1. He figured he paid $74 less on larger debit-card transactions, but that amount was offset by $73 in higher charges that he paid on small purchases."I was a little dismayed," says Mr. Hardee, who spent more than $1,100 to process card transactions in October.In some cases, companies that process transactions on behalf of merchants are raising select fees while refusing to pass on to merchants the lower rates now charged by banks, according to letters sent to business owners.Separately, some merchants that process a large number of debit transactions for small purchases—for example, under $15 in some cases— are seeing those rates rise because Visa Inc. and MasterCard Inc. have eliminated discounts that they had previously offered."What's now becoming clear is that the winners are few and far between, as gains for some of even the very largest retailers seem illusive," says Tony Hayes, who specializes in the payments industry at consulting firm Oliver Wyman.The complaints illustrate an even broader raft of complaints than those raised in a lawsuit filed by retailers on Tuesday. The National Retail Federation and other trade groups that represent merchants filed a lawsuit against the Federal Reserve, challenging the way that the central bank set new debit rates this year. The lawsuit, filed in U.S. district court in Washington, seeks to have the Fed recalculate the rates."We are aware of this lawsuit and we will be reviewing it," a Fed spokesperson said.The frustration expressed by merchants underscores the byzantine nature of the payments-processing industry, which is loaded with dozens of fees and rates based on the size and type of transaction and merchant. The situation is further complicated by the role of banks, which issue the debit cards, collect the fees that merchants pay to accept them, and sometimes own the middleman companies that load additional charges onto the merchant.The new rates took effect Oct. 1 as part of last year's Dodd-Frank financial-overhaul law. They apply to banks that have more than $10 billion in assets, which are involved in the majority of U.S. debit-card transactions.Banks lobbied against the law, which limited the amount that they can charge merchants to process debit-card transactions at 21 cents, plus the potential of a few pennies more to cover fraud-related expenses. That is down from a previous average of 44 cents, according to the Fed.Merchants also lobbied hard, with some saying that they would pass on savings to customers in the form of price cuts or enhanced customer service.The nation's biggest merchants, which are expected to see the most savings from the new law, generally aren't discussing the impact on their bottom line.What is clear, however, is that some debit-card rates are rising. Intuit Payment Solutions recently advised customers that it is raising some rates by fractions of a percentage point and increasing the per-transaction charge by six cents, according to a customer letter."While we try to absorb interchange-fee increases, we sometimes need to change prices as a normal course of business," according to a statement from the company, which is a unit of Intuit Inc. in Mountain View, Calif. The company also said that it has lowered rates for transactions that fall under the new law.Meanwhile, Heartland Payment Systems Inc., which processes electronic payments for small businesses, says it has passed on $25 million of savings to its customers as a result of the lower debit-card fees."I think what we're doing is the right thing," says Robert Carr, chief executive of the Princeton, N.J., payment processor, which has set up a website with a running tote board that tallies up the savings so far. Ruth Hanessian, who owns a pet store in Rockville, Md., has been struggling to figure out if she has gotten any savings from the new law.Her latest bill ran nine pages and included about two dozen fee rates that are based on the type of card that was used by the customer."The bottom line is you just can't figure it out," she says. Write to Robin Sidel at robin.sidel@wsj.com ...

How to Build Recognition for Your Unknown Brand

Tue, 10 Jan 2012 12:08:26 EST

By Michael Michalowicz In advertising, frequency is a term that refers to the number of times a consumer must see or hear an ad before they purchase the advertised product or services. Frequency applies to all industries—from the movie you choose on date night, to the brand of soda you purchase, to the stylist who cuts your hair—you are much more likely to buy something if it's familiar to you. The frequency technique works because it's about fostering trust. As consumers, we are hard-wired to mistrust anything new, but expose us to that same something repeatedly and we will start to trust that it's a product or service worthy of our hard-earned cash. You're more likely to pick the movie for which you've seen 32 previews over the art-house flick you've never heard of, and you're probably going to choose the name brand over a generic soda, even if it's not your favorite brand, simply because you're more familiar with it. And the hair stylist? Chances are you didn't choose your hair stylist because of a frequency ad campaign, but that doesn't mean that frequency didn't influence your decision. You probably heard about the stylist from more than one source, perhaps even noticed the stylist's booth at a local event, or his or her name as a sponsor at a fundraiser; maybe you ran into the stylist at a party. And, after you heard the stylist's name enough times, you decided to give that person a try. Here's where things get interesting for small businesses. While the film and soda industries have the big bucks to bombard consumers with advertising, spending money on "frequency" advertising is not realistic for most growing companies. However, small businesses can achieve frequency by working in tight, concentric circles – showing up many times in just a few places, as opposed to showing up in many places, just a few times. When implementing the frequency technique, the first step is to evaluate your target customers or clients, those who purchase from you repeatedly. What is their demographic? Are they mostly college students with trust funds? New moms over forty? Aging triathletes? Now that you know the basic common denominators of your target market you can discover where they hang out. Where and how do they spend their time and focus their attention? Which clubs, organizations and associations do they belong to? Where do they get their information (newspapers, online media, television, newsletters, the grapevine, etc.)? Which vendors do they use most? Which events do they attend? Once you've identified the concentrated area where your ideal customers hang out, make sure you have a consistent presence in those areas. Join the clubs, attend the meetings, show up at the games. I'm not suggesting you start shopping at their grocery store and bump up against them in yoga class – that sounds more like stalking than hanging out. I'm encouraging you to become part of their business community, so that when it comes time to make a buying decision, they will choose you over the other guy. This strategy plays out online as well. Small businesses are served better by focusing on building a presence in one social media environment, rather than dabbling in three or four. I applied this technique with my first business, a computer services company. We targeted the hedge fund industry, and as soon as I identified the circles in which my potential clients operated, I made sure we showed up there. Always. We joined their associations, attended industry events and even became friends with their vendors. Eventually, after they heard about my company from several sources, hedge funds started contacting us. They wanted to do business with us because they trusted us, and they trusted us because we were familiar to them.Using this and related techniques, I was able to grow that company and sell it for a number with lots of zeros (after the first number and before the decimal point). Had I split my time and money moving in wider circles, concentrating on many clients and showing up just a few times in a lot of places, I'm certain we would not have achieved that level of success. Infrequency will not generate qualified leads. Frequency inspires trust – trust in the brand, trust in the product or service, trust in you. So even if you don't have a big marketing budget, start moving in tight concentric circles and you will reap the benefits of frequency. ...

Franchising 2012 Outlook: Better Than 2011 Reality

Wed, 28 Dec 2011 23:50:27 EST

By Sarah E. Needleman The number of U.S. franchises declined for the third consecutive year, falling by a modest 0.6% in 2011, according to a new report commissioned by the International Franchise Association. "There was a greater contraction in the number of businesses than we anticipated," said Steve Caldeira, president of the IFA, the franchising industry's largest trade group.Mr. Caldeira said in an interview with the Wall Street Journal that a lack of access to credit "probably was a factor," in the decline this year. "We may have underestimated the potential significant downward impact," he added.In January, the IFA, the franchising industry's largest trade group, had forecast 2.5% growth this year for the sector. Employment at franchises rose just 1.9% in 2011 compared with IFA's previous forecast of a 2.5% increase.The IFA has used different research firms for its recent reports, it said. Its 2011 forecast, released in January, was prepared by PricewaterhouseCoopers, while its 2012 forecast, released Monday, was prepared by IHS Global Insight, a unit of IHS Inc. IHS Global said that it expects U.S. franchise establishments to increase in 2012, by 1.9%. It also expects franchise businesses to boost hiring and sell more goods and services in the year ahead.Lodging, business services, and personal services are expected to see the most growth in 2012, it said. Quick-service restaurants are expected to continue to make up the bulk of franchise establishments in operation next year (21%). They are also likely to provide the greatest number of jobs (37%) of all franchise categories, and to generate the most revenue (26%).IHS says its outlook is based on modest improvements made over the past year in small-business lending, as well as signs that the overall U.S. economy is on the mend, such as the lowering of the national unemployment rate. The forecast also presumes that the payroll tax cut for employees will be extended. Stephen Bronars, a senior economist with Welch Consulting in Washington, D.C., said in an interview that he believes the new IHS/IFA study may be "overly optimistic" because the health of franchising's largest sector, quick-service restaurants, is directly tied to consumer discretionary spending. "It will depend on what happens to housing prices and consumer sentiment," he said. "Are people going to go out to eat and take vacations? What's going to happen to the price of gasoline?" Franchises in some parts of the country are less likely to see a rebound than those located elsewhere, he added. "States like Nevada and California, where real estate values declined and the economic downturn had the biggest negative impact, will have to rebound a lot in the next year for this optimist forecast to come true," he said. "People have lost money on their houses and aren't as wealthy as they used to be." In a survey earlier this month of 149 IFA members, more than one quarter of franchisees said they expect a "moderate improvement in access to credit" over the next 12 months, compared with just 6.3% who said this in a November 2010 survey. Among franchisers, 55% said they expect a "moderate improvement in access to credit" in the year ahead, up slightly from 53% who said the same in November 2010. Write to Sarah E. Needleman at sarah.needleman@wsj.com ...

A Place in the Sun

Wed, 01 Feb 2012 14:50:53 EST

Rise in Start-Ups Draws Doubters

Thu, 02 Feb 2012 17:06:29 EST

By Sarah E. Needleman Did U.S. entrepreneurship grow last year? A report released last month suggests there's been a major resurgence in the number of start-ups operating nationwide. But some skeptics say that the study fails to take into account the potentially significant numbers of small businesses that shuttered last year. According to the Global Entrepreneurship Monitor, 12.3% of the U.S. population was actively engaged in starting or running a new business in 2011, a staggering 60% increase from 2010. The annual report defines new businesses as ventures less than three-and-a-half years old.An increase in start-up activity is a good sign for the overall national economy because it will lead to more employment opportunities in the near future, says Donna Kelley, the report's lead author and an associate professor of entrepreneurship at Babson College in Wellesley, Mass. "It's indicating that we're seeing a recovery," she says.The report, based on a combination of survey results and population data, shows that more than half of U.S. early-stage entrepreneurs—59%—expect to create up to four jobs within the next five years. Another 27% plan to create between five and 19 jobs and 14% plan to create 20 or more jobs during that period. Some critics argue, however, that the GEM report doesn't paint a complete picture of the nation's entrepreneurial landscape. Though it does note that 4.4% of U.S. survey respondents closed businesses within the past year, data from the Bureau of Labor Statistics tell another story. The government agency reports that the total number of self-employed Americans with incorporated and nonincorporated businesses declined 2% last year. As a result, the number of small businesses shuttered also must have risen last year, says Scott Shane, a professor of entrepreneurial studies and economics at Case Western Reserve University's Weatherhead School of Management. Using a bathtub as an analogy, he says: "If the level of water is going down, the amount flowing out has to be greater than the amount flowing in." To be sure, just because a business closes doesn't necessarily mean it failed and that another person is collecting unemployment. The former owner could've decided to retire or even go work for someone else. "But every business closure eliminates the jobs of the people who worked there," says Mr. Shane. John Haltiwanger, an economist at the University of Maryland, says he's skeptical of the GEM report given that it claims such a dramatic boost in start-up activity. "Last year would've been a much more robust year in employment growth and we didn't see that," he says. "It was a pretty anemic year."But Ms. Kelley offers a possible explanation for the surge in U.S. entrepreneurship identified by the study. She says start-up rates declined in 2010 and 2009, so last year entrepreneurs were essentially making up for lost ground. "It's very likely people were delaying starting businesses during the recession due to the fact that conditions weren't favorable for entrepreneurs," she says. "People that did start businesses during the recession were more likely to start out of necessity because they had no other sources of income." Another factor: many newly launched businesses won't survive for very long. On average, 20% of start-ups fail within their first year, according to the Ewing Marion Kauffman Foundation, which also conducts an annual study on entrepreneurial activity in the U.S. Its newest report, due out next month, is expected to show that start-up volume in the U.S. increased by just a few percentage points in 2011, just as it did in 2010, 2009 and 2008, says E.J. Reedy, a research fellow for Kauffman, a nonprofit in Kansas City, Mo. Still, he notes that last year's report indicated that U.S. entrepreneurship in 2010 reached its highest level in more than a decade. He reasons that this happened because many people saw new businesses opportunities resulting from the recession. For example, he says reduced commercial property rates may have prompted the launch of new retail shops and restaurants. Many people also likely started businesses in 2010 because they got laid off or their work hours or pay got scaled back. However, the latter types of businesses typically lack full-time employees, he adds. Kauffman bases its entrepreneurial activity index on a monthly population survey jointly sponsored by the Census Bureau and Bureau of Labor Statistics. It focuses on the rate of business creation at the individual owner level.The GEM is a nonprofit consortium that was initiated in 1999 as a partnership between Babson College and London Business School. Today it consists of more than 85 research teams from around the globe. The 2011 GEM report is based on a survey of 140,000 adults in 54 economies, including 6,000 just in the U.S. Researchers looked at responses from a random sampling of participants, as well as population data for each of the countries represented, to draw conclusions about entrepreneurial activity in those nations. The 2010 GEM report was based on a survey of 175,000 adults in 59 economies, including 4,000 in the U.S. Write to Sarah E. Needleman at sarah.needleman@wsj.com ...

The State of the Union: Small Firms Weigh In

Thu, 26 Jan 2012 10:57:31 EST

By Emily Maltby President Obama's State of the Union Address Tuesday night touched on deficit reduction, tax and regulatory reform, exporting, and other issues of interest to small business owners. But some entrepreneurs and small-business groups said that they believe the speech didn't go far enough in citing specific solutions that can help spur growth and hiring, among other things. The president highlighted the importance of small firms in the U.S. economy. He also emphasized the need to help them grow and hire in the U.S., through tax reform and regulatory reform. But he stopped short of listing the small-business tax provisions and regulatory challenges he hoped to change. For a detailed look at other aspects of the address, click here. For an analysis of his proposals for Congress to consider, click here. Small-business owners didn't get anywhere near the level of attention that they received in his State of the Union address two years ago. Then, Mr. Obama mentioned small businesses more than a dozen times. He also called on Congress to craft several pieces of legislation that directly impact small businesses, a few of which were later signed into law.Leading up to this year's address, Mitch Marrow, founder of SPOT Group LLC, a New York doggie day care and dog services firm, said he hoped the president would address liquidity issues facing small firms. His company has grown to 135 employees at six locations and is poised for expansion. But Mr. Marrow has had trouble accessing a line of credit that could help his firm meet its potential because, he said, he's only been in business for about a year. Mr. Obama touched on capital constraints but didn't offer specifics on how to loosen credit for small firms. Mr. Marrow, who formerly worked in the hedge fund industry, said he was discouraged that the president opted instead to speak about the need for strict oversight in the financial sector because "that equates to less lending and liquidity," he said. Mr. Marrow says he is a fiscally-conservative Independent who didn't vote for Mr. Obama in 2008. Mr. Marrow also wanted to hear about employment incentives, such as tax breaks for hiring and training new employees. But the president focused instead on incentives for bringing overseas jobs back to American shores, which doesn't apply to Mr. Marrow's business. "My general reaction was that it came off much more like a campaign speech," said Mr. Marrow. "He sort of pushed the ball back to Congress. That didn't give any immediate hope of getting anything done."Spokespeople for the National Small Business Association and the National Association for the Self-Employed, both trade groups in Washington, D.C., said they were pleased that the president noted the importance of creating a level playing field for businesses, despite the absence of details. "I forgive politicians who run a country and have one hour to outline plans," said NSBA Chair Chris Holman, adding that Mr. Obama's key themes of eliminating regulations, cutting the deficit and creating a fair tax code, were on point. The NSBA, a non-partisan organization that does not endorse candidates, has 150,000 members. Kristie Arslan, president and chief executive of NASE, said that the overall message of fairness resonated with the self-employed population because "they are dealing with their own legal work and regulatory work, as well as being CEO." NASE is a non-partisan organization that represents about 200,000 member businesses. It does not endorse candidates. "[Our members] wanted to hear concrete steps and it was short on details," said Cynthia Magnuson, spokesperson for the National Federation of Independent Business. The group, a conservative lobby based in Washington, D.C., has about 350,000 members. It has a track record of endorsing more Republican than Democrat politicians, but it does not endorse presidential candidates, according to Ms. Magnuson. Mr. Obama lingered on the idea of international trade, without specifically mentioning the role small firms play. The Export-Import Bank, the export credit agency of the U.S., authorized $789 million to small firms in the first quarter of fiscal 2012, ended December 31, 2011. And the number of small-business customers went up 10% compared to a year earlier. Between 85% and 87% of the transactions that Export-Import Bank does is for small businesses, said Fred P. Hochberg, the agency's chairman. But the agency, whose charter expired at the end of September, is running on a temporary charter. For some small firms, exporting is a critical path to growth, said NSBA's Mr. Holman. And a reauthorization of the Export-Import Bank, he said, is "a no-brainer."Mr. Obama also called for immediate and comprehensive immigration reform, and mentioned the need to support "everyone who's willing to work and every risk-taker and entrepreneur who aspires to become the next Steve Jobs."Steve Case, chair of the Startup America Partnership, a public-private program intended to spur entrepreneurship, said he is in favor of a variety of legislative proposals that aim to keep high-skilled and entrepreneurial-minded workers in the country, as well as reforms that can make it easier to go public and to get funding through crowd-based platforms. "There are almost a dozen bills in Congress" that touch on these issues, Mr. Case said. Although the president didn't call out any one particular legislative proposal, Mr. Case said he was pleased that Mr. Obama asked on Congress to put pro-entrepreneurship policies in place. "He said, we should get this done now," Mr. Case said. "That was encouraging." Write to Emily Maltby at emily.maltby@wsj.com Corrections & Amplifications The Export-Import Bank is running on a temporary charter. An earlier version of the article incorrectly stated that the agency was running on temporary funding. ...

Facebook Targets Huge IPO

Tue, 29 Nov 2011 15:17:42 EST

By Shayndi Raice Facebook Inc. is inching closer to an initial public offering that it hopes will value the company at more than $100 billion, according to people familiar with the matter. The social networking firm is now targeting a time frame of April to June 2012 for an initial public offering, said people familiar with the matter. The company is exploring raising $10 billion in its IPO—what would be one of the largest offerings ever—in a deal that might assign Facebook a $100 billion valuation, a number greater than twice that of such stalwarts as Hewlett-Packard Co. and 3M Co.A Facebook IPO has been hotly anticipated for several years, and viewed as a defining moment for the latest Web investing boom. The company has been vague about whether it would even make such an offering and silent on timing of an IPO. "We're not going to participate in speculation about an IPO," said Facebook spokesman Larry Yu. The company now appears poised to go ahead with a deal. But it will likely come to market at a time when investors are beginning to question the value of some newer Internet businesses. The most recent IPO, an $805 million float of discount-deal service Groupon Inc. on Nov. 3, has plummeted 42% in price in the past five trading days after surging in its first day of trading. Business-networking service LinkedIn Corp., whose stock more than doubled from its IPO price on its first day of trading May 19, has since fallen 36%, but remains 33% above its IPO.Facebook Chief Executive Mark Zuckerberg has in the past publicly expressed reluctance to do an IPO. And he has opted to keep Facebook private longer than many suspected he would. But he is warming to the idea. Facebook is now in internal discussions over the timing of its filing with the Securities and Exchange Commission, and is considering filing dates as early as this year, said these people. Mr. Zuckerberg hasn't made any final decisions, these people cautioned. Facebook remains aloof from Wall Street and shows signs of wanting to play by its own rules. Companies often explore an IPO once they have $100 million in revenue. Facebook is expected to debut with more than $4 billion in revenue, making it bigger than Web veteran Yahoo Inc. Facebook has gone so far as to craft its own prospectus, said the people familiar with the matter. A prospectus document—which is filed with the SEC outlining the company's business—is typically prepared by bankers and lawyers hired by a company. Facebook Chief Financial Officer David Ebersman has been leading the company's talks with Silicon Valley bankers about an IPO, said people familiar with the matter. Bankers are aggressively pursuing the company, but Facebook remains elusive about a commitment to specific banks, even though an IPO looms. Mr. Ebersman told some bankers that he is skeptical over what contribution investment banks could make to a Facebook IPO, since the company is so highly sought after by major investors, said people familiar with the matter. The social network, which was started by Mr. Zuckerberg in 2004 out of his Harvard University dorm room, has led the way in reshaping how people share information and interact with others on the Web. It now counts 800 million users, with 500 million users logging into the site daily. Facebook will be required to make its financial information public by April, because the company will cross the 500-shareholder limit by the end of this year. The SEC requires companies with more than 500 shareholders to publicly disclose its financial information. Facebook could publish its financial information come April without an IPO, but board members and top executives have privately acknowledged that it would leave the company at a severe disadvantage, since they would have most of the liability that comes with being a public company, but lose out on the fundraising benefits of a public offering, said these people.Only 13 IPOs have ever been completed with a value greater than $10 billion, and just three of those have been for U.S. companies, according to Dealogic, which tracks new securities issues. The only U.S. issuers at that size level have been Visa Inc. at $19.7 billion in 2008; General Motors Co. at $18.1 billion in 2010; and AT&T Wireless Services Inc. at $10.6 billion in 2000. The most valuable company ever to go public was Industrial & Commercial Bank of China, which sold $21.9 billion of stock in October 2006 and finished its first day of trading with a market value of $148 billion, Dealogic said. A Facebook offering of $10 billion would be the largest IPO by any technology or Internet company. The largest U.S. Internet IPO, the $1.9 billion sale in 2004 by Google Inc. which valued Google at $23 billion, ranks No. 3 among global Internet IPOs.Facebook's revenue is driven by its online advertising business, as big brands rush to the site to interact with consumers through display ads and fan pages. Facebook's world-wide ad revenue is expected to hit $3.8 billion this year, up from $1.86 billion a year earlier, according to data compiled by eMarketer. Facebook's share of display ad revenue in the US is expected to grow to 16.3% in 2011 and 19.5% in 2012, eMarketer found. Write to Shayndi Raice at shayndi.raice@wsj.com ...

Best Buy Jumps Into Small Business IT Services

Thu, 22 Dec 2011 18:37:52 EST

By Sarah E. Needleman Small-business owners in need of IT support may soon find it at Best Buy Co.Next week brings the expected closing of the world's largest electronics chain's deal to buy Mindshift Technologies Inc. ZDNet.com, a technology news site, called it a "watershed moment for small business IT services." Mindshift, of Waltham, Mass., was founded in 1999, and provides IT services to more than 5,400 small and medium-sized businesses throughout the U.S. Best Buy has more than 1,100 big-box stores. But the retailer and other traditional chains face the prospect of becoming showrooms for online-only competitors. Some shoppers visit a mall or big-box location to check out merchandise and then find lower prices on the Web, sometimes while using smartphones right in the store's aisles. A spokesperson for Best Buy didn't immediately return messages seeking comment. Via email, Mindshift spokeswoman Lisa Masiello said the company currently has no plans to make changes to its prices or list of services, which include simple cloud-based email as well as more advanced services such as virtual servers and desktops, VoIP solutions, and overall IT management.Demand for outsourced IT services among small businesses has been growing in recent years. Overall, the IT outsourcing market in the U.S. is expected to grow 1.9% to $40.6 billion in 2012, up from $39.8 billion in 2011, according to research firm IDC.Small businesses in many cases can't afford to employ large numbers of full-time IT professionals. At the same time, office technology has become more complex and diverse, and the threat of viruses and worms has increased. Best Buy's acquisition of Mindshift compliments its 2002 purchase of Geek Squad, a provider of IT support services to consumers, according to Jeff Roster, a retail analyst for research firm Gartner Inc. "It's a really interesting cross-sell opportunity," he says. "An owner of a small business is likely coming into their stores already" to look for electronics and other products, he adds. Mindshift, meanwhile, is likely to gain more than just access to Best Buy's massive customer audience. It could also benefit from the electronics chain's legal muscle. Case in point: Best Buy has disputed more than a dozen geek-themed trademarks in the past decade, The Wall Street Journal reported in June, citing federal records. For example, earlier this year the Richfield, Minn., company threatened online rival Newegg.com with legal action, arguing that its Geek On advertising slogan sounded too similar to Geek Squad. Newegg responded, according to WSJ, by posting a cease-and-desist letter on Facebook. Write to Sarah E. Needleman at sarah.needleman@wsj.com ...

Pandora Founder Tunes Into Listeners

Thu, 19 Jan 2012 17:33:41 EST

By Sarah E. Needleman Tim Westergren was working as a film composer in the late 1990s when he came up with the idea behind Pandora Media Inc., the popular online service that allows users to create personalized radio stations. Part of his job as a film composer involved figuring out directors' musical tastes. Over time, he developed a system for writing music tailor-made for them. He later realized that music lovers also could use a similar system to identify artists whose songs they might enjoy. He then teamed up with two partners and a fellow composer to build the Music Genome Project, the technology that lets Pandora users create individual online radio stations that cater to their musical preferences. Pandora was founded in 2000 and began trading on the New York Stock Exchange this past June.For the third quarter ended in Oct. 31, the Oakland, Calif., company posted net income of $638,000, or break-even on a per-share basis. Revenue nearly doubled to $75 million in the latest quarter, and the company had roughly 40 million users.Pandora's current business model is limiting because it relies more heavily on display and video advertising than audio, says Rich Greenfield, a media analyst with Wall Street trading firm BTIG LLC. Pandora also faces mounting competition from similar services—such as Spotify AB, a Swedish start-up founded in 2008—as well as traditional radio broadcasters' online offerings.Its shares have fluctuated in recent months. The company's shares were trading around $12 this week, compared with $16 each when Pandora went public, for instance. The company's 46-year-old chief strategy officer talked to The Wall Street Journal about the service. Edited excerpts: WSJ: How did your family and friends react when you quit your composer job? Mr. Westergren: I had been a nanny, then I was rock musician and then film composer, so people were used to me making unconventional choices. I started the company with two other people, who've long since left the company. We hired a small cadre of engineers and professional musicians. Then we rented a studio apartment in San Francisco and started building the prototype. WSJ: What did you do for start-up capital? Mr. Westergren: We raised some angel financing from a collection of about five or six angels. We got [the business] off the ground and a little less than a year later we had version No. 1 of our genome project. And then we went through a rough patch. Our money ran out essentially. The technology economy had collapsed and we went into survival mode.We pitched investors 348 times before getting a "yes" from Walden [Venture Capital] in March of 2004. WSJ: What was your initial business plan? Mr. Westergren: When we first launched, the deal was you could listen for 10 hours free [of charge] and then you needed a credit card to keep listening. We got lots of usage, but no credit cards. So we decided to make it free and it took off like a rocket ship, entirely by word of mouth. Our immediate task was to hire a team of salespeople and build an advertising business, which we did, and we've been working on that ever since. There also remains a paid-subscription version. WSJ: What made you decide to go public? Mr. Westergren: The IPO presented itself to us. We didn't have a particular plan. When you have certain level of confidence in your business, and when some liquidity is useful, those are the two principal drivers. WSJ: Are there significant tradeoffs to being publicly traded? Mr. Westergren: I'm struck by how little it changed the company internally, which is good. It's what we wanted. I wasn't sure what to expect. All of a sudden we have a stock price. There's a lot more public visibility and you have a new constituency, but it's been a very smooth transition. WSJ: Any regrets so far? Mr. Westergren: I probably spent too much time trying to raise money. That's time and energy I could've spent on more productive things but it was very hard to know that. Success is all about the team and about creating a company where you get the best out of each team member. WSJ: Pandora has taken multiple investment rounds. Was has this meant for your ownership stake? Mr. Westergren: It's been diluted over the years, let's put it that way, but I'm doing just fine. WSJ: Pandora has more than 400 employees. How do you manage them? Mr. Westergren: I was in rock bands for a number of years and that's actually a great place to learn management. When you're in a band, you're managing a start-up. It's a creative process. You have to work together and there's a tremendous amount of uncertainty. You're navigating unchartered territory and you're under constant financial strain. WSJ: What's next for Pandora? Mr. Westergren: We have very grand ambitions. Radio is an enormous category. We're going to begin to have a real impact for musicians and that's why I started this thing in the first place. It's the perfect technology to surface bands you've never heard of. Write to Sarah E. Needleman at sarah.needleman@wsj.com Corrections & Amplifications Pandora Media Inc. posted a profit in its latest third quarter. An earlier version of the article incorrectly stated that the company has yet to turn a profit. ...

Crowd-Funding Brings Unease

Thu, 17 Nov 2011 10:49:02 EST

By Angus Loten Congress is considering exemptions to decades-old securities regulations as a way to throw open the doors to entrepreneurs who want to legally sell equity stakes in their start-ups over the Internet. But some, such as Jared Hardy, co-founder of a North Dakota beer start-up, aren't waiting for Congress to act.Mr. Hardy is among a small but growing number of small-business pioneers already cracking open those doors, by raising capital through the online social-networking process known as "equity-based crowd-funding."Nine months ago, Mr. Hardy and three co-founders raised $41,000 from 17 investors on a fledgling equity crowd-funding site called ProFounder to launch Fargo Beer Co. in Fargo, N.D. The effort has turned out well for Mr. Hardy and his business, so far. "My only regret now is that we couldn't go bigger," he says.But the site he used, ProFounder Financial Inc., hasn't fared as well. The West Hollywood, Calif.-based operation drew scrutiny from California securities regulators and was recently forced to abandon its original mission of providing online sales of equity stakes in small businesses."They were acting as a broker without being licensed as a broker dealer," says Preston DuFauchard, the commissioner for the California Department of Corporations.In August, the state agency issued a formal consent order to ProFounder to "desist and refrain" from engaging in securities transactions without registering as a broker dealer, he adds, forcing the site to regroup. Jessica Jackley, ProFounder's 34-year-old co-founder, says the site provided a valuable service by giving entrepreneurs a way to tap their friends and family for money, in exchange for stakes in the businesses. "If every [Web] start-up had to become a broker dealer to raise money for small businesses, it would be too prohibitive," she says. The site's current focus is offering small businesses do-it-yourself funding tools.Many crowd-funding sites—which make money by charging either a percentage of the funds raised or a flat rate for services—cite costs and burdensome compliance requirements as deterrents to becoming a licensed broker dealer. To do so, the sites must not only register with the Securities and Exchange Commission through the Financial Industry Regulatory Authority, but also in every state where they plan to do business—adding up to fees of between $10,000 to $30,000 a year. At least 100 supporters of a so-called "start-up exemption" to allow equity crowd-funding by sites such as ProFounder are planning to rally on the sidewalks near SEC headquarters in Washington on Thursday.Two weeks ago, the House approved a bill that would let companies sell up to $2 million in equity online, with investors buying stakes of up to $10,000 year, or 10% of their annual income, whichever is less. Last week, Sen. Scott Brown (R., Mass.) introduced a measure similar to the House bill, but which restricts investors to a maximum investment of just $1,000 on an offering of no more than $1 million. But the legislation makes some crowd-funding sites—which have gone through the trouble and expense of registering as broker-dealers—uneasy. "You have a lot of people who have never made an investment before and they don't understand what they should be looking for," says Bill Clark, founder of MicroVenture Marketplace Inc.Because the proposals call for an overhaul of federal securities laws, and pre-emption of state laws as well, some critics believe they may increase the chance that unsophisticated investors will get scammed by people who aren't really starting new businesses. Some also point out that the impersonal nature of the Internet should call for more investor protections, rather than less. "The potential for fraud in this area is real and potentially enormous," Jack Herstein, president of the North American Securities Administrators Association, a trade group of state regulators, warned in a letter to members of Congress last month. Mr. Clark says it took six months to join FINRA and register his Austin, Texas, site as a broker dealer with 18 state authorities on a state-by-state basis. Onnie Carr says he registered his crowd-funding site, WealthForge LLC, as a broker dealer in Virginia, North Carolina, Texas and Colorado at what he describes as a significant expense. WealthForge has sold $3.2 million in shares of 22 small firms to an online network of more than 50 investors, he says.Yet Mr. Carr says it makes sense for sites like his to be licensed. "I think they're treading in murky waters," he says of his unregistered peers. John Torrens, who teaches entrepreneurship at the Whitman School of Management at Syracuse University, says there might be dire consequences for start-ups that raise cash on crowd-funding sites that are later shutdown by regulators."The biggest risk would be getting wrapped up in litigation with your previous investors," he says, citing the potential for unclear terms in investment agreements that aren't scrutinized by state or federal authorities. That could be a huge and costly distraction that "derails efforts to go public down the road," he says.Fargo Beer's Mr. Hardy says he was initially wary about running into legal trouble, so he worked with North Dakota regulators to ensure the fund-raising round on ProFounder was legal in the state. To err on the safe side, the beer business co-founders also limited their investors, extending online invitations only to friends and family, he says. Meanwhile, in June, the SEC filed a cease-and-desist order against BuyaBeerCompany.com, a crowd-funding site set up by two marketing executives who raised more than $280 million in a bid to buy the Pabst Brewing Co. The site had attracted some five million investors in less than a year.The cash was never collected, according to Michael Migliozzi II, one of the two ad executives. He says the legal fees following the SEC's order were "considerable" and "a burden" on his ad agency. He thinks there should be changes to the current law to allow equity-based crowd-funding for small businesses and start-ups. Write to Angus Loten at angus.loten@wsj.com ...

