Start-Ups Key to States' Economic Success

New small businesses are the most important factor in driving personal income, employment, and other factors, research shows.

Start-ups are the single most important factor driving a state's economic success, according to a new study by the Small Business Administration's Office of Advocacy.

The study, which was released Monday and examined U.S. Census data on small-business start-ups by state between 1988 and 2002, found their success or failure rates had a profound impact on gross state product, state personal income levels, and total state employment.

For instance, raising the number of small-business start-ups in a given state by just 5 percent tended to boost gross state product -- the sum total of a state's economic output -- by 0.465 percent, the study found. By contrast, a higher number of small-business closures tended to impede state economic growth.

Similarly, a 5 percent hike in small-business start-ups increased a state's employment growth rate by 0.435 percent, while raising personal income by 0.405 percent, the study found.

The study defined small businesses as those with fewer than 100 employees. Based on the median number of small-business start-ups across all 50 states per year, a 5 percent increase was equal to roughly 445 new small businesses.

"Every one of our models indicates that states with more new small firm establishments grow at a higher rate over time, even after we control for the level of economic activity and a variety of other factors," researchers said.

"Now more than ever, state policymakers should be aware of how their decisions affect small business," Chad Moutray, the agency's chief economist, said in a statement.

"Creating an environment that values entrepreneurship and risk-taking is sure to increase economic growth, personal income, and employment," Moutray said.

A Portfolio of Young Business Owners

Meet six students who have already taken the entrepreneurial leap.

Laima Tazmin

Age 17, LAVT, New York City

When we first wrote about Laima Tazmin in 2004, as part of an article titled "25 Entrepreneurs We Love," she was a high school freshman with her own website design company, LAVT, in New York City. Today, as Tazmin is finishing her last semester, her business continues to expand. Now it manages 20 ongoing projects, including designing banner ads starting at $1,000 each, for clients such as the producers of the movie Saw II and of Kanye West's second album, Late Registration.

The company earned $25,000 in 2006, and Tazmin put that money toward paying family expenses while her mother struggled to find work. "It was overwhelming, but I managed," says Tazmin. "The independence and maturity I learned helped my adult clients feel calm and comfortable."

Tazmin hasn't found it easy to make the transition from solo businessperson to manager. Lacking time for supervision and coaching, she has burned through 10 freelance designers. The problem is that, in addition to her company, she maintains a roster of high school activities. She's a shooting guard on the basketball team ("I like scoring points--I'm not a passer," she says) and works on the yearbook staff ("I get a little too control-ly," she admits). Tazmin, who will attend Columbia University in the fall, is also working, predictably enough, on starting a second business. It will create Web portals for college towns.

Derin Coleman and Rayneshia Rodgers

Both age 17, Bling Buckles, Oakland, California

Derin Coleman and Rayneshia Rodgers have been friends since the seventh grade and business partners since 2004. Together, they run Bling Buckles, an Oakland, California, company that sells custom chrome belt buckles with white rhinestone lettering for $25 apiece. Bling grossed $2,075 during the last academic year, selling belts primarily at events sponsored by BUILD, a program in the Bay Area created to teach high school students in low-income school districts about entrepreneurship.

"They work great together," says Curtis Below, an executive at GetActive Software, who serves as the company's mentor. "Rayneshia is the more outgoing of the two, chatting up customers and constantly throwing out ideas. Derin is mature and does whatever needs to be done with a smile on his face."

The partners, who are juniors at a charter school called Lionel Wilson College Preparatory Academy, were tested during their first holiday season in business, when Bling faced a big backlog of orders. "Derin and I were making buckles over Christmas vacation and on our lunch hours," says Rodgers.

Just as the company is taking off, however, its future is in doubt. Rodgers and Coleman are applying to colleges far apart. In fact, in addition to launching and running a company, BUILD helps students prepare for the college board exams. Eight out of every 10 BUILD graduates have been the first members of their families to go to college.

