Today’s edition of the New York Times reports on a couple in New York City who own a small ice cream company called 5 Boroughs. The company was newsworthy because a local politician was offended by one of their flavor names (Staten Island Landfill), but the article revealed a few interesting small business challenges.
The article states, “It is a small business, but the Myleses have lofty ambitions. They would like to turn their mom-and-pop operation into a national brand that can compete with much bigger names like Ben & Jerry’s. While the Myleses think of themselves as the Ben and Jerry of New York City (they, too, have clever ice cream names and a portion of some sales goes to charity), competing as a small ice cream business in the New York market has not been easy.”
The article goes on to discuss the challenges of achieving national distribution, acquiring the right levels of capital equipment, and the expense of marketing and promotion on a national level. The Myleses recognize they need more than a good idea. Their solution? “We need an investor.”
An investor can help a small company stay afloat and purchase the infrastructure and capital equipment to produce goods, and investment dollars can fund a marketing program as well. And there is a lot of venture capital available again. But most VC looks for pretax returns above 25%, and they hold on to their money until that return is a fairly sure thing, so small concerns need angel investors (a nice way of saying friends and family) to get them through the first $300 - $500k of investment before VC will even look at them. VC also wants a clear exit strategy, which can be either a buy-out by a much larger firm (public or private) or a public offering. For all the talk of IPOs before the technology bubble burst, it’s useful to remember that less than a quarter of a percent of American business is public. (If you’re curious about Venture Capital, the blog to watch is VentureBlog).
So what’s a small business to do? First of all, to remember that the cost and risk of growing a business are frequently much greater than the potential reward. The rate at which a business grows its revenues is something to be watched carefully, because if the costs of growth aren’t carefully contained along the way, cash flow and margins are likely to suffer and the business won’t survive.
The only way to grow a company profitably is to establish differentiation and competitive advantage. Without those two elements – pursued in tandem – a business has only two options. Option one is to remain local and accessible – customers will patronize a business they feel is their own. In essence, the local-ness of the business becomes their competitive advantage and differentiation. But to compete on a regional or national level, if the business does not have some other compelling form of competitive advantage and differentiation, their only option will be to compete on price. And all the fun and exciting advertising in the world won’t differentiate a business – so don’t look there for opportunity.
The Myleses need to determine what makes their ice cream company truly unique and desirable, and how they are going to achieve and maintain their competitive advantage. If they can come up with a compelling business argument that offers clear benefits to consumers, any investment dollars they receive will be icing on the cake (er, um, ice cream).
(c) Andrea M. Hill, 2007