'Small' IT Market Attracts Big Companies

Thu, 26 Jan 2012 01:56:11 EST

By Sarah E. Needleman The small-business help desk is going corporate, with initiatives from companies like Apple Inc. bringing new competition to independent consultants who typically handle the IT needs of U.S. start-ups and small companies. The move comes as the use of external IT support among small businesses is exploding. Information-technology services can include setting up new computers, upgrading software, protecting against malware and troubleshooting. U.S. businesses with less than 500 employees spent roughly $23.5 billion on IT services last year, and are projected to spend $27.2 billion on IT services by 2015, according to estimates by research firm IDC. Best Buy Co. sees "significant, untapped potential" in small business IT, a company spokeswoman said. The national retail chain in December bought Mindshift Technologies Inc., a Waltham, Mass., provider of IT services to more than 5,400 small and midsize businesses nationwide. Apple in June formed a partnership with OnForce Services Inc., an eight-year-old IT services network based in Lexington, Mass., to provide small businesses with IT help on their own premises. "Everyone's talking small business right now. There's a huge opportunity," says Peter Cannone, chief executive of OnForce.Apple stores already feature a "Genius Bar," where customers have their products serviced. A year ago Apple introduced "JointVenture," a program providing small businesses with limited tech support offered by Apple employees in Apple stores and over the phone. That program starts at $499 a year for those who buy a new Mac. But in-store support isn't ideal for many business owners who may need to carry multiple computers or devices from their office into an Apple store.While many small businesses and start-ups are still reluctant to hire new employees, spending on technology and IT services is seen generally as smart if it can help a company operate more efficiently, or make it possible for an owner who travels to manage his or her business from a remote location. "I don't have an IT department," says Kevin Kay, owner of an Easley, S.C., health-care company with just 53 employees. "It's not a luxury I can afford." Mr. Kay, who says he has been cautious in his overall spending in recent years due to the economy, sought Apple's help in updating and transferring accounting software to three new iMac computers from older personal computers earlier this month.Apple referred him to OnForce, which then dispatched a technician from its roster of more than 100,000 partners—independent IT-service providers nationwide who pay OnForce a referral fee of 10% of sales—to Mr. Kay's business. Mr. Kay paid the technician $1,050, or $150 an hour, for seven hours of labor, an amount he describes as "costly but necessary." That's on top of the $5,600 he shelled out for computers, iPads, software and data backup.Thanks to the advent of cloud computing, the options now available to small businesses go well beyond what was typical for a help desk just a few years ago. They include analytics, software customization, disaster recovery and video conferencing, for instance. Such options and others only recently became feasible to dispense on a widespread scale—and at prices the average small business can afford. Spending on IT services by U.S. companies of all sizes has been growing at a rate of about 3.2% annually over the past five years, and reached $304 billion last year. That total is about 55% more than their spending on computer hardware and software sales combined, according to research firm Gartner Inc. About 71% of small and midsize U.S. companies said they planned to increase their IT budgets by an average of 5.2% over the next 12 months, according to a July survey of 602 companies with less than 500 employees by the Computing Technology Industry Association, a trade group.The small-business IT market is alluring to many in part because no single player dominates it, even though some large corporations have been in the space for longer than Apple and Best Buy, including International Business Machines Corp., Staples Inc. and AT&T Inc.PlumChoice Inc., a midsize IT-services firm in Billerica, Mass., has signed partnerships with five large corporations in recent years to provide help-desk support to those outfits' small-business customers. "When things don't work, you can't even run your business in many cases," says Ted Werth, its founder.There are roughly 300,000 independent IT consultants, and another 114,000 small IT companies, according to the trade group. Some independent consultants believe they can thrive despite potentially increased competition for mom-and-pop shops and other small-business clients. "A college kid offers better pricing than I do but I'm able to give my clients the answers they need in ways they can understand," says Allan Sabo, an IT consultant in Flushing, N.Y., who charges $100 an hour, or $500 a month, for service for clients who have one server and as many as five workstations. Small-business owners "want to work with local people," says Jason Comstock, an independent consultant in Marysville, Ohio, who says he visits his clients on site at least once a month even though he can assist them remotely with many IT issues. "They want to know who you are, where you go to church, are you a member of the local chamber of commerce, all those things. They're really about the relationship."Best Buy so far isn't planning to carve out dedicated space in its stores for Mindshift, as it currently does for Geek Squad, its tech-support service for consumers. Rather, Mindshift will serve the businesses in most cases via remote access to a customer's computer or over the phone. "We can do 99% of the work remotely," says Paul Chisholm, Mindshift CEO. "More and more customers want to go to the cloud, and the independents and small regional providers don't have the financial capital and expertise to develop scalable cloud offerings."Keeping a team of IT professionals can be too costly for a start-up. "The minute you bring them in, unless you spend a tremendous amount on training and keeping them up to date, their skills deteriorate," says Rick Rodgers, co-founder of Tesaro Inc. The two-year-old biopharmaceutical company, based in Waltham, Mass., paid Mindshift about $40,000 for all of its 2011 IT needs. Write to Sarah E. Needleman at sarah.needleman@wsj.com ...

Self-Publishers Get Help

Wed, 16 Nov 2011 09:41:13 EST

By Jeffrey A. Trachtenberg In a sign that major book publishers are now recognizing the potential of the digital self-publishing industry, Penguin Group (USA) on Wednesday is launching a service to help writers publish their own books. For a fee of between $99 and $549, plus a cut of any sales revenue, Penguin's subsidiary Book Country will offer an array of tools—ranging from professional e-book conversion to a cover creator—to help a writer make their work available through digital book outlets and print-on-demand services. The self-publishing venture could help Penguin discover new writers while creating an additional revenue stream.Penguin Group (USA) has invested "a substantial amount of money" in technology to launch the new service, said Chief Executive David Shanks. "If some of these books hit the best-seller lists, it could be very successful." Penguin could offer the most successful self-published writers contracts if they wanted to be published through a traditional house, he added.On the other hand, Penguin's traditional publishing business doesn't plan to refer authors it has rejected to the self-publishing operation. Molly Barton, Penguin's global digital director, said "it wouldn't be appropriate" to "suggest a path that involves fees" to an author whose manuscript had been rejected.Fueled by the emergence of e-readers and the growing popularity of e-books, the number of self-published titles in the U.S. nearly tripled to 133,036 in 2010 from 51,237 in 2006, according to R.R. Bowker LLC, which tracks the publishing industry. And while many sell tiny numbers, self-publishing can be extremely lucrative for some. Amanda Hocking, a young adult author, this month joined Amazon.com Inc.'s Kindle Million Club, selling more than one million digital copies of her books. She has struck a three-book publishing deal with St. Martin's Press to reprint her "Trylle" trilogy in print and digitally, plus a quartet of new titles for later publication.Many companies already serve self-published authors, including e-book distributor Smashwords Inc., Amazon.com and Barnes & Noble Inc. Penguin is using its Book Country, a website for genre fiction, as the basis for its new service. Writers already post manuscripts on the site, which focuses on romance, fantasy, science fiction, thrillers and mysteries. Users comment on evolving manuscripts and offer advice about the publishing business.Penguin says Book Country, which was launched in April, has attracted about 4,000 members who have posted an estimated 500 manuscripts, some finished, some not, with at least three authors finding agents to represent them.Those writers who opt for Penguin's self-publishing tools will have to share some of their earnings with Book Country. Authors will receive 70% of revenue for titles sold directly from Book Country that are priced at $2.99 or more, and 30% on books priced from 99 cents to $2.98. Book Country also will take a fee for each sale on other online retailers, which also will take a percentage of each sale."Our proposition is that this is the best place to self-publish genre fiction because that's what we're focused on," Ms. Barton said. "Everything we do in self-publishing is tailored to genre fiction, including formatting and design, as well as how to describe your book, position it, and discover it." Write to Jeffrey A. Trachtenberg at jeffrey.trachtenberg@wsj.com ...

The Return of Small-Business Credit Cards

Tue, 17 Jan 2012 23:48:35 EST

By AnnaMaria Andriotis Lenders are courting small-business owners like you with growing numbers of new credit cards and generous rewards programs. And it's easy to see why. About 42% of small-business owners carry a credit-card balance, according to July 2011 data from the National Small Business Association in Washington, D.C.But the cards often lack consumer protections and thus, they can hurt or destroy your credit score. Indeed, critics say lenders are turning to small-business cards because they have fewer consumer protections. Small-business credit cards were excluded from the Credit Card Accountability Responsibility and Disclosure Act of 2009 that outlawed random interest-rate hikes and other practices on personal credit cards. On consumer cards, issuers can't raise that interest rate on existing balances unless the cardholder is at least 60 days late with a payment. But on small-business cards, issuers can change it whenever they'd like, according to Odysseas Papadimitriou, chief executive at CardHub.com, a credit-card comparison website.If you are paying two different interest rates—one on purchases and another on a balance—the monthly payment that is above the minimum required could be applied to the balance with the lower interest rate first, according to Bill Hardekopf, chief executive at LowCards.com, which tracks credit card offers, including those aimed specifically at small-business owners. In contrast, personal credit cards must apply the payment to the higher rate first to lessen the costs for the borrower. Bank of America chose to apply all the major provisions of this law to its small-business credit cards and Capital One has to a lesser extent. But most major lenders haven't, according to an April 2011 study from CardHub.com.You also have to consider how small-business credit cards will impact your credit score. Even though they're pegged to small-business spending rather than personal spending, in almost all cases, you, the business owner who signs up for a business card, are personally liable. (The lenders say the small business is also held responsible, though in most cases that boils down to the owner.) Typically, if a small-business cardholder stops paying, lenders will inform the credit bureaus. That could lead to a lower credit score for you, which would likely make getting a mortgage or other loan for personal purposes harder. Despite the risks, some experts say small-business credit cards are among the safer financing options for small-business owners right now. Signing up for small-business loans is still risky: Most loans require collateral that the lender can collect on if the loan is not repaid, such as the borrower's home equity or his business's machinery, says Jeanne Hulit, acting associate administrator for capital access at the Small Business Administration.In contrast, credit cards are unsecured debt, which means small-business owners don't have to put their home or other belongings at risk, she says. One strategy may be to use a mixture of plastic. You can use the small-business credit cards for purchases that will be paid in full each month. That way, you can potentially avoid the risks while earning more rewards.The average interest rate on personal credit cards is 12.4%, according to the Federal Reserve. But the average rate small-business cardholders pay is 15%, according to the NSBA. Doris McMillon, owner of McMillon Communications, a Fort Washington, Md., executive-coaching-services provider, says she was paying her small-business credit card on time and sending more than minimum required payment when her interest rate skyrocketed to 23% from 9% two years ago. Since then, Ms. McMillon says she's been using her personal credit cards for the business-related purchases she can't pay off in full right away. And she's been using small- business credit cards for purchases she can pay off in full each month while taking advantage of the rewards.Rewards on small-business credit cards are relatively generous. In October, Capital One introduced six new small-business credit cards. American Express and Bank of America launched a total of five credit cards, over a period of six months last year. Each has its own rewards programs.Chase recently increased the rewards it doles out on three of its existing small-business cards. Some credit cards also provide free access to budgeting tools. In November, Chase launched an online invoicing and cash management tool for its small-business cardholders, which it says can help them track billing statements and payments made by their clients. Card issuers say they're eager to provide small-business owners with purchasing power. And as the economy improves, they expect more small businesses will be created, and they'd like to sign up those new entrepreneurs as customers. Longer term, these small-business credit cards can help small businesses to establish a credit history with one of the small-business credit bureaus, says John Ulzheimer, president of consumer education at SmartCredit.com, a credit-monitoring site. That might make getting approved for financing easier and cheaper. Ms. Andriotis is a reporter for SmartMoney.com. Write annamaria.andriotis@dowjones.com. ...

Debate: Do Big Banks Lend Enough to Small Business?

Tue, 13 Dec 2011 14:55:56 EST

Are big banks lending enough to small businesses?The Journal invited two guest contributors -- Ami Kassar, chief executive of MultiFunding LLC small-business loan advisors, and Marc Bernstein, executive vice president, Wells Fargo small business segment -- to share their opposing views on the subject. Readers, we invite your comments. Why Big Banks Don't Lend Enough to Small Firms By Ami Kassar, chief executive of MultiFunding LLC small-business loan advisors As a country we must do whatever is necessary to get capital into the hands of small business owners and entrepreneurs. Otherwise, we will never crack the code to the stubborn unemployment that is gripping our economy.America's big banks should be ashamed of their lending record to small businesses. The top 5 big banks in our country hold 40% of all domestic deposits ($2.965 trillion), yet only make 16%, ($97.3 billion) of all the small business loans in America, according to data reported by the FDIC. This record is particularly disappointing after these banks took in $151.59 billion of TARP money.We get our data on small business loans from quarterly FDIC call reports, where each bank self-reports its active loans to small businesses with balances of $1 million or less. We think this is an excellent indicator of lending to truly small businesses. And it tells a very different story than the information promoted by the big banks. They define small business loans as loans to companies with revenue of $20 million or less, which could include companies that have hundreds of employees.But, according to the FDIC data, as of June 2011 all of the banks in the country held just over $605 billion of small business loans, compared to just over $681 billion held at the beginning of the recession in June 2007. In a recent study published by my company, MultiFunding LLC, we dug into that data and found that the bigger banks shed $93 billion of small business loans during this period, while the smaller banks increased their small business loan balances by $17 billion. Somehow, the smaller banks have managed to find demand for small business loans while the larger banks have reduced their exposure by almost 25%, according to our study.Despite these facts, the big banks like to promote their small business lending records for political and marketing reasons. They use marketing to draw small business owners into their branches but the business owners are then met with slow, cumbersome, and bureaucratic loan processes that consume time, and simply don't work.Because of their size and complexity, most big banks have layers of decision makers in their loan processes. Many times their employees who are involved in the loan process are in different cities and have never even met. This forces an assembly line approach to small business loans.Unfortunately, the big bank bureaucracy causes many small business loans to blow up, particularly in today's economy where loans are complicated and require thought and creativity. Every loan is different, and requires careful consideration. After all, people's livelihoods, dreams and jobs are often at stake. Many times, months into the process of applying for a loan at a big bank, small business owners throw up their hands and give up. They either end up with a very expensive private money loan or they put their expansion plans on hold.The loan process creates great apprehension in the small business community. In another study we recently commissioned, we discovered that 73% of small business owners who need a loan don't bother to apply for one. Some of them are simply afraid of rejection. What is particularly disturbing is that each participant in the study who didn't receive full funding claimed they would hire an average of eight employees if they secured funding. Before choosing a bank to apply for a loan, a small business owner deserves to know the true lending record of that bank. Each bank should have an objective grade for small business lending, and be required to display it on their front window. This would be similar to how many cities require restaurants to show their grade for cleanliness. At MultiFunding, we've actually given every FDIC regulated bank in America a grade for its small business lending, based on the ratio of its small business loans to its domestic deposits. Of the 6,800 banks in our analysis, the good news is that 5,600 of them (82%) either got an A or a B grade. Unfortunately, 70 of the 100 largest banks in America got a grade of C or below. Thirty banks got an F. Small business owners might want to avoid wasting their time applying for loans at these banks. (Mr. Kassar's firm helps small businesses find loans and at times accepts fees from lenders that agree to make loans.) *** Why Big Banks Are Lending Enough to Small Firms By Marc Bernstein, executive vice president, Wells Fargo small business segment If you ask small business owners, very few will mention credit as one of their top three concerns. In a survey released in November by the National Federation of Independent Business of its small-business membership, only 4% cited credit availability as their top concern, and only 9% said that not all of their credit needs were satisfied. Wells Fargo and Gallup together conduct a quarterly survey more representative of smaller businesses. In October, 34% responded that it was "very difficult" or "somewhat difficult" getting credit.Some people might ask: Isn't that a problem when one in three businesses reports some difficulty in getting credit? I think not. The Wells Fargo/Gallup survey includes businesses with sharply falling or very little revenue; those with poor credit or too much debt already; even those that recently defaulted on a loan. We've all seen what happened with mortgages when just about everyone who wanted a loan was able to get one, often from a lender no longer in existence today. It wasn't good — and sometimes even tragic — for the borrowers, for their communities, and for the shortsighted lenders making questionable loans. Granting a loan without reasonable confidence about how you expect to be repaid is a lose-lose proposition. I make small business loans for a living and, like anyone in business, I want to do as much business as I can — which in my case means making as many loans as possible. I expect to take risks. Yet some applicants seem very likely to have difficulty repaying their loan. We help those businesses by advising them on how to improve their position and be more likely to get credit in the future. Certainly it was easier to get a loan five years ago. Between 2005-2007, the Wells Fargo/Gallup survey reported about one in eight small businesses had difficulty getting credit. However, those were the peak years of the real estate bubble, with almost five times as many new homes sold each month and households extracting $2.5 trillion from their home equity to spend. Millions of small businesses benefited from the inflated real estate sector or by enlarged consumer spending. Compare the 2005-2007 period to today. Revenues in many industries have still not fully recovered from the Great Recession. In the NFIB survey, 26% of small businesses ranked weak sales as their #1 problem. The Federal Reserve estimates that small business debt quadrupled between the mid-1990s and 2008 and has declined only slightly since; many businesses are struggling with too much debt. Business bankruptcies remain elevated. But even in this environment, the overwhelming majority of small businesses don't report difficulty getting a loan.Wells Fargo is saying "yes" to all the small business loan applications we possibly can, often taking a "second look" at applications initially declined. We've grown our SBA lending team over the last two years and, for the 2011 federal fiscal year, approved a record $1.2 billion in SBA 7(a) loans. All new loans we made to businesses with revenues under $20 million reached $10.3 billion in the first three quarters of 2011, up 8% over the same period last year. That's not small change. We know that making loans responsibly is the right thing to do for our customers, for the communities we serve, and for our shareholders. I know my counterparts at competing large institutions also work to approve as many loans as they can. According to government data, the top 20 lenders were responsible for 84% of the small business loans made in 2010.Are there good, solid small businesses that have had their credit application inappropriately declined? Of course there are; there are numerous lenders and there will always be some poor decisions by loan officers or lending institutions that are excessively cautious or risk averse in response to the current climate of economic uncertainty. But during these difficult times, more so than ever, Wells Fargo and many other banks are trying to stretch in whatever ways we prudently can to put credit into the hands of small business owners. We know we have an important role to play in helping restore the health and vibrancy of the national economy and we are committed to doing all that we can. (Mr. Bernstein is an officer of Wells Fargo and thus, he has a financial interest in the bank.) ...

Whitening Upstarts Make Dentists Gnash Teeth

Tue, 15 Nov 2011 17:25:48 EST

By Jennifer Levitz Waitress Aimee Gharis faces the public constantly, but she used to be less than confident about her smile.So when a local hair salon in Hamden, Conn., began offering teeth whitening for $99—far less than dentists charge—she bit."I didn't want to look like a crazy person with super white teeth you can see in the dark, but I wanted to look like I don't smoke, or drink coffee or red wine," says Ms. Gharis, who was thrilled with the results.But not everyone is so chipper. Dentists are battling with spas, tanning salons and other nondental peddlers of pearly whites from North Carolina to New Jersey and, now, Connecticut over who should be permitted to meet the needs of a nation clamoring for an anchorman's smile.Four out of five dentists, it seems, believe they should handle teeth whitening. But nondentists argue that the tooth doctors are just trying to protect their turf. As relations between the two sides have decayed, some Connecticut "teeth-whitening entrepreneurs" have begun a legal campaign to overturn a rule passed by the state's dental commission in June that bars nondentists from offering the service. Dingy teeth were once relatively common. But after a 1989 scientific article touted the use of low levels of hydrogen peroxide, pressed against teeth, to improve smiles, companies began producing whitening products and dentists began hawking them.Entrepreneurs jumped in quickly. The Food and Drug Administration classifies teeth-whitening products as cosmetics, and drugstores were soon selling strips that consumers could paste on at night while watching TV. Promising a faster fix, dentists, salons and mall kiosks began offering on-site treatments. Those customers typically bite down on a tray of goopy whitening agent and sit in front of LED lights that are said to enhance the transformation process.Dentists generally charge between $300 and $700 for a whitening session, which isn't normally covered by insurance, while nondentists charge between $100 and $150, according to the Federal Trade Commission.In Connecticut, the teeth gnashing began in June. That's when the Connecticut State Dental Commission, which then included seven dental professionals and one member of the public, passed "Declaratory Ruling: Teeth Whitening." Under the measure, only licensed dentists would be able to offer on-site teeth whitening, and in Connecticut, violators of state dental laws can get jail time.The ruling wasn't prompted by any "specific reports of harm," but "we want to make sure that whatever is applied is applied safely," says Jeanne Strathearn, the board's chairman and a dentist who offers whitening. Teeth whitening can cause gum or tooth sensitivity, she says. In addition, tooth discoloration can be caused by underlying medical conditions that dentists are better able to spot.But the Institute for Justice, an Arlington, Va., libertarian public-interest law firm, is representing nondental teeth whiteners in Connecticut. Paul Sherman, an attorney with the group, argues that the dentists are "using government power to stifle honest competition." Lisa Martinez, a 29-year-old mother of two, opened her business, CT White Smile, in the Crystal Mall in Waterford, Conn., in 2008 but shut it in June after the dental board's ruling. "I don't think it's fair at all," she says. "I feel like everyone is an adult and can make a conscious decision after reading over risks involved." Dentists in North Carolina and New Jersey have also tried to ban nondental whitening. In North Carolina, the state's dental board accused nondentists of engaging in unlicensed stain removal. The board dispatched a camera-toting investigator and sent out a flurry of cease-and-desist orders, scaring off proprietors like Whitening on Wheels and SheShe Studio, according to the board's "closed investigative files," which were submitted to the FTC after the agency sued the dental board last year.In July, the FTC ruled that the dental board engaged in "anticompetitive conduct" and ordered it to revoke its orders to nondentists. The dental board is appealing the ruling, says Noel Allen, the dental board's attorney. He argues that states' rights are at issue, specifically "whether states can continue to protect their citizens" through licensing boards.Meanwhile, in New Jersey, whitening woes have led to "trying times" for tanning salons, says James Oliver, the chief executive of the Beach Bum Tanning & Airbrush chain, which offers $69 teeth-whitening sessions and features its most famous customer, "Jersey Shore" star Snooki, in a TV commercial.The New Jersey Dental Association sued Beach Bum in a New Jersey superior court last year, alleging unfair competition and accusing the tanning chain of removing stains, which the association said amounted to practicing dentistry illegally.Mr. Oliver said his stores merely hand customers a whitening tray. "We don't even put our hands in people's mouths," he said.In April, the court ruled for Beach Bum. The association is appealing.Still, dentists have been able to prevail in some areas. Alabama's supreme court blocked a hair salon from selling a teeth-whitening product in 2009, ruling that because the gel was applied in the store it constituted dentistry. Write to Jennifer Levitz at jennifer.levitz@wsj.com ...

SBA Changes: A Deeper Look

Fri, 13 Jan 2012 17:40:24 EST

By Emily Maltby President Obama announced Friday that he is elevating the head of the U.S. Small Business Administration, Karen Mills, to become a Cabinet member. The move, he said, is intended to "make sure that small business owners have their own seat at the table."But as Ms. Mills assumes her new status, the agency she runs is poised to undergo a massive merger—assuming Mr. Obama can entice congress to jump on board with his plan to consolidate six government departments and agencies that focus on business and trade into one. Here's a look at what the changes mean for small business owners: Q: Does this affect my ability to get an SBA loan? A: No. Not currently. SBA loan programs will continue to run as usual. And there isn't any indication that those programs would be impacted in a merger, should one happen. Q: What does the SBA do anyway? A: The SBA was officially established in 1953 created from earlier – and since abolished – agencies that provided loans to small firms during the Great Depression and World War II. Its function is to aid, counsel, assist and protect the interests of small businesses.It collaborates with other federal offices to ensure government contract opportunities are available to small businesses. It also provides free counseling and technical assistance at centers around the country. The SBA's Office of Advocacy conducts research on U.S. small businesses in order to review and evaluate congressional legislation. The SBA also operates programs that make risky small-business loans more enticing to lenders, by guaranteeing a portion of each loan against default. Q: Has the SBA been effective? A: Critics have slammed the SBA for, among other grievances, mishandling certain loan programs and perpetually falling short of awarding 23% of federal government contracts to small firms, a statutory goal.Thousands of business owners across the country have taken advantage of the SBA counseling and mentorship services. But some gripe that the advice isn't current, and seems dated in a digital era. The SBA-backed loan programs have been a bright spot in the gloomy lending environment (see October 2011 story), giving thousands of small-business owners such as Andrea Piatt access to capital they need to grow and hire. She founded Commonwealth Psychology Associates LLC, a behavioral health and counseling company in Boston in 2004. The private practice now has 40 employees at three locations. She attributes the growth in large part to the SBA loans she got over the years. A record $30.5 billion in these loans were extended to more than 60,000 businesses in the government's 2011 fiscal year, ending September 30.Still, SBA loans account for only a small fraction of overall small-business lending. So SBA loans haven't been able to deliver broad relief to business owners amid the credit crunch. Q: Why is Mr. Obama doing this? A: The announcement follows a pledge he made a year ago to streamline the government. Mr. Obama wrote an opinion piece in the Wall Street Journal in January 2011, calling on agencies to review rules and regulations that lead to bureaucratic headaches and stifle job creation. Several days later, in his State of the Union speech, the president pointed out major inefficiencies in the government. "There are 12 different agencies that deal with exports," he said. "There are at least five different agencies that deal with housing policy."If given the authority from Congress, Mr. Obama says he would merge the Department of Commerce's core business functions with the Small Business Administration, the Office of the U.S. Trade Representative, the Export-Import Bank, the Overseas Private Investment Corporation, and the Trade and Development Agency. The new agency would replace Commerce.Although the larger reorganization proposal needs congressional approval, elevating Ms. Mills to become a Cabinet member is one step he can take on his own. Under his plan, the SBA administration would no longer be in the Cabinet once the reorganization is complete. Write to Emily Maltby at emily.maltby@wsj.com ...

Michael Kors Prices IPO

Thu, 15 Dec 2011 10:09:48 EST

By Lynn Cowan Apparel designer Michael Kors Holdings Ltd. commanded a higher price tag and sold more shares than expected in its initial public offering Wednesday night. The company priced 47.2 million shares—5.5 million more than originally planned—of its stock at $20 apiece, above its expected $17 to $19 range. It begins trading Thursday on the New York Stock Exchange under the symbol KORS. The 30-year-old brand, headquartered in Hong Kong, sells everything from clothing to footwear through high-end department stores such as Saks Fifth Avenue and Harrods and through its own company-operated outlets. In fiscal 2011, which ended April 2, total revenue grew 58% to $803 million and global comparable-store sales increased 48% compared to fiscal 2010; in the six months that ended Oct. 1, total revenue rose 61% to $549 million and comparable-store sales grew 42%. Net income during fiscal 2011 rose 85% to $73 million compared to fiscal 2010, and in the six months that ended Oct. 1, it doubled to $65 million. The company has experienced positive comparable store sales growth in every quarter of the last five fiscal years. All the shares sold in the offering came from insiders, so none of the proceeds will benefit the company. The biggest seller was Sportswear Holdings Ltd., a private-equity company formed by Silas K.F. Chou and Lawrence S. Stroll; post-IPO, Sportswear holdings continues to own 38% of Michael Kors. Sellers also included management, with Chairman and Chief Executive John D. Idol and Michael Kors, who is the company's chief creative officer, selling a portion of their stakes. If an over-allotment option of additional shares are sold by the company's underwriters, the IPO will end up raising slightly more than $1 billion. Morgan Stanley, J.P. Morgan Chase & Co. and Goldman Sachs Group Inc. managed Michael Kors's offering. Write to Lynn Cowan at lynn.cowan@dowjones.com ...

Years of Growth at Risk for N.J. Wine

Wed, 04 Jan 2012 16:29:08 EST

By Heather Haddon RINGOES, N.J.—If the concept of a New Jersey wine renaissance sounds absurd, the joke fades upon arriving in this rural hamlet of rolling hills dotted by wintering grape vines. Unionville Vineyards—about 60 miles southwest of Manhattan—produces 20 whites and reds tasty enough to have won nine Beverage Testing Institute awards in 2011, including an international Bordeaux contest. "There is no question good wine grapes can and are being grown in New Jersey," said Orley Ashenfelter, an economics professor at Princeton University and president of the American Association of Wine Economists.But just as New Jersey's boutique vineyards come of age, they are also on the verge of shriveling up, wine makers and economists say. And a fierce battle is shaping up in Trenton over the industry's future.The state hasn't issued new licenses to wineries for one year as lawmakers try to address a 2010 federal court ruling that struck down as unconstitutional a New Jersey law that made it illegal for out-of-state producers to run tasting rooms. If lawmakers don't address the court's concerns by March, the state's few dozen tasting rooms could be forced to close.Powerful state Senate President Stephen Sweeney has introduced legislation that would, for the first time, allow both New Jersey and out-of-state producers to operate tasting rooms that sell directly to customers. It would also, for the first time, let New Jersey vineyards ship directly to consumers and let Garden State wine lovers buy from vineyards in the 38 states that allow it, including New York and Connecticut. Vineyards would pay up to $1,000 for the shipping license and could produce up to 250,000 gallons of wine a year. The bill would also help at least 16 new producers who have been issued temporary licenses allowing the harvesting of grapes and bottling of wine. But those producers can't sell their products."It is extremely disappointing and frustrating to be held back," said Mike Beneduce, a fifth generation winemaker who can't get a license to sell the wine made at his new $750,000 winery in Pittstown in northwestern New Jersey. "We are spread as thin as we can possibly be."State liquor retailers have campaigned hard against the bill, arguing that it would hurt small liquor stores and allow California wines to inundate the New Jersey market. "The Senate president should be running for legislator of the year in California right now," said Paul Santelle, president of the New Jersey Liquor Store Alliance and the owner of liquor store in Perth Amboy.New Jersey's wine sector had been growing. The state was home to 192 grape farms and 79 dedicated vineyards in 2007, according to the most recent census conducted by the U.S. Department of Agriculture. That's up from 182 grape farms and 60 vineyards in 2002. At the same time, the amount of land devoted to grapes nearly doubled, to 1,043 in 2007. Vineyard production was valued at $4.7 million in 2007, not far behind potato and apple crops. The Garden State had long produced wine on a small scale, but after prohibition's repeal in 1933, the state permitted one vineyard per one million people. The law was changed in 1981, allowing for small wineries with tasting rooms. The quality of New Jersey wines has improved as trained vintners have supplanted the hobbyists as the main producers, industry experts say. Unionville's winemaker was trained in Napa Valley. The tasting rooms have brought in tourism dollars and lent New Jersey a splash of sophistication. Wines from the Tomasello Winery, the oldest in the state, are served in Carmine's in New York, along with the Borgata Hotel and the Palm in Atlantic City."Having good wines promotes New Jersey from a public-relations standpoint," said Assemblyman Jon Bramnick, a Union County Republican. "If we have the New Jersey tomato, why can't we have the New Jersey grape?"Tom Wenner, 52 years old, was impressed as he sipped a pinot noir at Unionville Vineyards recently. The printing company administrator from North Carolina has visited the winery three times while visiting friends. "We're not experts, but I was surprised that they were so good," Mr. Wenner said. New Jersey's grape-growing area extends through the state's western and southern reaches, and its climate and sandy soil are comparable to the Bordeaux region of France, said Daniel Ward of the Rutgers Agricultural Research and Extension Center.Rutgers researchers have estimated that more than 736,000 acres of land in New Jersey could be cultivated for wine grapes. In Gloucester and Salem counties, more than a third of the total land area is suitable for vineyards. "It's tremendous. That's the bottom line," Mr. Ward said. New Jersey's wine industry has grown slower than New York's, where 1,400 vineyards do $420 million in sales a year, according to the New York State Liquor Authority. New York has allowed for the direct shipping of wine to customers since 2005.Currently, many of New Jersey's small wineries produce too little wine for a wholesale distribution deal, which typically requires a vintner make 125,000 gallons a year, said John Hawkins, a co-owner of Unionville Vineyards. Of the 13,000 gallons of wine he bottled in 2011, 80% was sold directly through his tasting room, with the rest purchased by local restaurants and liquor stores, he said. With the Third U.S. Circuit Court of Appeals deadline looming in March, Mr. Hawkins and other vintners have lined up behind Mr. Sweeney's bill.The Senate passed Mr. Sweeney's bill 23-13 in December, but it has stalled in the Assembly. Small vineyards are mounting a desperate campaign to get the Assembly to act before the session ends on Jan. 10. An Assembly committee will have a hearing Thursday. "It's David versus Goliath and I'm the Senate president," said Mr. Sweeney, who has several vineyards in his district. Gov. Chris Christie hasn't taken a position on the pending bill, as is his practice, a spokesman said. Mr. Hawkins, a former New York City restaurateur, fears he would go out of business if his tasting room closed. "We're just victims here," he said. Write to Heather Haddon at heather.haddon@wsj.com ...

