In Defense of the Virtual Family Firm (VFF)

Venture capitalists may look down on us as hopeless romantics, government policies may try to cut us off at the knees at every opportunity, bankers may be bankers, lending umbrellas when the weather is clear and demanding them back when it begins to rain – and yet we do not despair.  Because we are entrepreneurs.  We are forever hopeful.  We do not give up.  We persist. 

As entrepreneurs, we are hell-bent on making a better life for ourselves, our families, and yes the world. And you know what, Luhring SurvivalWare is leading the charge.   We are leading the charge to increase the financial sophistication and nimbleness of small business owners all over the world so that they are not buffeted so much by the complete failure of the financial system to attend to their needs. 

Pretty soon, banks will be asking “Are you using SurvivalWare?” and will compete vigorously to lend to those companies that do.  The smart banks will be the ones to do this first, because it fosters two way communication between the borrower and the bank, and makes the loan generating, approval, and ongoing monitoring process efficient for both parties.  This is one way to break the credit log jam. 

What we don’t need is a government program that rations credit by putting a ceiling on interest rates, and awards loans to those most skilled at filling out forms rather than actually contributing to economic growth. 

Living well is our ultimate revenge. 

I am so encouraged when I talk to entrepreneurs like Gregg Moore, CEO of WorkPlace Integra in Greensboro, North Carolina, (http://www.workplaceintegra.com) and a loyal SurvivalWare user.  Gregg says,  “I tell people I’m a blessed man.  I get to get up and go to work every day and do something I thoroughly enjoy doing.” 

Or Jarrod Osborne, founder and CEO of Solar Source in Long Beach, California, (http://www.solarsourcepower.com) who has a newborn baby and schedules his appointments for late afternoon after his wife gets off work so that he can care for the child during the rest of the day.  Jarrod is passionate about Clean Energy and building his business,  and is considering SurvivalWare as a potential tool to help him avoid the pitfalls of rapid growth as he looks to expand.  Jarrod still manages to play a lot of golf, and lead an active social life, while doing something he enjoys, and spending precious time with his family. 

This is why we persist.  Why we fight the battle.  And why we’re going to find a way around stupid government policies and the constipated credit market for small business owners come hell or high water. 

Hear this policymakers: you can’t keep us down.  You can keep throwing bullshit our way, but WE WILL PREVAIL.  But for God’s sake, it is in your interest – the whole country’s interest – to remove the shackles and let us innovate and compete. 

For this is the dawn of a new age in entrepreneurship and business formation.   The Kauffman Center just released their study of Entrepreneurial Activity which shows new business formation reached a 14 year high last year despite the recession.

New bNew business formation rates reach 14 year high in 2009

http://www.kauffman.org/newsroom/despite-recession-us-entrepreneurial-activity-rate-rises-in-2009.aspx 

Contributing to this increase is a phenomenon that I call the Virtual Family Firm (VFF).  We are the family farms of the 19th and 20th centuries transposed into the age of the internet and Moore’s law.  We straddle generations and cultures in order to bolster our understanding of the latest technologies and social discourse.  Nothing like having young people around to make you humble about your usage of technology.  

What is a VFF?  It is a company dominated by family members related by blood or marriage, who may live in different places around the country, or even around the world.  The ties that bind and the mutual trust dispense with a whole host of problems and concerns.  You don’t have to come up with non-compete agreements, non-disclosure agreements, or employee handbooks.  Already we have a lower cost structure. 

Next is the frugal innovation enabled by family flexibility.  How about this:  my nephew Sam, who lives in Long Beach, comes to the East Coast and spends 8 or 9 days working with me on some sale videos.

Normal cost:

Airtravel:  $400

Car Rental: $200

Hotel:   $1,000

Meals:       $450

Total:  $2,050

Actual cost:  $300 – less than 15% of the normal cost.  Not too shabby!

Sam stayed at my house.  We did not eat out once.  I cooked every night.  He covered the flight out since he was coming to the East Coast on other business.  Oh yeah – that’s another advantage of a VFF:  I’m totally cool with Sam having outside business interests.  I trust him to devote the time necessary to LSI.  I want him to succeed in life, not just with my company.  The end result:  I know of other software companies spending $15,000 and up for a single 5 minute promotional video.  We get them done for a fraction of the cost.  It allows us to compete.

So you see, it is not just the developing world that practices frugal innovation.  We do it every day in the VFF’s of America just by our very existence.  We have to in order to survive.

Unfortunately, the Big Elites (corporate, media, and government) seem clueless about what it truly is to be an entrepreneur, much less a leader of a VFF.  The risk of wrong-headed policy is that it will stifle or choke off the one hope we have of growing ourselves out of this mess.  By “this mess” I mean the whole economy thing.  You guys are looking for solutions.  There are better strategies than pouring more slop into the federal trough for Wall Street bankers and porcine government contractors.

Here’s an example of the kind of stuff we have to put up with:

I just went through the obstacle course of “getting legal” with my work force, classifying some as sub-contractors, and some as employees to the best of my ability to discern the law (with advice from my accountants and payroll service).

So now I have to register in Pennsylvania and North Carolina in addition to my home state of Virginia.  And pay their un-employment tax. And workers comp rates.  Which means I have to get workers comp insurance.  In case one of my family members slips and falls in their home office due to my negligence and decides to sue.  Say what?!

I’m lucky to have found an incredible company to outsource my “bookkeeping and bullshit” as I like to call it.  (OSI Business Services – highly recommended.  www.osibusinessservices.com Just tell Bill Gerber that Rusty sent you).  Under the rubric “bullshit” falls income tax returns, payroll tax returns, un-employment tax filings, sales tax returns, state registrations, and generally anything that involves filling out a stupid government form.  It ain’t cheap, but it frees me to concentrate on developing product and serving customers.

