No employees, no profits, no sweat. Nearly 60% of new businesses have no employees during their first year and 37% have no revenue. Yet, most make it through these early years, according to a recent study from the Ewing Marion Kauffman Foundation. The firm has followed 5,000 businesses founded in 2004 through their early years.
“It takes time to establish a new business in the marketplace,” says Robert Litan, vice president of research and policy at Kauffman. “Starting a new business has always been risky. However the fact that almost half of the businesses (45%) actually reported a profit in their first year is both surprising and encouraging. Previous informal surveys we have done suggest that people believe that startups are a lot more unprofitable for longer periods of time than they actually are.”
This is especially true for ad specialties distributors. In fact it is one of the best industries to get into if you have no financial backing, says Brad Streeter of Streeter Enterprises (asi/338118). “You can do it with other people’s money if you have good credit.”
Many distributors are born out of the home with no employees, says David Woods, CEO of Adventures in Advertising (asi/109480). “There is fairly low overhead so promotional products distributors will certainly be profitable in their first year,” Woods says. “If you have a sales background and good relationships you can build a strong business quickly.”
According to the survey, more than half of small businesses had profits in excess of $100,000 in their first year. Less than half (44%) had no debt financing in their first year and about 17% started with $5,000 or less. About 80% had some positive equity investment in their first year with the majority coming from business owners themselves. Just 10% used external equity sources in their first year. “It is noteworthy that only a small fraction of startups relied on outside equity and an even smaller fraction (2.7%) relied on venture capital,” says Litan.
Streeter, who is involved in a number of small businesses, says the most common mistake owners make is undercapitalizing their businesses. “That’s why most people don’t succeed,” he says. “They end up planning for the best-case scenario and not what happens when things don’t go your way. The economic IQ of most people is low.”