Using Social Gaming in Health Care

Wed, 28 Dec 2011 23:23:09 EST

By Timothy Hay A group of technology start-ups is taking its cue from social gaming, in hopes of relieving companies, doctors and patients of some of the pain involved in managing health care. The new businesses, staffed mainly by health-industry veterans, have adapted common social-gaming features to help companies motivate their employees to get fitter or to encourage doctors to keep in touch with their colleagues and patients online. One of the start-ups, Keas Inc., whose clients include Pfizer Inc. and Novartis Inc., offers a gaming platform that allows groups of employees to compete with one another at exercising, eating healthily and taking better care of themselves. San Francisco-based Keas originally aimed to offer consumers alerts, messaging and personalized information to help them lose weight and adopt healthier habits, but that plan didn't work out. "We tried to give people constant feedback about their health, but for a lot of people, more bad news and negative feedback just didn't work," said Adam Bosworth, the company's chief technology officer. "If you keep giving someone negative feedback, they will eventually change the channel to the game channel. One day we decided to become that game channel."Keas now sets up contests in which co-workers compete by walking to the office more often or eating more vegetables. It says it has 80,000 active users, more than $16 million in venture capital and a growing list of customers. Quest Diagnostics Inc. said more than 80% of its employees who participated in an employee-wellness pilot program with Keas reported improved health.Other start-ups are pushing doctors to step up their game with features found in social games like Zynga Inc.'s Farmville or on social-networking sites like Facebook or Foursquare. HealthTap Inc., of Palo Alto, Calif., runs a website that doctors can use to build an online profile, gaining public exposure by answering health-related questions from consumers. The more questions a doctor answers, the more points the doctor wins and the more prominently he is featured on the site, potentially attracting more patients. Patients, meanwhile, can sign up as followers of a particular doctor or of other patients on the site and can indicate if they like or dislike various bits of content. HealthTap says more than 6,000 doctors, as well as institutions including Harvard Medical School and the Cleveland Clinic, are actively answering users' questions on its site."We're not building a game here, just adding subtle game mechanics to make it more fun for doctors," said HealthTap Chief Executive Ron Gutman. Audax Health Inc., a Washington-based start-up with $16.5 million in funding, said it plans to offer a gaming platform designed to enable large insurers to offer incentives to their members—such as reduced premiums—in return for adopting healthier habits. Doximity Inc. and WellnessFX Inc., two start-ups that have gained some traction among health-care providers, are in the process of incorporating gaming features.Doximity, based in San Mateo, Calif., provides a secure messaging platform that doctors can use to answer treatment questions from colleagues, and to become acquainted with other doctors, to whom they can refer patients. Because of strict privacy laws, doctors often discuss cases by fax, since regular email isn't considered secure enough.Chief Executive Jeff Tangney said Doximity has grown more quickly over the past several months since it added some game-like features. By expanding their network of friends and followers on Doximity, a doctors can earn a "Top Doctor" badge on the website, a potential magnet for referrals. Doximity soon plans to let users "follow" one another, he said, as they can on other platforms.San Francisco-based WellnessFX, which analyzes blood and urine samples, also provides a secure online forum in which doctors can confer with their patients.WellnessFX is considering adding game features to the mix to keep doctors and patients engaged, according to Chief Executive Jim Kean. "We're working on badges and leaderboards," he said. ...

December Job Growth: A Tale of Two Estimates

Fri, 06 Jan 2012 09:50:52 EST

By Angus Loten Many small employers found it difficult to find qualified job applicants in December, according to the latest survey data from the National Federation of Independent Business. The Washington, D.C., lobby group said Thursday that small businesses shed an average of 0.15 workers last month, based on preliminary data from a survey of 735 small-business owners nationwide.Job growth at some small businesses was offset by steeper cuts at others. But a wide majority of firms made no staffing changes at all, the survey found.By contrast, ADP on Thursday reported that small employers – those with less than 50 workers – added 148,000 new jobs in December, up from 109,000 the previous month. The ADP estimates are based on payroll data. Click here for a look at the conflicting data sets on the Wall Street Journal's MarketBeat blog.According to the NFIB, more than a third of the employers it surveyed reported finding few or no qualified applicants for open positions.At the very least, hiring plans appear to be pointing in the right direction, according to William Dunkelberg, the group's chief economist. In the past seven months, job cuts have fallen to their lowest levels in four years, he says. Initial claims for unemployment have dropped below 375,000 – much closer to levels during periods of full employment, he adds. As of December, a net 6% of small employers were planning to hire new workers in the months ahead, down one point from the previous month, yet still one of the strongest readings since September 2008, the group reported.Small firms employ about half of all private sector employees, and have generated up to 65% of net new jobs over the past 17 years, according to the U.S. Small Business Administration.Separately, TD Bank reported Thursday that 20% of 300 small-business polled expect to hire at least one new worker in 2012. As much as 61% of survey respondents said they met or exceeded revenue projections in the last three months of 2011, and 74% expect to do the same in the year ahead. Write to Angus Loten at angus.loten@wsj.com ...

Blue Bottle Aims to Blend Slow Coffee, Fast Growth

Wed, 01 Feb 2012 18:20:22 EST

By Ian Sherr In an era of fast-food cappuccinos and drive-through coffee shops, Blue Bottle Coffee Co. is banking on slowing things down to help itself grow.Since the Oakland-based coffee company's founding in 2002, its revenue has jumped an average of about 50% annually to between $15 million and $20 million last year, according to James Freeman, founder and chief executive. As the company continues to expand—with plans to enter Manhattan in the next month of so—Blue Bottle could have more than 200 employees by the end of this year, up from about 70 two years ago. Blue Bottle's concept is slow coffee, an unusual offering in today's coffee-retail industry. Brewing a cup of Blue Bottle coffee is a laborious process that can take up to five minutes, including the time it takes a barista to grind the beans and pour the grounds into a filter suspended above a cup before water is added on top. The process takes substantially more time than it does to get a typical cup of coffee from shops like Starbucks, raising questions about how many customers would be willing to wait for a cup of joe from Blue Bottle and whether they can taste the difference.But so far, this slow style—which Mr. Freeman says has become popular in Britain in recent years—has helped Blue Bottle and rival Bay Area practitioners of the art, like Ritual Coffee Roasters, develop a devoted customer base."It's really excellent" coffee, says Jayn Pettingill, a local 48-year-old musician and music librarian. She says she buys only Blue Bottle beans for coffee at home because the company delivers the most consistent good taste she can find. Still, Blue Bottle faces the usual limitations of an artisan food business. Its coffee is pricey, with a standard 12-ounce cup costing about a dollar more than the roughly $1.65 charged at Starbucks.Alexander Slagle, an analyst at Jefferies & Co., says customers who would switch to higher-end coffee from Starbucks-type shops are mostly found in cities like San Francisco, New York and Chicago. "I don't expect to go to other markets very quickly," he says.This is borne out by Starbucks's own version of slow coffee, which it makes with a machine it calls Clover. In the four years since Starbucks acquired the machine's technology, it has rolled out the device to more than 200 of its stores. "It's about being deliberate about where we offer the Clover brewing system," said Marianne Duong, a Starbucks spokeswoman, who added that a 12-ounce cup starts at $2.95, a little more than Blue Bottle's price. "We want to make sure it's in the right store, and that customers are asking for it."Mr. Freeman, a native of Northern California who began Blue Bottle after he "washed out" of playing the clarinet in local symphonies, began serving his first cups of slow coffee at a local farmers' market in 2002, relying on a small batch roaster for his beans. Blue Bottle's name is an homage to Jerzy Franciszek Kulczycki, who became a hero in Vienna in the 17th century for his role in fending off an invasion by the Ottoman Empire. He used the money he was given for helping save Vienna to open a coffee shop whose name roughly translates to "House to the Blue Bottle."Mr. Freeman, now 45 years old, spent nearly $40,000 to start his business in 2002; lines at the farmers' market began forming a couple of years later. "One day, I looked up and there were 15 people in line," says Mr. Freeman, who has made organic bean blends sourced from such far-flung places as Sumatra, Indonesia, Panama and Hawaii. "It's been like that ever since."Blue Bottle opened its first retail location, a kiosk in San Francisco's Hayes Valley, in 2005. The company has now opened a total of seven cafes and kiosks around San Francisco, Oakland and Brooklyn, N.Y. In 2008, the company took on an equity investment of more than $1 million to help fuel its growth. The company has been striking wholesale agreements with places like cafes and bookstores, and now has between 150 and 200 such deals, roughly double from two years ago. Blue Bottle rigorously trains its new recruits. New employees go through two to three weeks of training to learn how to expertly make espresso, pour coffee and mix the right amount of milk with their drink. Then the java rookies work and shadow employees on the job before performing in front of a "jury" of Blue Bottle employees to ensure they understand how to properly make and serve coffee.Baristas at partner cafes go through training with Blue Bottle as well. Sarah Rosedale, a manager at Readers Café & Bookstore in San Francisco's Fort Mason Center, says Blue Bottle extensively trained her employees to serve coffee the right way. In the two years since the nonprofit bookstore opened its cafe, coffee has grown to represent three-quarters of its sales, with some of the proceeds supporting local libraries."It's the artisan coffee in demand," Ms. Rosedale says.Mr. Freeman says the company is also now developing a bottled coffee drink that can be sold in grocery stores. Blue Bottle has been testing it in various locations but is still tweaking the recipe and hasn't set a target date for an official launch. "Our first priority is to make a delicious product," he says. Write to Ian Sherr at ian.sherr@dowjones.com ...

Opposing Views: Voices on Health-Care Reform

Tue, 15 Nov 2011 13:47:46 EST

How will the coming health-care reform changes impact small businesses and the self-employed? The Journal invited two entrepreneurs -- Eric Ries, author of The Lean Startup, and Rose Corona, owner of a Temecula, Calif., ranch and store -- to share their opposing views on the health-care law signed last year by President Obama. Several changes under the law will go into effect in 2014. Why the New Health-Care Law May Encourage Entrepreneurship By Eric Ries, entrepreneur-in-residence at Harvard Business School and author of "The Lean Startup" (Crown Business, 2011). You shouldn't have to put your family's health at risk to start a company. Today, the individual and small group health insurance market is actively inhibiting the creation of start-ups. Those barriers will be gone in 2014 -- unless the Patient Protection and Affordable Care Act (PPACA) is struck down or repealed. If that happens, it will be a sad day for America's entrepreneurs. Here's why:As an entrepreneur, I knew that if my company failed, I could always try again. So I often felt that the only real risk of true financial ruin came from the possibility of a serious illness that either exceeded my insurance plans lifetime limits, or was not covered due to rescission.I overcame these fears because I began my start-up journey when I was young, healthy, and had no dependents. But limiting high-growth entrepreneurship to the young is counterproductive. Research from the Kauffman Foundation reveals that the median age of successful entrepreneurs is close to forty. Not only are older entrepreneurs more active than most people think, they are also a better bet – they tend to be more successful overall. Yet, these are precisely the entrepreneurs most likely to have dependents that rely on them for access to health insurance. These entrepreneurs are least able to risk losing that coverage.This isn't a purely hypothetical worry. Data from a study by the Kauffman-RAND Institute for Entrepreneurship Public Policy shows clearly that rates of entrepreneurship shoot up just after potential founders become eligible for Medicare.In addition, new initiatives like Healthcare.gov, created by the new law and run like a lean start-up itself, give everyone detailed information about the insurance plans that are available to them. The biggest start-up successes -- from Henry Ford to Bill Gates to Mark Zuckerberg -- were pioneered by people from solidly middle-class backgrounds. These founders were not wealthy when they began. They were hungry for success, but knew they had a solid support system to fall back on if they failed. They took financial risks, but at no time were they putting their family's health or welfare in jeopardy. Most start-up companies fail and it is smart public policy to help entrepreneurs increase their odds of succeeding. But, the biggest loss to our economy is not all the start-ups that didn't make it: It's the ones that might have been created but weren't. In order to foster more entrepreneurship, we need policies that reduce the cost of failure so that more people will be able to become start-up founders. Health care reform is part of that solution.Here in Silicon Valley, I have taken part in hundreds of conversations trying to convince people to dive in and become entrepreneurs. All too often, innovators with good, safe, jobs are unwilling to put their family's access to health care at risk by walking away from company-backed medical insurance.As part of a large corporate pool, they generally cannot be denied coverage for a pre-existing condition, and neither can their children. But on their own, they would have no similar protections.Everyone knows the stories of the how difficult it is to buy insurance as an individual or small, brand new company. Even if you could afford it, you had to worry that insurers might deny you based on even the most trivial pre-existing condition -- or that they might find a loophole to get out covering you if you got sick. So, only by being part of a large company could someone ensure that his or her family would have access to quality health care. The PPACA has many provisions that promote entrepreneurship by fixing these problems. When it is fully implemented in 2014, individuals will have much greater access to insurance plans via exchanges; insurance companies cannot deny coverage due to pre-existing conditions; rescissions will be banned; and lifetime policy limits will be history.Several of these protections have already been phased into law. For example, children cannot be denied coverage because of a pre-existing condition. That addresses a major worry of entrepreneurial parents.The biggest obstacle to taking the start-up plunge is fear.*** Why the Health Care Law May Be a Harmful Prescription for Entrepreneurs By Rose Corona, owner of Big Horse Feed and Mercantile, and Corona Ranch in Temecula, Calif. ObamaCare is a disaster for small businesses -- an epic, devastating act of well-intentioned, wanton destruction. As this rambling, vague and expensive law is implemented the full impact of its requirements will cripple a struggling economy. Small businesses, such as mine, will feel the full brunt. At my family ranch and store in Temecula, Calif., we don't provide insurance at this point (other than workers' compensation). I had looked into health insurance before the ObamaCare mess was started. Once I could see this monster of a mandate coming down the road, I put the brakes on. I didn't think it fair to offer my 30 employees something, and then yank it out from under them if we couldn't afford it. As I told them, I would like to offer health benefits. But if offering them bankrupts the company, then no one has a job, let alone benefits. There is another approach…I'm sure many small businesses will keep their work forces under the 50 person minimum requirement in order to remain exempt. So much for more jobs.There is going to be inordinate cost impact on small business, under the new health care law. Some sources say health care premiums may rise by 7%. That's a tough hit for most businesses. Many of my suppliers and manufacturers are small-to-medium size and they have paid benefits to their employees. Do they raise their prices to me to continue the health care for their employees? Or do they cut the benefits for their employees in order to keep their prices to me competitive? It is a Catch-22. Of course, we are told that 35% of health benefits may be tax deductible. However, few businesses will qualify for that deduction -- some say it will be only about a third. Those who qualify can lose even that after six years. Also, there will be health-insurance fees on insurance companies that are not self-insured plans. That cost could total $8 billion dollars (in effect a new tax) that will be passed on to small businesses. The Federal Policy Group found that 87% of small businesses use these plans. Ending the threat of ObamaCare would give small business some necessary breathing room and build needed confidence. Confidence is a real key for business owners in this economy. Most, if not all of this plan should be scrapped. It isn't as if there aren't any alternatives to addressing the health-care issues we face or handling them in a more effective manner. There's an existing bill -- H.R. 3000 -- that has been introduced by Dr. Tom Price of Georgia that addresses most all of the key issues that concern us. This law would make health-care financially feasible for all Americans, cover pre-existing conditions, protect employer-sponsored insurance, create greater choice and portability. It also encourages healthier lifestyles by allowing employers to offer discounts for healthy habits through wellness and prevention programs. Small-business owners don't have the luxury to absorb surprises. Every day we find out more and more about new requirements or new mandates. No sound business owner wants to operate in an environment of vagueness and unknown costs. It is time for honesty. No one knows the full impact of this bill. Finally, with all of this, what do we get? There is no proof that there will be much of an improvement in coverage or that the quality of care would improve. Higher costs mean fewer jobs; less hiring means less coverage for Americans. ObamaCare is one of the greatest legislative mistakes in our history, a cure that is worse than the disease. ObamaCare is a business chiller and job killer to the very businesses that create most American jobs. It is costly, vague, dishonest, and burdensome. We can do better. ...

Banks Stumble Along Tech Frontier

Tue, 29 Nov 2011 11:29:02 EST

By Robin Sidel Mike Jordan never liked the two payment devices in his Dairy Queen that were supposed to make it easier for customers to buy Dilly Bars and Oreo Blizzards.The machines let people pay by tapping their credit and debit cards instead of swiping them. But they didn't seem to work and wound up frustrating customers, said Mr. Jordan, who owns a DQ Grill & Chill in Middletown, Del."Ultimately, I guess we'll throw them out," he said of the "contactless readers" that were installed several years ago. For now, they are tucked out of view, gathering dust.Mr. Jordan's experience is emblematic of the financial industry's love-hate relationship with new gadgets. Banks have spent billions of dollars over the past decade developing and deploying technology that is supposed to give consumers a new way to pay for stuff, squeezing out old-fashioned cash. Yet as financial companies spend freely in a rush to the latest frontier, known as mobile payments, previous technology stumbles offer a reminder of how tough it can be to change consumer habits.In September, Google Inc. introduced phones that are embedded with a chip that allows consumers to make payments by tapping their phones against a device at the cash register. Visa Inc. and MasterCard Inc. are backing the technology, and merchants such as American Eagle Outfitters Inc., Jack in the Box Inc. and Macy's Inc. are accepting the payment method.The new phones rely on what is called "near field communication," which is viewed as the next generation of contactless payments, transactions that draw on a customer's credit or debit accounts without anyone actually having to swipe a card at a reader connected to a telephone line. Instead, customers tap a mobile phone against a payment device at the cash register or another location.Phone companies are planning to launch similar technology, banking on the increasing number of Americans who use smartphones for everyday tasks like comparison shopping. Smartphones now represent 40% of all mobile phones owned by adults in the U.S., according to a July survey by Nielsen Holdings NV. Banks are chiming in with "mobile wallets" that make such payments easier by giving customers a way to store financial information, such as credit-card data, in phones.But there are doubts about whether these would-be financial innovators can change consumer habits in the same way that they convinced people to swipe a card at the cash register instead of reaching for cash or a check. It took 50 years for plastic to triumph in the U.S., and even today most transactions under $10 still use cash.Yankee Group analyst Nick Holland estimates it will cost $15 billion to deploy the technology that will make mobile payments ubiquitous. Technology-research firm Gartner Inc. places mobile payments in a category called "Peak of Inflated Expectations," and said it is likely the category will move into the "Trough of Disillusionment" within the next year."We think companies are trying to persuade consumers to use a technology that they do not really need at this stage and that is not yet good enough," according to a July report from Gartner.The main gripe about mobile payments is that the current technology doesn't significantly improve upon the tried-and-true method of swiping a piece of plastic. Those traditional transactions rely on a 3.37-inch-long magnetic strip that was invented in 1969 by an International Business Machines engineer and runs across the back of the card.Bank executives acknowledge that replacing the plastic card with a phone likely isn't enough to get people to switch. Instead, they are looking toward a later generation of technology that they said will revolutionize the payment process by adding features like zapping targeted discounts to a phone when a shopper enters a store, allowing people to pay in a physical store without walking up to a cash register, and sending electronic receipts right to the phone.For mobile payments to take off, "something has to be in it for the consumer and something has to be in it for the merchant," said Paul Galant, chief executive of Citigroup's Global Enterprise Payments group, which designs payment solutions for consumers, corporations and governments.That was the big hurdle for Mr. Jordan, the Dairy Queen franchisee whose technology troubles began several years ago when credit-card companies began issuing plastic embedded with computer chips that allowed customers to tap instead of swipe. Financial institutions encouraged merchants to install the devices, saying they would speed up the checkout process by requiring fewer steps.The banking industry, led by J.P. Morgan Chase & Co., flooded customer mailboxes with new cards that cost $2 to produce, compared with 20 cents for a traditional card with a magnetic strip.The problem was that the banks didn't explain or promote the new technology to customers, who didn't know that the card was different. Merchants stuck the new industry-funded card readers on counters, but didn't encourage people to use them.Today, just 1% of U.S. merchants have the technology, according to industry estimates."The entire industry completely dropped the ball on contactless payments," said Mr. Holland of Yankee Group, who predicts the same outcome for mobile payments if banks don't make a big enough effort to make it worthwhile for consumers and merchants.A spokesman for J.P. Morgan's credit-card unit said the company still is issuing the contactless-enabled cards, but "we are not actively marketing it." MasterCard, another big backer of contactless cards, is still pushing them in the U.S., which ranks behind other countries in terms of usage. Some 10% of MasterCard transactions in Canada are contactless, the company said."The lesson in all of this is that you need critical mass and you need something that works and works well," said Ed McLaughlin, chief emerging-payments officer at MasterCard. Write to Robin Sidel at robin.sidel@wsj.com ...

Top IPO Schools

Fri, 02 Dec 2011 11:08:35 EST

By Jim Carlton Stanford University leads the nation in a new measure of success: the U.S. college with the highest number of graduates who are top officers in companies that recently filed for public stock offerings. Stanford grads accounted for 32 of the 802 executives whose companies filed for IPOs in the first half of 2011, followed by Harvard University with 24, according to a new analysis by research firm Equilar Inc. Another prominent Bay Area institution, the University of California at Berkeley, came in third with 23 graduates, the Equilar report found. Equilar officials said the executives attended a total of 379 schools, and speculated that Stanford and Berkeley ranked so high because of their proximity to Silicon Valley, the nation's capital of start-ups. "There is definitely a bias towards California," said Andrew Comstock, an Equilar senior product manager. Write to Jim Carlton at Jim.Carlton @wsj.com ...

Tide Shifts on Web Start-Ups

Wed, 23 Nov 2011 13:39:07 EST

By Ben Worthen After taking a back seat in recent years to consumer Internet companies like social websites and mobile-apps makers, technology start-ups that sell to businesses are hot again with Silicon Valley investors, helped by the growing popularity of online software.In a shift away from the frenzy surrounding consumer-focused companies such as social-games maker Zynga Inc., venture capitalists are pouring more money into business-to-business start-ups. In recent weeks, at least five companies that sell Web-based software or other online services to businesses have secured tens of millions of dollars each in funding, with at least one snagging a $2 billion valuation. Other business-focused start-ups, including Jive Software Inc. and Splunk Inc., are moving toward initial public offerings. The momentum allowed Zuora Inc., which makes billing software that clients access over the Internet, to turn down some potential investors when it raised $36 million recently, according to its chief executive. The Redwood City, Calif., start-up was valued at more than $300 million in its latest round of funding, announced Wednesday, twice what it was worth when it raised money last year. With big businesses increasingly buying from online-software providers like Zuora, "the money is starting to pour in" from investors, said Chief Executive Tien Tzuo.In the third quarter, venture capitalists put a total of about $1.2 billion into start-ups that sell business software online, sometimes known as "cloud" companies, nearly double the $758 million they invested in the year-earlier period and 50% more than in any other recent quarter, according to VentureSource.More big-funding deals have been struck since then, including $85 million for human-resources-software maker Workday Inc., $81 million for online file-sharing site Box.net Inc., $50 million for marketing company Marketo Inc. and $40 million for data-management company Cloudera Inc. Workday, based in Pleasanton, Calif., scored a $2 billion valuation, more than four times its previous valuation in 2009, according to a person familiar with the matter.Some business-focused start-ups are gearing up to go public, seeking to join a wave of big consumer Web IPOs, such as Groupon Inc. and Angie's List Inc. Jive, whose software allows individuals to collaborate, filed for an IPO earlier this year. Others, such as Splunk, ServiceNow, and Palo Alto Networks Inc., recently hired executives with public-company experience. Like their newly public consumer Web counterparts, some of the business-focused start-ups are unprofitable but growing quickly. Jive had a loss of $31.7 million through the first nine months of the year, more than its loss of $27.6 million for all of 2010. Its revenue rose 73% in the first nine months of the year to $54.8 million from $31.6 million a year earlier.Still, "the cloud stuff for enterprises is really happening in a significant way," said Mike Volpi, a venture capitalist at Index Ventures. That's made business start-ups better bets, he adds. "With a consumer company, one misstep and you're gone," he said.While there's no shortage of consumer Web start-ups in Silicon Valley, venture capitalists are plowing a bigger proportion of their funding into online business start-ups, while the share they commit to consumer-focused start-ups counterparts levels off. Consumer start-ups received 16% of venture funding in the third quarter, up from 9% a year ago but down from 30% in the fourth quarter of 2010 and 22% in this year's first quarter, according to VentureSource. Companies making online software for businesses reaped 14% of all funding in the third quarter, up from 12% a year earlier and the high single digits for most of the past couple of years.Entrepreneurs who run online business start-ups said the change is palpable. When Box.net set out to raise money last year, "we got a lot of questions about the feasibility of the business model," said CEO Aaron Levie. But over the past year, Box.net, based in Palo Alto, Calif., started dealing with corporate chief information officers and winning companywide deals, including one this past summer with Procter & Gamble Co. for 18,000 employees to use its online software. "That difference is all the difference in the world," said Mr. Levie.Behind the appeal of online software start-ups are executives ike Paul Lones, senior vice president of information technology at Fairchild Semiconductor International, who first bought online software for his company in mid-2009, when he replaced an aging email system from International Business Machines Corp. with an online one from Google Inc.At the time, Fairchild wanted to save money, but the new email system worked so well that Mr. Lones soon brought in other online software, including human-resources-management software from Workday this year. Fairchild now has nine such applications, he said.The online software is faster and less costly to get up and running, said Mr. Lones, and he won't have to go through time-consuming upgrades, because the maker is constantly updating the product. He said the online email system alone saves him about $500,000 a year.One reason it has taken time for customers and investors to flock in big numbers to online business software is that the products take time to develop. Whereas a lone programmer can write an app for Apple Inc.'s iPhone in days, building a program that's up to the standards of large businesses can take years."It's taken a while for some of these companies to get to scale," said Tim Haley, a venture capitalist at Redpoint Ventures, which invested in Zuora. But now that some have reached that point, he said he is "actively looking for more" such deals. Write to Ben Worthen at ben.worthen@wsj.com Corrections & Amplifications The chief executive of Zuora Inc. is Tien Tzuo. An earlier version of this article misspelled his last name as Tzou. ...

Groupon Shares Backpedal

Wed, 23 Nov 2011 14:51:02 EST

By Randall Smith And Shayndi Raice Shares of Groupon Inc. tumbled 15% Tuesday to end near the $20-a-share price of the daily-deals company's recent $805 million initial public offering.Analysts attributed the stock's biggest one-day loss since its Nov. 3 IPO to concerns about the health of the e-commerce market and rising competition, as well as factors that may have helped short-sellers, who have taken an interest in the company.The sharp drop—Groupon's stock was down $3.51 at $20.07 in 4 p.m. trading Tuesday on the Nasdaq Stock Market—may be a sobering sign for other high-profile Internet companies awaiting IPOs.The sudden decline represents "a break in the thinking that the Internet is still a safe platform for technology speculation," and means investors will be more skeptical of "automatic high-demand IPOs," said David Menlow, president of IPOfinancial.com, an IPO research provider in Millburn, N.J. The initial success of Groupon's offering was hailed as a signal that the market was receptive to fast-growing but risky social-media stocks. Its shares rose 31% to $26.11 on Nov. 4, their first trading day, valuing the company at $16.7 billion, despite arguments from critics that a much lower value was more realistic.Since then, they have stayed near $26.But the broader stock market has weakened recently, with the Dow Jones Industrial Average falling 5.4% since Nov. 11, and Groupon shares have been hit hard this week. After closing at $26.19 Friday, The stock fell $2.61, or 10%, to $23.58 on Monday. John Aiken, head of equity research for ITG Investment Research Inc., said the selloff partly reflected overall weakness in e-commerce. Buying coupons on the Internet, he said, is among the most discretionary of e-commerce purchases. For that reason, he added, Groupon also would be the first in the business to be hit by growing concerns about holiday sales. "There are fundamental reasons this is happening," Mr. Aiken said. "There is fundamental weakness in e-commerce."Groupon shares also have become cheaper recently for short sellers, who sell borrowed shares to bet on a stock's decline. That may have greased the skids for Groupon's two-day price slide. Bruce Turner, president of Quadriserv Inc., an electronic-trading platform that helps clients lend and borrow stock for settlement of short sales and other purposes, said the annualized cost of borrowing Groupon stock has fallen to 21% from 96% a few weeks ago. The reason, he added, is that more shares have become available for borrowing because the stock has traded actively since its debut. Some analysts noted that Groupon's main rival, LivingSocial Inc., said last week it will offer 20 national deals with major retailers starting on Black Friday, the day after Thanksgiving. The Washington-based daily-deals site also is making a big marketing push to promote the Black Friday deals, including a national television campaign that began airing Monday.Groupon also will be offering thousands of national deals for Black Friday and Cyber Monday. "I think the biggest lesson from how Groupon has traded is how difficult it is to price IPOs of companies with dramatic growth, but significant question marks about their business models," said Lou Kerner, a Liquidnet analyst. "Groupon will find support, but it appears likely that it will be below the IPO price."A Groupon spokeswoman declined to comment. ...

Health-Law Opponents Try to Add Plaintiffs to Lawsuit

Thu, 05 Jan 2012 09:50:25 EST

By Jess Bravin and Emily Maltby A small-business group fighting President Barack Obama's health-care law asked the Supreme Court on Wednesday to add two plaintiffs to its lawsuit after possible problems arose with an initial plaintiff.The case moved through the lower courts based in part on an assertion by Mary Brown, the owner of an auto-repair shop in Florida. Ms. Brown said her business planning was jeopardized by the need to set aside funds to pay for her health insurance beginning in 2014, when a provision requiring most Americans to carry such coverage or pay a penalty takes effect. Two other plaintiffs also were listed: a retired investment banker in Washington state and the National Federation of Independent Business itself, the small-business lobbying group in Washington, D.C., that is fighting the law. But Ms. Brown was the only plaintiff the Justice Department agreed had legal standing to pursue the case. The Wall Street Journal reported last month that Ms. Brown closed her shop in August and filed for personal bankruptcy the following month. Without owning a business, it could be harder for her to argue that the law harms her, and her financial woes suggest she could be exempt from penalties for not having health insurance.The Supreme Court will hear the case in March, with a decision expected before July. The most significant issue is the one raised by Ms. Brown—whether Congress can impose the insurance mandate on Americans. In addition, 26 states are challenging a provision of the law that expands Medicaid coverage for lower-income Americans. The motion filed Wednesday seeks to add two NFIB members as plaintiffs: Dana Grimes, the owner of a roofing company in Greenwich, N.Y., and David Klemencic, who runs a flooring business in Ellenboro, W.Va.The Justice Department, which said it didn't oppose the motion, declined to comment.Mike Carvin, an attorney representing the NFIB, Ms. Brown and other plaintiffs in the matter, said the group was confident Ms. Brown retained standing to pursue the suit. He said the addition of Messrs. Grimes and Klemencic, who filed affidavits on behalf of the organization at an earlier stage in the litigation, was a "belt and suspenders" effort at ensuring legal standing.In an interview, Mr. Grimes, 50 years old, said that if he had to pay for health coverage, he would likely have to close his company, because he wouldn't be able to afford new equipment. "Every year, I have had to put personal savings into the business," he said. "If the government says I or my employees have to have health insurance, I think they are overstepping their bounds."He hired his only employee, who works part-time, in October, he said. Mr. Grimes said he once had health insurance that cost at least $5,000 a year but gave it up several years ago because he didn't need it and found it too expensive.Mr. Klemencic declined to comment. Write to Jess Bravin at jess.bravin@wsj.com and Emily Maltby at emily.maltby@wsj.com ...

For Grads Seeking to Work and Do Good

Fri, 13 Jan 2012 10:41:47 EST

By Emily Glazer Ivy League senior Ethan Carlson recently turned down a job with a global-energy consulting practice and instead pledged to spend two years working for an entrepreneur, perhaps with a focus on renewable energy, in a struggling U.S. city. "I want to make an impact not only on myself, my career and my finances, but also society around me, and my local community," the 21-year-old mechanical-engineering major at Yale University says. The project he plans to join, Venture for America, was founded by Andrew Yang, the former chief executive of Manhattan GMAT, a test-preparation company acquired in 2009 by Kaplan, a Washington Post Co.Venture for America says it was inspired by Teach for America, which places recent college graduates at schools in low-income communities for two years. This summer its first crop of about 50 "fellows" will be placed at small businesses such as Drop the Chalk, an education-software firm in New Orleans, and Andera Inc., an online-account-opening firm in Providence, R.I.The companies will pay participants $32,000 to $38,000 a year, plus health benefits. The program includes a five-week program at Brown University that mimics training for consulting and investment banking.Firms with fewer than 500 employees created about 65% of the nation's net new jobs, or jobs created minus jobs eliminated, according to the most recent Small Business Administration data. The goal of the program, Mr. Yang says, is to help start-ups and early-stage businesses get off the ground, and its target is to create 100,000 jobs by 2025. The program has drawn commitments to donate services and about $500,000 in cash, he says.Mr. Yang believes there is a disconnect between small businesses seeking to hire successful college graduates capable of wearing many hats, and graduates, like Mr. Carlson, who want to learn about the basics of starting a new company. Fifty-four percent of the nation's 18-to-34-year-olds either want to start a business or have already started one, according to a survey by the Young Invincibles, a group focusing on young entrepreneurship, that was funded by the Ewing Marion Kauffman Foundation, a research group. Some of the struggling cities selected by the program have burgeoning start-up scenes but still need talent. Cincinnati, for instance, has a fairly vibrant consumer marketing and branding industry, partly because Procter & Gamble Co. and Kroger Co. are based there. At Andera, the participating fellow will be expected to work as part of a team to conceptualize a new product and to create a business case for it, says Charlie Kroll, the company's founder and chief executive officer.The Initiative for a Competitive Inner City, a nonprofit strategy and research organization based in Boston, Mass., estimates that 460,000 U.S. businesses are located in inner cities. Jen Medbery, founder and CEO of Drop the Chalk, says the program will serve as a "professional recruiting firm, picking the best and brightest from the top colleges and making it affordable for me to hire and mentor them." Write to Emily Glazer at emily.glazer@wsj.com ...

