Educating Customers

George Siemon, CEO of the Organic Valley Co-op of 1,600 farmers, is not worried that consumers trying to save money will abandon organic milk and other products for lower cost non-organic foods. While sales growth did slow during the recession, Siemon says demand for organic products is connected less to the business cycle and more to how educated customers are about food. “Organics is an education issue, not a recession issue,” he says in an interview at Bloomberg’s offices in New York today.

“Educated women drive our business,” Siemons says, particularly new mothers who want to provide the healthiest food for their children. That demand is growing despite the recession, because consumer interest in organic food is growing — see Michelle Obama’s vegetable garden and the sales of Michael Pollan’s books. Organic Valley had revenue of $527 million in 2009 and is estimating $600 million this year. The co-op is both tapping into and perpetuating the movement that’s growing demand for its products. Siemons is confident that science will bear out the benefits of organic food, and a growing number of educated customers will allow more dairy farmers to switch to selling more profitable organic products.

Education is a part of marketing, but it’s something broader too. Marketing is creating awareness about a product or positioning a brand. But education is about teaching people something that benefits them — and also turns them into potential customers. Gary Vaynerchuk has helped educate thousands of wine lovers, which benefits his business even though most probably never bought a bottle from him. You can take free software workshops at the Apple Store or learn home improvement techniques at Home Depot. Bookstores host reading clubs and some bike shops offer repair clinics. All these things expand the universe of educated customers while delivering benefits to those people.

Part of Siemon’s strategy is to reach more consumers with information about organic food, including a barnstorming bus tour planned for this summer. “We have a society that is very distant from food and farming now,” he says. “There’s tons of educated, well-off people who are not trying organic food.” He might call them future customers.

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More Recognition and Capital for Inner City Business

If you picked up a copy of this week’s magazine, I hope you caught our story and Michael Porter’s commentary about doing business in the inner city. The two pieces were pegged to this year’s Inner City 100, a ranking of fast-growing companies located in America’s inner cities. The annual roundup is compiled by the Initiative for a Competitive Inner City, a nonprofit Porter founded in 1994 to foster economic growth. (We also published an online special report in early May that includes a slide show with profiles of the top 25 companies in the 2010 ranking and video snapshots of a selection of 10 of them.)

What didn’t make it into our coverage was a mention of ICIC’s call for nominations for its 2011 ranking. So here goes: The nomination period is open now through the end of September. Private, for-profit companies in poor urban areas are encouraged to apply via this form on the ICIC website. More info about the ranking is available on this page.

In addition to the ranking, ICIC runs a financial education and capital matchmaking program called Inner City Capital Connections that is also looking for participants. Companies can apply using this form.

Both programs are free.

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Seeding New Farm Businesses

By many measures, the iconic family-owned farm seems endangered, at least as a sustainable business. The average farmer was 57 years old in 2007, and half of all current farmers are expected to retire in the next 10 years, according to the Department of Agriculture. Less than half of the nation’s 2.2 million farms turn a profit. Most farm operators (1.2 million) have another occupation and use other income to cover farm expenses.

At the same time, Americans are rethinking how and what we eat. The number of farmers’ markets has grown by 42 percent from 2004 to 2009. There is growing demand, coming from restaurants and home cooks, for food from small, local farms.

The question is how to create farm businesses that can profitably meet that demand. Tanya Mohn at Daily Finance reports on an effort in Pennsylvania’s Lehigh County to incubate new farm businesses by teaching aspiring farmers both agricultural and business skills. From Mohn’s story:

The incubator gives prospective farmers the opportunity to see whether they want to pursue farming full-time without making a huge investment in land and equipment. Among the apprentices there are mid-career switchers looking for new opportunities, people who have always dreamed of farming, and immigrants who farmed in their native countries but don’t have the resources to start farms here.

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First-year apprentices, who attend the program for free (they do have to pay a $40 application fee), commit to 20 hours a week of class time and hands-on experience from February though November. The training covers technical topics like what crops to grow, disease and pest management, and what tools and equipment to use, and visits to local farms. Classroom instruction on the business of farming — with a strong focus on marketing and management — is provided by the local extension branch of Penn State University.

