Bill Hobbs has written a lot about the small business boom, but I'm not sure how to take advantage of it. When one expects big business to do well one invests in the stock market, but how can I leverage my optimism towards small business to make money?
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Start a small business.
Better still, start a consultancy showing other people how to start a small business.
Mail order multi level might add icing to that cake ;)
Buy from small business. Try to find local merchants, locally manufactured goods.
There are some problems with trying to be a consultant to small business:
1. Small businesses tend not to waste money on things like consultants. That's part of why they're so successful.
2. Small businesses aren't similar to each other simply because they're all small. A business's needs are much more likely to be determined by its industry, not its size. So you could only consult with a specific kind of small business.
It's misleading to talk about a small business boom; it implies that they're booming because they're small. The better description is that lots of industries are finding that the optimum size of a business is much smaller than in the past, in part because of changes in technology.
In my own business of law, for example, lawyers once clustered together in large firms mostly for a very simple reason: libraries. Lawyers need access to a vast array of information, and not so long ago the only way to have that at hand was to maintain a private law library. The costs of such a library were enormous. Not only were the books and updates themselves expensive, but so was the labor to update them and the space to make them all accessible. If you haven't seen a proper private law library before, we're talking about maybe a 30'x30' room, so full of books that they have to reinforce the floor to support the weight.
The cost of the library isn't much lower for five lawyers versus fifty. It's a relatively fixed expense. The larger the firm, the less it costs each lawyer to have library access, and the better the library.
That library isn't necessary any more. Many firms still keep them, but many younger lawyers have figured out that much of that information is available on the web for reasonable prices--or for free. So now lawyers are free to experiment with different firm sizes under these new conditions and see what works best.
A complementary factor in the trend towards smaller businesses is the trend towards a service economy. Machines do manufacturing, and larger machines usually do better than smaller ones. But people perform services, and smaller groups of people tend to be more efficient than larger ones: People are more personally committed to the business, information flows more freely, decisionmaking is easier and faster, management is simpler, and smaller businesses are less heavily regulated.
You asked how to make money on small business, Michael. It's easy: Find an industry in which businesses are sub-optimally sized, then start a business in that industry at the correct size. You would probably want to do this in some industry that you have experience with, and the optimal size would probably be pretty small.
Therefore: Start your own small business.
One of the great killers (I believe it's the #1 cause) of small business death in the US is undercapitalization. Do you want to invest in small business? Find a quick and easy way to provide working capital in exchange for a piece of the action.
"One of the great killers (I believe it's the #1 cause) of small business death in the US is undercapitalization."
That's like saying that the reason people are poor is that they don't have enough money.
Yes, small businesses die because they run out of money. The question is whether they ever would have turned a profit given more time and money. Every business owner believes that the answer in his case is yes--obviously. That doesn't make it true. Nobody ever really knows whether a given business would have succeeded had it had more money--if it died because it was undercapitalized, or simply because it wasn't a viable business.
Small-cap mutual funds.
Or, if you've got a lot of money to burn, buy a stake in a VC firm.
TAC: Even small-caps are pretty large companies, aren't they?
All: This is all very good advice, thank you. Some of it is new to me, and other parts are good reminders.
Sure, running out of money and shutting down is the end state of just about every failed business but I always took that to mean that these were businesses that were on their way up (losing less money each month) but simply didn't have the cash to make it to break even.
TML: That's probably the case sometimes. Gotta find out which times, though.
Invest in commercial real estate- strip malls, warehousing, office space, etc.
Scott: I thought of that, but many of these small businesses are home-based, and the commercial property market here in SoCal is glutted. House prices are poised for a downturn/correction as well, I think.