Popular Toy in Short Supply

Fri, 16 Dec 2011 16:37:47 EST

By Spencer E. Ante The recent flooding in Thailand has disrupted more than exports of cars and PCs. It also has knocked out supplies of a popular toy at the height of the holiday season.Inventories of Magna-Tiles, which are magnetic connector toys, have disappeared, says its manufacturer, Valtech LLC. Flooding in the suburbs of Bangkok, where the Chicago-area company's factory was located, destroyed the machinery that makes the square- and triangle-shaped tiles used to construct rocket ships, roadways and skyscrapers.That has triggered a run on the toys, which have caught on in schools and with young children, who find that the magnets make the toys easy to assemble. Prices have soared, more than doubling in the past month since the company announced it had run out of product.A 32-piece set of colored tiles retails for $49.50, and a 100-piece set lists for $110. But sellers on eBay are asking $150 to $250 for the 100-piece sets, while sellers on Amazon.com are offering the large set for $349.99 plus shipping. Smaller sets are listing for $65 to $100."We did not think the flooding would get to our industrial park but it did," said Rudy Valenta, chief executive and owner of 14-year-old Valtech. "You can't fight mother nature." Roger Glazebrook, a manager at Manhattan store Mary Arnold Toys, said the company was lucky because it stocked up on the Magna-Tiles months ago. They are the store's top seller, he said. But the store finally ran dry on Tuesday."Now everyone is calling," he said. "It's one of those unobtainable toys."Magna-Tiles were introduced in 1997 and got off to a slow start. When schools began buying them as educational tools, the business took off around 2003 and it has been growing steadily ever since. The floods came at the worst possible time. The company generates about 35% of its sales in the last three months of the year, said Mr. Valenta.Valtech subcontracts the manufacturing of its Magna-Tiles to the factory of a major toy maker in the suburbs of Bangkok. The arrangement has worked well since the deal was struck nine years ago, said Mr. Valenta, who wouldn't identify the company. But in early October, monsoon rains triggered the worst flooding Thailand has seen in decades. The deluge left the factory under more than six feet of water for more than a month as runoff from the north besieged the city. Production came to a halt and ruined Valtech's machinery. All hasn't been lost, though. Valtech officials were able to salvage the molds used to make the plastic squares and triangles. They plan to restart production at a new factory outside the flood zone by early next year. But even then it could take two months or more to ramp up production. Mr. Valenta hopes to start selling tiles by April.Until then, consumers have been left to hunt for the last available Magna-Tiles. Sophia Chiang, the chief executive of a California start-up that helps nonprofits to raise money, was looking to buy more tiles for her two children. "My kids love the Magna-Tiles," she said. "We have 150."But Mrs. Chiang was shocked when she searched for the tiles on Amazon.com and found sellers on the site were asking $300 for a toy she spent $100 on just months ago. She passed, because she only buys from Amazon merchants when they offer products at a discount. "I thought it was holiday markup," she said. "I had no idea it was the Thai thing."Some retailers have also taken to the Internet, touting their tile inventory. "Yes we have @Magnatiles! We stock up so you don't have to worry," announced the Twitter account of Baltimore toy retailer aMuseToys. On Dec. 14, the company posted a follow-up tweet: "Just had an economist here say we need to raise our prices on @magnatiles. Told him we understand supply and demand, but will never raise 'em." Write to Spencer E. Ante at spencer.ante@wsj.com ...

Hurdle for Health-Law Suit

Mon, 05 Dec 2011 13:17:26 EST

By Emily Maltby, Vanessa O'Connell and Jess Bravin YOUNGSTOWN, Fla.—The woman chosen to represent the legal challenge to the Obama administration's health-care overhaul filed for bankruptcy in September after her business failed, a move that could pose problems for the high-profile lawsuit.The suit, brought by 26 states and joined by the National Federation of Independent Business, a small-business lobby group, is set to be heard by the Supreme Court next year. It relies in part on the story of Mary Brown, an auto-repair-shop owner who argued in court filings she would have had to divert funds from her business to comply with the law's requirement that, beginning in 2014, most Americans obtain coverage or pay a penalty.Ms. Brown closed her five-year-old Panama City, Fla., shop, Brown & Dockery Inc., in August, the same month she and the state coalition prevailed in front of the 11th U.S. Circuit Court of Appeals. On Sept. 30, Ms. Brown and her husband filed for personal bankruptcy. They later listed $62,972.04 in debts, most of which were business expenses.Without owning a business, it could be harder for Ms. Brown to argue she is harmed by the legislation. Meanwhile, her recent financial woes suggest the possibility she would be exempt from penalties for noncompliance with the individual mandate. That raises questions about whether the suit can be based on her experience.How much of a problem this could cause is hard to predict. If her standing is voided and no replacement can be found, the suit could falter. The 11th Circuit specifically cited the government's acknowledgment of Ms. Brown as a legitimate plaintiff in permitting the suit to proceed. That court is the only one of the four federal appeals courts to have ruled on the law that found any aspect of it unconstitutional."There is at least a suggestion that her case is now moot, even if she had standing when it was originally filed," said David Levine, a professor at Hastings College of the Law in California. At the same time, the suit names another plaintiff, retired investment banker Kaj Ahlburg. The government has contested his standing.Gregory Katsas, a Washington, D.C., lawyer who represents Ms. Brown and the NFIB, said if Ms. Brown's right to sue is called into question, he believes the business group could instead sue on behalf of other members.Mr. Katsas acknowledged the bankruptcy "throws some more wrinkles into" the case, but he contends that "the critical facts are that she doesn't have health insurance and doesn't want to be forced to buy it."Cynthia J. Magnuson, a spokeswoman for the NFIB in Washington, said Ms. Brown remains a member of the organization and added that she believed the bankruptcy "has absolutely no impact on NFIB's standing in our case challenging the health-care law."Andy Hessick, a law professor at Arizona State University, said "this current court takes standing very seriously" and that before the justices pass judgment on a law passed by Congress, "they want to make sure all the T's are crossed and all the I's are dotted." He said the court could ask the parties for additional briefing in light of Ms. Brown's new circumstances. A Justice Department spokeswoman said Friday that it was unaware of Ms. Brown's changed circumstances and declined to comment.Given the high stakes, and the interest both sides have in determining the law's constitutionality, the High Court would be under pressure to provide a ruling on the merits. "In a case like this, you can be sure that if they want to find standing, they will find standing," said Prof. Richard Fallon of Harvard Law School.The question of standing has proved thorny for opponents challenging President Barack Obama's health-insurance overhaul. Of 34 lawsuits filed against the Affordable Care Act, 16 have been dismissed for lack of standing, the Justice Department said.States aren't well-placed to file a challenge to the individual mandate, the core of the case against the law, because they can't easily demonstrate how it would affect them. The government, meanwhile, contends that individuals can't easily claim harm from the 2014 mandate, because its future impact is too speculative.For that reason it argues that the second named plaintiff in the Supreme Court suit, Mr. Ahlburg, of Port Angeles, Wash., doesn't have a valid claim. Mr. Ahlburg, who didn't return calls seeking comment, said in his affidavit he didn't need or want insurance because he was wealthy enough to pay for all medical expenses out of his own pocket.These hurdles to challenging the law are among the reasons Ms. Brown was asked to join the case, because she was better able to show she was harmed by the law today. In a May 2010 filing, Ms. Brown and the states cited the "profound and injurious impact" of the law on her and other business owners. These proprietors would be forced to divert resources from their endeavors even if the added costs threatened their ability to maintain their businesses, the filing said.Her bankruptcy hasn't yet been disclosed to the court, something experts in civil procedure call necessary. "We intend to address the bankruptcy issue in our opening brief in January, and we will explain why it does not change anything," Mr. Katsas said. Her lawyers in the case first learned of her bankruptcy around Oct. 6, he said.Mr. Katsas said Ms. Brown's lawyers decided to email her bankruptcy filing to the U.S. Solicitor General's office Friday. That followed inquiries about it by a Wall Street Journal reporter.Ms. Brown, 56 years old, had health-care insurance for herself and her husband several years ago but dropped it because the $1,100-a-month cost was prohibitive, she said in an interview. Referring to the health overhaul, she said: "No one has the right to try to control how you spend your money."When the states filed their lawsuit in Pensacola, Fla., in March, Ms. Brown wasn't taking a salary in order to keep her business afloat. The Gulf oil spill of spring 2010l, in particular, slowed demand for repairs of commercial vehicles. She began putting personal savings into the business. Ms. Brown fought "every day" to keep the business open, said Ed Moorhead, who used to work there as a mechanic. "I hung in there a lot longer than I should have," Ms. Brown said.Ms. Brown, who is receiving unemployment benefits, now spends her time caring for her parents, job hunting and tending to her garden crowded with birdbaths and wooden butterflies. Her next project, she says, is to paint an old bowling ball to resemble a ladybug.At her former establishment, a new sign reads: ARC Auto Repair & Cooling. Write to Emily Maltby at emily.maltby@wsj.com, Vanessa O'Connell at vanessa.o'connell@wsj.com and Jess Bravin at jess.bravin@wsj.com ...

Small Businesses Are Optimistic, Sort of

Thu, 29 Dec 2011 05:09:50 EST

By Angus Loten After years of sputtering, many of America's nearly 30 million small businesses could see at least modest improvements next year. The proprietors of Sukhi's Gourmet Indian Cuisine, for example, plan to open a 16,000 square-foot plant by early 2012, spending $500,000 for new equipment and possibly adding several dozen jobs."We don't want to stay behind as the economy recovers," says Sanjog Sikand, sales and marketing manager at the Hayward, Calif., company, a supplier of curry and other dishes to Whole Foods Market Inc. and Costco Wholesale Corp.Still, uncertainty over the U.S. election and the federal budget impasse, and broader economic worries in Europe, could undermine the positive outlook. Another worry: Real disposable income growth from U.S. households continues to decline, and private savings rates have dropped, leaving less to sustain consumer spending in the months ahead. Robert Litan, an economist with the Kauffman Foundation, a Kansas City, Mo., entrepreneurship research group, cautions that 2012 could wind up no better than 2011, which started off strong but faded by mid-year. Here's a closer look at what next year may bring:About 24% of 781 small-business owners surveyed in November said they were planning capital outlays in the next three to six months, according to the National Federation of Independent Business, a Washington-based small-business lobbying group. That's the highest it has been in 40 months, but still five to 10 percentage points below typical levels in past periods of robust economic growth.Many of the additional outlays will be geared toward improving sales without hurting cash flow. That means investing in technology to reduce overhead, and increasing productivity through work-force training and development, according to Fred Graziano, head of regional commercial banking, government banking and small business at TD Bank."At some point you have to spend money," says Janice Shade, who owns an all-natural soap maker in Richmond, Vt. After years of cutting back, she is planning to shell out money for marketing efforts that she hopes will increase sales over the Web. "I can't cut expenses any more than I already have," says Ms. Shade. She also plans to hire part-timers next year as her sales pick up. Of course, many business owners are still cautious. "Things are still moving very slowly," says Levon Kurkjian, the vice president of marketing at Boston-based Kettle Cuisine, a soup manufacturer with 180 employees. It plans to drop a third-party marketing firm next year so it can rein in spending.Continued weakness in the housing market is still a challenge for many business owners, who are prevented from tapping home equity or from using their homes as collateral for secured bank loans.But large banks have started to approve more loans for small businesses, recent lending data show, suggesting many small business borrowers are in better shape, and more creditworthy, than they were a few years ago.Banks with assets of more than $10 billion approved 10% of total loan requests last month, up from 9.3% in October and 9.2% in September, according to a Biz2Credit analysis of 1,000 small-business loan applications. Small-business loan approvals by small banks and credit unions have climbed steadily since the start of the year and are now roughly half of all applications, its data show.Meanwhile, an increase in the number of loans backed by the Small Business Administration has enabled banks to extend repayment periods for creditworthy borrowers who might otherwise be reluctant to take on debt. Small businesses in many cases have already pushed the limits of their existing lean staffs, says Carl J. Riccadonna, a senior U.S. economist at Deutsche Bank in New York. "We're getting to the stage where employers can't squeeze more water from the stone," he says. "They can't satisfy additional output with their current labor force."The NFIB's November survey showed that over the next three months, a net 7% of small businesses plan to create new jobs, compared to 4% in November 2010. (The figures were adjusted for seasonal fluctuations.) CBIZ Inc. said businesses with fewer than 300 employees had 0.35% more workers on their payrolls in November than in October, ending a four-month streak of lower employment.Businesses with up to 49 workers added 110,000 jobs in November, according to payroll company Automatic Data Processing Inc., compared with 67,000 jobs created in October. Meanwhile, those with between 50 and 499 workers expanded their payrolls by 84,000 last month, while employers with more than 500 workers added 12,000, ADP said.Technology, particularly in areas such as software, hardware and social media, is a bright spot. Most wanted are programmers, market researchers and product managers. Strong job markets for those positions are developing in Northern California, Austin, Texas, and New York.SeaMicro Inc., a provider of low-power server technology in Sunnyvale, Calif., plans to increase its staff of 100 by 50% in 2012, says founder and chief executive Andrew Feldman. "We're bursting at the seams," he says, adding that finding skilled engineers and technical salespeople are his biggest challenge. Write to Angus Loten at angus.loten@wsj.com ...

3 Small-Business Blunders to Avoid This Year

Tue, 03 Jan 2012 13:47:16 EST

By Susan Wilson Solovic Survival has been the operative word for small businesses these past few years. Many of us hope the worst is behind us. During the past several months, I've been on a nationwide book tour, which gave me the opportunity to speak to thousands of small-business owners. I was happy to hear cautious plans for growth in 2012 from some entrepreneurs, but most remain nervous about what lies ahead.Now, usually at this time of year we all start thinking about New Year's Resolutions. We pledge to make changes personally and professionally to enhance our success. Faced with continued economic uncertainty, it's tough to know what those resolutions might be for our businesses. So let me suggest that as business owners we resolve to run our businesses smarter this coming year. Let's make well-thought-out decisions so we avoid making mistakes.Here are a few common errors business owners make: Not Hiring Smart There are indications that small businesses will start to hire again this coming year. After working with little or no staff, many entrepreneurs find themselves in need of an extra set of hands to grow to the next level. Not knowing exactly how to find the right employee, many owners resort to hiring a friend or a family member. (Big red flag!) Typically, your family and friends don't have the skills, experience or dedication you need to really grow your business. If and when it doesn't work out, it can ruin the friendship and harm family relationships.Friends and family members often have good intentions when they want to join your team, but it is difficult for them to set the personal relationship aside. You're still their buddy, BFF, cousin or sister/brother. And, as the business owner, you trust them with a handshake and a smile, as opposed to following good operational practices. That's where the problems begin.Rob Lewis, founder of U.S. Equipment Sales Inc., a used construction, recycling and demotion equipment sales company in Tampa, Fla., is still dealing with the aftermath of hiring a friend of more than 17 years who needed a job.Mr. Lewis was familiar with noncompete agreements but says, "I decided it wouldn't be very best friend-like to make my friend sign one."At first, everything went smoothly. But as time went on, the friend's attitude and work ethic changed. "He was spending days at home instead of working and would lie about visiting or calling people," Mr. Lewis says.When the friend's sales fell completely flat, Mr. Lewis got suspicious and discovered his friend had started his own company and was funneling customers to that business. "Among my biggest mistakes, I showed him how to essentially keep ahead of the competition while spending a small fraction of what they do," he says. "I'm still torn between the possibility of losing half my customers or having to resort to litigation." The business does a little under $2 million in revenue and this friend was Mr. Lewis's only employee.Always remember, business is business and friendship is friendship. It you are thinking about hiring this year, make sure you hire smart. Find the person who has the right job skills and experience to help your business grow. Failing to do Your Homework One of the first steps any business owner should take before launching or expanding a new business, or product or service offering, is to research the market. Success depends on analyzing the opportunity to determine whether there is a viable opportunity. You simply can't force the market to embrace your business no matter how fabulous you think your product or service is.Fourteen years ago, serial entrepreneur Nathalie Ekobo moved to Phoenix from Paris to live her dream of creating a French restaurant and pastry cafe. She opened her venture in a tiny strip mall on one of the most famous streets in the Phoenix area -- Camelback Road. The problem was you couldn't actually see the posh eatery from the road or parking areas."People had to park their cars and walk a few feet to finally see us. We got angry cell phone calls from people in their cars saying, 'We cannot find you!' " Ms. Ekobo says.Europeans consider it charming to walk through neighborhoods to find out-of-the way, hidden treasures, Ms. Ekobo says. But in Arizona, where temperatures can reach 110 degrees, you don't want to get out of your car if you don't know exactly where the restaurant is located, she says.The restaurant managed to survive for four years as a result of major marketing efforts. But after the September 11 attacks, Ms. Ekobo says she couldn't hold on any longer.This is a perfect example of an entrepreneur failing to take the time to analyze the market and to seek additional feedback. If Ms. Ekobo had done her homework, she might still be open for business. Playing Banker to Your Customers No business owner wants to badger a client or customer because of late payments. You want to maintain your relationship, yet the bottom line is you need to get paid. After all, you aren't the bank or a charitable organization.If you permit a customer to fall months and months behind, then shame on you. You're putting your entire business operations at risk. Once a customer starts falling behind you need to address the situation immediately. In fact, if the customer is having serious financial difficulties, you may need to make the decision to stop doing work until the customer catches up.I know how serious this is because I made this mistake myself. When I owned a marketing firm, I failed to confront a very large client about long-standing unpaid invoices. Our relationship was positive and I assumed the client would catch up quickly. But the firm filed for bankruptcy before I was able to collect a dime. Because this was my biggest customer, I couldn't sustain the loss and closed up shop. Don't let this happen to your small business.These scenarios are just a few of the mistakes small-business owners make that could be avoided by taking the right steps. The economy is out of our hands, but we can control the decisions we make. So this year, resolve to make smart choices for your business. Take time to get the information, advice and resources you need to succeed. For questions or concerns, please email smalltalk@wsj.com. ...

'Cash Mobs' Help Ignite Buy-Local Effort

Mon, 26 Dec 2011 19:03:42 EST

By Emily Maltby At 6:30 p.m. last Tuesday, Michelle Murrain showed up at a downtown Oakland, Calif., street corner to meet with 15 strangers who had organized themselves over Facebook. Many showed up with $20 bills. Their mission was to descend on Marion & Rose's Workshop, a gifts boutique, to spend money. Ms. Murrain and her compatriots are among hundreds of devotees of the "cash mob," a new social-networking-and-shopping movement aimed at increasing sales at selected small businesses. Similar cash mobs have materialized in more than 20 cities from Norman, Okla., to Muskegon, Mich., most arranged by individuals who establish followings on Facebook and Twitter. The cash-mob organizers don't get any benefit in return.The Oakland event, for instance, was organized by Alex Haider-Winnett, a paralegal and participant in the Occupy Oakland movement.Cash mobs are one of many buy-local campaigns that recently have spread to communities across the country. One in four business owners say poor sales is their top business problem, ahead of any other issue, according to a November survey from the National Federation of Independent Business, a small-business lobby group.Last month, in an event called Small Business Saturday, American Express Co. provided its cardholders with a $25 credit if they used the card at small retailers the day after Black Friday. Hundreds of thousands of consumers registered their cards to participate in that promotion, according to American Express, the event's sponsor.In contrast, cash mobs spring up organically through social media outlets and have no corporate sponsor or formal advertisements. (At least one cash mob, in Grand Rapids, Mich., was organized by the local Chamber of Commerce, however.) The first known cash mob was the brainchild of Chris Smith, an engineer for Oracle Corp. The 37-year-old from Buffalo, N.Y., says the idea stemmed from his realization that consumers, including his wife, tend to flock to smaller establishments when a bargain is available through the daily-deal social-networking sites including Groupon Inc. and LivingSocial Inc. "Why do we need a discount to support good, solid, local businesses?" he asks. He used Twitter and Facebook to rally more than 100 people to purchase wine at City Wine Merchant on Aug. 5. Business that day tripled, according the store's president, Eric Genau. "We have clients that would have taken a lot longer to get here or never would have gotten here at all if not for that," Mr. Genau says. Several weeks later, a group of young professionals in Cleveland say they independently came up with the same concept and the same name. Their first event, on Nov. 16, drew about 40 people to a bookstore and, afterward, to a bar for drinks. They launched a blog, and the idea began to catch on in Albuquerque, San Diego and elsewhere. In some areas, Occupy Wall Street affiliates have embraced the idea. The Cleveland group has distanced itself from that cause, noting on its blog that cash mob "isn't a political or social organization … or meant to be an answer to economic crisis." Sarah Ditzenberger, owner of Fischberger's Variety, a gifts store in Milwaukee, says one cash mob that showed up to spend money at her store earlier this month boosted sales by $1,200, roughly doubling an average day. The extra cash will help to pay off inventory and other business debts, she says.Sales at the Oakland gift store last Tuesday were around $450, or about double the store's typical sales. Ms. Murrain, a 52-year-old Web developer, said she purchased herbal tea and greeting cards during the Oakland cash mob event, spending $30. Some cash mob groups are planning to continue their events in January and February.Mr. Smith of Buffalo, who has organized mobs at a beer store, a restaurant, a bookstore and a coffee shop, plans to ask his Twitter followers to nominate a business for another cash mob to be held Friday, Jan. 6. Write to Emily Maltby at emily.maltby@wsj.com ...

And the Most Innovative Entrepreneur Is...

Tue, 15 Nov 2011 15:45:32 EST

By Sarah E. Needleman, Vanessa O'Connell, Emily Maltby and Angus Loten Imagine this. You're coming off the best year in your company's history, with record sales and seemingly smooth sailing ahead.Then the industry implodes. Your sales drop 70%, and your prospects seem even bleaker.What do you do?If you're Quadlogic Controls Corp., of New York City, you think fast, get creative and rewrite your business plan. And you do it so well that you not only stay afloat but thrive in the teeth of the recession—taking on dozens of new workers and setting a record for revenue.Quadlogic's nimble reinvention put it at the top of The Wall Street Journal's Small Business, Big Innovation competition. In July, the Journal invited entrepreneurs to share the ideas they've used to survive the worst downturn in decades. Over the next three months, more than 100 entries poured in, ranging from a rubber-duck manufacturer in San Rafael, Calif., to a consignment retailer in Tampa, Fla., and a Chinese-language school in Riverside, Conn.Their strategies for overcoming the harsh economy were just as diverse—and could be a model and an inspiration for other companies that face similar struggles. Some expanded their offerings, adding goods or services to appeal to consumers with less disposable income. Others tapped new markets to cater to a larger demographic or an underserved niche. Some abandoned their original business model and pursued an entirely different venture.The Journal's small-business staff narrowed the field to 10 finalists, and then a panel of editors—Vanessa O'Connell, Alan Murray and Dennis Berman—chose an overall winner. Readers also voted for their favorite.So, what exactly did Quadlogic do to earn the top spot? Let's go back to early 2009 for the answer. Times were good for the company, which made energy-tracking products that let different tenants in the same building manage and pay for their own usage. The two remaining founders—Doron Shafrir and Sayre Swarztrauber—had just put up the best revenue figures the 27-year-old company had ever seen.All of a sudden, though, the housing market was in shambles, driving sales into the ground. So Quadlogic decided to stake its future on a daring reinvention plan.Messrs. Shafrir and Swarztrauber had learned from a business associate a few years earlier that in developing countries, energy theft was a major problem. The entrepreneurs had even begun tinkering with a new product to prevent utility-metering systems from being breached. Only it was far from complete, and they hadn't yet identified any potential buyers.The partners decided that their best move would be to ramp up production of the experimental line and launch an intense marketing push. "You have to place your bets," says Mr. Swarztrauber, 56. "We saw our survival threatened and that gave us the incentive to make it happen."The gambit paid off. Within five months, Quadlogic Controls signed a multimillion-dollar deal with a private utility company in Jamaica, and a recovery was under way.Today, Messrs. Shafrir and Swarztrauber say the company's new line has a dozen customers, all in markets thousands of miles away such as Jamaica, Mexico, Costa Rica and Ecuador. What's more, demand for its original energy-tracking systems is close to the level it was just prior to the recession, thanks in part to an improvement in the commercial housing market.The company has ballooned to roughly 90 employees from about 20 two years ago, and it's on track to post $20 million in revenue this year, $5 million more than its previous high.Messrs. Shafrir and Swarztrauber credit the turnaround they pulled off to constantly keeping an eye out for new business opportunities. While they say it's important to focus on proven models of success, it's also critical to regularly set aside time to investigate potential alternative sources of revenue."I always have a plan B and a plan C for just in case," says Mr. Shafrir, 64. "You never know."Here's a look at the other finalists in the competition, and what they did to stay afloat. Alejandro Velez and Nikhil Arora seemed destined to launch a company together. Before they had even met, they went to the same teacher at the University of California, Berkeley's Haas School of Business for advice on the same offbeat business idea: growing gourmet mushrooms in used coffee grounds, rather than pricier fertilizers and wood.After the teacher brought them together, the new partners approached neighborhood coffee shops offering to haul away their waste free. In a fraternity kitchen, they grew their first crop of mushrooms in a coffee can filled with discarded grounds—and it worked."We got so jazzed about that first bucket," says Mr. Velez, now 24, who turned down a Wall Street banking job to co-found Back to the Roots LLC with Mr. Arora in April 2009.The company saw strong sales at a local Whole Foods and nearby farmers' markets. But scaling up proved tricky. Even though raw materials were cheap, other parts of the business were getting expensive, and financing was tight. It didn't take long before the partners outgrew an 800-square-foot warehouse and payables were already much higher than receivables, Mr. Velez says."We came to a crossroads in the business where we could have tried to become regional mushroom farmers," says Mr. Velez. "But we weren't mushroom farmers."Instead, they used the technique to develop grow-your-own mushroom kits, eliminating the need for a costly infrastructure. The kits can produce 1.5 pounds of mushrooms in just 10 days.Today, the company collects some 20,000 pounds of used grounds from area coffee shops and repurposes them into growing kits (as well as a separate product, $10 bags of nutrient-rich soil). Whole Foods and Home Depot are now stocking the kits, with deals in the works with SkyMall and Wegmans. This year, revenue hit $1.1 million, up from $240,000 in 2010."We're profitable after just two years," says Mr. Velez. "But even better, we're reconnecting people with growing food again."Many small businesses in the housing industry grew with the real-estate boom—and then went bust when the bubble burst. Not Henrybuilt Corp.—thanks to some quick thinking by founder and Chief Executive Scott Hudson.The Seattle firm specializes in designing kitchens that range from $30,000 to $100,000. Launched in 2001, the company expanded quickly. In 2006, it opened a New York City showroom, which doubled in size in just 18 months. By 2008, the company was working on some 200 projects in the U.S., Mexico and Canada, and sales had tripled since 2004.In October 2008, sales came to a standstill. "Everyone was canceling projects," says Mr. Hudson, 50. Over the next two months, the company lost hundreds of thousands of dollars of revenue, he says.With clients shying away from the high-cost renovations, Mr. Hudson launched a subsidiary in 2009 called Viola Park Corp., which provides clients with a modular option based on the Henrybuilt designs. Rather than working with an architect, clients use the company's software to configure and customize the layout and design to their liking—a cheaper and quicker process that costs roughly half what the Henrybuilt kitchens do."We listened to the market, rather than waiting to get back to the old days," Mr. Hudson says of the strategy.Since Viola Park launched, both businesses have collectively grown about 10%. Viola Park now represents 20% of the company's revenue and has doubled every year.But the biggest benefit to the company has been psychological, says Mr. Hudson. When things got tough, he laid off two of his 25 employees. But after Viola Park launched, the two divisions grew to a combined 30 employees, who felt excited and inspired amid the industry's turmoil. "It drove morale," he says. "We created opportunity in a time when everything else was contracting."Shane Bauer started Laughingstock Design as a graphic-design and custom greeting-card company in 2007. But the downturn left fewer businesses and families able to afford its high-end custom cards, which required a first-time outlay of at least $40 to create a graphic using a likeness of the recipient's head. His Duluth, Minn., business needed a new revenue stream.Mr. Bauer was inspired by a T-shirt on display in a department store featuring the words, "Bite Me." He thought there might be a market for shirts with positive slogans to counteract that kind of negative message. "I thought, man, things are getting pretty bad," says the 35-year-old.So, he created Happy Space PositiveWear, a line of casual clothing and accessories that pair his intricate graphic designs with positive messages—such as a guitar with the slogan "Live In Harmony."Mr. Bauer now sells more than a dozen different designs, up from six in 2008, and expects his business to generate about $100,000 in sales this year. The success of the new products led Laughingstock Design to open a retail store, Happy Space, in April 2010, and to hire its first outside employees—two part time and one full time. Courtney Tudor of Madeira, Ohio, spends his weekdays designing jet engines at GE Aviation. But on the side, he's honing Mr. Bigshot Inc.—a company that tries to have some fun with the stock market.Mr. Tudor, 50, grew fascinated with the market while seeking an M.B.A. at Xavier University, and wanted to capture in a game the thrill of investing. In 2000, he created the company, funded by the proceeds of his own stock investments and backed up by financial data and market results for 45 years.The idea: Players can go back in time to play the market through rounds of investing. For instance, they might go to Jan. 1, 1969, and follow two companies (known by aliases) for the year. Every quarter, they decide whether to sell or switch to another company.Mr. Bigshot started out as a board game, followed by a downloadable computer version. But sales were meager. And when the real market plunged in 2008, Mr. Tudor's source of capital dried up. Then he got what he describes as his breakthrough idea: an online multiplayer version that can be used to conduct a "Massive Market Madness Tournament" with thousands of high schools across the country.His next steps are to conduct trial tournaments in a few area high schools, incorporating the feedback from students and teachers. Then he intends to hold a regional tournament in the greater Cincinnati area.To be sure, his big idea hasn't been tested. But it was recently among those that took top honors in a business-launching competition at Xavier, and as the prize Mr. Tudor will get consulting services to help him move forward.Mid-2009 was a scary time for Merrimac Dillon, founder of Pillow Bar LLC. Some $400,000 in potential licensing agreements for her custom pillow-making machine suddenly fell through as customers became too nervous about the economy to commit. To keep the company going, she realized, the business model would need a risky overhaul.Ms. Dillon, now 52, first designed and constructed the pillow machine in her Dallas garage in 2007, after an extensive and unfruitful search for the perfect bedtime headrest. For $12,500 a year, she licensed the machines to high-end linens stores, which used it to make customized and personalized pillows according to their customers' sleeping positions and shoulder widths. The pillows cost $195 to $295. By mid-2009, the company had made about $400,000 in sales. It had placed eight machines in stores and had a waiting list of 30 interested retailers.But the honeymoon didn't last long. The economy lagged as the normally busy holiday season approached, and retailers were less prepared to make capital investments—22 on the list told Ms. Dillon they didn't have the cash."They wanted me to float it, and that scared me," she says. "What if I float it and they can't pay? It really made us stop and say, 'Now what?' "Some retailers asked Ms. Dillon if she would offer ready-made pillows. She didn't like the idea. The machine gave customers a unique buying experience, she reasoned. They liked watching the down feathers swirl in the machine, and the assembly process.But Ms. Dillon decided to give it a try. She started wholesaling the 12 pillow varieties most commonly requested. And the business took off. Ms. Dillon moved manufacturing operations into a 3,500-square-foot work space with a loading dock. She also opened an online store.Today, the ready-made business accounts for 60% of sales. The company, which now has four employees, will exceed $1 million this year, Ms. Dillon says. "We could move quickly as a small company," she says. "We wouldn't be afloat if we hadn't made the change."When Dawn Cameron launched Sanctuary T, a small New York City restaurant, in mid-2007, she naturally expected it would take time for the business to turn a profit. But the former banking professional never imagined the wait would last more than two years, or that she would need to dip into family savings to cover payroll.Ms. Cameron, 37 years old, says she might not be in business today if she hadn't branched out—and gotten help from her employees. In the summer of 2008, she and her 15 staffers put their heads together to create a line of four tea-infused cooking spices.Since money was tight, the seasonings needed to be prepared and bottled by hand, with labels designed and printed in-house. Ms. Cameron, at the time pregnant, visited a dozen local grocery stores to drum up orders. She also pitched media outlets for press coverage. "It was a very stressful but exciting time," she says.Within a few weeks, efforts started to pay off. A buyer for one specialty grocery store placed an order on the spot, and the New York Times ran a story about one of the company's new spices. Next, Ms. Cameron says she invested $10,000 on upgrades that included beefing up the company's website, buying product-liability insurance and adding new packaging with nutritional information and bar codes.As more wholesale orders came in, Ms. Cameron says some local clients agreed to let her to run in-store demos. As a result, she says, traffic to the restaurant and her online store increased.Today, Sanctuary T's Dust-T spices are for sale in 19 grocery stores in four states and Washington, D.C. Ms. Cameron expects the business overall to post $1.2 million in revenue this year, up from just $400,000 in 2008."It felt counterintuitive to try to grow the business in the face of declining sales in a recession, but that's what it took to survive," she says. "I'm glad we had the courage to do it."Brian Linton, 24, was on shaky ground when the retailers that sold his company's coconut-wood jewelry suddenly halted orders in late 2008. But he found inspiration in an unlikely place—trash-strewn beaches.His company, Sand Shack LLC, based in Philadelphia, had taken off earlier that year. He had established a customer base of small beachside boutiques and surf shops on the East Coast, as well as one national retail chain, and had reached $150,000 in sales. The firm had a green streak, too—5% of the proceeds were donated to environmental-education and conservation organizations.After the financial collapse, however, "the only thing keeping us afloat were a few key accounts," says Mr. Linton. A few dozen boutiques out of several hundred were still ordering by mid-2009. And the 5% donations were a burden on the company.Mr. Linton and his two employees brainstormed how to turn the business around without losing its environmental mission. Their concept? Instead of donating cash, the company would collect one pound of trash—mostly on waterways and beaches—for every product sold. Each cleanup involves a few hundred of those small loads at once; the company says it has pulled in 40,000 pounds to date.Mr. Linton moved core operations to a new division called United By Blue, which sells hoodies, handbags and T-shirts. The company, he realized, could be more competitive if it had more items to offer, and it could build a stronger brand if its merchandise sported the company logo.The business model had instant appeal to a whole new retail base—outdoor-industry stores, specialty clothing stores and certain supermarket chains. Despite the dismal first half of the year, sales in 2009 stayed flat.Last year, sales hit $350,000. And this year they could double, Mr. Linton projects. Now, United By Blue is going international, thanks to interest from Japanese retailers. And the company has caught the attention of a major auto manufacturer that wants to launch a cross-promotional campaign by providing cars for the company's clean-up efforts."The recession made us think in a different way," says Mr. Linton. "Some companies throw money at a problem, but we want to internalize it and solve it ourselves."Four years ago, Travelers Haven LLC, a Naples, Fla., real-estate rental firm, found itself in the epicenter of the housing crash. Demand in the rental market dried up and nearly drove the fledgling company under."We could've gone down with the rest of the housing market there," says Elia Wallen, 28, the firm's president. Instead, he decided on a new direction—worker-relocation services.As the recession set in and jobs became scarce, more Americans were willing to follow jobs wherever they went and for however long. Usually, corporate housing services and staffing firms own properties or rent them long term, which means they can sit empty for long stretches between tenants.Travelers Haven offered to handle the task at lower cost. The firm would use proprietary software to track the availability of short-term rentals and match it with the needs of clients.To better tap this emerging market, Mr. Wallen and a handful of remaining employees pulled up stakes and moved to Denver. Their time zone allows them to work within the 9-to-5 office hours of staffing firms on either coast without having to start too early or stay too late, he says.Since leaving Florida, the firm has grown to 35 full-time employees. Revenue rose to $10.8 million last year—doubling from 2009 and up from an average of $1.3 million in 2007 and 2008. The company expects revenue to hit $20 million by the end of the year. "We started off imitating every Tom, Dick and Harry in the real-estate industry, where you earn a commission, shake a few hands and that's it," says Mr. Wallen. "We took a traditional model and turned it on its head." Rebecca Geier, 42, and Wendy Covey, 37, were colleagues for more than a dozen years at a marketing firm. In early 2008, they got together to build Trew Marketing—a venture that they hoped would bring them more balanced lives as well as new challenges.The agency got off to a strong start, but the recession took its toll. By the end of 2008, prospective new work was thin for the Austin, Texas, firm.The founders decided to narrow their focus, concentrating on business-to-business projects in engineering and science markets.Their reasoning: It takes a lot of hands-on work to deal with scientists and techies properly. If they were doing other types of work, it would take their attention away from tech-oriented clients. And their reputation might suffer as a result, costing them recommendations and jobs.That meant turning business down, including clients like a city looking for help with economic-development projects and a start-up that wanted to develop a website. Each of those jobs could have comprised from 12% to 20% of Trew's sales, Ms. Geier says.They also put more of an effort into optimizing traffic to Trew's website. That meant redesigning the site to match their new focus, adding a blog and offering a free downloadable book, "Smart Marketing for Engineers."The result: Trew thrived during the recession. Revenue is on track to grow a projected 194% this year over 2009. What's more, the pipeline of work is healthy, and comprised of the kind of technical marketing the firm is best at, Ms. Geier says. By Sarah E. Needleman, Vanessa O'Connell, Emily Maltby and Angus Loten in The Wall Street Journal's New York bureau. They can be reached at sarah.needleman@wsj.com, vanessa.o'connell@wsj.com, emily.maltby@wsj.com and angus.loten@wsj.com. ...

