Tuesday, February 19, 2013

Small Numbers and Big Percentages

I remember sitting in the work study office at Business School with two (male) colleagues. I was writing up a study of before vs. after construction benefit-cost analyses of an interstate highway link.  One of my office mates, Tim, was crunching numbers for a study of real estate price growth rates.

“Did you know that a given absolute increase in a number will show a higher percentage growth rate if the starting value is small than if the starting value is big?”

With that insight, Tim conveyed the Universal Truth About Small Numbers and Big Percentages. Or, as Samuel Clemens once opined, “There are lies, damn lies, and statistics.”  If you begin with a base number of 2 and progress to 3, the absolute increase is 1, while the percentage change or growth rate is 50%.  If you begin with a base number of 29 and progress to 30, the increase also will be 1, but the percentage change or growth rate will be a measly 3.4%.  So, Tim and Twain’s lesson is this: to impress the be-jeebers out of everyone, when you are a small fish in a big pond, use percentage growth rates rather than real numbers. The percentage growth rates will always hide the reality of an increase over a small base.

This is what often happens with the conversation about the data on women-owned businesses.  The latest example is the 56.6% increase, between 2002 and 2012, in the number of women-owned businesses earning $10 M or more per year.  That 56.6% rate of growth described an increase of just 4,590 actual women owned businesses to the ranks of $10 M or more revenue-earning firms, out of a total of 8.3 MILLION women-owned businesses, 13.2 MILLION equally male/female-owned firms, and 27.7 MILLION total privately-owned firms.

There were other much more valuable statistics and insights to be found in the 2012 The State of Women-Owned Businesses Report commissioned by American Express OPEN with Womenable.

Most telling was the fact that just 1.8% of all women-owned businesses earned $1 million a year or more.  By 2012, American Express OPEN and Womenable estimated that number to include:

  12,700 women-owned businesses earning $10 million a year or more
  15,100 women-owned businesses earning $5 to 9.9 million a year
125,100 women-owned businesses earning $1 to 4.9 million a year
152.900 women-owned businesses earning $1 million or more a year.

No matter how you slice it, that total of 152,900 is still just a tiny sliver of a share of the total of 8.3 M women entrepreneurs – a percentage that has been unchanged since 1997.

The 2012 Census has other insights that go a long way toward explaining the whys and wherefores of these persistent patterns.  It is these insights that deserve our closer scrutiny.  The 2012 Census has charts describing two important phenomena.

First is the “dip” that occurs among WOBs at the $250,000–$499,999 revenue mark. (See the graphic, left.)

The second trend, probably related to the first, is the dip that occurs among WOBs at the 5 to 9 employee per firm mark. (See the graphic below.)

The researchers suggest that both of these points are possibly the levels at which WOBs “are more likely to struggle as they put more management systems in place and transition from owner/operator to CEO.”  They are two trends very likely linked together by causative factors.

Another interesting observation about the firms earning revenues of $10 M or more is that, at that stage in their evolution, WOBs are very likely to transition into mixed-gender firms, tapping the diverse talent available to them in the investment community. Thus, they would disappear from the ranks of women-only firms and enter the ranks of co-owned or simply privately-owned firms. Consistently, jointly-owned firms outperform WOBs across many metrics.  Diversity works both ways.

Even though only 4% of all women-owned firms exceeded the $500,000 revenue per year mark, those in just three industry sectors surpassed that threshold: wholesale trade (19%), accommodation and food services (11%), and construction (13%).

Wholesale trade includes the sale of merchandise to other businesses and normally involves operating from a warehouse or office. Customers are generally reached initially via telephone, in-person marketing, or by specialized advertising that may include Internet and other electronic means.

The accommodation and food services sector includes establishments providing customers with lodging and/or preparing meals, snacks, and beverages for immediate consumption.

The construction sector is especially interesting because it is one of the lowest concentrations – only 8% of firms are women-owned, yet a higher than average revenue potential (13% of firms earn over $500,000), possibly due to federal, state, and local diversity contracting requirements.

The reasons women-owned businesses have not surpassed the revenue threshold of 1.8% earning $1 M or more are threefold:

1.         WOBs still self-select low income industry sectors. Industries with the highest concentration of women-owned firms are: health care and social assistance (53% of firms in this sector are women-owned), educational services (45%), other services (40%), and administrative and waste services (37%).

2.         WOBs overall have a lower than average propensity to hire employees.

3.         When they do build teams, WOBS have a propensity to hire fewer employees per firm on average.

A separate survey of women-owned businesses by the National Association of Women Business Owners (NAWBO) in 2012 found that WOBs opt not to pursue capital beyond friends, family, and credit cards.

"Financing Options to Meet Business Capital Needs: More than three quarters (78 percent) of WBOs did not seek a new or extended line of credit in the past year. Of these 78 percent, more than half (68 percent) indicated they did not want additional credit in the first place, and the others (32 percent) did not think they could get credit if they tried. Most WBOs financed their businesses through credit cards (45 percent), business earnings (40 percent), or private sources such as personal savings or contributions from family or friends (37 percent)."

Source: 2013 State of Women-Owned Businesses Survey Finds Optimism Pervasive (NAWBO).

Some may argue that, by highlighting these facts and statistics, that I am not “supportive enough” of women entrepreneurs. Recalling my days in Business School, I distinctly remember the times that the 40 or even 340 other students (all male) in the class, deliberating upon the same material that I was presenting in the class, would insist that we all “look at the numbers” in order to understand the case study being presented. We were not afraid of what the data was presenting.  We used the data to tell us what we needed to know in order to make appropriate choices, decisions, and craft effective strategies.  I learned that valuable lesson from Tim and the other economists in Business School.

