Dashboard: Is the Startup Party Over?

[Music] hello everyone welcome to another 21 hats dashboard every Monday Jee marks and I talk about the issues we think business owners should be monitoring this week Gan is president of the marks group a consulting firm that advises small businesses especially about their technology needs he also hosts his own podcast small Biz ahead with the Hartford Insurance you can find it at SBA harford.edu you um let's start today Jean you had a really interesting piece that ran this week I think in the hill uh the last couple years have actually been they've been a mess in all sorts of ways but they've been great for entrepreneurship and startups we'd been through a kind of a dry period there have been a lot more startups but you wrote this week that you think the part is over why is that yeah I you know you're right there has been a a ton startups um over the past really year and a half going on two years and 2020 startup applications filed with the Census Bureau were like 20% ahead of applications from the previous year this during the pandemic year um and then this year they're they're on a similar pace so you've got millions of people fil you know filing these startup applications there's a lot of discussion as to why that's going on you know there's a lot of people sitting at home uh some people had to start up businesses because they're unemployed they had to it was out of necessity it was I certainly out of necessity I kind of I think that that's certainly one of the reasons there's always I think there's a few reasons why one of them others is I think all those corporate employees that pretend they're so busy and slammed all the time is not exactly um you know they weren't as busy as they were saying they were they time to start up you know little side gigs and what have you you know the the Venture Capital industry has also been going like bunkers I mean you know Venture Capital Investments are about 150 billion last year in us uh you us companies um this year it's already 140 billion year to date looks like it's going to exceed uh last year's number it's all great news for entrepreneurs Lauren I think it's going to end and it's going to end pretty soon not like completely stop but I think the party is going to be tapering down um you know and ask me why go ahead why Jean why do you think that you know I just um the reason why there has been so many businesses starting up is you know one of the reasons why the biggest reason why is that there's been a lot of capital there's been a lot of savings but more importantly there has been a lot of capital available for business owners to uh get a hold of and particularly in the Venture industry there's been a lot of capital available that's because interest rates for the past God knows how many years now 10 years at least have been Rock Bottom so you know the cost of capital has been extremely low and Venture Capital firms have been able to raise capital with the enticement of giving their investors more of a return than putting it certainly in the bank um or putting it in the stock market where you know you're at the mercy of other people managing your money and I think that that is you know that that's been a big big reason why so much Capital has been available that's going to go away and the reason why is inflation uh you know we're we're seeing inflation rise all over the place uh there's a lot of money circulating in our system our you know our Bank Reserves our M2 money supplies $4 trillion in just a year lots of stimulus money being spent supply chain issues other price pressures um you know at some point the FED is going to jump in and start raising interest rates and when that happens um it's going to happen longer term and you right now we've got interest rates of about 2 to 3% I think that's going to at least double over the next year if not go up even more than that and as the cost of capital goes up uh there's going to it's going to be more expensive uh for people to raise capital and therefore to invest in startups I just don't think there's going to be as much Capital available for all of these startups and that's one of the prices we pay for high inflation is um I think it's going to hurt Innovation and and startups in this country and uh you know and I I think we're going to see that play out in the next six to 12 months well let me ask you about that I'm curious about one aspect I mean to a certain extent what you're saying is you know there's just no question there is inflation everybody expects rates to go up and business business owners do not like interest rates going up and it's going to have an economic impact and that just is what it is that said I'm curious whether there really is that much of a tie between interest rates and startups especially the the number of startups I mean you know the cliche we all know is of the uh entrepreneur who starts a business by maxing out 12 credit cards that person clearly isn't worried about interest rates um actually they are you credit card rates go up um so you mean if you're if you're starting your business with credit card money you're paying very high rates already and another point or two isn't going to make much of a difference um I I I wonder you know here let me ask it a different way as you said interest rates have been low for quite some time they were low before the pandemic when there were not that many startups um well let's I mean let's talk about the difference between startups and and startups that that grow and sustain um yeah the the startup numbers that I talked about earlier include a great number of side gigs people selling on Etsy or Amazon resellers or even Uber drivers you know can be starting up their own businesses I don't think you know interest rates aren't going to really impact those people that much but for the the startups that turn into Bonafide companies that employ people and and you know grow and um you know contribute to the economy in a more significant way those startups at some point whether they got credit card financing or bootstrapped or whatever at some point they will need Capital to to reach further levels you know stages of their growth and many of them turn to venture capital firms private investors as well as U you know as Banks um for more you on a traditional side for more mature companies so you know for those companies you know and and those are the companies the Silicon Valley companies the tech companies the uh you know the people that are in Silicon alley in New York and uh other other circles in the country they're they're going to be try to raise Capital to do this and they are going to have a harder time raising Capital because there just won't be as much Capital available because the cost of that Capital uh is is is