Why Amazon.com's New App Is Creating a Stir

Wed, 21 Dec 2011 11:05:13 EST

By Angus Loten Small brick-and-mortar retailers who recently may have taken Amazon.com for a new and powerful friend are likely thinking twice these days. Last month, the online shopping giant joined these small stores in their long-running battle to force Web-based retailers to collect out-of-state sales taxes – an exemption that enables many online retailers to charge lower prices, the store owners have argued. Amazon.com resisted collecting state taxes on remote sales for years. But as WSJ reported this month, it has recently expressed support for federal proposals to bring order to the way online retailers collect state and local taxes.Its willingness to get behind the proposals—combined with pressure from states for new sources of tax revenue, and bipartisan efforts in the House and Senate—has given the movement more traction this year.Whatever warm fuzzy feeling that move may have elicited from small, independent store owners was likely short-lived.On Dec. 10, Amazon promoted a new "Price Check" mobile phone app by offering shoppers a 5% discount—valid only for that one day—on items they found in brick-and-mortar stores, but purchased online through Amazon instead. The app enables in-store shoppers to scan or snap a photo of a product. It then immediately compares prices with Amazon's.The app is prompting an outcry from small retailers, who say the site is using their independent stores as its own showroom. By way of background, many small brick-and-mortar retailers have supported recent legislation requiring online retailers to charge state sales taxes on the grounds that customers often come into their stores to see products, but then turn around to buy the same products tax-free online.More than 7,000 people have signed a petition against the promotion, according to Change.org. The Change.org campaign was launched by Marcus Books owner Jasmine Johnson of Oakland, Calif. She told the Wall Street Journal in an interview Thursday that Amazon's promotion will hurt holiday sales at small businesses at a time when they can least afford it."The Price Check by Amazon app is primarily intended for customers who are comparing prices in major retail chain stores," an Amazon spokesman said Thursday. "The goal of the Price Check app is to make it as easy as possible for customers to access product information, pricing information, and customer reviews, just as they would on the Web, while shopping in a major retail chain store," he said.The Price Check app features prices from Amazon and its many third-party sellers, he added. An Amazon spokesperson told the New York Times this week that the promotion was not aimed at small competitors, but rather big box stores.Sen. Olympia Snowe (R., Maine), the ranking member of the Senate Committee on Small Business and Entrepreneurship, had recently likened that to "incentivizing consumers to spy on local shops," calling it "an attack on Main Street businesses." She urged Amazon to cancel the promotion. Write to Angus Loten at angus.loten@wsj.com ...

6 Tips for Building a Web-Based Store

Mon, 12 Dec 2011 16:03:45 EST

By Ty McMahan Four years ago, Jared Madsen started a company that makes bicycles built for five. He sold his bikes—which had two wheels and a rear bucket big enough to tote four children—wholesale to shops around the country.But today, 90% of sales at his small business, Madsen Cycles, in Murray, Utah, come from an online store that took his Web designer half a day to embed within his company's website.The company's bikes are now sold by him directly to consumers for about $1,485 apiece, at what he describes as a "way higher profit." He declines to specify his markups. Mr. Madsen says he initially thought the online store would just fill in "holes" where he didn't have distribution. But the benefit to him in the end, he adds, was that the Web store made it possible for him to dramatically reduce his reliance on third-party shops. As a result, the online store is now his business's main source of income.Have a company website? If you're not using it to sell your goods or services, then you could be losing out on an opportunity to boost your company's bottom line.Forrester Research says online shopping has surged in recent years and is continuing to grow. U.S. online retail sales, which rose 12.6% to $176.2 billion in 2010, are expected to grow at a compound annual rate of 10% through 2015, the research firm reports.Building an ecommerce platform within your company website doesn't have to be complex or expensive. A number of new services—such as such as Goodsie, Shopify, Storenvy and Weebly—now make the task easy and affordable. You can use these services to design a store, upload product, create shopping carts, manage fulfillment and more, —all for as little as a few dollars a month.Older platforms such as eBay and Etsy allow merchants to sell direct to consumers with benefits such as built-in site traffic. But these new services give merchants more control over the look and feel of their online stores."I wanted to have some sort of online presence or shop, but I thought it would be too much work and I couldn't do it on my own," says Kimberly Lash, who uses Goodsie to sell vintage clothing at ShopAmour.com. "I thought eBay felt like just selling clothes. You couldn't build a brand or company. There's tons of traffic and people are already going to the site, but you can't create a brand."The cost to use the new Web-store services ranges from as little as $5 up to $179 a month. Both Storenvy and Weebly are "freemium" services, offering the basic platform for no charge. The services can be free because the platforms make their money selling additional features, such as more storage. Storenvy charges monthly fees of $4.99 to link a store's own domain name and $2.99 for a discount code feature. Weebly charges $5 to link a domain name. Goodsie offers the first month for free, then a flat $15 each month for all features.The Shopify platform is the most feature-packed and also the priciest. The company charges $29 a month and a 2% transaction fee for all e-commerce features and up to 100 products. The company says its most popular offering is $99 plus a 1% transaction fee and up to 10,000 products.We spoke to executives at Goodsie, Shopify, Storenvy and Weebly, as well as Tom Davis, global head of e-commerce at footwear and apparel company Puma.Based on their suggestions, here are our tips for using these services to create an online store: 1. Invest time, and possibly money, in taking good photos. Photography is the "dirty little secret" of e-commerce, according to Mr. Davis. "[Customers] can't touch and feel your wares, so your photography needs to be an important element."Merchants should professionally photograph as many details of a product as they can afford.Goodsie Chief Executive Jonathan Marcus recommends shooting each product individually, as well as while it's being worn or used by a model, in order to show how big the product is. 2. Use a voice that matches your brand. "There's a fine line between cute and strategic," says Mr. Davis. For example, a flower shop may describe marigolds as "perfect for fall and a favorite for moms," while an electronics store may provide a more technical description of products. Merchants should also consider how their descriptions might surface in search-engine results, he adds. 3. Experiment with the layout, and mix it up. The new services, which emerged within the past five years, provide hundreds of templates for the arrangement of products on the page, as well as a wide variety of different colors and fonts. "Change things every two to three weeks over three months and see what drives the best results," Mr. Davis says.Goodsie's Mr. Marcus adds that stores need to be thoughtful about what products fit together on a page. For example, an apparel company may consider arranging items that make up an entire outfit. 4. Figure out the payment gateway. This is the trickiest part of creating an online store, according to Mr. Davis. Store owners will need to set up a merchant account with a bank to link funds from the credit card company or a third-party processor like PayPal, which lets customers use its merchant account under certain terms, usually with very little setup required. PayPal does not charge a setup fee.Currently, Weebly stores only accept Paypal or Google Checkout to process payments. Goodsie offers those services, as well as Braintree Inc. and Authorize.net, a Visa Inc. company, to accept credit card payments. Shopify offers dozens of payment options.PayPal accepts all major credit cards with no setup or monthly fees. The service takes a 2.9% fee per transaction on monthly sales up to $3,000. The rate reduces as monthly sales increase. Google Checkout charges the same. Authorize.net charges a $100 set-up fee, a $20 monthly fee and 10 cents per transaction. Most services charge about $10 per chargeback in the event a refund is issued. 5. Try to make online shopping feel like an experience. "Do you have the right boxes? Do you have packing foam? How do you want merchandise to be presented when your customer opens the box? Remember, that's the only one-on-one you're going to have with a customer," Mr. Davis says. He suggests offering gift wrapping and sending hand-written thank-you notes to add a more personal touch to the e-commerce experience.Alternatively, you can outsource fulfillment. Shopify integrates with third-party fulfillment services such as Fulfillment by Amazon, Shipwire and Webgistix. The cost of this can range for tens of dollars into the thousands depending on the product and volume of shipping. Those who choose to outsource fulfillment should do several trial orders with a service before committing to a provider, Mr. Davis suggests. 6. Promote heavily. With the growth of social media, these e-commerce platforms have baked in Facebook and Twitter integration so the store and individual products can be "Liked" and tweeted across the social networks. This requires registering for those services separately. The e-commerce platforms will ask the usernames and passwords of those separate services to sync the store. Gaining a following on services like Facebook and Twitter is a good way to alert customers to new products or specials, and to gain customer feedback, and potentially evangelism.Goodsie and Storenvy have tools to "port" an entire store to Facebook, enabling shopping directly through the social network. They say the process is as simple as installing an application and all products are automatically imported into a Facebook store. Store owners lose some control over the look of their store on Facebook, of course, however.Storenvy also combines all stores built on the platform into one big marketplace. It claims its stores are making almost 15% of their sales through the marketplace rather than through direct traffic. Goodsie also plans to launch a similar marketplace. A similar version of this story appeared previously in Dow Jones VentureWire. Write to Ty McMahan at ty.mcmahan@dowjones.com ...

Wage Hikes Force Tough Choices

Mon, 05 Dec 2011 09:54:37 EST

By Sarah E. Needleman Small businesses, already on a tight budget, are looking for new ways to cut costs as they brace for minimum wage increases in several U.S. states next month. Strategies range from cutting back workers' hours, to replacing waiters with an automated ordering system.Eight states including Arizona, Florida and Washington will require employers to pay non-salaried workers a minimum of 32 cents more per hour, on average, starting Jan. 1. While occasional increases to the minimum wage—which currently stands at $7.25 an hour nationally, but varies by state—are nothing new, the planned 2012 adjustments will hit many businesses at a time when profits are razor thin."It's a big deal," says Skip Vallee, chairman and chief executive officer of R.L. Vallee Inc., a convenience-store chain with 60 locations in Vermont, New Hampshire and New York.About half of R.L. Vallee's roughly 450 employees make the minimum wage—mostly entry-level cashiers, sales associates and inventory-control personnel. To cope with the wage increases in Vermont, the 69-year-old family business plans to cut employees' work hours in that state and is considering having employees there pay a larger share of the premiums for their employer-provided health insurance. Legislators commonly recommend boosting the minimum wage to compensate for cost-of-living increases, and some research suggests that mandated wage increases don't necessarily result in job losses or reduced work hours.There is no "evidence of any loss of employment or hours for the type of minimum-wage changes we have seen in the U.S. in the last 20 years," says Arindrajit Dube, a professor of economics at the University of Massachusetts Amherst. Earlier this year, Mr. Dube and two colleagues used government data to compare employment figures in counties that border states with different minimum wages.If employers cut back on labor, it's generally due to poor economic conditions, not pay requirements, Mr. Dube says.But opponents argue that minimum-wage increases do have unintended consequences. "When you raise the price of something, including entry-level labor, you're going to decrease demand for it," says Michael Saltsman, research fellow at the Employment Policies Institute, a nonprofit research group in Washington, D.C.Some small-business owners who have relied on teenagers and other low-cost employees in recent years already have cut back significantly on staffing, forcing them to search for other options."At this point, we're staffed at about the lowest level we could possibly be staffed," says Albert F. Macre, co-founder of a restaurant in Steubenville, Ohio. Mr. Macre says he will have to cut back the hours his employees work. He also plans to spend less on window washings and other vendor services to help his 14-employee establishment, Triple Play Café, stay in the black. Martin O'Dowd estimates a pending 36-cent increase in the minimum wage in Florida to $7.67 an hour will add up to more than $1 million in annual operating expenses for the 30 Hurricane Grill & Wings restaurants outlets he owns there.He recently began investing in technology—an interactive menu—for some locations that lets patrons order meals by themselves from their tables. If it works out, he says, he'll be able to cut back on the number of servers he needs to hire."We have to be more efficient," says Amy Igloi, owner of Amy's on the Bay LLC, a steak and seafood restaurant in Port Orchard, Wash., where the minimum wage will rise 37 cents to $9.04, including for servers and others who normally receive tips. "There's not much room for error."She had as many as 34 employees just a few years ago. Now, she plans to trim her 22 employees' work hours as much as possible.Still, some entrepreneurs say they prefer not to pay minimum wage. Spencer Williams, president of Schoggi Inc.'s West Paw Design, says he came to this conclusion soon after he founded the pet-products manufacturer in Bozeman, Mont., in 1996. Initially, he paid some plant workers the lowest wages possible. But when he later decided to give out raises that exceeded the minimum required, he says he gained a more loyal work force. Today his lowest-paid staffers earn $11 an hour. The minimum hourly wage that employers must pay in Montana will rise 30 cents to $7.65 next month. "Our turnover dramatically reduced and the engagement level from our employees rose," he says. Write to Sarah E. Needleman at sarah.needleman@wsj.com ...

Chasing the New Angel Investors

Tue, 03 Jan 2012 11:00:31 EST

By Angus Loten Budding entrepreneur Eric Bolden had never met an angel investor until he tried pitching a business idea to a few of them.Last week, the retired prison guard showed up at a midtown New York loft for an event that connects entrepreneurs with investors to see whether he might get, say, $50,000, from the angels—wealthy individuals who provide capital to start-ups with the potential for fast growth.?Mr. Bolden, dressed in a suit and tie, took to the microphone for a two-minute pitch, clutching his crumpled notes of the key selling points for his idea—a police handgun identification signal, complete with a flashing alert. The proposed device is meant to protect plain-clothes officers from friendly fire.??Angel funding has become increasingly available to entrepreneurs like Mr. Bolden, whose product ideas are in the earliest stages.?Of the $8.9 billion in total investments by angels in the first half of this year, 39% went into seed and start-up ventures, up from 26% of $8.5 billion in total investments over the same period in 2010, according to data from the University of New Hampshire's Center for Venture Research.?The number of businesses overall that received angel funding over the first half of the year increased 4.4%, compared to the same period a year ago, with the average angel investment measured at $338,400 per start-up, according to the data. Jeffrey Sohl, director of the Center for Venture Research, says he expects start-up investing by angels to remain solid in 2012.?The 48-year-old New Yorker Mr. Bolden has sunk more than $60,000 of his savings into building a prototype of his police handgun signal—a concept that came to him two years ago after an off-duty cop was shot dead by fellow officers while pursuing a robbery suspect. ??"I thought I could walk in there with a great idea and someone would write a check," Mr. Bolden said after making his presentation last week. ?But, as Mr. Bolden is discovering, many angels are more demanding than they were before the recession."If you don't have any skin in the game, how can you expect angels to put up their own money," says Katherine O'Neill, executive director of JumpStart New Jersey Angel Network, who attended the networking event last week. She wasn't particularly impressed with any of the pitches she heard, she says, because she thought the business plans seemed "pretty unformed." David Freschman, founder of the ARC Angel Fund, says angels are now more likely to ask founders and entrepreneurs to provide them with prototypes of fledgling products, beta-tested websites and extensive market research.One possible factor driving angels' greater diligence is the rise of angel alliances, with individuals banding together to invest in start-ups to spread the risk. Between 10,000 and 15,000 angels are believed to belong to angel groups in the U.S., which spread risk around by syndicating deals between members, according to the Angel Capital Association. The Overland, Kan.-based trade group says the number of angel groups has tripled since 1999.?The group-investor approach often results in a more formal review process because potentially dozens of people have to review and discuss the possible risks and rewards, Ms. O'Neill adds.??Another potential factor: an understanding among angels that venture capital remains very hard to come by for midstage companies.??Without this venture capital funding down the road, it could be more difficult for an angel-funded start-up to ever become profitable, or to be viewed as an attractive acquisition target by a larger company, many angel investors say.?"You don't want to build a bridge to nowhere," says Josh Lerner, who teaches finance and entrepreneurial management at Harvard Business School. ?In response to angels' increased scrutiny, many entrepreneurs say they are spending substantial amounts of time and money on tools, props and research that could help demonstrate the viability of their ideas in the marketplace.?"There's far more scrutiny now," says Max Belenitsky, an entrepreneur who spent the past two years trying to get investors to notice his Text-A-Cab smart-phone reservation system for taxis and limousines. A former vice president at Goldman Sachs Group Inc., he says he raised $100,000 from friends and family and now needs as much as $500,000 for further development and marketing costs to "flip the switch" and take payments from customers on the website."They want to see implementation," he says of potential angel investors. "They want to see the first 1,000 users [of the website] and how revenue is generated." ? Liza Deyrmenjian, the founder of ShopToko.com, an online fashion and accessories wholesaler for independent retailers, says prospective angel investors in her company have asked for a breakdown of all the recent transactions on the site, as well as specifics on her target market and other data. After raising $250,000 from friends and family to get her site up and running in October, she is now seeking an additional $1.5 million to scale up and reach more retailers. "They want to see a business that is up and running," she says.?To be sure, there's a chance that angel investors could lose their heightened appetite for investing in start-ups.?About 58% of venture capital professionals say they expect there to be an overall shortage in seed or early-stage funding in 2012, according to a new survey from the National Venture Capital Association and Dow Jones & Co. Dow Jones owns also The Wall Street Journal.?Venture capitals are institutional investing funds.Of course, many seasoned entrepreneurs with proven track records are and will remain able to get funding with little more than a back-of-the-envelope, or informal, pitch, angel investors say. Mr. Bolden says he is polishing his pitch. He is currently developing a website that he hopes may help to lure angel investors, including those outside of New York. The site will show video demonstrations of how the gun signal works. Building it may cost him another few thousand dollars at the very least, he says.? Write to Angus Loten at angus.loten@wsj.com ...

Poised for Growth, But Not Hiring

Thu, 02 Feb 2012 12:53:13 EST

By Emily Maltby Small-business owners are more optimistic about conditions at their firms, but that's not translating into a hiring surge. Businesses with fewer than 50 employees added an estimated 95,000 jobs nationwide in January, according to a report released Wednesday by Automatic Data Processing Inc., a payroll processor based in Roseland, N.J. That's down from the 136,000 jobs they added in December and the 111,000 jobs in November, though fairly consistent with the overall hiring trends of the last year. Small businesses added an average 82,000 jobs in each of the last 12 months. Such increases may help to curb unemployment, but are not rapid enough to regain the previous peak in employment for years, says Joel Prakken, chairman of Macroeconomic Advisors LLC, a research firm that works with ADP to prepare the monthly report. The private sector as a whole – including mid-size and large businesses, added 170,000 jobs in January.These are "slow and steady gains," he says. "Not spectacular."The ADP data, released Wednesday, reflects the sentiment of business owners surveyed in the 2011 Year-End Economic Report from the National Small Business Association, a lobbying group in Washington, D.C. That report, also released Wednesday, shows major improvements in current conditions and future outlook among small businesses, but little change in job growth."They're still cautious," says Todd McCracken, president of the NSBA, which releases its member survey twice a year. "Many folks are still in a position where they need to shore up their businesses, get by on the employees they can for a while, and get in a better cash position before they hire."Some 22% of business owners added employees to their payrolls in the last 12 months, according to the report, which compiled responses from 450 business owners, averaging 15 employees. That's unchanged from six months ago. And 30% anticipate adding employees in the coming year – about the same as the 29% that reported such plans in July. Meanwhile, revenue growth hit its highest point in more than three years, with 46% of firms showing increases, up from 39% six months ago. Three out of four businesses are confident about the future of their businesses, up from 64%. Some 70% have been able to secure adequate financing, also the highest in at least four years. And only 14% anticipate another recession, down from 30%. Despite the positive outlook, adding employees is "a long-term decision," says Mr. McCracken. "You don't want to hire and then let them go in six to nine months. You want to feel confident that you will be a bigger business than you were before."In order for owners to feel more secure that their growth is sustainable, they need more confidence in the broader economy, which is based partly on the political climate, he adds. The report shows that economic uncertainty is the top challenge to the future growth and survival of the respondents' businesses.Mr. Prakken of Macroeconomic Advisors also suggested that the hiring conditions today are tied in part to the uncertainty in Washington. Businesses are waiting for updates on certain tax provisions, such as the Bush tax cuts and the payroll tax, as well as regulatory changes. Combined with worries about the country's deficit, he says, "it's not a happy mix." Write to Emily Maltby at emily.maltby@wsj.com ...

Big Price for Flash-Sale Site

Wed, 07 Dec 2011 19:24:46 EST

By Spencer E. Ante Newly public Internet companies are having a tough time on the stock market this fall, but that hasn't stopped venture capitalists from making some big bets on start-ups.Case in point: investors led by venture firm Andreessen Horowitz have just plowed $40 million into flash-sale website Fab.com Inc. The round values New York-based Fab.com at more than $200 million, people familiar with the matter said.The investment comes just six months after the company decided to ditch its original business plan, running a social network for the gay community, and shift to selling discounted furniture, jewelry and art in 72-hour sales.An $8 million fundraising round in July, shortly after relaunching the site, valued Fab.com at around $25 million, people familiar with the matter said. The difference, Andreessen Horowitz says, is the company's fast growth. In November, Fab.com processed 100,000 orders, double the previous month, and is now averaging $1.4 million in sales a week. Fab.com already claims 1.2 million registered users, and is seeking to reach 4 million members next year. "We think there is a really big business in aggregating the world's designers," said Jeffrey Jordan, a general partner at Andreessen Horowitz who will be joining Fab.com's board. Fab.com's previous investors—First Round Capital, Menlo Ventures, Baroda Ventures, SoftTech VC, and Ashton Kutcher investment vehicle A-Grade Investments—are also participating in the financing round. Other investors include Washington Post Co., SV Angel and Zelkova Ventures.The question now is whether Fab.com can keep expanding quickly amid growing competition and the logistical challenges that come with scale, such as managing inventory and customer service. Fab.com competes against e-commerce gorillas such as Amazon.com Inc., flash-sale sites such as Gilt Groupe Inc., and other start-ups including crafts retailer Etsy Inc.Fab.com's founders relaunched their business this June as a flash-sale online store that sells well-designed products after realizing their gay social network was not going to be as big as they expected, peaking at about 150,000 members. The design market seemed an obvious choice to them, since it was fragmented and because designers were looking for alternatives to traditional retail channels.The company plans to use the funds to invest its distribution and customer service capabilities to meet surging orders and begin an expansion overseas. It employs 120 people world-wide, with 85 of them based in its New York office.Fab.com CEO and co-founder Jason Goldberg, who previously founded jobs site Jobster Inc., said the company will bring on another 80 people over the next year and open a second fulfillment center on the West Coast, to complement its first one in New Jersey. "We are playing catch up to the users," he said. Much of Fab.com's growth has come from social media. Users can let others know when they join the site and when they buy products they buy through Facebook and Twitter tools that are integrated into the website.The company runs about 14 sales a day, which typically last 72 hours. They also are experimenting with pop-up stores focused on special themes such as the holidays. Write to Spencer E. Ante at spencer.ante@wsj.com ...

Some Left Out as Corridor Shines

Wed, 11 Jan 2012 18:42:51 EST

By Stu Woo Remy Nelson recalls that around the time he opened Mojo Bicycle Café in San Francisco's Divisadero Corridor in 2006, there were multiple nearby shootings.With a declining crime rate in the area, gunfire is no longer his biggest worry. But with rents rising so much in the past few years, Mr. Nelson, who is president of the Divisadero Merchants Association, says he can't afford his own apartment in the area."It became a desirable neighborhood," says Mr. Nelson. The downside, he adds, is "there's a whole demographic group that's been alienated."The Divisadero Corridor, which runs roughly north and south between Haight and Turk streets and stretches a few blocks west and east of Divisadero Street in the Western Addition, has become San Francisco's new Mission District. Once a mainly black, working-class neighborhood, with some crack houses and prostitution, the Divisadero Corridor is becoming home to hip eateries and young, largely white techies. In doing so, the neighborhood is dealing with some of the same gentrification issues, such as rising rents and demographic shifts, that the Mission has faced in recent years.RealFacts, which tracks hundreds of units in three buildings in the Divisadero Corridor, says the average rent in those units rose from $1,596 in 2003 to $2,276 in 2011. The average price of a studio apartment over this time has gone from $1,280 to $1,834. Police say the number of violent crimes in the Northern Police District, which includes the Western Addition as well as more posh neighborhoods such as Pacific Heights, Russian Hill and the Marina, fell from 806 from Jan. 1 to Dec. 26, 2009, to 706 during a comparable period in 2011.The area is now anchored by one of the Bay Area's most popular restaurants, NOPA, and is welcoming new outposts from two Mission institutions, Four Barrel Coffee and ice-cream maker Bi-Rite Creamery.But the departure of many of the older, working-class black residents in the Divisadero Corridor—akin to the exodus of many of the Mission's Hispanic residents as that neighborhood has changed—gives pause to Jason Hopkins, who has owned the Your Scents Trading incense shop next to Mojo for nearly two decades. He says many of his older black customers have left, though business from new arrivals has made up for it."The pro is you don't see the negative impact of the brothers hanging out on the corner and not doing anything productive," says Mr. Hopkins, who is black, of the gentrification. "The con is I hate to see the culture here gone." The younger residents moving into the Divisadero Corridor are often coming after being priced out of the Mission District. Meghan Murray, a 28-year-old marketing employee for a technology start-up, says she and her boyfriend moved into a large studio near Alamo Square Park for $1,900 a month after failing to find one under their $2,000-a-month target in Mission. "It's sort of the same vibe here," she says.The same is true for business owners such as Brian Belier. The hairstylist wanted to open his salon, Population, in the Mission. But he found everything was too expensive and instead opted for a former check-cashing place on Divisadero and Fell streets, where the rent is less than half the $7,000-a-month going rate for a storefront he considered in the Mission. He says the clientele at his shop, which opened in August 2010, includes tech employees, students and artists. The neighborhood's metamorphosis accelerated after the restaurant NOPA opened in 2006, say longtime residents and merchants. The upscale eatery, whose name is short for North of the Panhandle, brought in affluent diners who otherwise wouldn't have stopped in the neighborhood. Other businesses such as Mojo Bicycle Café, Mini Bar and Café Divis also moved in. Local merchants spurred the growth by organizing art walks several times a year and a farmer's market on weekends. Several restaurants, including Mojo and Tsunami Sushi, benefited from what are known as parklets, in which street-side parking spots are replaced with outdoor seating. That created a feeling of a more walkable neighborhood."People are thinking it's the Mission 2.0," says Jarie Bolander, a board member and former president of the North Panhandle Neighborhood Association, which includes the Divisadero Corridor. "It's a great place to hang out and window shop."London Breed, executive director of the African American Art and Culture Complex, who grew up in the Western Addition, says she finds many of the changes in her native neighborhood positive. But she says city leaders must do something to preserve the remaining black culture."We could come up with some creative ways in which we can attract and support the African-American population coming to San Francisco, but it has to involve taking a lot of risks and challenging a lot of the laws that exist around housing and affordability," she says. Mr. Bolander says he agrees with Ms. Breed's idea to help black residents and merchants stay in the area. "The diversity of San Francisco is what makes it such a great place to live." Write to Stu Woo at Stu.Woo@wsj.com ...

Government Lays Out Health-Law Defense

Mon, 09 Jan 2012 12:36:30 EST

By Brent Kendall And Emily Maltby The Justice Department on Friday formally opened its Supreme Court defense of the Obama administration's health-care overhaul, and in a twist said the recent bankruptcy of the one of the challengers bolsters one of the government's key arguments.The department submitted a 63-page written brief that reiterated its main legal arguments in support of the health-care law's requirement that individuals carry health insurance or pay a penalty.Among its submissions, the Obama administration argued the insurance mandate is a valid way to address a national crisis in which the uninsured impose huge costs on the U.S. health-care system.In a new effort to underscore that argument, the Justice Department cited plaintiff Mary Brown, a former auto-repair-shop owner from Florida. The Wall Street Journal reported last month that Ms. Brown closed her shop last year and filed for personal bankruptcy. Among Ms. Brown's liabilities are thousands of dollars in unpaid medical bills."Those liabilities are uncompensated care that will ultimately be paid for by other market participants," the department said in its brief. "As Congress found, Brown's experience is hardly atypical."Ms. Brown said in an interview Friday that she and her husband filed for bankruptcy because of the significant expenses related to her auto-repair business, not because of their medical bills. "You have to put down everything you owe," she said of the filing. "That doesn't mean I won't pay it." Ms. Brown said she was looking for a job that would enable her to afford health insurance, "but I don't want someone telling me that it's the law and that I have to have it."The Justice Department said the uninsured consumed $116 billion in health care services in 2008, and providers were not compensated for $43 billion of that total. It said the insurance requirement is a "classic economic regulation" to address that problem.Groups opposing the law also filed several briefs at the Supreme Court Friday. One was filed by 36 Republican senators, who said that if the court finds the insurance mandate unconstitutional, it should nullify the entire law. Ms. Brown was the only plaintiff the Justice Department agreed had legal standing to challenge the insurance mandate. The case also involves challenges by 26 states and the National Federation of Independent Business. Without owning a business, it could be harder for Ms. Brown to argue that the law harms her, and her financial woes suggest she could be exempt from penalties for not having health insurance. To address potential problems posed by the bankruptcy, the business federation this past week asked the Supreme Court to add two new plaintiffs to its lawsuit, and the government supported the move.The Supreme Court will hear the case in March, with a decision expected by the end of June. Write to Brent Kendall at brent.kendall@dowjones.com and Emily Maltby at emily.maltby@wsj.com ...

Start-Ups Aim to Teach Coding

Thu, 08 Dec 2011 07:29:29 EST

By Jessica E. Vascellaro With computer programmers in demand, new start-ups that aim to train people in coding skills are also becoming hot properties. Ventures that teach computer programming, design and other once-nerdy skills to the masses are surfacing nationwide and drawing interest from Bay Area investors. Many of the investors want to cash in on a technology-driven sea change in learning that will allow consumers to cultivate a broad array of skills online and help ease Silicon Valley's talent crunch. Treehouse Island Inc. launched last month with $600,000 from West Coast investors including Greylock Partners and Social+Capital Partnership. The service, which starts at $25 a month, teaches online classes in subjects like Web development and building mobile apps. Users rack up virtual badges for completing quizzes and code challenges. Competitor Codecademy raised $2.5 million from Union Square Ventures, SV Angel and others in October. The site's free online exercises have been accessed nearly 30 million times since its August launch, says co-founder Zach Sims. Physical schools are sprouting up, too. General Assembly, which teaches Web development and design classes in New York City, raised $4.25 million in September from venture firm Maveron LLC, Amazon.com Inc. Chief Executive Jeff Bezos and others. The services are taking hold as computer programming continues to gain allure and relevance amid the rise of mainstream tech companies like Google Inc. and Facebook Inc. and almost every industry going digital. But despite the fact colleges are churning out more programmers, many fast-growing Silicon Valley companies say they still can't find enough of them.Overall, the number of students who received a bachelor's degree in computing rose nearly 11% in 2010, according to the Computer Research Association, which tallied 12,501 degrees at the nearly 200 institutions it tracks. But the number of U.S. high schools offering introductory computer science dropped to 69% in 2011 from 78% in 2005, according to Computer Science Teachers Association. The trade group attributes the drop to a decline in electives caused by budget constraints at school districts nationwide. Treehouse founder and CEO Ryan Carson says his company aims to ease the pain for employers by releasing software that identifies standout Treehouse users as they progress, allowing companies seeking Web developers to identity high-performing users. Companies including LivingSocial Inc. say they plan to use it. The new services are among a host of groups evangelizing the potential of online self-education. Stanford University and others are unleashing their lectures to millions over the Web. Nonprofits like the Khan Academy and start-ups like Lynda.com Inc. and Mahalo.com Inc. are offering volumes of online lessons in topics ranging from algebra to 3-D animation. Raghu Betina, a 29 year-old economics major, recently enrolled in Chicago-based school Code Academy LLC, another new school that offers 12-week Web programming and Web design classes for $6,000 each. He likens the skills he's learned to "superpowers" that he's now using in his latest venture, video site FriendBC. "Now I can help build the darn thing," he says. Write to Jessica E. Vascellaro at jessica.vascellaro@wsj.com ...