Not that the passion for entrepreneurship is lost in the shuffle: "I like school, but running a business feels more real," says Coleman. "Oh, I can learn how to make a million dollars? Okay, I'm listening."

Omar Faruk

Age 18, BlueStream, New York City

Omar Faruk believes that social entrepreneurship can make the world a better place. He's CEO of BlueStream, a Web management company that specializes in helping nonprofits with limited resources. The business grossed $40,000 in 2006 and earned Faruk the Youth Entrepreneur of the Year award given out by Ernst & Young and the National Foundation for Teaching Entrepreneurship. "Make a difference first, make the money later," Faruk says.

In 1997, at age 9, Faruk immigrated with his family from Noakhali, Bangladesh--"The district that Gandhi visited," he notes--to New York City. The family had been well off back home but ended up with eight people sharing a three-bedroom apartment in Brooklyn. By the time Faruk enrolled in high school, he was spending a lot of time online and learning the ins and outs of Web design. Three years ago, he started BlueStream to build websites at a cost of $200 and up for fledgling nonprofits. The idea was to marry his interest in social activism to his interest in technology. One of Faruk's customers is Intertradingcorp.com, an organization that helps women in Guyana sell crafts on eBay. "Omar helped the idea to flower, and he makes the world of commerce so much fun," says Avi Shiwnandan, Intertradingcorp.com's founder.

In the meantime, Faruk is trying to bolster his grades in an effort to get into Babson College, where he hopes to study social entrepreneurship. Shiwnandan, for one, is not worried about Faruk's prospects: "I have no doubt he will make a lot of money in his lifetime, even if it isn't his main ambition."

Jake Fisher and Weina Scott

Both age 17, Switchpod, Miami and Rochester, Minnesota

Only five years ago, two enterprising teens might have mowed lawns to earn spending money. Today they can start a company on the Web. That's how it worked for the co-founders of Switchpod, Weina Scott and Jake Fisher. And, oh yeah, they live 1,440 miles apart--she's in Miami, and he's in Rochester, Minnesota.

The two met via a message board in June 2005, got to talking about podcasts, and started Switchpod within the month. Scott already had a Web design business, which she started at age 13. Fisher, for his part, says, "I wanted to get into a business at the beginning of some new technology bubble."

Their basic podcasting package, which covers hosted space on their servers, costs as much as $30 a month, but they'll give it for free to customers who take out an advertisement on their site. By the time Switchpod's product had generated 800,000 downloads, a company named Wizzard Software came calling. The Pittsburgh-based business, which makes speech-recognition and text-to-speech technology, was looking to add podcasting to its product mix.

Wizzard Software CEO Chris Spencer, 37, remembers that it took him a while to realize that the students he was negotiating with were in high school rather than college. Odder still, Scott and Fisher met face-to-face for the first time at Spencer's home in Fort Lauderdale, where their parents brought them to sign the paperwork transferring ownership of Switchpod to Wizzard in an all-stock transaction worth $200,000. The sale also provides the partners with annual salaries of $40,000 for a 20-hour workweek. It acknowledges that their schoolwork comes before business.

Eye On the Prize

Secrets Of Entrepreneur Athletes.

Nothing sticks like a lesson learned while hurtling 10,500 feet through the air at 120 miles per hour. So it is no wonder John Hart improved his listening skills when he started jumping out of airplanes.

Hart, the owner of Selection.com, a background-check company in Cincinnati, had always cared more about getting his point across than listening to others. "I was a creator. I built things, and I moved on. I didn't take the time to listen," says Hart, 45. Then five years ago, he took up team-formation skydiving, a test of grace and guts in which up to 17 people leap simultaneously from a plane and arrange themselves in a pattern in the 35 seconds before their parachutes open. This requires jumpers to know in advance what their teammates will do and to communicate through eye contact and hand gestures while plunging through the air. "When I took up skydiving, I couldn't randomly decide what I wanted to listen to," Hart says. "I had to pay attention to everything."