I believe women-owned businesses have the potential to perform at exemplary and outstanding competitive levels.  But, if women entrepreneurs choose to avoid reality by relying on bad data or poor analysis of good data, then they are only fooling themselves. 

Secrets of Happy Families

This is not your typical article out of Cosmo or Good Housekeeping (are they even in business anymore?). It’s a new book tapping the wisdom and research available from the likes of Warren Buffet, the Green Berets, Silicon Valley, and a host of other research. It provides guidance to families, using specific examples, helping families strengthen their relationships, remove thorns in their sides, and chart troubled waters. Subtitled, “Improve Your Mornings, Rethink Family Dinner, Fight Smarter, Go Out and Play, and Much More”, the book covers pretty much every family encounter you could ever imagine, providing good ideas with which families can experiment – at a minimum.

The web site for the book is: http://brucefeiler.com/books/the-secrets-of-happy-families/ and Parade Magazine provided a quiz sampling some specific recommendations from the book. See: http://www.parade.com/news/quiz2/secrets-to-a-happy-family-quiz.html

The most interesting part of the book is that it is written by a man, Bruce Feiler, whose own life story is a tale unto itself.  He’s faced some impressive real world problems we would not wish on anybody; he’s come up with very creative solutions worthy of examination.  See, for example, the story of The Council of Dads: A Story of Family, Friendship & Learning How to Live -- in which the author tapped the wisdom of six men – each one a very important part of his life -- and asked each one their advice for his twin daughters on how to live, travel, question, and dream..

If you’ve been on this planet during any of the past four to six decades, you’ve heard the litany of complaints about how hard it is to raise a family today.  Feiler’s writings resonate with the advice and insight of familiar, respected aunts, uncles or grandparents.  It holds the wisdom of years and experience.  It is a welcome relief from all the whining and kvetching about “work-family balance” because it doesn’t complain – it hypothesizes solutions. 

It’s always surprised me how many men have come up with so many solutions that we women take for granted.  Examples include Whole Foods, Trader Joe’s, and Dinner’s Done. We’re finally beginning to see a few outstanding women create businesses that solve well-known life problems experienced by parents or caregivers. Examples include Care.com, Angie’s List, and Task Rabbit.

There will always be those who advocate “out of this world” ideas, such as change all business hours to coincide with school hours. Or suggestions to foster “increase awareness” activism,  taking us nowhere. By contrast, it is nice to see some solutions grounded in hard-core, roll-up your sleeves, market research for a change. We certainly can learn a lot from our brothers.

Sunday, February 17, 2013

Visitors in a Strange Land

When entrepreneurs pitch their business plans to investors (angel, venture, or lenders), it reminds me of what it was like to live in a country other than my native America, trying to speak and understand that different language and culture.

Living abroad creates a situation where neither party fully understands either the language or the customer of the other person.  At least, not with great ease.

Who should take the lead to bridge the communications gap? Is it the responsibility of the native to translate for the visitor or is it the responsibility of the newcomer to take the initiative to ensure comprehension?

Remembering again my own experience as a guest in another country, my hosts were very appreciative of my efforts (albeit stumbling) to learn their language.  They could see my appreciation and respect of their way of life.  They told me stories of my compatriots who had chosen not to follow that path, but rather who stayed aloof in American enclaves, isolated, and ignorant of the world beyond their walls.  And they did not speak well of those isolates.

My hosts did not expect me to be perfect in my presentation, word selection, or sentence structure.  But, they were genuinely appreciative of my efforts to reach beyond the differences that separated us and to convey a sincere interest in learning about them and their ways.

The same logic applies to entrepreneurs presenting to investors.  The latter are not expecting perfection.  They are expecting preparation, sincerity, curiosity, and a genuine interest in learning. Investors bring a great wealth of knowledge about the “culture” of the capital marketplace.  They recognize that every entrepreneur will be a stranger to much of that experience.  Investors are looking to see if the entrepreneur is teachable or coachable – if she or he is interested in discovery and opportunity.  Will the entrepreneur respect the investor’s culture enough to become a part of it?  Or will the entrepreneur remain walled up in her or his pre-conceived notions about the world “out there” in the investor’s space?

Signs on the Freeway

In a few areas along California freeways, we have large digital signs which display information about major congestion, construction ahead, or advisories to call 911 if we encounter either a drunk driver or the car and license of a child abductor.  These digital displays can also teach entrepreneurs a lot about effective presentation techniques.

A first lesson for presenters is “Don’t Use Too Many Words!”  Just because the screen is big and you have the ability, digitally, to scroll through pages of text does not mean you should.  Too many words per line become difficult to read quickly or easily. Multiple displays of jam-packed text are incomprehensible, whether speeding along the highway or cruising through an investors’ pitch deck.  

The problem is compounded when an abbreviation is used instead of the complete word.  In such cases, the reader is forced to come to a braking halt, intellectually, in order to translate the shortened form to its full English language version.  Even those with text-messaging dexterity must slow down for the conversion process.

The equivalent, in an entrepreneur’s PowerPoint presentation, is the use of jargon or acronyms.  The reader is forced to stop, convert, and translate – meanwhile, missing the message of the presenter.

On the freeways, both of these presentation errors result in many cars slowing down to comprehend the message.  If English is not the drivers’ first or preferred language, the need to slow down and translate will be more pronounced.

All of this explains the backup and occasional rear-enders that occur at or near California’s large digital displays.  The problem is compounded in urban areas which have seen a proliferation of huge advertising video screens with their constantly changing displays.  

While the intent behind all these dramatic new media outlets has been to inform, the result has been the opposite.  The reader looks, slows down the traffic flow and the mind, missing the message or worse.

The end-user interface should rule – both on and off the freeway.  The technology chosen to deliver the message to the end-user should be simply an obedient servant.