It’s 8 in the morning. Most students are preparing for their first classes of the day. Chris Swindle is organizing loose ends of his own company from the previous night. His student-run company, B&S Transportation, a bus service in Lawrence, is one of many that have been developed at the hands of those in higher education. However, Swindle has managed to escape the unfortunate failure, which so many of his fellow student entrepreneurs have experienced.
As entrepreneurs, student have an innate knowledge of exactly what their clients need. So why do so many companies go belly up?
“College students can tap into their target market better than anyone, but it’s important to have some sort of business knowledge,” Alissa Masoner, Vice President of Intrust Bank said.
Small business failure is not unique to a student demographic. A report by the Dun and Bradstreet business reporting estimated that businesses with 20 employees or less have only a 37% chance of surviving past four years. However, when a person’s business plan is only intended to survive a four-year period, it seems that student entrepreneurs have a step up on other business owners.
Student entrepreneurs are creating companies to help pay for college expenses. However, starting a business with little to no experience, affects the longevity of any venture. Also, the “boot-strapping” financial approach creates problems, when their ideas don’t pan out, and students are left with a heap of “I Owe You’s” that some struggle to recover from.
The business plan is an essential foundation to any successful venture. Although students may have the ability to identify the needs of their consumer, the logistics of the process are escaping them. Professor Wallace Meyer pointed out that 65% of businesses fail and 65% of business start with no business plan.
“I tell my students that if you don’t know where you are going any road will get you there,” Meyer said.
During his experience with student entrepreneurs, Meyer credits the demise of small businesses based on three factors, inexperience, lack of customer orientation and lack of a plan.
The likelihood of a student successfully exhibiting all three areas is unlikely.
Donna Duffey, a professor of entrepreneurship at Johnson County Community College, says her teaching material is influenced by what hasn’t worked in the past. Her program, which combines elements of general education along with business classes, offers students classroom experience later applicable to realistic situations in the commercial world.
“We’re trying to minimize business failure. We’ve studied what hasn’t worked and now we’re applying that to our classrooms,” Duffey said.
It’s safe to assume that most student-run companies are focused in the service industry. Because of the character of their businesses, large revenue and overhead is often not necessary. The National Federation of Independent Business found that one out of every 10 high-growth business start with $1,000 or less. However, students are placing themselves in a financial landmine by financing their small business through personal lines of credit.
Finding capital is undoubtedly the hardest step in developing a business. The process becomes even more daunting to students trying to scrounge for loose change.
“The problem I’ve seen is people hang on too long. They throw good money, into businesses that aren’t going anywhere,” Will Katz, Regional Director of the Kansas Small Business Development Center, said.
Most student entrepreneurs are using the overflow from their companies to pay for college and living expenses. But when starting a business on unstable ground, a successful outcome can get lost in the chaos. Once a company, financed on personal credit goes bad, a student is left with high interest rates along with school expenses.
“I’ve seen it happen all of the time. The interest is sky high and the borrower will only pay off the minimum interest,” Meyer said.
Fortunately for a lot of student entrepreneurs, mom and dad are there to bail them out. However, there are cases where students are left in serious trouble when creditors come knocking at the door.
Erik Mackinnon, director of the Global Student Entrepreneurship Awards, has seen his share of bitter business endings. During his time at GSEA, Mackinnon has met a lot of students who have lived the ramen noodle existence.
After factoring in operating costs along with school expenses, he estimates that only 35% of student-run companies can turn a profit. One major problem Mackinnon has noticed is that students tend to heavily focus on their businesses in summer months. However, when school returns, students find it difficult to juggle the academic workload with being their own CEO.
“These students are creating these companies to pay for school. Graduating with a profit is unusual. What’s more common is the business will fail while the student is still in school,” Mackinnon said.
Bert Gervais a student at Bennington University in Bennington, Vt., and winner of the GSEA in 2006, is familiar with the upsets and success of the business world. After recognizing a problem with off campus housing, Gervais along with his roommate created Placefinder.com, a Web site where local landlords advertised available residences. However, his first Web site crashed placing Gervais back at the drawing board, and a mess of people to answer to.
“When you start a business and it doesn’t succeed you take it personally. I felt like someone was smacking me in the face. I started avoiding people. Everyone wanted an answer and I had no idea what to say,” Gervais said.
A friend of Gervais experienced a similar problem. However, when his business crashed he walked away. Gervais on the other hand, started over. By raising money through local business competitions, Gervais and his roommate funded the development of a better Web site designed by a true web designer. Now Placefinder.com accounts for 35% of all off campus rentals in Bennington Vt., and contracts are being negotiated with five other colleges interested in Gervais’s online services.
“Although some of these businesses fail, it’s not gonna be their last attempt. I’ve seen a lot of kids burn through four or five companies before they know what they’re doing,” Mackinnon said.
As detrimental as a business failure might be to a student entrepreneur, it also has the ability to be the most educational experience they will have.