The more Hart jumped, the more parallels he saw between his avocation and his business life. Specifically, he came to realize that when meeting with customers he talked a lot more than he listened. Selection.com provides companies with background-check software, and for more than a year customers had been complaining that the product was slow. Hart paid little attention. "We thought our application was superior to anything in the industry, and we made changes as we saw fit," he says. After skydiving for a while, however, he began to wonder if his selective listening could hurt the business.

For CEOs and CEOs-to-be, sports may be a more effective training ground than any business school, according to both psychologists and entrepreneur athletes themselves. Athletic endeavors help CEOs and CEOs-to-be develop such leadership skills as self-discipline, morale building, and teamwork. In a Harvard Business School study of roughly 30 graduates who had become entrepreneurs, almost all the respondents reported playing individual or team sports during their early years. "Many felt strongly that competitive sports had prepared them not just to compete in life but also to deal well with winning, with losing, with setbacks, with training, and perhaps most importantly, with others," the report states.

Most skills learned or honed through sports fall into two categories: self-management and teamwork. The former can be gleaned from almost any activity in which the athlete sets goals and seeks to improve in a disciplined manner. That includes not just team sports but also pursuits such as running, hiking, even fishing. For example, when Stephanie Forte isn't running Forte Creative Media, a PR company in Las Vegas, she can often be found rock climbing. Forte climbs at least twice a week and says the habits of mind she's developed scaling a cliff face also come in handy when she's sitting behind a desk. "In climbing, I need to be my own coach, to look at myself and my performance objectively and to be the athlete at the same time," she says. That talent for being "two people in one" has helped her evaluate her business performance as well. She recently turned an objective eye on how she is coping with growth. The verdict: Excessive attention to detail was leaving her vulnerable to being overwhelmed. So Forte quickly hired an assistant.

Focus is another habit of mind. Successful athletes learn to shut out distractions so they become one with the ball speeding toward them. They display identical focus in business meetings, not allowing anxiety to prevent them from capturing every nuance of the proceedings. Many top athletic and business performers also know how to manage adrenaline. Using techniques that range from deep breathing and progressive muscle relaxation to positive mental imagery, they calm themselves when excitement or agitation threatens to interfere with good decision making.

Athletes also learn to manage problems in ways that make sense for business leaders. High performers set "process goals" instead of "outcome goals," explains Charlie Brown, director of FPS Performance, a coaching firm in Charlotte, North Carolina. That means they mentally divide competitions into tasks that will lead to victory, then focus on executing each task and not on the victory itself. A top runner, for example, won't say "I'm going to win the 100-meter dash," but will concentrate on calming herself before the gun goes off, then on establishing a smooth stride. Similarly, an entrepreneur athlete is less likely to obsess over landing a major investment. Instead, she may concentrate first on communicating key points with aplomb, next on listening closely to any objections and answering them well. Even if the athlete or entrepreneur fails, carving up the process makes it easier to analyze each step for weakness and tweak it to improve the results next time.

n team sports, athletes learn not only to master themselves but also to manage relationships and pursue a common goal. Team players "have to understand roles, responsibility, and accountability--what it's like to have a mission and a dream and to work collectively to achieve that," says Brown. And because many people learn better by doing than by studying, a football field or basketball court can be a highly effective classroom for future leaders, according to John Eliot, professor of performance psychology at Rice University and author of Overachievement: The New Model for Exceptional Performance.

One crucial skill business leaders acquire from team sports is motivation. Robert Maffei, president of Maffei Landscape Contractors, a $7 million company in Cape Cod, Massachusetts, played football in high school. "Once a week, the coach would blow a whistle and yell 'Bring it in!'" he recalls. "We'd get on one knee in front of him and have a meeting." During that meeting, the coach would designate players of the week, and each honoree wore a sticker on his helmet with pride.