Here’s my message to policy makers: let’s cut the bullshit.  Just because something is hard doesn’t mean it can’t be done.  We entrepreneurs have to do the impossible every day just to stay in business.  Shut up and listen for a change.  I have three simple suggestions:

Number 1:

Let’s make it easier for virtual companies to establish dedicated work forces across state lines.  Call it the Virtual Family Firm Act.  Is that so hard?  We’re not asking for subsidies or looking to avoid taxes.  Why can’t there be just one government entity to register with, instead of one per state.  How about a special employee classification so that we can treat family members as sub-contractors?  You realize the government forces us to be their tax collectors.  It’s time they did that themselves.  It is an un-necessary burden for us little guys.

Number 2:

Let’s tackle Social Security here and now before it gets worse.  Here’s what I think:

  • We as a country are willing to make shared sacrifices if they are deemed fair
  • We want to solve the problem.
  • Most people don’t understand the significance of productivity vs. CPI indexing, and would consider the lower cost method fair.  The difference is huge.  This is truly low hanging fruit, we need to pick it.
  • People live longer, and actually are happier the longer they work and keep active.  We should raise the age of retirement 1 to 5 years, in increments.
  • We should ask the actuaries how much benefits would have to be reduced to get the system in balance by some target year, say 2,050.  Or maybe phrase the question:  for each 1% reduction in benefits, what does that do to the solvency projections?  We need this information in order to make informed decisions.  Time to get the ole head out of the sand, and start crunching some numbers to frame the debate.
  • There should be no penalty for retirees holding jobs and earning income.  Just normal taxes.  That makes it easier to get by with less guaranteed benefits.  The current reduction in benefits is crazy.

Number 3:

Do not try to control the cost of credit – that will just make the banks become more selective, avoid risk-taking, and ration it.  Guess who is at the bottom of the totem pole when it comes to access to credit?  I’ll give you a hint: it’s not AIG, General Motors, or Goldman Sachs.

Yesterday’s USA Today featured an article on the money page with the headline “Rates rise for small firms – Credit card issuers charge 13.7% more.”   Apparently small business rates were 13.7% higher in April vs. October last year.  Consumer cards, on average, were just 2.4% higher.  Molly Brogan, spokeswoman for the National Small Business Association was quoted as saying, “The absence of any small-business credit card protection in this legislation is likely a significant factor in these increases over the last several months.”

You can quote Rusty Luhring as saying, ”Charge me what you want.  I have the tools to figure out whether it is a good deal or not, and how to work repayment into my future cash flow.  Just raise my limit so I can make those decisions without having to jump through hoops.”

Has anyone thought seriously about the lost opportunity that arises from this obscene mis-allocation of capital?  I have, and it makes my blood boil.

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Economic Development Assistance – state warfare leads to corporate welfare

The latest news around these parts involved the decision by Northrup Grumman to move their 300 person corporate headquarters to Northern Virginia from California.   Gov. McDonnell was giddy with joy at the announcement,  beating out Washington, D.C. and Maryland in a fierce competition to see who could offer the best incentives. 

It was hard to pry details of the deal out of the company, but the governor later admitted in a radio interview with WTOP that the package of incentives came to $12,000,000 to $14,000,000.  Subsequent press accounts put the number at $12,000,000 to $15,000,000.  Hmmm, let me do the math.  That’s $40,000 to $50,000 per job.   Excuse me while I get violently ill.

As I was researching the amount of the incentives, I came across some other interesting facts about Norththrup Grumman and the Commonwealth of Va.  It seems that Northrup has a $2.3 billion, 10 year contract with the Commonwealth for consolidation and outsourcing of the state government’s IT services.    A year ago there was a dispute about contract performance.

Here’s an excerpt from Government Technology:  (http://www.govtech.com/gt/717405)

“Some critics and lawmakers have complained the outsourcing contract and partnership has been plagued by poor service and cost overruns. A VITA oversight board dismissed former Virginia CIO Lem Stewart in June, shortly after he said he wanted to withhold a scheduled $14 million payment to Northrop Grumman because he said the vendor wasn’t fulfilling its contractual obligations.”

That was then – this is now.  So how are things working out?

The Shad Plank had some  depressing revelations about campaign contributions from the company to Governor McDonnell and the state Republican Party, and then this:

“Couple that with the big and lucrative extension McDonnell signed with Northrop Grumman and the Virginia Information Technology Agency. The three-year extension on the problem-laden contract included $105 million in extra payouts and $47 million in additional purchases from the state.”

(See the full article at: http://hrblogs.typepad.com/the_shad_plank/2010/04/northrop-grummans-virginia-donations-feed-republicans-and-democrats.html)

Bloomberg news reported this on April 7, 2010:

“Gov. Bob McDonnell and Technology Secretary Jim Duffey on Tuesday outlined changes to the Virginia Information Technology Agency partnership that had prompted bitter complaints of poor, slow service by state agencies and a scathing audit by the General Assembly.

The revisions put new pressure on government and defense contracting giant Northrop Grumman, which holds the $236 million-a-year contract, the largest ever written by Virginia state government to a single vendor.”

I think the governor misunderstood his strong negotiating position, to say the least.  What is it with politicians and big companies?  It’s just corporate welfare as far as I’m concerned.  As a taxpayer, I’m pissed at McDonnell for wasting precious state resources.  As a small business owner, I livid that I didn’t get to participate in such a lucrative scam.

I’m seriously considering moving the Luhring SurvivalWare Headquarters to California in protest.  How cool would this be:  showing off SurvivalWare’s Comparanator and Automator at a press conference with the Governator.  You read it here, first.