More States Decide to 'Buy Veteran'

Fri, 13 Jan 2012 17:45:07 EST

By Tamara Audi After two deployments in Iraq, U.S. Army reservist Josh Cuddy returned to New Brighton, Pa., to open a gourmet-waffle restaurant. Business is good, the 33-year-old veteran says, and he hopes it might get better: His state and nearby Pittsburgh are trying to boost contracts awarded to small businesses owned by veterans. If government officials need catering, Mr. Cuddy is ready to serve.More states and local governments are setting aside money to buy goods and services from veteran-owned businesses. The movement has gathered steam as vets have returned from Iraq and Afghanistan to growing unemployment in their ranks.Currently, 23 states offer some type of preferential treatment for businesses owned by veterans, according to the National Veteran-Owned Business Association, an advocacy group. Nine have enacted the legislation since 2009, when veterans started a lobbying push for the benefit, said Matthew Pavelek, spokesman for the group. Some states, like Illinois, set an annual goal of 3% of all contracts for businesses owned by veterans. Others, like Pennsylvania, encourage government agencies to increase contracting with veteran-owned businesses, without establishing a target. This month, Hawaii Republicans are expected to introduce a bill that would set aside 3%, or roughly $33 million, of the state's spending for veteran-owned businesses each year."Veterans more than anyone else have really sacrificed for their country,'' said state Rep. Aaron Ling Johanson, one of the bill's sponsors. "If there was a group to give a preference for, there are very few others that are as compelling."Since 1999, the federal government has had a goal of awarding 3% of its contracts to veterans disabled in the line of duty. It awarded $10.8 billion in contracts to veteran-owned small businesses in fiscal 2010. But veteran advocates say state and local-government programs can be more effective."We've got a lot of veterans coming back who want to see opportunity in the states where they live," said Mr. Pavelek. Cities from Las Vegas to Nashville are also passing ordinances.The unemployment rate among veterans returning from Iraq and Afghanistan jumped to 13.1% in December, from 11.1% the previous December, according to the latest report from the Bureau of Labor Statistics. (Nationally, unemployment was 8.5% in December.) Many veterans who can't find jobs are starting their own businesses, veteran advocates said. There are an estimated three million veteran-owned businesses nationwide.Kevin O'Connor, a 58-year-old Army veteran who owns a business primarily installing dental equipment in California state prisons, says 80% of his business is with the state. He said the state's veterans program allowed him to buy a nice home in a Los Angeles suburb and send his two children to the University of Southern California. "I've gotten the American dream because of this program," he said. "It's not a giveaway—you have to perform. But at least it makes up for the time we lost serving our country."Between July 2009 and July 2010, California spent $213 million on businesses owned by disabled veterans, or around 3.7% of the state's $5.8 billion procurement budget. The state has had a goal of spending 3% on businesses owned by disabled veterans since 1989 but started meeting it only in the past two years, after a push from a veterans' group. Set-asides like these are typically targets for advocates of free enterprise. But because veterans' causes are politically popular, opposition to such bills often takes the form of keeping them off the calendar until they die a quiet death, veterans say. Some advocates for minority-owned businesses oppose the inclusion of veterans in state preference programs meant for minorities, fearing that adding them to the mix could further shrink opportunities for everyone. "Supporting veteran businesses is a positive thing, but I think that's the wrong way to go about it," said Dedrick Muhammad, senior director of economic programs for the NAACP. "You'd want to grow the pie instead of fitting more categories into it.Otherwise you're not really addressing issues of racial inequality or doing much for veterans."That worry arose in North Carolina, home to military installations at Fort Bragg and Camp Lejeune, two years ago. A bill that would have added veterans to the pool of minority-owned businesses given preferential treatment languished after lawmakers raised concerns about how it would affect minority-owned businesses."There were too many unanswered questions," said Floyd McKissick Jr., a Democratic state senator from North Carolina who led a subcommittee to study the bill. "Sometimes you can take actions which are admirable but they can have unintended consequences."Some states have resisted the legislation, citing the costs associated with ensuring that businesses are really veteran-owned to avoid fraud. A federal audit last year estimated that the Department of Veterans Affairs awards "ineligible firms" 1,400 contracts worth $500 million a year. The agency awards around $3 billion a year in contracts to veteran-owned businesses. Tom Leney, the VA official in charge of the verification program, said controls have improved since the audit. He said most of the ineligible firms weren't fraudulent but simply didn't meet standards. No other federal government agency is required to verify the status of veteran-owned businesses. "Nobody knows how much fraud and abuse there is" government-wide, said Greg Kutz, a director with the Government Accountability Office who performed a follow-up audit on the VA that called for fixes to its verification system. Mr. Kutz said the agency has improved but that more can be done. Write to Tamara Audi at tammy.audi@wsj.com ...

For Smaller Firms, Recruiting Costs Add Up

Wed, 30 Nov 2011 11:54:06 EST

Large firms see a significant scale advantage when it comes to recruiting costs per new employee, according to a study from Bersin & Associates, a human-resources advisory firm.Companies with more than 10,000 employees world-wide pay a median figure of $1,949 per hire, compared with midsize companies, which pay $3,632, and small firms, which pay $3,665.Because small and medium-sized organizations tend to have fewer dedicated recruitment employees, they often have to outsource hiring, which "can be very expensive," says Josh Bersin, chief executive and president of Bersin & Associates.Large companies also hire significantly more employees than small and midsize firms relative to the size of the recruitment staff, bringing down the costs.Of the industries analyzed, manufacturers had the highest recruitment costs per hire, with median spending of $6,443. That's because those jobs require specialized skills like familiarity with particular types of equipment or software, Bersin says.Health-care companies had the lowest costs, at $2,127, because the skill and certification requirements for many medical positions, such as nurses, are rigidly defined, which simplifies hiring, Mr. Bersin says.To calculate the cost per hire, 414 companies added up all their spending on internal recruiting staff, third-party agencies, company career websites, applicant tracking software, job-listing services, college recruiting, employee referral programs plus other recruiting-related expenses—and divided that number by their total hires over the preceding year.American workers under the age of 30 experience the highest levels of job satisfaction, according to a study by the Center on Aging and Work at Boston College. Those over 50 are also pretty happy with their jobs. The least jazzed about their daily grind? Workers between the ages of 30 and 39.On a scale of one to six, with six being the highest rating, the median job satisfaction levels of the under-30 crowd and the 50+ group came to 4.66 and 4.55, respectively. For the 30-39 group, the rate was 4.33. It was 4.44 for those aged 40-49. A total of 1,156 respondents in the U.S. completed the 30-minute online survey.The under-30s were the most satisfied with their job security. They and the over-50s were also happiest with their relationships with peers and co-workers. Meanwhile, the over-50s—considered in the study to be at the "late-career" stage of their work lives—trumped most of their mid-career counterparts on measures of satisfaction with their own skills and abilities, the diversity and inclusiveness of their organizations, their benefits, and the sense of accomplishment they derived from work.More than 40% of the survey respondents, especially those over 30, were dissatisfied with their companies' efforts to provide opportunities for advancement and promotion, making it the area of greatest frustration among the 13 topics considered.The findings about age and promotions might be related, says Margaret Morford, president of HR Edge, a consulting and training firm in Brentwood, Tenn. Generation X workers—those between 30 and 49—have been "in the work force for a long time and they keep waiting for Baby Boomers to move out so they can step into those managerial positions, and it's not happening," she said.Instead, Boomers are working for more years to compensate for the hit their 401ks took during the recession, says Ms. Morford. ...

EBay Buys Hunch to Serve E-Commerce Recommendations

Wed, 23 Nov 2011 09:35:00 EST

By Ty McMahan Hunch Inc. has found a home inside eBay Inc., helping the global e-commerce company better predict which items will entice shoppers. Hunch was founded by serial entrepreneurs Caterina Fake, co-founder of Flickr, and Chris Dixon, a noted angel investor. The company raised about $20 million from investors including Bessemer Venture Partners, General Catalyst Partners, Khosla Ventures and SV Angel. The company combines algorithmic machine learning with user-curated content to connect affinity to anything on the Web, from fashion to food trucks. "When you start a company, the number-one thing you want to do is get it out there and have an impact," Dixon said. "This [acquisition] is going to let us have impact on the biggest stage." Financial terms of the deal weren't disclosed. Hunch's technology is expected to help eBay expand its merchandising and relevance capabilities to improve the shopping and selling experience for eBay customers. Buyers are expected to benefit from Hunch's predictive ability to generate meaningful, yet often non-obvious, recommendations. For example, someone searching for computer parts may also be shown computer repair tools. "We're getting much more focused on the wealth of data we have," said Mark Carges, eBay's chief technology officer. "By studying keywords, clicks, messages and feedback scores, we can use that data to make a more delightful experience for consumers." EBay has made several recent e-commerce acquisitions, such as e-commerce platform GSI Commerce Inc. and Milo Inc., which helps users find nearby stores that have a particular product in stock using their mobile phone. The company's X.commerce platform aims to provide all of the fundamental technologies needed for end-to-end commerce, delivered in a way that's simple enough for the mom-and-pop shops to manage. "We're all about enabling commerce," Carges said. "We have a set of technologies that enable the large and small. Hunch is something we can use on eBay, but then give access to folks in the GSI portfolio." Hunch's employees will remain with the company, including co-founders Dixon, Tom Pinckney and Matt Gattis. Hunch will continue to be based in New York, adding eBay to the growing number of tech heavyweights to plant engineers in the city. Write to Ty McMahan at ty.mcmahan@dowjones.com ...

Start-Ups Need Staff to Get Investors' Cash

Wed, 28 Dec 2011 16:49:05 EST

By Deborah Gage Many Silicon Valley start-ups have had a tough time finding qualified computer engineers amid a growing talent war. Investors are adding to the pressure.Venture capitalists and Bay Area entrepreneurs say local start-ups face extra hurdles in raising money or are denied funding if the companies don't have what is considered to be a full team of qualified employees—especially engineers. This has traditionally been the case, but the problem has become more pronounced in recent years as the number of solo entrepreneurs in Silicon Valley has grown. These lone entrepreneurs—many of whom are developing videogames or smartphone apps and can have a narrower skill set than the small groups of people that form start-ups—may have only a handful of people working for them. But venture capitalists, mindful of the risks of putting their money into one-man shows, now more than ever want to know that start-ups are able to get sufficient staffing."You need a full complement of senior engineers," says Sanjay Subhedar, a managing director at venture-capital firm Storm Ventures in Menlo Park. Mr. Subhedar says Storm has delayed and denied funding for companies that don't have a strong technical leader or team. "If you need to hire eight to 10 engineers after the funding, do you know who these guys are? If you say yes, good. If you say no, it's very difficult."The team focus comes as a talent shortage has become more acute in Silicon Valley this year, especially for mobile and consumer Internet companies. As of Sept. 30, StartUpHire.com, a job-search engine for venture-backed companies, had 1,429 postings for software, networking or information-technology services jobs in the Bay Area, up 58% from 903 postings a year earlier.One entrepreneur who ran into funding problems because of the lack of an engineering team is Justin Nassiri, who in 2010 founded VideoGenie Inc., a Menlo Park-based company that lets businesses manage customer-made videos. He says he couldn't initially talk anyone into funding his company, partly because he was the only person on board. At one point, he spent $8,000 of his own money to bring on a group of engineers in India, who worked on developing a product until he ran out of cash. Carol Sands, an investor at The Halo Funds in Mountain View, says she passed on Mr. Nassiri's company because she doesn't typically back solo entrepreneurs. "If I have three people working at an investment, chances are those three people aren't clones of each other…so when a company gets a problem, they can have a significant and meaningful conversation among the three of them," she says.Mr. Nassiri's luck only changed last year when he raised $350,000 from Google Inc. Chairman Eric Schmidt's Innovation Endeavors and persuaded one engineer, Rob Starling, now a co-founder, to work for him. Mr. Nassiri got an additional $2 million from Blumberg Capital this year."It was incredibly lonely and isolating," Mr. Nassiri says of his days getting up at 5 a.m. to catch the engineers in India before the end of their day. "I still look back on it, and if there's anything I could have done to have a team at that point I would have gladly given away half the equity."Engineers in Silicon Valley are so scarce that one investor, IDG-Accel China Growth Fund, paired local entrepreneur Jason Johnson with Hugo Dong, an engineer in China. The two hit it off when they met via email and Skype in February and in person in May. The duo came up with the idea for BlueSprig Inc., which protects mobile phones from hackers and other threats, and announced $10 million in funding in December.Mr. Dong now supervises BlueSprig's engineering team in Chengdu, while Mr. Johnson handles business development from San Francisco. "Whenever I met somebody [in Silicon Valley] who was technically qualified, they had their own idea," Mr. Johnson says of the difficulties of putting together a team. ...

Searching for Side Effects

Wed, 01 Feb 2012 16:07:05 EST

By Melinda Beck You're taking a new medication and have dry mouth and feel dizzy. Want to know how many other people have reported those side effects—and how your drug compares with similar drugs? The U.S. Food and Drug Administration has millions of such "adverse event" reports, ranging from fatigue to fatal heart attacks, for thousands of prescription drugs dating back to 1969. But the information hasn't been readily accessible—until now. A start-up company, AdverseEvents Inc., has streamlined the FDA's often impenetrable database and made it easy to search the adverse-event reports for more than 4,500 drugs, free and online. Another start-up, Clarimed LLC, has done the same for reports filed with the FDA on 130,000 medical devices, a far more complex group that runs the gamut from syringes to stents to tanning beds and diagnostic machines that could impact tens of thousands of lives. Both companies, which launched in September, see their services as empowering patients, many of whom now comb Internet discussion boards for medical information. "If your doctor tells you to take a drug and it's three times more likely to give you a heart attack than another drug, not having that information seems foolish," says AdverseEvents President and co-founder Brian Overstreet. While basic searches will remain free, AdverseEvents plans to charge consumers $10 a month for access to full drug reports starting Wednesday, and will offer health-care professionals and businesses more detailed information for additional fees. Clarimed may follow suit. Both websites offer a way to file reports to the FDA, but few visitors have done so. Nora Iluri, CEO and founder of Clarimed, likens these efforts to the advent of J.D. Power and Associates safety ratings for cars. "Suddenly, manufacturers started competing on quality," she says. "The best way to drive quality improvements is to make things crystal clear and transparent as possible." The adverse-event reporting system for drugs (known as AERS) helps the FDA monitor side effects that crop up after a medication is approved and used in the real world. (The system for devices, called Maude, for Manufacturer and User Facility Device Experience, started in the 1990s.) AERS has received 6.4 million reports, and the volume has risen steadily. There were 759,000 for drugs and 238,000 for devices in 2010. But reporting is voluntary, and represents only a fraction of all the side effects and malfunctions, the FDA says.Agency analysts mine the data for worrisome trends that prompt further investigation and sometimes stronger warning labels or even removal from the market. The cholesterol-lowering drug Baycol, for example, was withdrawn in 2001 after 52 deaths from rhabdomyolysis, a muscle and kidney disorder, turned up in the adverse-event files.People seeking AERS information can download raw quarterly data from the FDA's website, but it isn't cumulative and requires technical expertise to use. They can also file a Freedom of Information Act request for more specific data, but what they get back may be voluminous and impenetrable. That's what Mr. Overstreet, a data-marketing entrepreneur, found when a friend's wife suffered a severe drug reaction and he went looking for information. He and his fellow data experts found the FDA's AER files indecipherable. "That's when we said, 'Let's fix this,' " he says.One problem is that the data are sometimes jumbled. Most reports come through drug and device manufacturers, but patients, physicians, family members—even lawyers—can send reports to the FDA, and they often contain errors and inconsistencies. "There are at least 440 different ways to spell Ambien and each has a separate file at the FDA," Mr. Overstreet says. AdverseEvents Inc. developed an algorithm that filters out duplicates and combines spelling variations, reducing over 200,000 drug names to about 4,500. It also made the data easily searchable and comparable for thousands of conditions and side effects back to 2004. Still, the FDA's data have other limitations that some critics say make it potentially misleading. For one, there is no way to determine whether a side effect is due to a drug or a coincidence. (Device malfunctions are even trickier, since operator error or surgical skill can affect how they perform.) For another, the reporting doesn't necessarily mirror the true incidence of problems. New drugs tend to generate more reports than older ones, and a negative news story about a drug or device can prompt a sudden spike in reported problems. Expectations matter, too. Chemotherapy drugs that cause severe side effects get far fewer reports than drugs for, say, heartburn.What's more, the FDA files don't indicate how widely a drug or device is being used, so there is no perspective. For example, Lipitor tops all statins for side effects, with 76,535 adverse-events reported from 2004 to 2011 (most often muscle pain, pain in extremities and muscle weakness), compared with 34,938 for rival Crestor, according to AdverseEvents.com. But users aren't told that Lipitor was prescribed far more frequently, so the proportion of problems was smaller. AdverseEvents plans to post prescription data for some drugs. But sales information isn't available for many medical devices—even for costly implants like artificial joints, says Ms. Iluri. Without such numbers, she says, "Neither we nor the FDA can easily compare safety for devices across manufacturers."The FDA defends its own use of the data for safety surveillance and it issues frequent MedWatch alerts on potential problems. But its website also warns that its AER files "cannot be used to calculate the incidence of an adverse-event in the U.S. population." For consumers who want more information on drug side effects, "the best source is to read the product label and talk to your doctor or pharmacist," says Gerald Dal Pan, director of surveillance and epidemiology in the FDA's Center for Drug Evaluation and Research. Kate Connors, a spokeswoman for the Pharmaceutical Research & Manufacturers of America, which represents most drug makers, said the group isn't familiar with AdverseEvents and believes the FDA is the most appropriate source of information. "We think it's important for this information to be framed within context and to be properly evaluated," she says.Some consumer advocates argue that the FDA is too understaffed to investigate all the potential problems in its files, that regulatory actions often take years and that consumers and health-care professionals need better safety information in the meantime. AdverseEvents "is useful and necessary, but it may not be sufficient, given the problems with the FDA data," say Joe Graedon, a pharmacologist who runs ThePeople'sPharmacy.com, a website where visitors often discuss their own experiences with drugs. Other experts say AdverseEvents and Clarimed can be helpful, as long as users understand the caveats. "If you just want an impression of the side effects of a drug, those impressions are pretty accurate," says Thomas J. Moore, a senior scientist at the Institute for Safe Medication Practices.Mr. Overstreet notes that even with the limitations, consumers looking for information "can base some conclusions on the three million-plus reports we have in this database, or they can go with what a couple of people are saying in an online discussion board—that's what a lot of people do now." Write to Melinda Beck at HealthJournal@wsj.com ...

What The Health Care Law Will Mean for Your Small Business

Wed, 07 Dec 2011 17:09:07 EST

By Emily Maltby As a small-business owner, you may find your head spinning when trying to figure out what the Patient Protection and Affordable Care Act may bring. How the new provisions impact you, if at all, depends on the outcome of a high-profile Supreme Court case and potentially on the results of the 2012 election. The law's key provisions are set to take effect roughly two years from now, on January 1, 2014. Here's a look at how you may be affected: Q. What if I am a one-person business? A. The impact for sole-proprietors and others with no employees will be much like the impact on individuals. For people in this group, the crux of the 2014 roll-out is the individual mandate, which requires all U.S. citizens and legal residents to have health coverage or pay a penalty. You, as a one-person business, would buy insurance through your state's benefits exchange that will roll out in 2014. There are some exemptions, however, such as those from certain religious backgrounds and those who are eligible for the so-called "hardship exemption" if the cost of the annual premium exceeds 8% of household income. There are penalties intended to ensure compliance. The top penalty for individuals, once fully phased in, for not having insurance is $695 or 2.5% of income – whichever is greater. Q. I have employees or may be hiring. What provisions impact me? A. If you have employees, the health-care provisions are a bit more complicated. Let's start with what's on the table under the law today. Since last year, firms with fewer than 25 full-time equivalent employees have been eligible for a tax break if you cover at least half the cost of health insurance. (Full-time equivalent is the number of employees on full-time schedules plus the number of employees on part-time schedules, converted to a full-time basis.) But only if you have fewer than 10 full-time equivalent employees and average salaries of $25,000 or less is your firm eligible for the full credit. Today, that full credit is 35% of your contribution toward an employee's insurance premium. As your firm size and average wage amount goes up, the tax credit goes down. And once your business hits 25 full-time equivalent employees or $50,000 in average salaries, the credit is completely phased out. The Internal Revenue Service has full details here. Q. What happens to the tax credits going forward? A. In 2014, the state-based Small Business Health Options Program Exchanges will be open to small firms. And getting insurance through those exchanges could bump the maximum tax credit to 50% of your contribution, up from the current 35%.But the tax credits won't last. The credit is only available for a maximum of five years and only two years once the exchanges are up and running. Q. Will I have to provide health insurance to my employees in 2014? A. No firm is mandated to provide insurance, but in 2014, only the smallest businesses will be exempt from penalties if they don't. Q. What are the penalties and under what circumstances would I be exempt? A. Once your firm reaches 50 full-time equivalent employees, a penalty will kick in if you fail to provide coverage for employees who average 30 or more hours a week in a given month. The penalty is $2,000 for each full-time employee in excess of 30 full-time employees. There are no penalties if part-time employees are not offered coverage.A key factor in calculating the penalty is that the equation isn't based on full-time equivalents, but rather on actual full-time employees. That means some businesses that are subject to the penalty may end up owing nothing. Here's a basic example: Say your firm has 25 full-time employees and 50 half-time employees that, combined, equal 25 full-time equivalents. Your firm, in effect, has 50 full-time equivalents and would be subject to the penalty if you don't provide health-care coverage. However, your penalty cost likely would be zero because the $2,000 tally starts at the 31st full-time employee and you only have 25 full-time employees. Q. What should I know about getting insurance for my employees? A. You can't just buy any old insurance to avoid the penalty. You have to provide so-called "minimum essential" and "affordable" coverage. Minimum essential coverage means covering 60% of the actuarial value of the cost of the benefits. And affordable means the premium for the coverage of the individual employee cannot exceed 9.5% of the employee's household income. If the coverage you offer is unaffordable, qualifying employees can get subsidized coverage through the tax credit on the state exchanges. In such a case, you will have to pay the lesser of $3,000 per subsidized full-time employee, or the $2,000-per-employee penalty after the first 30 full-time employees. Source: WSJ Research Write to Emily Maltby at emily.maltby@wsj.com ...

Venture Makes a Go at Same-Day Delivery

Thu, 29 Dec 2011 23:44:56 EST

By Amir Efrati Numerous start-ups have tried to go after the Holy Grail of e-commerce—delivering things to people's homes and offices on the same day they ordered them—and have failed. Postmates Inc., a San Francisco Internet start-up that launched its same-day delivery service in December, is hoping to succeed by tying its business to the proliferation of smartphones. "We want to do for intracity commerce what FedEx did for overnight shipping across the country," says Postmates Chief Executive Bastian Lehmann. "We're definitely not blind" to the history of failed delivery start-ups, he says, "but we're not afraid."Founded last year and backed by $1.5 million from angel investors and venture-capital firms such as Matrix Ventures, Postmates faces tough odds. Start-ups such as Kozmo.com Inc. in the late 1990s and LicketyShip Inc. in the mid-2000s promised delivery of goods to customers within a few hours of their order. But the companies flopped, with Kozmo grappling with the high costs of building a network of couriers, and LicketyShip fizzling after trying to sell items from participating retailers directly from its own website.At the same time, technology giants are now jumping into same-day delivery, ratcheting up the competition. Google Inc. is working to offer same-day delivery of items purchased from big retailers' websites that are also in stock at stores located near the customers, people familiar with the matter have said. Amazon.com Inc. offers same-day deliveries for selected items in 10 U.S. markets, including New York and Chicago, for an extra $9.Mr. Lehmann says Postmates differs from previous same-day start-ups because it is trying to take advantage of the smartphone boom and the falling costs of facilitating transactions through such devices. In addition, more retailers are making their products available to digital shoppers through online services. Unlike prior delivery ventures, today's mobile technology lets couriers "transmit their location to a system that can dispatch them in an intelligent way," giving them additional deliveries they can make even after they've started a job, says Mr. Lehmann. For now, Postmates is focused just on the San Francisco area and is working with 10 merchants in the city—including bakeries and tailors—that don't make their inventory available online and haven't been able to offer fast delivery to their customers. With Postmates, once a customer pays the retailer for a delivery, the merchant can use an iPhone, iPod Touch or iPad to send an alert to the iPhones of car-toting couriers or bike messengers who are closest to the store.The roughly 30 couriers in Postmates's San Francisco network—who are either independent or work for delivery companies that allow them to take on extra work—can accept the job with the tap of a button on a mobile app that tracks their location. Postmates charges merchants $10 to make short deliveries within the city and up to $45 for longer trips outside the city. Postmates takes 25% to 40% of the fee; the couriers keep the rest.Some venture capitalists note there are challenges. "For Postmates to succeed, they need enough couriers interested so that they have supply, but then they need enough stores, customers, transactions so that the couriers stay busy enough to keep [working with] Postmates," says Josh Elman, a principal at Greylock Partners, which hasn't invested in Postmates.Some local merchants say Postmates has been a boon. Mission Bicycle Co. in the Mission District, for instance, regularly uses Postmates to order a delivery of bike frames from a frame painter. It costs $20 for the delivery, less than the previous approach of sending an employee to rent a car to pick up the frames, says Brian Kenny, the store's flagship specialist. "It's a great business tool," he says.So far, Postmates fulfills an average of several delivery orders a day, says Mr. Lehmann, who employees six computer programmers, a website designer and a sales manager. He says he expects to expand the service to New York or Los Angeles next year, though he acknowledges the business won't be easy to build up and replicate across different markets. Chris Neal, who is the only Postmates courier on the company's payroll, says the system attracted him because "you get to pick and choose what job you want and not be beholden to a [company] dispatcher I had to grease at the bar" in order to get "premium jobs." Last week, Mr. Neal took on a Postmates delivery for a dozen cupcakes from That Takes the Cake, a bakery in the Marina, to a customer in the financial district. During the trip, he says, his iPhone beeped twice to alert him to new delivery jobs from Postmates, but other couriers accepted the jobs before he could. Write to Amir Efrati at amir.efrati@wsj.com ...

Zynga Chief Talks IPO, Lessons Learned

Tue, 17 Jan 2012 11:53:04 EST

By Shayndi Raice Zynga Inc. Chief Executive Mark Pincus ended 2011 as the face of an overhyped Web initial public offering. Now he wants to show the hype was justified. Early last year, his San Francisco company, which makes social games such as "FarmVille" that are played on Facebook, was on track for one of the hottest initial public offerings of 2011. But when Zynga finally went public last month, its stock price dropped 5% on the first day of trading and has since consistently traded below its $10 offering price.Mr. Pincus, 45 years old, also came under scrutiny for his role in asking some early employees to renegotiate their stock compensation packages. Some saw the move as undermining Silicon Valley's long-held tradition of young entrepreneurs signing up at start-ups for low salaries but with the hope of an eventual payoff from big equity packages. Now Zynga faces questions of whether it can keep producing new gaming hits, even as it works to move away from its dependence on Facebook. With the quiet period surrounding Zynga's IPO now over, Mr. Pincus sat down to discuss Zynga's culture, its stock price, and the potential for future revenue growth and online gambling. WSJ: Were you happy with how Zynga's IPO turned out? Mr. Pincus: Our goals were we want to raise a billion dollars. Through going public, we wanted to add some more great long-term investors to the company. All of that was successful. WSJ: But Zynga's stock price sank below the IPO price on the first day of trading. Who or what do you blame for that? Mr. Pincus: I don't blame anybody because from our standpoint, we think it was successful. It was many times larger than the other tech IPOs that had just happened recently. We think we're now well positioned to move forward in the future. WSJ: Zynga's stock price is still below $10. Did the company go public at the wrong time? Mr. Pincus: We've never tried to time the markets, so we weren't trying to time the markets. We were trying to go public at the right point in our company growth, and we thought that was the right point. WSJ: Zynga has attracted criticism for how the company's focus on meritocracy creates an ultra-competitive environment that puts tremendous pressure on employees. What is the company's culture? Mr. Pincus: The average Silicon Valley [attrition rate] is 14%, and we've run a little over 3% attrition. I think that's a good sign of employees liking the company and the culture.The culture inside Zynga is not ultra competitive but Zynga is very competitive, and we're in a very competitive industry. We have teams that push themselves very hard, but it's driven by themselves. We have a culture of leveling up [through promotions]. More than 60% of our work force has leveled up every year for the last three years. More than 15% of our work force has leveled up every quarter for the last 12 quarters. I think that our employees feel a great sense of career opportunity and mobility. WSJ: What was the purpose of the "MIA list?" (The Wall Street Journal reported Mr. Pincus had a "Missing in Action" list for employees who were underperforming and held large amounts of equity.) Mr. Pincus: What you're referring to is around two years ago, I had a list that I kept on my whiteboard of big leaders and individual contributors in the company who weren't on big missions as a reminder to me to help find them big missions. WSJ: Why did you decide to renegotiate the stock compensation of some early employees? Mr. Pincus: Any company, especially in Silicon Valley, that is growing quickly can outgrow the capabilities of senior leaders, and that happens all of the time. We did, especially growing as fast as we have. In four isolated incidents, we outgrew senior leaders and we wanted to find them another position at the company versus just parting ways. They had the option to leave and have a package, as happened with some other leaders, but we in addition to that offered them other positions at the company that came with different forward compensation. WSJ: Do you think those were the right decisions? Mr. Pincus: It's a tough call. I'd say that in two of those four cases, those people are at the company and they're wonderful executives and contributors who have found other opportunities to lead, and so I'm really happy. I realize that that wasn't a model that had been done in Silicon Valley, and we're always as a company trying to invent new models, and not all of them are worth keeping and repeating. That's never been a policy at our company, and probably I'd say in retrospect, given how much that blew up, and questioned traditions in the Valley, I think probably wasn't a good idea. WSJ: How is Zynga now aiming to capitalize on changes in the videogame industry? Mr. Pincus: We're in the early stages of a secular shift in all of gaming from a lot of upfront [cost] barriers to play, and we're moving quickly to a world where these barriers are coming down. And we're seeing that there's huge latent interest in people to play. WSJ: How do you see free-to-play social games evolving in terms of your potential for revenue growth? Mr. Pincus: Free to play [games were] here before 2007 and they were ad supported. The display ad model [in which ads pop up while on a website] was not a good revenue model for games. We're at the beginning of a new advertising model for the Internet, which is about engagement [through virtual goods or product placement in games], not clicks. WSJ: The Department of Justice recently came out with a new position on online gambling. Does that open opportunities for Zynga? Mr. Pincus: We're watching it with interest. Virtual reality is about the connection between the virtual and the real, and there's just such a close and perfect connection between the virtual and the real when you're gambling, because these chips have real world value. Write to Shayndi Raice at shayndi.raice@wsj.com ...

Oakland Seeks a Lift From Pop-Ups

Thu, 12 Jan 2012 20:56:01 EST

By Lauren Rudser OAKLAND—Vacant storefronts have long plagued the city's downtown, but six small businesses, including a jewelry store and a bike shop, suddenly opened up last month on the Old Oakland block of 9th Street and Broadway.The surge of activity was no coincidence. The pop-up stores are part of an experiment by two entrepreneurs, backed by the city of Oakland, to help revive commerce in the area—and potentially in other parts of the city as well."We're focused on incubating small businesses," says Sarah Filley, co-founder of the project, dubbed "popuphood." She adds that she and co-founder Alfonso Dominguez are trying to foster a community and attract bigger companies to move to Oakland.Ms. Filley and Mr. Dominguez persuaded a landlord to offer pop-up stores free six-month leases in locations that, in some cases, have been vacant for years. The merchants have a goal of turning a profit during the six months and then signing a longer-term lease, at a price to be negotiated. The landlord, Peter Sullivan Associates, is hoping that the free short-term leases will turn into longer-term revenue.In November, Oakland gave popuphood $25,000 through its Tenant Improvement Program, and Mr. Dominguez and Ms. Filley have been working with the city to expedite the permitting process for the new stores.Pop-up stores aren't a new phenomenon—often they are seasonal, setting up for holidays like Halloween or Christmas. Restaurants also occasionally pop up for a night or two to test a new menu or location. Such stores have become more prevalent nationwide with the increasing number of storefronts left vacant amid a weak economy, says Jesse Tron, a spokesman with the International Council of Shopping Centers.What makes popuphood different is the number of stores opening simultaneously, and the goal of going from pop-up to permanent. "I haven't heard specifically of anything quite like this," Mr. Tron says.One of the merchants betting on the program is Kate Ellen, owner of the recently opened pop-up jewelry store Crown Nine. While she had been looking to open a permanent retail space, she figured the combination of opening costs and rent would take her five years to amass. So when Mr. Dominguez offered her the chance for a rent-free storefront in early November, Ms. Ellen jumped at it.So far, Ms. Ellen has seen quick progress. She says she was able to make back her opening costs of roughly $5,000 in three weeks and is working toward signing a long-term lease. "I'm really hoping to stay—that's definitely my objective," she says of the recently converted storage room that her store now calls home. Funds from the city and Peter Sullivan Associates were used to install a window in the space to turn it into a shop.Mr. Dominguez, owner of a nearby Mexican restaurant called Tamarindo, met Ms. Filley, an urban designer, at a local coffee shop in late August. Both wanted to reinvigorate the neighborhood by filling the long-vacant storefronts with pop-up stores, and the duo presented their idea to the city of Oakland in early September. After getting the city's green light on the project, they reached out to small-business owners who they knew were looking to open a retail space."It has turned out to be a really great opportunity to kick-start or remind people about Old Oakland," says Aliza Gallo, Oakland's Economic Development Coordinator.That same month, Mr. Dominguez and Ms. Filley got in touch with Peter Sullivan Associates, the landlord that owns the popuphood locations and the neighboring buildings, including restaurant and office spaces. Martin Ward, an asset manager at Peter Sullivan Associates, says the company decided to participate in popuphood because in the long run, "the retail makes the offices look more attractive and helps with the office leasing as well."Popuphood is already having a knock-on effect on other local businesses. Don Harbison, co-owner of B Restaurant and Bar at the end of the block, says he has seen an uptick in lunch business since the pop-up stores opened."We had to bring on another cook and another counter person already, and we're actively seeking right now more servers," says Mr. Harbison. "If this trend continues through 2012 we're going to need a little more help." ...