Those huddles boosted morale and performance, Maffei remembers, something he naturally wants to do for his business. So every week, Maffei rings a bell and yells "Bring it in!" to his 80 employees. "My employees don't get down on one knee or anything like that," says Maffei. "But we gather at 7:20 in the morning on Thursdays for 15 minutes for a team meeting." Recalling how much that football sticker motivated him on the field, Maffei designed a more elaborate reward program for his company. Employers of the week receive gift certificates for Dunkin' Donuts or a local movie theater. Employees of the month are in line for flat-screen TVs or Xboxes. And the employee of the year walks away with an all-expenses-paid trip for two to the Caribbean.

Entrepreneurs also transfer behaviors that worked on the field--or in Hart's case in the sky--to their daily lives as leaders. As Hart paid more attention to his fellow jumpers and diving coach, his team started to win competitions. He tried treating clients the same way--and finally heard what they were telling him. "Although our application was beautiful to look at, it was too graphic-intensive," he says. "We completely reworked the design with the input of our clients." Sales growth at Hart's business has jumped from 19 percent the year he started diving to 31 percent today.

Perhaps the most universal effect is that sports exercise the persistence muscle. "Failure is part of the process," says Chris Kouloukas, founder and CEO of SOHO Hero, a franchiser of print and copy shops based in Atlanta. Kouloukas started out in Little League at age 7 and played baseball through his years at Troy University in Alabama. While he won plenty of games, he also got comfortable with loss. "The greatest hitters of all time hit .400, which means they fail 60 percent of the time," Kouloukas says.

Kouloukas brought that perspective to his business, refusing to let failure bog him down. "To get my first loan, I went to 54 banks before I was approved. Fifty-four banks!" says Kouloukas. "And even when I was sitting at the closing table, the banker looked me in the eye and said, 'Chris, I won't be upset if you back out of this deal. I still don't see how you're going to compete.'" But Kouloukas never lost faith. Today, SOHO Hero has 30 locations throughout the Southeast, and those setbacks are ancient history.

Of course, business leaders have also been known to transfer undesirable behaviors from the field to the office. Some athletes, for example, like to see what they can get away with. A sports cliché holds that "if a penalty isn't called, then it isn't a foul," says Rice University's Eliot. As recent corporate scandals attest, that kind of thinking isn't foreign to business.

But you should remember that the sports analogy has its limits. "In baseball, the worst thing that can happen is you can lose the game," Kouloukas says. "The stakes are higher in business. When you fail, you can lose money--and sometimes other people's money." So apply the lessons of the playing field to your business. But never tell yourself that it's only a game.

Exotic pets business

Exotic pets now represent a $15 billion industry. Plenty of entrepreneurs have found a way to make money peddling kinkajous, hedgehogs, and other rare beasts.

When Paris Hilton takes to the red carpet with a new look or a new man in tow, people buzz. So it's no surprise that little girls everywhere began begging their parents for kinkajous last spring, after the hotel heiress started surfacing at parties with an adorable kinkajou perched on her shoulder. Even after Baby Luv garnered tabloid headlines by biting Hilton, the nocturnal mammals remain objects of desire.

As it turns out, kinkajous -- not to mention hedgehogs, sugar gliders, llamas, and other exotic animals -- have become increasingly common as household pets. That growing demand has helped transform exotics into a $15 billion industry, with plenty of entrepreneurs finding ways to earn part or all of their livelihoods from related businesses.

So why is Fido, at least in some circles, losing his status as man's best friend? "People always want something that nobody else has," says Marc Morrone, owner of Parrots of the World in Rockville Center, N.Y, which sells parrots as well as pygmy possums and other mammals and reptiles. "It's human nature to want to stand out in a crowd."

Morrone opened up shop in 1978, and says that as the popularity of exotics has grown over time, the industry has been forced to rehabilitate what some consider an unsavory reputation through increased regulation of animal importation and sales.

"In the old days, people went out and they caught animals in the wild and they brought them back," Morrone says. "Those days are gone."

Such improvements have brought new opportunities -- and more entrants to the industry.