higher and because of that there will be you know investors will be less you know less attuned to taking the risk I mean you know if if if interest rates are that high a lot of times investors they invest based on margin so they're borrowing money to invest other people are also looking for other options to invest their money for return uh for the past 10 years or so like we we've had few options to invest our money other than the stock market which is why so many investors have gone out into the private Equity Market but as interest rates go up you know one of the good things about it is that you know it it increases the Returns on say treasury bills and government securities and savings account money market accounts there's other options and I think people are going to be putting their money in in those places and you know because it's less risky and still provides a satisfactory return to them than having to turn to venture Investments or Angel Investing and I think that those startup companies are going to find themselves without the capital they need interesting you know I think it's such an important issue I I don't think we necessarily completely understand why there were so few startups or declining startups during that period before the pandemic and I'm not sure we completely understand why the number picked up although obviously you know the people who started businesses out of necessity uh clearly that was a result of the pandemic um I think it's important for us to try to understand going forward uh what the situation is and whether the increased entrepreneurship will go on if I hear you correctly I think what you're saying is it may not be so much about the number of startups but kind of the the quality and the uh the long-term sustainability of those startups the ability to go from uh starting a business to really building a sustainable business yeah I I think you I think you phrase that right Lauren I mean the you I mean there are a lot of a lot of people that start up side gigs to do stuff and I don't really that's not really what I'm talking about you know I'm talking about companies that are starting and plan to grow and hit further stages and employ others um and become Bonafide you know entities uh those are the ones that are going to be searching for Capital and those are the startups that are going to wind up having a real struggle getting that Capital all right let's go to Story number two I was really uh I was really caught up in this story today it ran uh I mean last week Friday's Wall Street Journal there was a story it was a case study uh of a business trying to raise its prices and I I'm always a sucker for pricing stories I think it's really interesting I think you know it's something that everybody struggles with it's such a psychological problem everybody knows that lots of small businesses price poorly and many go out of business because they don't charge enough for what they're doing and it's it's easy to tell them you should charge more but it's different when you're sitting in that seat and you're the one that's afraid that if you increase your prices everybody's going going to run in the other direction so this is a story about a uh the owner of a theater a movie theater chain who decided to try going with a special deal where you could pay a certain amount just for the ticket price uh but if you pay $25 you also get all you can eat and we all know how easy it is to spend money on food uh quote unquote food at a movie theater yeah um it didn't go well for for him and I thought it was a really interesting piece did it strike you as well yeah it did and first of all your comments on pricing are so right I mean all the clients that I talk to I obviously you say what's your biggest issue and people are like finding people okay but every client has a hard time with pricing nobody knows if they're charging too much too little it is I know it's like the market compare but it is you you ask any business owner and you know how they come up with their pricing and it's never Quantified you know I mean it gets to so they take their costs and and they put their thumb in the air and they're like okay we're going to bump it up 20% we hope that that's right I tell you Lauren if you ever want a book if you want to write a great book uh because you know I don't have the time to do this but you I don't know if you have the time to do this but it would be fascinating to interview you know a half a dozen you know academics pricing experts around the country and and lay it out for a small business owner to really give them you know five six seven pricing strategies for their business um just a book on pricing because it it really uh and it changes so frequently it's not like you you know you can go back to the same book written 10 years ago cuz a lot of things have changed but you know so this person that runs a theater they you know he you know he he's trying to figure out if you know if this all you can eat you know you know option is going to work for him good for him that he's giving it a shot I mean right and and it's not like he went out of business because of it I mean it was just you know it was a deal that he tried I think that's a great point it's so important to try to experiment and it doesn't necessarily have to be fatal yeah it really does and you can always pull it back I mean you know if the if the pricing is wrong or if he's not making money it's you know he he can always go back and I've written before in the past of of people that run buffets there was one um restaurant owner it was in China somewhere it was a hilarious story that he uh you know he he you know put up like an all you can eat kind of deal at his restaurant and went out of business because of it you know there were like so many people lined up outside the door and I don't know the difference in Chinese Society I guess you make promises you got to keep them and therefore you went out of business whereas if it was me I'd be like all right this isn't working I'm breaking the promise right now U but I give the I I give the guy credit for giving it a shot like I said it didn't put him out of business um I would encourage him not to give up and try and come up with other you know other scenarios for pricing but again do you notice he's just it's like what we all do it's like he's just he's giving it a shot you know he's he's it's it's not based it's not like a data driven thing it's not a uh you know it's just you know I there were some things that he probably should have seen coming based on the story and one of them is there there's a pretty funny uh part of the story where uh he got a bad Yelp review from somebody who pointed out that if you didn't take the all you can eat deal and you just bought the ticket you were are were not