New Legal Structures for 'Social Entrepreneurs'

Mon, 12 Dec 2011 12:42:16 EST

By Kyle Westaway You may have noticed the emerging class of "social entrepreneurs" who are creating companies that seek profit but also are devoted to a social purpose, to create long term, sustainable value. Social entrepreneurs believe a business can be a part of the solution to some of the world's greatest challenges. It's this kind of thinking that has given rise to such mission-driven companies as Better World Books, TOMS Shoes, D-Light Design and Warby Parker, to name a few. But, until recently, social entrepreneurs would find themselves in the position of choosing whether to organize either as a for-profit company or a nonprofit organization. The problem was that sometimes a company would be too much of a business to be a nonprofit. Yet, it also might be too mission-driven to be a for-profit.Fortunately, there are a few innovative legal structures designed for entrepreneurs who are driven as much by mission as money. The cost of using one of these new legal structures will vary depending on lawyer fees, but generally those fees shouldn't exceed more than $10,000 for a start-up with fewer than 10 employees. Here's an overview: L3C Ideal for: companies that want to blend traditional capital with "philanthropic" capital, such as from foundations Available to start-ups in: Vermont, Michigan, Wyoming, Utah, Illinois, North Carolina, Louisiana, Maine and soon in Rhode Island. The Low Profit Limited Liability Company is a new class of LLC for mission-driven companies.An L3C offers the same liability protection and pass-through taxation as an LLC. But it must be organized primarily for a charitable purpose – and secondarily for profit. Unlike a traditional nonprofit, it may distribute its profits to owners. The L3C is designed to attract both traditional investment and a very specific type of philanthropic money called Program Related Investments (PRI). PRI is capital – in the form of equity or debt – from a foundation to a for-profit company that is doing work in line with the charitable purpose of the foundation. BENEFIT CORPORATION Ideal for: companies that want to create a measurable positive impact while and providing greater transparency to the public Available to start-ups in: Maryland, Vermont, Virginia, New Jersey, Hawaii, California and soon New York The Benefit Corporation is a new class of corporation with a corporate purpose to create public benefit, a broader fiduciary duty and is transparent about its overall social and environmental performance.By definition, it must operate for the general public benefit – defined as a material positive impact on society and the environment. Every benefit corporation is required to publish an assessment using an independent, third-party assessment tool. To create a material positive benefit, a benefit corporation operates in a manner that not only creates value for the company's shareholders, but also its community, environment, employees and suppliers. The structure also calls for a high level of transparency and accountability. Within 120 days after the end of each fiscal year, a benefit corporation is required to publish a "Benefit Report," which states how it performed that year on a social and environmental axis. FLEXIBLE-PURPOSE CORPORATION Ideal for: companies seeking to do good on their own terms Available to start-ups in: CaliforniaThe Flexible Purpose Corporation a new class of corporation that creates the maximum amount of flexibility for socially/environmentally conscious companies. It is designed for businesses that want to pursue profit along with a special purpose of its own designation.The structure allows the designation of a special purpose that the company will pursue in addition to profit. For example, a flexible purpose corporation might be a for-profit developer that has a special purpose of building a public park in each of its developments.This type of corporation must issue an annual report that is available to the public and provides details on the following: the special purpose; the annual objectives that it has set to achieve its special purpose; the metrics used to gauge the success of the special purpose; how it has achieved or fallen short of the stated objectives; and how much money was spent in furtherance of the special purpose. But it does not require any measurement against an independent third-party standard. ...

Start-Ups Look for Shortcut From Farm to Table

Fri, 27 Jan 2012 15:29:31 EST

By Jessica E. Vascellaro Silicon Valley start-ups are trying to re-create the milkman. A host of new tech companies are creating ways to buy food directly from local food producers, cutting out grocery stores and some of the middlemen. They are also providing new services to educate consumers about what they are eating, down to the growing conditions of a carrot.Founded by alumni from tech giants like Google Inc., the companies are using the same sorts of online tools that changed how people rent an apartment or find a date to make it easier to buy locally grown food. They are part of a growing class of start-ups targeting food and eating, from sites that deliver celebrity-chef meals to your door to a business that aims to turn roofs into vegetable patches. Many are steering clear of delivering fresh foods to your door, trying to avoid the pitfalls that felled some food-delivery companies in the past.Among the new entrants is Farmigo Inc., a San Francisco company that has 50,000 subscribers after launching late last year. Founded by Microsoft Corp. and SAP AG veteran Benzi Ronen, Farmigo allows consumers to search for and buy produce and meat from local farms that deliver to pick-up locations in their neighborhood, including offices like Yelp Inc., Twitter Inc. and Google. Many of those inclined to shop from the source rather than the store currently have to hunt for a seller via word of mouth. Farmigo tries to automate that process and hopes its technology increases the number of farmers that sell directly to consumers in the first place. "At the end of the day farmers want to be in the field," not cobbling together technology, says Mr. Ronen. The company has raised $2 million from Silicon Valley angel investors.Farmers like Annie Salafsky, just south of Olympia, Wash., say they appreciate how Farmigo lets customers register themselves online rather than having to enter in all their data manually. Farmigo takes a 2% cut of a farm's sales through the system and allows farmers to build their own Web store to sell additional products like lamb and honey. Those add-ons have brought Ms. Salafsky's farm, Helsing Junction Farm, about $35,000 in sales over the past year or so, out of annual sales of $500,000, she says. Meanwhile, former Silicon Valley engineer Karl Rosaen co-founded Real Time Farms LLC and is building a database of farms and their growing practices, making it possible, for instance, to find a place to buy a tomato grown without synthetic pesticides with a few clicks. So far, the site has growing-practice information for a few hundred farms.And Rob Spiro, co-founder of Good Eggs Inc. in San Francisco, left Google in June to start developing software for local food producers, testing ideas like allowing them to sell their products via mobile apps and helping them market with email newsletters. Good Eggs is testing a consumer site offering information about where local foods are available, along with recipes. The goal is to "make local food even more convenient than typical grocery shopping" for national food brands, Mr. Spiro says. His company—which raised an undisclosed amount of funding from Silicon Valley venture-capital firms Baseline Ventures and Harrison Metal Capital in August—plans to launch its service this year. Write to Jessica E. Vascellaro at jessica.vascellaro@wsj.com ...

You Are Only as Good as Your Vendor

Sat, 14 Jan 2012 21:41:33 EST

By Sarah E. Needleman When Joy Randel set out to build an online retail shop last year, one of the first steps she took was to find companies that could provide the products she wanted to sell.But Ms. Randel says some of the suppliers she initially struck deals with for her start-up, Dazzle Dog Delight, did a lousy job that cost her sales. "They either sent out the wrong items or the packaging was terrible," recalls the Oakland, Calif., entrepreneur, who started her business after getting laid off from a large health company.Ms. Randel, 50 years old, says she now asks prospective vendors for more details about their services, such as the steps they take to ensure quality and make deliveries on time. She also asks friends and relatives to order goods from her store on her dime, such as dog collars, leashes and shampoo, so they can report back to her on when and in what condition the items arrived."You have to constantly check," she says, to ensure that suppliers don't slack off.For just about every entrepreneur, running a successful enterprise means having to depend on other businesses to regularly provide goods or services. But identifying top-notch vendors and forming healthy relationships can be challenging for first-time business owners who may not know where to look or what to expect."You have to do your homework," says Michael Marsan, an instructor for the Rothman Institute of Entrepreneurship at Fairleigh Dickinson University in Madison, N.J. "You want to find out what differentiates suppliers."Good places to search for vendors are trade shows and magazines, as well as industry-association websites, says Mr. Marsan. He also recommends networking with other entrepreneurs to secure referrals. "There's nothing wrong with calling competitors," he says, particularly ones located outside of your geographic area. "People are willing to share information most of the time."Mike Stenke, owner of Klausie's Pizza in Raleigh, N.C., says he did this and now recommends vendors to others looking to start food-truck businesses like his. "We've all been in the spot where we were brand new," says the 41-year-old.Mr. Stenke launched his business in 2010 after demand for his expertise as a contract technical writer began to dry up. He now relies on about 15 vendors to operate his roving start-up—including merchants that provide the ingredients he needs to make everything on his menu. One of the most important lessons Mr. Stenke says he learned early on about striking deals with vendors is to stand your ground. Don't settle for a lesser product or one you don't need just because a supplier doesn't have the merchandise you're seeking, he says.For example, some of the food vendors Mr. Stenke approached when he was starting out told him that the type of cheese he wanted wasn't available and that he should buy a different kind from them instead. But after making a few calls to dairy farmers that he found online, Mr. Stenke says he was able to track down the cheese he wanted and he convinced one of the vendors to start carrying it. Buying the cheese direct from a dairy farmer, Mr. Stenke says, wasn't a convenient option because of the logistical demands involved. But in some cases, he and other entrepreneurs have discovered that it's possible to purchase certain items straight from manufacturers or local retail stores for less and without hassle.Barry Greenstein came to this realization after a supplier that his Boston start-up had been using disclosed that it didn't keep an item he needed in stock. Mr. Greenstein, co-founder of bGreen, a retailer of eco-friendly products, says he called the company that made the item and was told that he could buy it at wholesale without having to go through a middleman. As a result, he avoided paying the fee the supplier would have charged to provide the same item."Go direct whenever possible because you're almost always going to save money," says Mr. Greenstein, who decided to take up entrepreneurship after getting laid off in 2008 from a marketing firm. The 32-year-old adds that about 20% of the products his business sells are now purchased straight from manufacturers.When striking deals with vendors, keep in mind that it may take several months to secure the kind of rates and terms you'd like. Start-ups "usually don't have a sufficient track record to justify any kind of extended credit or preferred customer pricing," says Dennis J. Ceru, an adjunct professor of entrepreneurship at Babson College in Wellesley, Mass. He suggests offering to initially make payments faster than what a vendor requires in exchange for a better price. Or, if you have a line of credit, offer to pay more than the fee the vendor proposes to get a few extra days or weeks to pay off the amount you owe. "A lot of times, starting entrepreneurs think they don't have negotiating ability," says Mr. Ceru. "But they do." Write to Sarah E. Needleman at sarah.needleman@wsj.com ...

Zynga IPO Road Show Set for Next Week

Wed, 30 Nov 2011 20:36:09 EST

By Lynn Cowan Online games company Zynga Inc. is expected to launch its IPO road show next week and begin trading as a public stock later in December, even as shares of recent consumer Internet deals like Angie's List Inc. and Groupon Inc. sink below their offering prices. Zynga, which is best known for its social games played on Facebook Inc., such as FarmVille and Mafia Wars, hasn't yet set the price or share size for its initial public offering. But it expects to do so within days, and begin marketing its deal on Monday, said a person familiar with the plans. If all goes as planned, the company could begin trading on the Nasdaq under the symbol "ZNGA" toward the middle of the month, likely before Dec. 21. Zynga declined to comment. Zynga is choosing to go public at a time when recent high-profile consumer Internet offerings haven't fared very well. Although Groupon priced above its range and rose nearly 31% on its first day of trading last month, it is currently trading below its $20-a-share IPO price. Angie's List, which priced at the high end of its range and gained 25% during its debut last month, is also below its IPO price of $13 a share. But Zynga differs from Groupon and Angie's List in several ways. Neither Groupon nor Angie's list is profitable, and there have been concerns raised about the amount they must spend to market themselves to new users. Zynga's top line revenue is growing swiftly, but it has also been booking profits since last year. Its games are free to play, so it makes its money primarily by selling virtual goods to players, and also through advertising. In the first nine months of the year, its total revenue doubled to $829 million from the same period a year earlier. Its net income declined 35% to $31 million during the same time, solely on higher income taxes; income before income taxes was up 48% at $82 million. Although Zynga's games are available on other social networks and mobile platforms, substantially all its revenue is derived from Facebook-accessing players. It has the largest player audience on Facebook, with more monthly active users than the next eight social game developers combined, according to AppData, an independent service that tracks application traffic on Facebook. One risk for Zynga is its reliance on Facebook, which has a lot of muscle when it comes to changing its rules for applications that appear on its platform. The social media site now requires apps to use Facebook's proprietary payment method, Facebook Credits, as the primary means of payment collection. As a result, Facebook now receives a greater share of payments made by Zynga's players than it did when other payment options were allowed. Morgan Stanley and Goldman Sachs Group Inc. are managing Zynga's offering. ...

Business-Plan Contests Take a Practical Turn

Fri, 03 Feb 2012 11:05:46 EST

By Melissa Korn Less planning, more legwork. That's the formula some business schools are using to overhaul the competitions they conduct each year to test their students' mettle as entrepreneurs. The contests, which have been an academic rite of passage for decades, typically involve teams of students submitting written business plans, then following up with a short presentation to a panel of judges. The winner might receive a cash prize of tens of thousands to hundreds of thousands of dollars and even the chance to mingle with potential investors. But most of the business plans emerging from these competitions never become full-fledged businesses. Critics say that's because the competitions don't encourage budding entrepreneurs, they just reward a well-written plan. "You can write a beautiful 50-page business plan without ever talking to a potential customer," says Janet Strimaitis, managing director of Babson College's Arthur M. Blank Center for Entrepreneurship. So, the Wellesley, Mass., school is launching a new competition this spring that emphasizes action over ideas.Among the requirements: teams must introduce their ideas with a PowerPoint presentation and show the concrete steps they have taken to develop their proposed business. Those steps might include identifying a market opportunity or interviewing potential customers to demonstrate their proposal's viability. At no point would competitors submit a written business plan. The school also will dole out prize money differently, with the top graduate and undergraduate each winning $20,000 and the runners-up receiving a relatively paltry $2,500. Ms. Strimaitis says the top-heavy reward system is based on Babson's research, which shows that the winners of its business-plan competitions are more likely to become entrepreneurs after they graduate than are other finalists. Over the past 10 years, about 65% of the school's first-prize winners launched their companies, though it isn't clear how many of them became profitable ventures. Since 2006, when the school started tracking runners-up, just 32% of undergraduates and 50% of graduate students who came in second or third place launched their ventures.To be sure, those figures don't reflect the many M.B.A. students who try their hands as entrepreneurs later in life, often after working in more traditional corporate roles that provide valuable experience, as well as salaries they might need to help pay off student loans.The University of Virginia's Darden School of Business is developing a new contest to judge how well students manage the unpredictable demands of starting a fledgling business. The contestants all would receive a description of the same hypothetical business, including the product idea, target market and a problem it is trying to solve. Each team would have to figure out whether the business would be viable by talking to potential competitors, customers and suppliers. If they determined that the business plan wouldn't pan out, they would have to propose an alternative.Darden says the contest would reward students for understanding and applying the steps necessary for starting a business, rather than rewarding students for coming up with the best—even if unproven—idea. The school hopes the experience would put team members in a better position to launch their own ventures down the line. "Business plans are useful in a world where analysis gives you control over the future," but in a start-up, even the best-laid business plans often fall short and need to be modified, says Philippe Sommer, director of Darden's Center for Entrepreneurial Leadership. Not everyone is worried about the low real-world success rate among winners of traditional business-plan competitions.Companies have continued to sponsor those contests in hopes of gaining name recognition, new partners or even a stake in an up-and-coming venture. Houston-based venture-capital firm DFJ Mercury, for example, offers a $100,000 seed investment as a prize in Rice University's Business Plan Competition, in part to connect with promising businesses before other investors pounce. "It helps build out our Rolodex," says managing director Blair Garrou. So far, the firm has given its $100,000 seed investment to two companies, both of which have since raised millions of dollars from venture backers. But Mercury asks for more information than the competition requires, conducting weeks of additional due diligence on the teams and their proposed technologies before forking over any funds. Taking the time to investigate companies that don't make the final cut still is a valuable exercise, Mr. Garrou says, as it allows the firm to expand its network and keep an eye on promising team members or business ideas. Overall, 37% of the 354 teams that have competed in Rice's event over the past decade are still in business, the school estimates. Write to Melissa Korn at melissa.korn@wsj.com ...

The Race to Nab Web Addresses

Mon, 09 Jan 2012 17:44:04 EST

By Sarah E. Needleman This week will bring the long-awaited opening up of a new realm of Web addresses in which just about any word—such as dot-furniture or dot-arcticvacations—can serve as a domain name. And to some, that spells opportunity.Beginning Thursday, the organization that oversees the Internet will start accepting applications to manage new top-level domains—the names that appear at the end of website addresses, like dot-com and dot-net.It will be the first time in more than a decade that anyone can apply for the rights to control a slice of the broader Web marketplace, as opposed to just domains for specific types of Internet users. Only a few options, such as dot-jobs for sites catering to job seekers, have been available more recently.Allowing a wider variety of domains to exist will create more choice on the Internet and potentially spur innovation, according to the Internet Corporation for Assigned Names and Numbers, or Icann, the nonprofit that regulates the world's Internet domain names. Jeffrey Smith, an entrepreneur in Louisville, Ky., sees gold in the opportunity. He and domain-name speculators like him have been building entire businesses around ideas for new right-of-the-dot names, and in many cases they have lined up backers to help them cover application and other costs. Just applying to be the overseer of a new top-level domain—and become what's known as a "registry holder"—involves an application fee of $185,000, more than double the cost Icann charged in 2000, when it last accepted applications for top-level domains of just about any kind.The goal of the overseers is to sell their names to registrars like GoDaddy.com LLC. The registrars specialize in reselling so-called secondary names—the words to the left of the dot—to entities known as registrants that want to own Web addresses. But before an overseer can sell its name to a registrar, it has to determine who will be eligible to use the name and provide the technology that will enable the domain to function. Mr. Smith and his eight partners started their business in 2000 for the sole purpose of having it become a dot-shop registry holder that could sell dot-shop Web addresses, such as jeans.shop and coats.shop. "I've dedicated the last 10 years to this," says the 46-year-old Mr. Smith.The way he sees it, dot-shop at some future point could catch on among retailers and others involved in Web sales—and one day may even rival dot-com, the dominant domain operated by Internet-services giant Verisign Inc.Mr. Smith says he has already put more than $2 million of his own money into his speculative dot-shop registry business. He and his partners have also lined up four angel investors to raise capital.Their business, called Commercial Connect LLC, initially applied for the rights to dot-shop in 2000. But Mr. Smith says that application was denied for reasons he's not clear on. A failure to nab it in the coming application season would be crushing, he acknowledges. Jacob Malthouse is also developing a domain-registry start-up. He and two business partners say they plan to apply for dot-eco, a domain they hope will be attractive to companies and nonprofits with eco-friendly products or missions. "We get emails almost every day from people wanting to buy" a dot-eco domain name, says Mr. Malthouse. He and his partners began building the Vancouver, angel-backed start-up in 2007. Mary Iqbal of Fitchburg, Wis., has a start-up dedicated to dot-bank and dot-secure. She thinks the domains will be attractive to financial institutions and large and midsize businesses seeking greater security on the Web, a service she says her domains would provide. "I'm obsessed with this opportunity," she says, adding that several thousand potential buyers have expressed interest in her addresses. Getting the rights to be a domain registry doesn't guarantee success. A small number of these new dot-anything names may catch on, but it could take years. Many dot-something businesses will likely go bust.Even if they succeed in their quest to become registry holders, these entrepreneurs will likely need to spend hundreds of thousand of dollars annually on technical support and promotional efforts to generate revenue consistently."You're going to have to have a widespread marketing campaign to build up consumer recognition," says Christopher Glancy, an intellectual-property attorney in New York."It requires care and feeding," adds Jothan Frakes, a domain-name consultant in Seattle. Tom Embrescia, the owner of the Cleveland business that oversees dot-jobs, a domain that Icann approved in late 2005 only for websites listing job openings, says he spends more than $1.5 million annually on marketing. It took about three years for his venture, Employ Media LLC, to become profitable, he adds.But for the current crop of people hoping to become dot-anything entrepreneurs, there's an immediate concern. If more than one equally qualified applicant seeks the same domain name, an auction would likely ensue. And that could drive up the costs of getting started. "It's possible to have no competitors, but we could have five," says Jean Guillon of Paris, who along with several partners is seeking the rights to dot-wine, a registry aimed at wine bloggers, retailers and others. Enrico Schaefer, a Traverse City, Mich., attorney specializing in Internet law, is excited about his right-of-the-dot idea. But he's so worried about the possibility of a bidding war that, in an interview, he refused to divulge the name that he and his business partner intend to seek.Mr. Schaefer thinks his undisclosed dot-something could become a leading rival to the ubiquitous dot-com registry. "Dot-com is not immune to real competition," he says. "This will be the very first opportunity for competition to come to dot-com in a real, meaningful way."Large companies are likely to make up the bulk of applicants. But most of the big firms will probably go after brand names for which they already own trademarks and hold onto any registries they acquire. Compared with the last broad, dot-anything application period in 2000, the application itself is now several hundred pages long and far more complex, according to Icann spokesman Andrew Robertson. It requires numerous additional details about applicants' finances and technical capability, as well as their plans to use the domains they're seeking the rights to, he says."You can't have a fly-by-night organization run out of a kitchen," says Kevin Wilson, who served as Icann's chief financial officer from 2007 to 2011 and is now co-founder of a South Pasadena, Calif., consulting practice. Write to Sarah E. Needleman at sarah.needleman@wsj.com ...

Singles Bow to Cupids-for-Hire

Fri, 06 Jan 2012 14:58:37 EST

By Jennifer Levitz BOSTON—Cort Johnson, 27, is an affable guy who's skilled at promoting his company—a mobile-application start-up he co-founded. But when it comes to socializing, especially with women, he tends to clam up. "I'd like to be romantic," he sighs. "But how?"For Mr. Johnson and many others, the answer is "hire a coach." Hoping to meet some prospects at a holiday party in December, Mr. Johnson enlisted Thomas Edwards, who runs a service called "The Professional Wingman." For a fee of $125, Mr. Edwards accompanied Mr. Johnson to the event and posed as his good pal. As they negotiated the crowd, the wingman alerted his charge to flirtatious types and helped make seamless introductions. "I love that," said Mr. Johnson. As romantics grow weary of the digital dating game, so-called wingman and wingwoman services are taking them back in time. Such outfits, which popped up in cities like Boston and New York as long as eight years ago, are promoting the old-fashioned tête-à-tête. They're gaining traction at a time when Internet dating sites are attracting fewer visitors.Susan Baxter, founder of "Hire a Boston Wingwoman," says she launched her business specifically because her friends were fatigued by online dating. She sensed a good niche. "You go to meet [the person] and realize their picture was taken 10 years ago and that they are not who you thought," says Ms. Baxter, 32 years old. Paired with a confident wingwoman, her customers "can see prospective partners right away, and know right then and there if there is chemistry." Ms. Baxter, whose fees start at $130, insists that clients who go out with a pro have better odds of success than those who troll with an untrained male buddy. Often, the friend "says stupid stuff, like 'my friend thinks you're hot,'" she says. The service's slogan: "We're better at hitting on women than you are." While online dating sites have changed the dance of romance, academic researchers have been skeptical about sites' purported "success" (code word for marriage) rates. And the Federal Bureau of Investigation, which handles Internet crimes, says it receives thousands of complaints annually from people who get scammed by shady suitors. In an ongoing lawsuit filed in federal court in Dallas a year ago, several Match.com customers sued the company, saying that many of its profiles are phony or are linked to inactive members. A spokeswoman for Match.com calls the lawsuit "frivolous." The wingman has been on the dating scene since the days of Shakespeare, when Romeo's closest pal Mercutio helps him to forget a girlfriend by taking him to a masked ball at Lord Capulet's estate to meet other women (in the end, that didn't go well). More recently, the wingman has been celebrated in movies like "Hitch," a 2005 comedy starring Will Smith as a professional Cupid.Most services say they tend to focus on male clients, the theory being that men need more help since women often go out in groups, making it harder for a lone guy to break in. But the wings-for-hire say they do sometimes fly with female clients, too. Josh Mitchell, 27, started his Indianapolis wingwoman service, "Miss Pivot," last year after attending an event for young entrepreneurs. Romance aside, there was something else that convinced him he had a winning concept. No one, he says, seems to know how to have a face-to-face conversation anymore. "A lot of social skills you used to pick up watching your parents, but now everyone is busy watching stuff online or playing videogames online," he says.Mr. Mitchell now runs Miss Pivot with a team of five friends, including a "head coach," plus eight freelance "pivots" for hire at $45 to $65 an hour.Not everyone is cut out for the matchmaking work. "We don't want someone with a really annoying voice," says Mr. Mitchell. Another no-no: overly emotional types. "They tend to think love is very magical while we think there is a science behind it," he says.For the dates, the pivots generally stay away from nightclubs, and go to bookstores, coffee shops or pubs where the tables are high. "Sitting on stools brings everyone up to the same level," says Mr. Mitchell. At the Boston holiday party called "Ugly Sweater Night," Mr. Johnson had slipped in with his wingman. Revelers, dressed in blinking Christmas sweaters, sipped bottles of beer and shimmied to the rap song, "Bust a Move."Mr. Johnson, wearing a Santa hat, scanned the room and homed in on a blonde woman in reindeer ears dancing with two friends. "She looks fun," he told his wingman. "I'll go in," Mr. Edwards replied.Moving quickly, he saw that one of the women had a camera and asked if he could take the group's picture.Giggling, they huddled together. But when a few people behind them tried to squeeze into the picture, the women stopped posing and looked annoyed. In their pre-event strategy session, Mr. Edwards had determined that Mr. Johnson is inclusive and fun-loving and needs the same in a partner. He backed away and shook his head at Mr. Johnson, signaling that the young woman wasn't worth pursuing. "I'm an extension of Cort. If that turned me off, it will definitely turn Cort off," said Mr. Edwards. Mr. Johnson moved through the crowd and talked to several women with Mr. Edwards by his side. "Thomas is a confidence builder," he said.When a woman complimented Mr. Edwards's fuzzy white sweater, he put an arm around his client and said, "It would look much better on him."In their strategy session, they had looked at "sticking points" that were keeping Mr. Johnson from romance. "If he likes someone, he doesn't make it clear he's interested," Mr. Edwards said.But near midnight came Mr. Johnson's breakthrough. A woman he had talked to earlier, and had liked, sat in a chair pointed away from her table.He walked over and sat on her lap. Mr. Edwards stared, astonished. The woman's hand went up and around Mr. Johnson's shoulder."I love it!" Mr. Edwards said. "I knew Cort had this in him." A short while later, Mr. Johnson reported back to his tutor, grinning, and with the woman's phone number.Though he was a friend for hire, Mr. Edwards's enthusiasm seemed real when he slapped Mr. Johnson's back and shouted, "Good job!" Write to Jennifer Levitz at jennifer.levitz@wsj.com ...

Late-Night Fast-Food Sales on a Roll

Wed, 25 Jan 2012 14:52:56 EST

By Julie Jargon Fast-food chains are extending their hours to feed a burgeoning market of night owls and ultra-early risers and help wring more sales out of their existing restaurants.At McDonald's Corp.—which reported another quarter of strong earnings Tuesday—the hours of midnight to 5 a.m. are the fastest growing time segment in its U.S. business. Nearly 40% of its U.S. outlets are now open around the clock, up from about 30% seven years ago. Burger King Holdings Inc., which requires its U.S. restaurants to remain open until midnight on Fridays and Saturdays, and until 11 p.m. the rest of the week, now has several hundred restaurants around the country open 24 hours, according to a spokeswoman. And Dunkin' Donuts has doubled its number of 24-hour restaurants in the past 10 years, with nearly a third of its more than 7,000 U.S. outlets now open all day and night.Industry executives and analysts say the trend is driven partly by changes in the American work force. One-fifth of all employed Americans now work mostly in the evening, at night or on a regularly rotating schedule, according to Harriet Presser, a University of Maryland sociology professor and author of the book, "The Economy that Never Sleeps.""Whether it's taking on an additional job or just working a late shift, we're seeing more people out later at night," says Steve Levigne, McDonald's vice president of consumer and business insights. The company wouldn't disclose what percentage of overall sales come between the hours of midnight to 5 a.m., but said those hours have experienced double the growth rate of its lunch or breakfast business. Pat Treffiletti, a franchisee who owns four McDonald's in Albany, N.Y., was taken aback when a student in a college class he addressed a few years ago asked him why he couldn't get a Big Mac at 3 a.m."I said it's because we're not open," he responded.He decided to see if there was any reason to be open at that hour, so he drove around the city late at night and was surprised by how much traffic he saw on the streets. Health-care centers were open late and delivery drivers were dropping off goods at stores."I started talking to my customers and they said they'd love it if we'd be open late. Customers' lifestyle patterns have changed dramatically. Years ago, convenience was about having the right location. Now it's a lot more than that," he says.Mr. Treffiletti, who put two of his restaurants on a 24-hour schedule two years ago and a third 18 months ago, recently began offering a limited breakfast menu after midnight, in addition to burgers and fries, since some people are just starting their day when they come in and others are ending it. McDonald's said one reason for its growth in the latest period was its efforts offer more convenience, which includes things like extending hours. For the fourth quarter ended Dec. 31, McDonald's beat analyst expectations with profit of $1.38 billion, up from $1.24 billion a year earlier, on revenue of $6.82 billion, which was up 9.8% from a year earlier. The company forecast global same-store sales in January will be up 5.5% to 6.5%, after rising 7.5% in the fourth quarter.He says his wee-hour customers are a mix of college students seeking a bite after the bars close, late-shift workers, some of whom have taken on second jobs to make ends meet, and elderly patrons who are up early.At 2 a.m. on a recent Friday, more than 20 customers were dining inside a 24-hour McDonald's on Chicago's North side.Ernest Roberson, a security guard at the McDonald's, said the customers usually consist of bar hoppers and homeless people, but also a steady stream of police officers, transit workers, parking attendants and construction workers."This time in the morning it's about the only place you can eat," said Mike Pittman, a 65-year-old construction worker eating a cheeseburger on his break. He's been working nights renovating a nearby store, and has been frequenting this McDonald's on his break.To some degree, McDonald's and others are just satisfying late-night appetites that have long had few options. But companies say market research shows demand is growing. Dunkin' Donuts, long a morning destination, has been pushing deeper into the evening because "our research and feedback from franchisees indicates we're seeing very strong growth in the evening hours," says John Costello, chief marketing and innovation officer for Dunkin Brands Group Inc. He declined to break out specific sales trend information."I think we really have moved to a clockless day," Mr. Costello said. "People are working longer hours, in many cases multiple jobs, and are more time-starved than ever before and they want the flexibility to have a full variety of products that aren't limited by time of day." Write to Julie Jargon at julie.jargon@wsj.com ...

