Are you familiar with the phrase, “the fog of war?” You can get the idea from the image here, from a computer strategy game: the pieces in the center of the image can see the terrain for only a short distance, shown here as the brighter area. The rest is obscured by the fog of war.

Some days, bad days mostly, I think there’s something like this that goes on with most business research. They create the fog of research. It’s like the fog of war. Poor vision. Partial vision.

I think this happens all the time with focus groups and surveys. The research is almost always flawed because it’s almost impossible to get random people lists. Questions inadvertently distort results. People answer what they like to hear themselves or think of themselves answering, not the truth. Often they don’t know the truth. Surveys ask “would you buy this?” for example. “What price would you pay?” People often project who they want to be as they answer these questions. And focus groups: they depend on randomly chosen participants, but that almost never really happens. People can’t gather random people. And then one person — bad day, good day, some outside annoyance — can influence the whole group.

Then comes the problem of fog of research: once there is research in house, discussion gets fogged. People stop thinking fully, fairly, unwilling to question assumptions, and quick to devalue common sense. “After all, we have the research,” we say. “Let’s not ignore the research.”

I realize that this fog of research idea makes me seem to be against research, against analysis, and against study. I’m not, really; I’ve done a lot of research through the years.

What I do say is do the research, but don’t believe it blindly. Don’t lose your skepticism and common sense.

Special reminder: I’m doing my Global Entrepreneurship Week webinar today, free of course, at 11 am PST, titled: Develop Your Business, Not Just Your Business Plan. Click here now to register.

(Image credit: from classic.battle.net)

I want to start this with a story. I’m quoting Jason Cohen in his post Business advice plagued by survivor bias, with thanks to Alan Gleeson for tipping me off to this one. As you read this story, think of how it applies to business experts and business advice:

During World War II the English sent daily bombing raids into Germany. Many planes never returned; those that did were often riddled with bullet holes from anti-aircraft machine guns and German fighters.

Wanting to improve the odds of getting a crew home alive, English engineers studied the locations of the bullet holes. Where the planes were hit most, they reasoned, is where they should attach heavy armor plating. Sure enough, a pattern emerged: Bullets clustered on the wings, tail, and rear gunner’s station. Few bullets were found in the main cockpit or fuel tanks.

The logical conclusion is that they should add armor plating to the spots that get hit most often by bullets. But that’s wrong.

Planes with bullets in the cockpit or fuel tanks didn’t make it home; the bullet holes in returning planes were “found” in places that were by definition relatively benign. The real data is in the planes that were shot down, not the ones that survived.

Could there possibly be a better summary of survivor bias? Do you see how it matters with business research? I need to thank Steve King as well, because he focused on survivor bias recently in his post Don’t Quit Your Job Until You’ve Talked to a Small Business Failure. Steve points out, in that post, that if we only ask small business owners about risk, we only get opinions from the survivors. 

But if your goal is to find out how all small businesses owners think about risk, this approach is flawed.  This is because former small business owners – the folks that went bankrupt, lost their companies or were removed from their jobs – are no longer small business owners so they aren’t included in these surveys.  Because business failures are excluded, the survey results are biased towards successful small businesses. 

Do you see his point? You can’t get an accurate picture of a contest by asking only the winners. Sure, the winners are the right ones to ask for stories of what worked. But the losers have some insight too, like on what didn’t work. 

 (Image: Nick Schroedl/Shutterstock)

Posting on his Small Business Labs blog, Steve King wrote: Don’t Quit Your Job Until You’ve Talked to a Small Business Failure. Amen. Everybody even thinking about starting a business should 1.) Read that post; and 2.) do what it says, talk to a small business failure.

Steve cites a couple posts he’s done recently on research showing small business owners feel relatively safe in their jobs. But then he adds:

Several people have asked me does this data mean that small business ownership is less risky than traditional employment?  The quick answer is yes, but only if your small businesses is successful. (emphasis is mine).

I love the irony: the polltakers ruled out failures by asking existing business – which, by definition, aren’t failures – about risk. Steve’s a professional researcher, so he quickly identifies the problem as survivor bias, which he says turns up often in research. He adds:

My favorite example of survivor bias is surveying existing customers to develop satisfaction ratings.  I was once asked to figure out why a company was losing so many customers despite having stellar customer satisfaction ratings.

It turned out they didn’t include customers that left prior to the annual customer satisfaction survey.  After all, they explained, they weren’t customers anymore.

So, as Steve suggests, if you want to explore the dark side of small business, talk to the losers instead of the winners.