allowed to just buy a soda or just buy popcorn you couldn't have any food and on the Yelp review the person wrote what Brainiac thought of that and the story quoted the the owner as saying well actually I'm The Brainiac who thought of that and I give him credit for uh up to I mean that also you know brings up the point about testing out you know whatever pricing change among your friends and colleagues and you know and advisers like is there anything that I'm missing you know I the best scenario of pricing that I've seen um in in my experience is um Major League Baseball I mean I I interviewed it was a couple years ago the it was the VP of marketing at the St Louis Cardinals I forget the name of the guy and he was explaining to me the MLB's pricing because it's all kind of dictated from the MLB but then down to the individual teams and if you go on you know the Cardinals website to buy tickets the prices of a ticket change depending on the dynamic pricing yeah it's Dynamic you know I didn't know baseball was doing that yeah they are doing it and they've been doing it and it's been a very successful thing and and some you know travel and bus companies for example do the same thing you know like Bolt Bus and uh Mega Bus and those those companies as well also do Dynamic pricing I mean that is a you really the way to do it the problem is with a small business obviously because number one we don't have the resources number two we don't have the volume you know to to to justify that kind of a thing do you know what I mean um so it's it's really hard for us to come up with like a similar type of methodology but and also the lack of resources I mean a big company can experiment and if it doesn't work you know the losses are probably manageable uh you know with a small business you you often you know in a in a quick test you may not really be sure what the uh lesson to be learned is I mean even with the the movie theater guy you know maybe maybe the movies weren't that good um maybe Co played a role um you know he also said in the story that he wasn't sure he tried it at the right location and I don't know what he was thinking about but you know he has a chain and maybe he should have done it somewhere else there are a lot of variables and it's who's to say definitively what was you know the most important factor 100% 100% but like I said good on him for trying and um I hope he continues to try and it doesn't discourage him I just think um my only advice to him would be you know if you're going to make any pricing changes you know bounce it off of as many people as possible before you implement it and um and you be transparent about it you know in other you know what I mean like whether he has a Facebook page Communications with his audience um let them know that this is a new pricing structure but you give me feedback and um and be prepared to change it that's all Story number three there was a story again in the Wall Street Journal that consumer confidence is sliding um how do you think about that I mean this is the third month in a row September was that um that uh indicator is falling we had thought back in the spring that we were headed in the right direction the economy seemed to be booming um what do business owners take from this I I could tell you I I I think it all comes down we've been having a whole this whole conversation has been about inflation because that's really what's going on here and and that is what's eroding consumer confidence I think um you're right back in the spring and early summer people were excited we're getting shots in arms we're going to go out and resume normal life the economy's going to Boom back and a lot of people did um you know in the spring in the summer I mean you know after being H up for a year it was it's nice to go out to eat all of that but I don't know if you're' seen the same thing you know Lauren like I go to restaurants I was just at a bakery across the street from where I live um that you know they put a sign up on their doors apologizing because they've had to increase their prices because of you know the price of their materials have gone up and I'm seeing that all over the city in Philly where I live um restaurants are you know are having to increase prices and I think you know consumers are feeling it I mean we're noticing it we see like H you know this is really expensive to go out to dinner like more than before Jesus you know I'm paying $23 for a plate of pasta you know I mean this was only $18 you know a few months ago so I think I'm paying twice what I was paying for toilet paper yeah I hear you I mean it's it's and it's not I mean you can really if you start looking at what you're paying for now versus what you paid for it a year ago um a lot of companies are you know are they're raising prices and I'm telling my clients to raise prices whether they need to or not because we're in a we're in a situation now where you can get away with raising prices but it's kind of the easiest time ever isn't it it really is but uh consumers are noticing it because we ain't stupid and because of that where you know the the people are holding back a little bit on on undoing things and buying things and businesses a lot of my clients are doing the same thing they're you know they're they're limited and what they let me ask you this I I think initially there was the hope and some guidance from the fed and economists and other places like that that this was mostly supply chain driven pandemic driven and that it wasn't necess necessarily going to stick around right just recently the FED has said well it's probably going to stick around a little while we're going to have higher inflation at least into next year but you know a lot of it clearly is still driven by supply chain supply chain issues I mean that you know the car situation is just unbelievable what it cost to buy a car or to rent a car if you can even find one um that you know that that problem's going to be solved eventually I would think how do you look at it in terms of what's here to stay and what I think I think once prices have gone up they're going to stay up I can't see you know I think the average price of a car I think is now $35,000 or something like that you think it St price has hit a certain level it's you know for them to start going back the other way and the same thing with wages because I think that's what's going to happen next I mean hourly wages have gone up about 4% in the past year but certain industries are reporting increases significantly more than that people in the travel industry and the service indust indries are reporting 10% increases in wages once you increase wages in your company um you're not going back on that you can't say you're going to pay somebody X dollars and then six months later come