These aren’t hobbyists or back-to-the-land types starting communes; they’re entrepreneurs learning how to run businesses. Incubators in the technology industry and others give first-time entrepreneurs technical assistance, shared resources, and mentoring—all of which improve their odds of success. Farms that want to be sustainable businesses need similar support.

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Senate Clears Way for $30 Billion Small Business Fund

Washington is poised to launch its most direct attempt to revive small business lending since the financial crisis with a plan to invest up to $30 billion of federal money in small banks and give them incentives to re-lend that money to Main Street companies.

The Small Business Lending Fund, outlined by President Obama in his State of the Union speech six months ago, cleared a key Senate vote to end debate July 22 as two Republicans broke with their caucus to support the measure.

The full bill, which includes business tax breaks and enhancements to Small Business Administration loan programs, could come to a vote as soon as July 27, according to Richard Carbo, spokesman for the Senate Committee on Small Business. The House passed a version June 18.

The fund would invest in small banks—those with less than $10 billion in assets—by purchasing preferred stock, which would pay the government a dividend of 5 percent. The cost of that money would decrease to a dividend as small as 1 percent if banks boost their small business loans over 2009 levels by 10 percent. For banks that do not increase their small business lending, the capital would become more expensive, with the dividend rising to 7 percent.

Bank lending to small businesses has dropped to $670 billion from $710 billion since 2008, according to data filed with regulators. Obama and Federal Reserve Chairman Ben Bernanke have connected the drop in small business credit to weak job growth and urged banks to increase the flow of loans to creditworthy businesses. “The formation and growth of small businesses depends critically on access to credit,” Bernanke told a forum on small business July 12. “Unfortunately, those businesses report that credit conditions remain very difficult.”

Banks say lending is down because fewer companies want to take on debt and fewer borrowers are good credit risks. “Loan demand has fallen dramatically since the start of the recession,” the American Bankers Association noted in a recent fact sheet. The lobby group supports the Small Business Lending Fund.

Analysts like Raj Date question whether the money will be effective, however. Date, a former managing director at Deutsche Bank who now runs the Washington research group Cambridge Winter Center, calls the program “well-intentioned” but says it won’t work as well as lawmakers claim. While the bill’s authors say the $30 billion in federal money invested in banks would spur $300 billion in private lending to businesses, Date estimates that the Small Business Lending Fund would support only $70 billion in new credit. Banks will use most of the money to cover losses on existing commercial real estate loans, he says.

“The amount of help is relatively small to the size of the problem,” he says in an interview with Bloomberg Businessweek. Date also says that taking government money will be most attractive to the banks in the most trouble. Originally conceived as a part of the Troubled Asset Relief Program, the Small Business Lending Fund was separated from TARP to avoid discouraging banks from participating because of restrictions and the stigma associated with the bailout.

Republicans opposed the measure on the grounds that it mirrors the Troubled Asset Relief Program and “injects capital into banks with no guarantees they will actually lend,” according to a policy statement. Senate Small Business Committee Chair Mary Landrieu (D-La.) said in a statement that the bill has strong protections for taxpayer money and is expected to raise $1.1 billion in dividend income over 10 years.

The bill includes other provisions intended to aid small businesses such as $11.7 billion in tax breaks on things like investing in new equipment or the sale of small business stock. The SBA provisions would increase the limits on government-guaranteed loans to $5 million from $2 million, and extend the reduced fees and higher guarantees passed last year in the stimulus bill. The law would also allow self-employed workers to fully write off their health insurance costs in 2010.

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Weekend Links: Independents Week; Senate Jobs Bill Highlights; IRS Paperwork

To trumpet the economic benefits of buying from locally-owned shops, the advocacy group American Independent Business Alliance kicks off its seventh annual “Independents Week” in communities across the country, including Fayetteville, Ark., as the Fayetteville Flyer reports.

Robb Mandelbaum, writing in the NYT You’re the Boss blog, highlights the proposals in the Senate small-business jobs bill introduced on June 29.

