Entrepreneurial spirit gets nudge from recession

By Dave Berns

Sunday, March 27, 2011 | 2 a.m.

Scott Schmitt is the face of Nevada’s new generation of hopeful entrepreneurs. He was a construction foreman at CityCenter for nearly four years, a 35-year-old native of upstate New York who earned up to $118,000 a year plus benefits.

Now, the Ironworkers Local 433 member is in his third month of receiving weekly unemployment benefits totaling $400 after spending much of the past year in the East, hopping from job to job.

He is single, has no children and has wanted to start a business since graduating more than a decade ago from Rochester Institute of Technology, but he was drawn to the six-figure pay of high-rise construction.

“It’s all I’ve ever done,” he said. “Needless to say, things were booming here, and (I thought) we were good for the next 10 years. Unfortunately that became four. Now I’m giving it a shot. I want to open a couple of businesses.”

We find him on this day at the Clark County Library on East Flamingo Road. He and 29 others are attending a two-hour boot camp on how to become small-business operators. There is a casino worker, a former marketing executive and an former school bus driver. One spoke of opening a public relations firm, another has plans to start a museum that markets specialized Strip memorabilia. One couple hope to open a wedding chapel. Several were unsure of their goals. They are simply tired of relying on others for work.

Some were dressed in business attire. Others wore jeans and T-shirts.

Schmitt wants to open a debt relief company, a middleman between debt-laden credit card holders and credit providers.

The seminar he’s attending is sponsored by the Nevada Small Business Development Center at UNLV. And like Schmitt, the business development center that he’s turning to for help is facing its own economic turmoil.

The center is busier than ever; the fourth quarter of 2010 saw the largest jump in the filing of new business licenses since mid-2006.

It may not so much signal an economic rebound with entrepreneurs ready to fuel the economy as it is a sign that people out of work are scratching for new ways to make a living.

Larry Vierra, director and business development adviser at the business center, offers his assessment: “Those numbers don’t mean anything other than ‘I’ve got some time on my hands, and I’m willing to try anything, even start a business to pay my bills.’ ”

He notes that it costs about $600 to file for a business license and articles of incorporation.

“Maybe it works. Maybe it doesn’t, but the mind-set is clear: ‘I’ve got to give it a shot.’ ”

But risk-averse banks are unwilling to prime the pump for fledgling entrepreneurs. “We’re not finding any money out there for them to start these new businesses,” Vierra frets. “Banks are still not lending.”

It’s one thing to incorporate and file for a business license. It’s another to actually open the doors and start generating business.

•••

A former executive with Charles Schwab, Estee Lauder and GTE, Vierra is on the phone, leaning on Southern Nevada bankers for money to support the business center.

Forty percent of the center’s $400,000 annual budget comes from money provided by banks, federal grants and individual donors. “I call it begging for money,” he said, with a hint of irony. “I need money. I need help. I need support for important community infrastructure. I need to provide services to the business community.”

The hard-to-get dollars could help Schmitt and others start their businesses or remake others that have lost their way. The remainder of Vierra’s budget comes from UNLV and the U.S. Small Business Administration.

Business development centers were created in 1979 by the Carter administration as a way to foster greater development in urban and rural America. There are branches, including smaller counseling centers, in Carson City, Elko, Ely, Fallon, Gardnerville, Hawthorne, Laughlin, Pahrump, Reno and Winnemucca. Banks that give money to the centers are looked upon favorably by the Federal Reserve Bank, which uses such giving as one of multiple factors in determining borrowing rates for U.S. banks.

Two thousand Las Vegas Valley entrepreneurs used the center’s services last year through training programs, trade shows and one-on-one counseling. The volume matched pre-recessionary levels.

“In good times people want to open a business because they want to take advantage of the opportunities,” Vierra says. “In bad times people come because they don’t have any other alternative.”

•••

At the seminar, Vierra is teaching Schmitt and the others to read income projections, balance sheets and cash-flow statements. They learn how to determine key business ratios: current, quick, debt to equity. There is a great deal of confusion in the room as the group navigates through the formulas and attempts to grasp the terminology.

Schmitt is audibly frustrated as some struggle to add, subtract and divide with the inexpensive, plastic calculators that carried the Citibank label.

These would-be entrepreneurs want Vierra’s help. But the agency has only so much money. He’ll have to decide which of these businesspeople will get his full support.

This year, Vierra’s budget calls for

$5 million in capital formation through the creation of 27 businesses and 127 jobs. He cherry-picks the best prospects for full-scale support, helping them create business plans and shop for banks to raise financing while offering long-term technical assistance during the life of the typical five- to seven-year startup loan. He claims less than a 10 percent failure rate for the companies he adopts for full-scale services. But he and his staff also counsel newcomers who have little or no experience.

“Most people fail not because of financial economic conditions,” he said. “They fail because they don’t know what they don’t know.”

The typical failure rate for a new business in this country is 40 percent within the first five years. It is higher in some sectors, with an 80 percent failure rate for restaurants, which find it virtually impossible to compete with casinos and competitors that have video poker machines, which can generate as much as half of their revenue.

“In times of plenty, it’s easy to make money,” Vierra said. “But in tough times people don’t understand how to read those financials, don’t understand the relationship between gross and net profits. They need to understand what and where to cut.”

•••

The business center has helped Schmitt develop a business plan for his startup; taught him to navigate through the maze of federal, state and local business regulations; and offered a refresher course on the basics that Schmitt studied 15 years ago in college.

“You go from making six figures a year to $400 a week. That changes your world,” Schmitt said. He looks around the room of wannabe entrepreneurs. “That’s tough, just tough.”

Companies in the niche negotiate borrower payoffs at 20 to 50 cents on the dollar, with the lender getting the bulk of the money. The remainder goes to the middleman. The startup costs are relatively small, $5,000 to $7,000 for a set of fresh leads provided by regional firms that collect data about heavily indebted individuals. And unlike his life as a construction foreman, Schmitt is convinced that he will have job security with his latest venture.

“It’s a gigantic market when the economy is good, and it’s even bigger when the economy is bad.”