back and and say okay we're now going to reduce that you know so that that puts a whole new level of costs on an overhead structure for all businesses and those costs have got to be absorbed by customers which means that those higher prices are they're they're going to be here to stay now the rate of inflation might decrease after a year or so I mean that's certainly going to happen but you know what a lot of economists and and I'm worried about is so much money floating around in the system Lauren I mean there's you know again so much money on reserve with our banks um there's so much money that's been scheduled to be spent through stimulus payments I mean you know it's it's Monday today so Congress is still talking about all the different things that they're going to be spending money on between infrastructure and build back better and all that it is you know it it they're potential inflationary impacts for doing all of that stuff and and that's going to continue to you to have an impact on prices going forward that's a concern good so we started talking about this because of the uh impact it's had on consumer confidence yeah how do you how how do you look at that how do your clients look at that as they plan spending for months ahead are people reigning things in or right there's there's no question that consumer confidence um now there's there's two big indicators consumer confidence one is from the the conference board and the other's from the University of Michigan those are two good metrics to follow and you just mentioned that's the third month in a row and that's the key you know you can't take a metric just in you know in isolation you got to look at where the trend is going and we've had three months in a row of declining consumer confidence in the end everything is bought by consumers I don't care if you're in the packaging business or you're making corrugated containers or your you know paper and film in the end it gets consumed by consumers so uh when you see consumer confidence you know you know starting to go down that is that's a big concern um for businesses all across the board I'm not seeing my clients respond to that yet but they're wary of it they're keeping an eye on it as well as other metrics that they're keeping an eye on anything in particular that you would call to our attention yeah there's a few metrics that that you some of the smartest business owners I know that they they watch now during covid um there are some high frequency indicators that people are really I know a few clients are really keeping an eye on that I and we're still in this Co environment so couple things you know to to to be aware of Open Table publishes uh every week uh their um reservations on their system Open Table is that mobile app you know that you can use to make reservations all across the country they do it by City And then they do a national average and um it gets grafted out and compared to the levels in 2019 so it's it's you know it's important to see if people are spending money you know at restaurants because if they're spending money eating out that means you're spending money elsewhere um so Open Table you know the the restaurant reservation index has been a really reliable one during covid the other one is TSA Travelers you know the the Transportation safety administration they they publish or security safety whatever TSA they publish that every day um and they they show Travelers going through the airports compared to the same time in 2019 both those Levels by the way reservations and travelers are still you know below uh 2019 levels you know we should be in growth mode and but I think they're also trending down a little bit from previous months right they are they are so you know a really good place to go to see those metrics by the way it's a wonderful blog that I follow called calculated Risk blog um it is run by um you know a guy that's been doing it for a number of years and he is um he takes that data every week and he graphs it for you so you can see the trend as to where it's going because that really gives you a you a good indication people are traveling that has direct and indirect effects on so many businesses and then of course if people are eating out that also has direct and in indirect effects on many on many businesses and then there's there's other monthly indicators that I know a lot of my clients like to follow small business Confidence from the nfib is really important you mentioned consumer confidence but small businesses when they're feeling good I mean what there's 30 million of us you know employ half the people in this country generate half the GDP when we're feeling good you know that's a good news but if that if that you know indicator is trending down that's also a worrying sign and then the other the other good one that I recommend following the Institute of Supply managers puts out a monthly um two metrics one on business conditions for the manufacturing industry and business conditions for the services industry The Institute of supply managers is a an association of purchasing managers and uh they they survey those people and they ask them the obvious question what do you buying and how much over the next 30 60 and 90 days because the purchasing managers are buying that's a good sign for the economy and then they break it out between manufacturers and service industry they publish it once a month it doesn't get like major media attention on like you know ABC news but a lot of the economists that are tracking the economy look closely at those metrics we're just about done here can you give us a hint how's it looking right now um it's softening both you know both I mean it has been the it has been significantly growing throughout the summer um was it was really strong numbers and now over the past two months those numbers have softened a little bit so you have to keep a close eye to see if it's if if if any significant drops happening and I do want to say that you know Lauren there is no none of these indicators I look at are are panicking me they're not dropping off to like precipitously it's just they're just not growing at the level that we were hoping that they would grow and I think it's because of two things I think it's because people are still not you know they're still wary about going out and going to work and spending and the um and and even for the people that are going out you know the supplies are not there it's a you know both materials and labor or or short supply a lot of great tips there thank you Jean Marks it's always a pleasure speaking with you love to speak with you la look forward uh we'll talk next week right absolutely you can learn more about Jean's business at marks group.net and you can hear his weekly podcast small Biz ahead at sb. harford.edu