Back in May, Bloomberg Businessweek’s John Tozzi wrote about a clause buried in the health-care reform bill that requires companies to report to the IRS payments of more than $600 a year to any vendor, starting in 2012. Now, the agency wants suggestions on how to best put this provision into practice, WebCPA reports.

In his latest Infectious Talk podcast, Paul Kedrosky chats with Mark Cuban about startups, life on the roadshow, and reforming Wall Street.

Sarah McLachlan’s Lilith Fair festival, which just got underway, will donate $1 from each ticket sold to three social ventures, Alter Eco Fair Trade, Better World Books, and To-Go Ware, Bloomberg’s Patrick Cole reports.

And over on our Businessweek.com Asia channel, contributor Shaun Rein explains how not to run a business in China.

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America's Most Promising Social Entrepreneurs: Readers Vote

Three weeks ago, we posted profiles of 25 social ventures on this blog and asked readers to vote for the one they felt held the most promise. The profiles were part of our second annual round-up of businesses from across the country that aim to both turn a profit and do social good.

Now, nearly 4,500 votes later, the results are in.

No. 1. Hello Rewind took top spot, with about 17 percent of the vote. The New York City-based company makes custom sleeves for laptops out of old t-shirts, but its underlying mission is to help sex trafficking victims prepare for jobs.

No. 2 Morrisville, N.C.-based insurer The Redwoods Group pulled in just under 16 percent of the vote. Its founder, Kevin Trapani, says he started the company to cater to organizations like YMCAs, which are underserved by most insurers.

No. 3, No. 4, and No. 5 With just over 13 percent of the vote, Philadelphia biodiesel equipment maker BlackGold Biofuels took third spot. Rural development bank Southern Bancorp and Palo Alto, Calif. irrigation systems maker Driptech, shared the fourth, with 8.5 percent of the vote each. Cambridge, Mass.-based Global Cycle Solutions, which makes bicycle attachments intended for farmers in the developing world, took fifth, with 7.5 percent.

Hearty congratulations, all. You can read profiles on each of the top vote-getters as well as the rest of the finalists in our slide show.

Be sure to check our blog for follow-ups on this year’s alums, and keep your eyes peeled for candidates for next year’s roundup.

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Startup Activity at Record Low: Challenger

The share of high-level job-seekers exiting an outplacement program who start their own businesses dropped in the first half of 2010 to the lowest two-quarter rate on record, according to data from the outplacement firm Challenger, Gray & Christmas released July 19.

Challenger, which provides training and counseling to job seekers, says just 3.7 percent of job seekers leaving its outplacement program are going into business for themselves in the first half of 2010, compared to an average of 8.6 percent in the full-year 2009. The data is based on a quarterly survey of 3,000 people, including 75 percent to 80 percent former managers or executives, Challenger spokesman James Pedderson says in an email.

Scarce financing and improving job prospects are steering more of these workers away from entrepreneurship, says Daniel Cohen, a lecturer at Cornell University’s ILR School. “Whether you’re starting a small business or you want to make a more scalable business and raise venture funding, either way the capital is harder to come by,” Cohen says.

But the lower startup rate might be a good sign. The unemployment rate, at 9.7 percent, remains high, but job losses have abated and some companies resumed hiring in 2010. The private sector added 593,000 jobs in the first half of 2010, compared to a loss of 968,000 in the last half of 2009, according to seasonally adjusted data from the Bureau of Labor Statistics. “For those that were thinking of doing a startup as a last resort…there’s more opportunity now,” Cohen says.

Startup activity tends to drop at the beginning of a recession, spike at the end when unemployment is highest, and drop when hiring resumes, Challenger CEO John Challenger says in a statement. (See chart below.) “Right now, we are in the early stages of recovery when the fundamentals of the economy are still pretty shaky, but employers are just starting to add workers back to their payrolls,” he says. Startup activity increases again as the economy improves, he said.

The Challenger survey, which began in 1986, showed the highest rate of startups over two quarters in the first half of 1989, when the unemployment rate was under 5.5 percent. At that time, 21.5 percent of Challenger’s exiting job-seekers opted to start businesses, the group says.

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