For Brigitte DeMaster, owner of Bahr Creek Llamas and Fiber Studio in Cedar Grove, Wisc., breeding llamas began as a 4H project for her children. Her family is in the dairy business, and at an industry convention, she met a colleague who also raised llamas on his farm. After visiting the animals, the family purchased four and started to show and train them. "They were very clean, quiet, and easy to raise," DeMaster says. "And we fell in love with their eyes."

DeMaster can sometimes be seen transporting one of the family's 35 llamas in her minivan as she takes them to nursing homes, schools, or parades. The DeMasters sell baby llamas, called cria, as pets or breeding stock, but the bulk of their income comes from shearing the llamas to make yarn from the fiber. What began as a kids' project has blossomed into a business that includes a yarn shop and spinning-and-weaving school.

"Since we were involved in dairy and livestock, it was an added value to the farm," DeMaster says. "We feel that it's really enhanced everything on our property."

When he needed to finance his seminary education, Mike Smith, of Jack-A-Roo's Bennett's Wallabies in Swansea, Ill., began raising wallabies. "Raising and selling the animals paid for my doctorate work," Smith says. "Then it paid for vacations and little extras along the way."

"Fifteen years ago, I was raising ferrets just for fun and enjoyed them," Smith says. "We were struggling and needed some extra income. We live in goat country, and someone had included a pallet of wallabies from New Zealand along with a shipment of goats. I wanted them but I couldn't afford them, so I asked a friend if he wanted to go into the wallaby business. He said yes, and I've been making money and having fun with it ever since."

For David Lombard, owner of birdfarm.com, exotic pets have been more than just a sideline business. Eleven years ago, he lost his job as a sales manager and decided to go into business for himself. At the time, he had two small birds, and he saw how people who buy birds also buy plenty of toys and accessories for their pets. He started selling birds and bird accessories through his website, then opened a retail store in Boardman, Ohio, three years later. He sells bird food and cages, as well as more unusual products such as bird diapers with a patented "poop-pouch" and a hands-free vest-style carrier which lets pet owners bring their small-bird wherever they go.

"At first it was really scary," Lombard says. "I had no retail business experience myself so I surrounded myself with the best people I could find."

"Before I started the business, I used the last of my savings to fly down to Florida and learn as much as I could from breeder friends," he says. "I knew if I was going to do this, and make a living at it, I had to learn from the people I was going to do business with."

His business has expanded quickly, outgrowing three retail spaces in the past seven years. He recently sold the Boardman-based retail store and plans to continue selling online and open additional stores in Las Vegas and Myrtle Beach, S.C. "Since a lot of my business is not local -- of 100 birds, only 35 stay in the area -- I can do it from anywhere," Lombard says.

Like Lombard, Ken Korecky, president of Exotic Nutrition, saw an opportunity in the exotic-pet accessories and food market. At the age of 17, Korecky convinced his father to invest in the pet store where his son worked. Father and son became partners and ran the store for 20 years. Korecky then entered the sales department of a wholesale pet supplier.

"When I recognized a need for 'species specific' products for the exotic pets many of the stores sold, I began formulating, manufacturing, and packaging products for the exotic-pet trade," Korecky says. "I originally marketed the products to the 100-plus stores the company I worked for serviced. When my business grew, and the product line was in full demand, I left the company to run my business full-time."

Exotic Nutrition originally only sold its food and other exotic-pet accessories wholesale to pet stores, but in 2001, Korecky decided to offer the products directly to the retail market. "Once we designed the website and marketed our products via the Internet, our business grew," he says. "Cash flow enabled us to then broaden our wholesale marketing campaigns."

Exotic Nutrition is growing about 20 percent a year, and Korecky expects the opportunities in the exotic-pet industry will continue to expand, if for no other reason than by law of the jungle. "A pet owner that purchases a pair of animals will sometimes end up with five or six animals after a few years," he says. "Then they sell the offspring, which in turn creates more hungry mouths to feed -- and more customers that require our products."

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