How to Finance Your Start-Up Without Tapping Home Equity

Tue, 31 Jan 2012 19:39:45 EST

By Emily Maltby With home values still depressed—and likely to remain so in the coming year—many people who plan to start businesses won't be able to leverage their personal properties to raise capital they need.There are several alternatives, however, some newer than others.Some 39% of business owners with less than $5 million in annual revenues said a bank loan would be the best way to raise capital in 2012, according to a survey of 2,851 owners of small businesses conducted by Pepperdine University in early January. Other top prospects were personal savings (36%), friends and family (19%), and credit cards (17%), according to the survey. By contrast, only 11% said home equity would be the best capital source.Despite significant funding challenges, including depressed home prices and a tight overall credit market, entrepreneurship rates have risen from 2006 through 2010, according to the Ewing Marion Kauffman Foundation, a small-business research group in Kansas City, Mo.The foundation has an annual Index of Entrepreneurial Activity but hasn't yet measured the rate of new business creation during 2011, it says.Here's a look at some of your choices: Peer Lending A small but fast-growing segment of business owners have tapped relatively new capital sources that operate through websites. Peer-to-peer loan sites, such as Prosper.com and LendingClub.com, allow lending directly between individuals. Interest rates depend on the borrower's credit history. Only 4% of business owners surveyed in the Pepperdine study say this would be the most promising method of securing funds this year. Crowdfunding, available on Kickstarter.com, IndieGoGo.com and other such sites, links fundraisers to a large pool of small-dollar contributors. The sites charge fees for the service, typically less than 10% of the capital raised.Last September, Sung-Yoon Kang got a $5,000 loan through Prosper.com at a 27% interest rate and his wife, Dawn Kang, got a $3,000 loan from LendingClub.com at a 7.9% interest rate. The couple turned to peer lending after realizing they wouldn't qualify for a traditional bank loan.The Kangs, who don't own a home, used the funds to purchase a food truck. They hope to launch the business Ka'Chi Inc., of West Chester, Pa., in the near future. Asset-Based Credit Asset-based lending and factoring got attention when banks slashed credit lines in the 2008 financial collapse. Total asset-based credit commitments grew 5% in the last year, according to a November 2011 survey by the Commercial Finance Association. This type of financing has been dominated by the retail and garments industries, but has spread to other business sectors that have accounts receivable or other assets, according to Brian Cove, chief operating officer at the association, a New York-based trade group.Asset-based lenders extend loans that are backed by marketable securities, equipment, inventory, accounts receivable and other business assets.Factors operate on a similar model, purchasing accounts receivables from a business in exchange for an advanced funding amount for each invoice. The Pepperdine study shows 5% of business owners believe factoring is the best way to raise capital. Interest on the loans can top 20%. Rohit Arora, chief executive of Biz2Credit, a small-business lending broker based in New York, says he believes the interest rates and other related costs may come down as a result of increased competition among lenders.David Godwin turned to factoring when he started ContinuityX Inc. last year. Within four months of launching, the technology services company, based in Metamora, Ill., had secured a $500,000 credit line from Forest Capital LLC, allowing Mr. Godwin to hire 14 employees and purchase new equipment."It jump-started our business," says Mr. Godwin, who did not use his home equity but did tap personal savings and friends and family to cover other initial costs. SBA loans Many young start-ups face significant barriers securing bank financing because they don't have a substantial track record of growth. But there are small signs that the credit crunch is easing, as lending standards become more flexible and as some borrowers become more willing and able to take on debt, according to recent data including one January survey of senior loan officers by the Federal Reserve. Outstanding loans to small businesses have fallen each quarter since 2009, according to the most recent data from the Federal Deposit Insurance Corporation, in an analysis of loans of less than $1 million. They totaled slightly less than $600 billion at the end of September 2011, 5% less than the year earlier. One role of the U.S. Small Business Administration is to help banks make loans to riskier small businesses, while offering better terms such as a longer payback period. SBA loans are provided by traditional lenders, but a portion of each loan is backed by the government in the case the business owner defaults. Still, SBA loan recipients must adhere to the underwriting standards of the bank, which may include using personal property as collateral.SBA lending hit a record in the government's last fiscal year. But the jump was, in part, attributed to the larger loan amounts the agency agreed to back. Since October 2010, SBA lenders have been able to offer loans as large at $5 million, which are more profitable than the smaller loans start-ups typically request. (See this October 2011 story.)In general, smaller firms have more success with these loans once they are established and ready for expansion capital. Angel Investors Some small businesses have had success seeking angel financing – a segment that's showing a revival of sorts. Most angel investors, of course, will wind up with an equity stake in your firm.Some 39% of the $8.9 billion in total angel investments in the first half of 2011 went into seed and start-up ventures, up from 26% of $8.5 billion in total investments over the same period a year earlier, according to the University of New Hampshire's Center for Venture Research. It can be tricky to weed out the tire-kickers, says Paul Kedrosky, senior fellow at the Kauffman Foundation. Many individuals are angels "in name only" and not likely to make investments as eagerly as professional investors, he notes.Individual angels are increasingly coming together to invest as groups. That spreads risk among the group's members. But it could create headaches for business owners who have to deal with a number of angels rather than just one or two investors. Personal Credit and Savings More than 70% of small businesses were launched using personal savings or assets, according to Elizabeth A. Duke, a governor on the Federal Reserve Board, who, last April, disclosed preliminary data from the Federal Reserve's upcoming Survey of Consumer Finances.Personal credit cards, as well as friends and family have grown in popularity during the downturn, and will likely remain an important avenue for entrepreneurs even after the economy rebounds.Some entrepreneurs obtain business credit cards, which carry fluctuating—and often higher—interest rates while lacking consumer card protections. Delinquencies on business cards can also damage your personal credit score. Write to Emily Maltby at emily.maltby@wsj.com ...

Wendy's Set to Surpass Burger King

Wed, 21 Dec 2011 11:20:40 EST

By Julie Jargon Burger King, the perennial No. 2 in the burger wars, is about to be beaten out by a pigtailed girl. Wendy's Co. is poised to pass Burger King Holdings Inc. in U.S. sales, trailing only industry behemoth McDonald's Corp., in the first reordering of the industry-leading trio since Wendy's was founded in 1969.Americans are expected to spend more than $175 billion at fast-food restaurants this year, up about 3% from 2010. Wendy's U.S. same-store sales are forecast to rise 1.1%, while Burger King's U.S. and Canada same-store sales will drop 3.9%, according to market-research firm Technomic Inc.That means sales at Wendy's U.S. restaurants—both franchised and company-owned—are on track to be $8.42 billion or $53 million higher than Burger King's this year, according to an analysis conducted for The Wall Street Journal by Technomic. That's in line with expectations from some other analysts. The outcome will become clear when the two companies report fourth-quarter results early next year.Wendy's has gained on Burger King without opening more restaurants: its number of outlets in the U.S. has remained flat, at roughly 5,800, compared with Burger King's approximately 7,200 U.S. stores. McDonald's is the far away the leader with more U.S. restaurants than Wendy's and Burger King combined, and almost four times the U.S. systemwide sales than either of its direct rivals. Wendy's fortunes have been revived since investor Nelson Peltz's Triarc Cos. bought the chain in 2008. Much the way McDonald's has broadened its menu and remodeled its restaurants, Wendy's has upgraded its menu, changing the lettuce in its salads and softening the edges of its trademark square burgers. It has also raised some prices.The changes come amid intensified competition for market share in the fast-food industry, as room for restaurant growth has dwindled and the wobbly U.S. economy has prompted many to eat at home instead. Burger King reports its U.S. and Canadian sales together, but Technomic extrapolated the data to show that Burger King had 2010 U.S. systemwide sales of $8.7 billion, just $370 million higher than Wendy's, compared with a $542 million difference in 2009.Analysts focus on systemwide sales in assessing relative size in the U.S., rather than company revenue, because some chains franchise many more restaurants than they own and collect royalty fees from franchisees. Wendy's spokesman Denny Lynch declined to comment on the possibility of surpassing Burger King. "We're staying focused on our business," he said.Wendy's has benefited in part from weakness at Burger King, which analysts say has suffered in recent years from a series of management and ownership changes, a lack of menu development and an over-reliance on young adult customers at a time when high unemployment hit that market hard.Burger King spokesman Miguel Piedra said speculation about market rankings in the U.S. "highlight[s] the degree of competition" in the sector, but that such projections "do not illustrate a complete picture of the industry's competitive landscape, globally." He said Burger King has nearly 12,400 restaurants world-wide, almost double the number of Wendy's around the world. Burger King is "focused on driving strong expansion in its many markets around the world," and that "will strongly position the brand" to remain the No. 2 burger chain world-wide, he said.Wendy's has focused on improving the dining experience.Shortly after its acquisition by Triarc, Wendy's began an 18-month process of interviewing 10,000 consumers. "They told us they liked the idea of fresh foods with as little processing as possible and ingredients they were familiar with," Mr. Lynch said. The customer survey led to the "reinvention of our core menu," he said. Out went the traditional iceberg lettuce topped with tomatoes and onions, and in came four new salad varieties featuring 11 different greens and new ingredients like apples, pecans and asiago cheese. Wendy's then turned its attention to French fries, switching from a mixture of potato varieties to only Russet potatoes, sliced with the skin still on, and sprinkled with sea salt.More recently, Wendy's beefed up its burgers, switching to a looser grind of beef to make its burgers thicker and juicier. The company also refashioned its trademark square burgers with softer edges after customers said those burgers looked processed, even though they were fresh. Andrew Ofisher, a 24-year-old software engineer, went to a Wendy's in downtown Chicago last week to try the new burger. "This was more like a normal burger, not like a fast food burger," he said. "There was actually a pink part to it; it wasn't burned to a crisp." Tim Perry, a 30-year-old product manager who ordered a spicy chicken sandwich, likes Burger King but goes to Wendy's more often. "It's good, it's fresh and you've got the sea salt fries," he said.More customer visits and higher prices are showing up in Wendy's sales this year. The company said revenue for its fiscal third quarter ended Oct. 2 rose 1.8% to $611.4 million, although the company's quarterly loss widened to $4 million from a year earlier, due to costs associated with the July sale of the Arby's chain.Burger King, which went private in a leveraged buyout last year by 3G Capital Management Inc., said revenue in the third quarter ended Sept. 30 rose 1.4% to $608 million, while net income fell 24% to $48 million.Burger King also has been trying to emulate McDonald's lately by introducing oatmeal for breakfast and testing fruit smoothies in an effort to broaden its appeal. Mr. Piedra said the company is focusing on operations, menu innovation, brand image and marketing. In May, Burger King set a goal of remodeling 1,000 restaurants by the end of 2012.McDonald's isn't likely to feel much change from any shift in ranking. But with Wendy's getting stronger, McDonald's could lose market share in certain parts of the business, such as breakfast."As the leader in the [fast food] industry, we remain focused on our customers and our business," a McDonald's spokeswoman said. Write to Julie Jargon at julie.jargon@wsj.com ...

Military Veterans Prep for New Role

Fri, 09 Dec 2011 19:14:15 EST

By Sarah E. Needleman Former Navy Petty Officer Ronnie Reum knows how to safely jump out of a helicopter into the ocean but is having a hard time finding clients for his small commercial-cleaning company.The 36-year-old veteran, who has little business experience, is now being mentored in marketing with the help of an eight-month-old "business accelerator." Veteran Entrepreneurial Transfer Inc. of Milwaukee is one of a handful of free programs that have sprung up in recent years to assist veterans attempting to become entrepreneurs after struggling to join the civilian work force.At VETransfer, Mr. Reum has access to expert advisers as well as cubicle space with Internet service and a phone line to run his business. He hopes the program's advisers will help him figure out how to turn his Milwaukee start-up, Healthy Spaces Cleaning, into a profitable enterprise. The veteran, who left the military in 2002 following an injury, started his business in late 2009. Mr. Reum says the business, which had revenue of about $25,000 this year, is his main source of income.Overall demand is soaring for enrollment in programs designed to help veterans start businesses. Mr. Reum says he had to wait five months just to get a slot in VETransfer, for instance. Ted Lasser, executive director of VETransfer, says there are about 40 veterans who currently want to get in. The program, based out of a 15,000-square foot facility, is funded by the Department of Veterans Affairs and led by a team of six entrepreneurs. He initially expected it to provide free mentoring and resources to only about a dozen veteran-owned start-ups. But to date the program has managed to make room for about 160, serving about 60 on-site and the rest via the Web.Most VETransfer participants are expected to stay in the program for six months to a year.Wait lists for some other programs are as long as one year. The typical wait may grow even longer in 2012, with tens of thousands of service members set to return from Iraq by the end of this year.The unemployment rate for veterans who served in the military at any time since September 2001—so-called Gulf War-era II veterans—is 11.1%, according to the Bureau of Labor Statistics. The national unemployment rate currently stands at 8.6%.Due to structural shifts in the economy, there is "decreasing demand for the kind of blue-collar jobs that many veterans were trained for as part of their duties in the military," says Richard Burkhauser, a professor of economics at Cornell University in Ithaca, N.Y. More than 400 franchisers—ranging from household names like 7-Eleven Inc. and Dunkin' Brands Group Inc. to lesser-known chains such as U.S. Lawns Inc. and Caring Transitions—have pledged in recent years to provide financial incentives to veterans through a partnership with the International Franchise Association, the industry's largest trade group.Mail Boxes Etc. Inc., a San Diego-based retail shipping and business-services franchise that operates under the brand name UPS Store, offers veterans a $10,000 discount on the $29,950 franchise fee for a UPS Store. And starting in January, the company will waive the entire fee for the first 10 qualifying veterans who apply before June 30, 2012, says Stuart Mathis, president of Mail Boxes. But many veterans including Mr. Reum say they'd prefer to build their own businesses from scratch.Securing proper financing, however, is a common challenge."Many of them don't have a lot of formal training around how to go out and pursue traditional sources of capital," says Mike Haynie, a professor of entrepreneurship at Syracuse University's Whitman School of Management. For fiscal 2011, which ended in September, the Small Business Administration guaranteed 4,311 loans for veterans, down from 4,907 in 2010, though the total amount backed rose to $1.49 billion this year from $1.3 billion last year.Mr. Haynie, a former Air Force officer, has helped to develop four entrepreneurship-training programs for veterans nationwide, which vary in length and frequency. One program, started in 2007, is open only to disabled veterans. It received 500 applications this year—twice as many as last year—for only 175 slots.The programs have been funded mostly by corporations such as Wal-Mart Stores Inc., Humana Inc. and PepsiCo Inc. Meagan Smith, director of a recycling program at PepsiCo, says the beverage maker is providing $500,000 a year for three years to one of the Syracuse programs, and that PepsiCo is benefiting by touting its support for veterans in promotional materials for the recycling initiative.There is no way to measure what, if any, added value the "accelerator" programs provide to those who participate. Some cite intangible benefits of coaching and mentoring. Others point to entrepreneurship basics."It really laid the groundwork on how to properly start a business," says Shannon Meehan, who participated in a boot camp for veterans with disabilities at Syracuse University in July after waiting seven months to get in. The 28-year-old former Army captain says he is now applying the knowledge he gained from the program—such as how to incorporate a business and develop a customer base—toward a start-up, called Designing Freedom LLC, that specializes in embroidering logos that use a military-style camouflage-pattern onto T-shirts, thermals and other apparel. "I was really searching for something to do in my life," says Mr. Meehan, who left the military in 2009 due to an injury. "There's a comfort level with being surrounded by other veterans," he adds. "A lot of them were like me. They had an idea but didn't know what to do with it." Mr. Meehan's business is now up and running with four employees. He says he's in the process of developing a company website and licensing deals so he can embroider sports-team and other trademarked logos.Applicants for the programs don't have to be fresh out of the military. Navy veteran Kevin Jones, 50, is still waiting to get into VETransfer. He launched a real-estate investment firm in 2009 and says he needs help growing it because it isn't generating sufficient income. "My expertise has only gotten me so far," says Mr. Jones, who left the Navy in 1989. In the meantime he is working as an electrical technician, one of several low-paying jobs he has juggled in recent years to make ends meet. "I was able to get it started but I can't it get to that next level." Write to Sarah E. Needleman at sarah.needleman@wsj.com ...

Foursquare Grows

Tue, 06 Dec 2011 15:20:26 EST

By Laura Kusisto New York City-based Foursquare has closed a deal to sublease 56,000 square feet on two floors at 568 Broadway in SoHo.The company, which makes a smartphone application that lets users "check in" at bars, restaurants and other locations, will sublease the space from Scholastic Corp. for just under 10 years. Scholastic, a publisher, couldn't be reached for comment. While the city lately has seen an influx of technology companies establishing offices here, it boasts relatively few homegrown companies like Foursquare that have matured beyond the start-up stage. Foursquare was founded by Dennis Crowley and Naveen Selvadurai over a kitchen table in the East Village in 2009. It now has 15 million users world-wide and is notable for being one of the few companies native to New York's "Silicon Alley" to make it big. Foursquare had wildly outgrown its space at 36 Cooper Square, where it started with just a few employees in 2009. It now has more than 80 workers in the Cooper Square office. "We tried using the kitchen. We tried using the eating room [as office space]. We have staff everywhere right now," said Derek Stewart, finance and operations manager for Foursquare, who conducted the office search with Sean Black of Jones Lang LaSalle.Foursquare's move comes as far larger technology companies based outside New York are expanding their city footprints. In July, Facebook Inc. moved into a 40,000-square-foot space at 335 Madison Ave. and announced Friday that it plans to open a new engineering center. Twitter occupies 11,000 square feet at 340 Madison Ave., according to people familiar with the matter. Twitter didn't respond to a request for comment. The growth of tech companies has intensified competition for remaining office space in the desirable neighborhoods of SoHo, Chelsea and the East Village. Mr. Stewart didn't comment on competing offers for the space, but said it was one of the few sites of suitable size in the area. "We definitely thought about expanding to Midtown or the West Side Highway," he said. "This is where we thought our employees would be the happiest." ...

Economy Adds 206,000 Jobs in Latest Survey

Thu, 01 Dec 2011 16:28:07 EST

By Nick Timiraos and Kathleen Madigan Private businesses sharply increased their hiring in November, adding 206,000 jobs, according to a survey of hiring, and an index of contracts to buy previously owned homes surged in October to its highest level this year, bolstering views that the U.S. recovery is on track.The latest report by Automatic Data Processing Inc. and Macroeconomic Advisers showed the surge in hiring from October. In addition, the October figure itself was revised upward, to 130,000 from 110,000. The November increase was the largest monthly gain since December 2010 and nearly twice the average monthly gain since May, when employment slowed significantly. The survey is closely watched as a signal of the direction of the government's comprehensive jobs report, due out Friday, although the two reports often diverge greatly.Regionally, the economy grew in most parts of the U.S. in late October and the first part of November, the Federal Reserve said in its latest "beige book" report, which is based on anecdotes from business contacts and economists across the U.S. The Fed said 11 of its 12 bank regions—all but the St. Louis Fed—had reported an increase in economic activity since the previous report, on Oct. 19, but most of the districts described the pace of growth as slow or moderate. There were bright spots, such as manufacturing—a force in the early recovery that stumbled this year—but consumer spending increased only modestly.The National Association of Realtors' index of pending home sales, which reflects contracts signed on sales that haven't yet closed, rose to 93.3 in October from 84.5 in September, on a seasonally adjusted basis. It declined by 0.3% in the West but was up by 17.7% in the Northeast and by 24.1% in the Midwest.The reading is the latest indication that falling mortgage rates and stronger economic fundamentals could boost home-purchase demand. The increase in the pending-sales index, which hit a 12-month high on a seasonally adjusted basis, follows three consecutive monthly declines. "The market has been underperforming consistently from the early months of the year," said Lawrence Yun, chief economist of the National Association of Realtors. Mr. Yun said the gain is "in line with the various improving factors" in the broader economy, such as job growth, rising rents and falling mortgage rates.But sales gains are being driven in part by falling prices. Home prices remain under pressure because many housing markets must digest a large overhang of foreclosed properties. On Tuesday, the Standard & Poor's/Case Shiller index showed that home prices fell by 0.6% in September from August across 20 major U.S. cities.Mr. Yun said it would take several consecutive months of stable sales and continued inventory declines to signal a broad-based housing recovery. Real-estate agents recently have reported higher rates of canceled contracts as borrowers run into problems securing loans or appraisals that allow them to buy at the agreed-upon sale price. "Given the high degree of cancellations, we should be somewhat cautious about how the actual closing figures will play out," Mr. Yun said. Write to Nick Timiraos at nick.timiraos@wsj.com and Kathleen Madigan at kathleen.madigan@dowjones.com ...

Obama Calls on Tax Breaks for Small Businesses

Wed, 01 Feb 2012 16:23:40 EST

By Jared A. Favole U.S. President Barack Obama asked Congress to support tax breaks for small businesses Tuesday, saying he wants to tap into some bipartisanship to help give entrepreneurs a "leg up" in the economy.Obama, speaking while surrounded by his cabinet members, said he hopes and expects Congress will send him a bill this year that will expand and make permanent tax breaks to help small businesses grow. He said helping small businesses is an all-hands-on-deck approach within his administration.Obama frequently touts his administration's efforts to help small businesses and the president recently elevated the head of the U.S. Small Business Administration to a cabinet-level position. Obama said having the SBA administrator, Karen Mills, as part of the president's cabinet is a "symbol of how important it is to spur entrepreneurship, to help start ups, to move aggressively so we can ensure more companies that create the most jobs in our economy are getting a leg up."Specifically, the president wants Congress to expand and make permanent a measure eliminating taxes on capital gains in key investments in small businesses. He also wants a new tax credit for businesses that add jobs in 2012, as well as an extension of a measure that allows businesses to deduct the costs of equipment purchases.Some of the proposals are new, while the president has proposed others before.The president said he also wants to attract more high-skilled foreign workers by eliminating country-specific caps for immigrant visas. The president was asked Monday about the government issuing visas for foreign workers.During a live question-and-answer session sponsored by Google Inc., a woman asked the president why does the government continue to extend visas for foreign workers "when there are tons of Americans just like my husband with no job?"Obama said the visa program for foreign workers is only supposed to be used by companies when they can't find someone in the U.S. to fill a role. The woman said her husband was a semiconductor engineer and had 10 years of experience.Obama said her husband should be able to get a job considering his skills and said he'd be willing to pass her husband's resume along to the appropriate people. "Maybe we can get some information as to why your husband has had some trouble getting placed. We want to encourage more American engineers to be placed" in jobs, Obama said.The woman said she'd have to "take you up on that." ...

Tax Credits for 'Angels' Get Clipped

Fri, 03 Feb 2012 13:05:08 EST

By Angus Loten Bandals International Inc., a maker of women's sandals, raised roughly $100,000 in capital from so-called angel investors last year.When meeting with potential investors, the owners of the Rochester Hills, Mich., business touted the state's special tax break for angels—a term used to describe wealthy individuals who provide capital to start-ups. The Michigan incentive at the time allowed angels to seek tax credits of 25% on their 2011 investments in qualified start-ups. Tom Sesti, president of Bandals, says the tax credit was key to helping the three-year-old company raise the funds. "It's almost like offering a money-back guarantee," he says.Tax breaks for angel investors have cropped up in recent years in about two dozen states as a means of stimulating job growth. But the effectiveness of the incentives—which range from breaks on 15% of funding in Colorado to 100% in Hawaii—are coming under greater scrutiny, particularly as states face budget pressure. Many states' programs expired at the end of 2011, were stripped of funding or were placed under a moratorium.The incentives "can be controversial," said the National Governors Association in a 2008 brief, adding that "even angels are in disagreement as to the economic growth benefits of tax credits.""People rarely make a high-risk investment solely for tax reasons," says Scott Shane, a business financing researcher at Case Western Reserve University, and a member of the North Coast Angel network. He says tax credits likely do very little to boost investing—and even less to create jobs. "If I think I'm going to lose my money, a tax credit isn't going to make up for that," he says.In the first six months of a program launched in Minnesota in 2010, 67 businesses received $28 million in total funding from a mix of individual investors and certified funds, according to a 2011 report by the Minnesota Department of Employment and Economic Development. The program offered angels a 25% tax credit.Yet together, the businesses that received funding created only 47 new jobs, the report found."These are emerging companies, so they don't necessarily rush out and hire new employees," says Jeffrey Nelson, the state program coordinator.However, Mr. Nelson pointed to a so-called spillover effect, as newly funded firms hire local contractors and other third-party services. Minnesota's program is now growing, he says. Last year, investors claimed all $16 million in available tax credits under the program, which is set to expire in 2014, pending a review by state lawmakers."I've heard from entrepreneurs who say 'I would not have funding without this program,'" he says. Brook Eddy, founder of Bhakti Chai in Boulder, Colo., which sells tea at Whole Foods and other grocery store outlets as well as cafes, says the state's 15% tax-credit program helped her raise $125,000 in funding in 2010. "When we met with potential investors, it was like having an extra bonus to offer them," she says.Colorado's angel program expired at the start of 2011.Of course, only a fraction of the nation's small businesses are high-growth start-ups that might draw the attention of angel investors.In one survey by Pepperdine University of more than 10,000 small-business owners last August and September, only 3% cited angels as a source of financing. Roughly half said they tapped credit cards and bank loans.Meanwhile, Michigan's angel investor tax credit expired Dec. 31, leaving some entrepreneurs in the state disappointed."Investing is risky, but if you have a trump card to play, like a tax credit, it helps," says David Weaver, whose Ann Arbor, Mich., medical device firm, Blaze Medical Devices, raised $250,000 in a funding round in 2011. He says he believes the tax credits helped persuade local investors to act before the Dec. 31 deadline. Eli Thomssen applied early to the state's economic development agency to have his biotech firm, also based in Ann Arbor, on a list of that state's eligible small-business investments. But before his firm, Armune BioScience Inc., could begin looking for investors, state lawmakers killed the 25% tax credit. The firm, which is developing a diagnostic test for prostate and other cancers, needs about $400,000 to keep its lab running until the tests are ready to bring to market, Mr. Thomssen says.A spokeswoman for the Michigan governor says there is a replacement incentive program in the works, though it won't be structured as a tax credit. "We're going to try a new path that the governor feels confident will make Michigan a place where people want to do business," she says. ...

More Firms Enjoy Tax-Free Status

Fri, 13 Jan 2012 10:12:02 EST

By John D. McKinnon StoneMor Partners LP, the publicly traded firm that specializes in running cemeteries, expects to see handsome profits in coming years as baby boomers age and die. But unlike its largest rivals, its corporate tax bill from the federal government will be zero.StoneMor is among the many businesses organized so they don't pay a penny in federal corporate income tax. And yet such firms don't employ an army of accountants to shield profits in complex tax shelters. Their enviable tax position is perfectly legal and has been encouraged by Congress and state governments. Known as pass-throughs, these firms pass along profits to investors who pay taxes on those sums through their individual returns.This exception has been around for decades, and has been broadened repeatedly in recent years as a way to spur entrepreneurship. Millions of small businesses have organized this way, but so too have some behemoths like private-equity giant Blackstone Group LP, construction firm Bechtel Group Inc. and pipeline firm Kinder Morgan.The percentage of U.S. corporations organized as nontaxable businesses has grown from about 24% in 1986 to about 69% as of 2008, according to the latest-available Internal Revenue Service data. The percentage of all firms is far higher when partnerships and sole proprietors are included.Old-line U.S. public companies generally remain taxable, and many complain that they must pay higher effective rates than foreign competitors. They are eagerly seeking a cut in the 35% U.S. corporate-tax rate, now one of the highest in the world. But increasingly they find themselves at odds politically with the growing breed of nontaxable firms.By some estimates, more than 60% of U.S. businesses with profits of $1 million are structured as pass-throughs, the highest rate among developed countries. Their popularity is one big reason why federal corporate tax collections amounted to just 1.3% of GDP in 2010, well below their mark of 2.7% in 2006 and far beneath their peak of 6.1% in 1952. Almost everyone in Washington appears to agree that the Byzantine corporate tax code needs a revamp. But on this point, the business community is split, presenting perhaps the biggest obstacle to any overhaul. Many Democrats as well as some Republicans are willing to consider taxing the largest pass-throughs. It is a matter of fairness, they argue, and would also raise new revenue to help offset the cost of cutting tax rates. On the other side, a Republican-backed coalition including building contractors, beer distributors, auto dealers and funeral directors argues that changing the rules will inhibit entrepreneurship, as well as hit their pocketbooks.Various proposals for overhauling the tax code threaten to hit the untaxed entities to some degree, by curbing the business tax breaks they receive. And pass-throughs—unlike taxable corporations—would receive no benefit from a drop in the corporate rate. Treasury Secretary Timothy Geithner has kicked the issue squarely back to lawmakers. "Congress has to revisit this basic question about whether it makes sense for us as a country to allow certain businesses to choose whether they're treated as corporations for tax purposes or not," Mr. Geithner said at a Senate Finance Committee hearing last year. Pass-throughs are especially prevalent in industries such as agriculture, mining, construction, finance, real estate, professional services and entertainment. Businesses in these sectors often have relatively few owners and can rely on private financing to flourish. By contrast, public companies, with some exceptions, must organize as taxable entities. Analysts noted the tax advantage of pass-throughs when pipeline giant Kinder Morgan announced in October that it would buy rival El Paso Corp. in one of 2011's biggest tie-ups. Kinder Morgan holds nearly all of its assets in Kinder Morgan Energy Partners LP, a so-called master limited partnership, a nontaxable entity. El Paso, though, for various business reasons, has kept a large percentage of its assets in the standard taxable corporate form. A Kinder Morgan spokesman said energy MLPs were authorized by Congress "to promote the development of energy infrastructure" in the U.S. KKR, the big private-equity concern, reported that it earned a total of about $1.3 billion in 2010 through its pass-through ownership structure. KKR paid about $74 million in corporate tax, largely through a taxable subsidiary. If KKR were instead organized as a single taxable corporation, it would have paid about $523 million in corporate tax, counting both federal and state taxes, the company said. That means its pass-through structure saved it about $449 million.Some but not all of that tax savings disappears when the individual taxes paid by the owners also are considered. Even so, KKR's current pass-through structure saves at least $277 million in taxes overall, compared to a taxable corporate structure, when all taxes are considered.Many large pass-throughs are private, and few details have emerged about their tax status. Construction giant Bechtel Group, for instance, has become a frequent target for congressional critics who say it is inappropriately taking advantage of pass-through rules designed for smaller companies. The company declines to comment on how it is organized for tax purposes.Nontaxed companies go by a smorgasbord of appellations, from Subchapter S corporations to limited liability companies and master limited partnerships, to even more specialized forms. A common example would be a limited liability partnership, such as a law or accounting firm, which distributes profits to its partners. The firm itself typically doesn't pay taxes. Instead, the federal government gets its cut by taxing partners' income. The late Donald Alexander, an IRS commissioner in the 1970s, called this "tax nirvana." The concept gained momentum in the 1950s when Congress created the Subchapter S corporation, a relatively strictly defined designation aimed at encouraging start-ups and diluting the influence of corporate giants. It got a boost in the 1970s, when Hamilton Brothers Oil Co. persuaded Wyoming's legislature to approve a new form called the Limited Liability Company or LLC.Starting in the late eighties, when the IRS recognized LLCs as partnerships for tax purposes, other states quickly followed suit. By 2008, about 1.9 million LLCs were filing tax returns with the IRS. "I tell friends my biggest business error was not getting a royalty" on the idea, said A.J. Miller, the former Hamilton executive who led the effort.Reagan-era tax cuts made the structures more attractive because corporate rates suddenly were significantly higher than individual rates. Top individual rates have since risen and now are at 35%, the same as top corporate rates. But organizing as a pass-through for tax purposes is still attractive for most businesses, because it eliminates one layer of taxation. Corporate profits are typically taxed twice, first at the corporate level and secondly when they are paid out to individuals as dividends and capital gains. Investors in pass-throughs, therefore, often benefit from larger sums being distributed. Congressional officials knew they were encouraging businesses to become pass-throughs. Even so, "there were a hell of a lot more pass-throughs created than I think we expected," says J. Roger Mentz, a former Reagan Treasury official who helped guide the 1986 Act through Congress.In 1987, amid a rush by businesses to convert to the pass-through form, Congress declared that publicly traded companies should also be taxable corporations. But it carved out a few exceptions that seemed narrow at the time. One was for companies in the energy and natural resources field. Another was for real estate. Still another was for certain financial firms. Despite occasional recent threats by some lawmakers to try to block private-equity firms from using the pass-through technique, Blackstone Group and KKR took advantage of the rules for publicly traded partnerships a few years ago. In 2011, two more well-known financial firms, Carlyle Group LP and Oaktree Capital Management LP, filed to go public in the same manner. Todd Molz, general counsel of Oaktree, said the industry's moves are appropriate, because they prevent another layer of taxation on earnings. Businesses owned by private-equity firms often pay corporate taxes. Shareholders of the private-equity firms pay tax on their payouts. So imposing a levy on the investment firm itself would create a third layer of tax on the same activity, he said.Since 2004, StoneMor, based in Levittown, Pa., has been organized as a master limited partnership. That means it doesn't pay corporate-level taxes even though it is publicly traded and has grown to become one of the industry's larger firms. StoneMor filings indicate that the firm is structured to take advantage of the real-estate and financial exceptions. The firm's chief aim in converting to an MLP was to encourage investors to look at its cash flow and yield, the way MLP's usually are valued, rather than by typical corporate measures of profitability, said Tim Yost, a company vice president. "This isn't a tax-avoidance" maneuver, he said. StoneMor's market capitalization recently hovered around $450 million, up from $120 million at the end of 2006. Company materials tout StoneMor's "predominantly tax free" structure, and tax benefits for investors. But StoneMor has to pay some corporate tax through subsidiaries, for income such as casket sales that doesn't qualify for one of the MLP exceptions. And company officials note their investors pay taxes on their share of the profits. The structure is so potentially valuable that one of StoneMor's directors has sought to replicate it with other companies, and has obtained a patent on an investment-fund strategy that involves converting corporations to master limited partnerships. StoneMor's largest rivals in the death-care industry, as the firms dub themselves, are organized as traditional taxable corporations. Industry analysts say too much of their income comes from funeral services, which doesn't fit into any of the exceptions for publicly traded partnerships. Two of them, Service Corporation International and Carriage Services Inc., paid total tax rates of more than 40% each on their 2010 profits, counting federal and state corporate levies, according to their financial filings. They both declined to comment.The administration has been working for months on a business-tax overhaul, but has yet to release it. White House and Treasury spokesmen declined to comment. Some lawmakers have called for curtailing business tax deductions, with the additional revenue redeployed to help lower corporate tax rates. A few lawmakers—mostly Democrats—have floated the idea of imposing a tax on the largest pass-throughs. But small-business groups and their allies in Congress, particularly Republicans, have pushed back on the idea of raising taxes on pass-throughs, warning that such a move could slow job creation. And the larger pass-through companies retain significant lobbying and political clout. Most Republicans say they favor reducing both corporate and individual tax rates. "I don't know how you deal with the [corporate] rate without dealing with also the pass-through entities," Rep. Vern Buchanan (R., Fla.), whose own businesses are organized as pass-throughs, said at a House hearing in June. "It all has to be looked at." Write to John D. McKinnon at john.mckinnon@wsj.com ...