(Photo credit: el lobo/shutterstock.com)

Pictures, words, ideas. If one picture equals 1,000 words, how many ideas does it generate? Is there a transitive property there? I had time over the weekend to pick up two unrelated pictures. Each covers something entirely different. Both are full of ideas.

The first, a chart by Seth Godin:

From Seth Godin

This is one of those things that must have been hard to come up with, but makes sense when you look at it. A map of communication. On the horizontal axis of the chart, from book on one end to a conversation at the other. With a book, the writer writes it at one point in time and the reader reads it at an entirely different time. With the telephone and coaching, both parties of the communication, sender and receiver, are involved at the same time. On the chart’s vertical axis, how much bandwidth is involved, from mail and graffiti at the low extreme, to movies and coaching at the high extreme.

The Second, from Buzz Networker:

From bizzia.com, buzzworker

This one is fascinating to me. As always with this kind of research, accuracy depends on how they sampled, but even if it could be off by a bit, it still gives a big picture of the main social networking sites (which is what I assume the acronym SNS stands for) usage by age. I have no conclusions to draw, but maybe you do.

Please, if you own a business, take this simple (only 8 questions) survey on impact of the credit crunch. It’s asking you whether you’ve applied for a loan or not, was it approved, would you have applied if it weren’t for the economic crash, and so on.  I’d like to know, and of course I’ll share the results. Please click here to take the survey.

Thanks,

Tim

How do you spell "no-duh?" New research just released by the SBA shows that Advance Planning Pays Off for Start-Ups. That's the headline on a good piece of reporting by Kelly Spors of the Wall Street Journal's Independent Street. And, to be fair, she also offers background on why that's news.

It's the confusion between planning and the big fat formal business plan, frankly, that causes a lot of confusion in this area. You know: the people who confuse not needing a formal business plan document with not having or wanting to plan? Kelly Spors also wrote about that, a couple of years ago, when research showed that some successful businesses said they didn't have a formal business plan. (Again, "no-duh"; that's the same confusion. Added together with people who say they didn't have a plan, which is the same dynamic as when some people say they never studied in school (but got straight A's)). 

What this research actually shows, in my first skimming of it, is that startups with formal business plans early, tended to get more things done sooner. Startups that did only informal planning later, not surprisingly, tended to get things done later.

I do like this review of the state of business planning, from the text of the study:

We believe there is a substantial body of empirical evidence that indicates that the presence of a business plan during the venture creation process significantly improves the odds of successfully starting a business. In addition, Gartner and Liao (2007) found that the formality of the business plan (e.g.,unwritten, informal, formally written) significantly influences the success of starting a
business.

So, given that as background, this new study looks at three characteristics of business planning: presence, formality, and timing. The conclusion:

We believe that the evidence from this study and evidence from previous studies using the Panel Study of Entrepreneurial Dynamics indicate that engaging in pre-venture business planning has significant benefits that appear to encourage action and success at getting into business.

Me too.

Here’s an eloquent business chart, from the NY Times reporting yesterday on retail sales last month. I find the economics behind it fascinating. The big discount places, the high-volume low-price strategies of Wal-Mart and Costco, increased sales. The more expensive places, Saks and Nordstrom, fell heavily.

It looks to me like a classic example of price sensitivity. I see the retailers here as almost in order of their general price perception, from low price at the top to high price at the bottom. I’m actually not sure about TJX or Kohl’s, that’s not my expertise.

This is an interesting counterpoint to one of my favorite assumptions, namely that the high end holds up in a downturn. I got that from watching the Mexico economy for Business Week during the 1970s. In that economy, during a downturn, luxury cars held up while the sales of the economy cars fell.

That never seemed intuitive, and that was then, in Mexico; while this is now, and here in the U.S. Here we have data that seems to confirm what I think we’d all expect: people rushing down market during a recession.

Founder Tom Taulli called it "Zillow for business." That got me interested. Do you know Zillow.com? Google maps with estimated value and transaction data for every house on the map. How’d you like to see the same thing for businesses? I’ve been looking forward to it since I heard about it. And now it’s released, at least in a beta version. 

What’s your business worth? What’s that business on the corner worth? How would anybody know?

BizEquity offers at least one quick answer, although probably not what you’d hoped for.  For a quick demo, go there, type in a ZIP code and business type, and see what you get. Here’s a quick example for restaurants near me:

You probably can’t read the details because I had to resize the image, but to give you an idea, several of my favorite restaurants are on the list and worth several hundred thousand dollars each.

There are certainly glitches. In some cases restaurants with several locations show up as separate and distinct entities, and in a couple cases the headquarters or offices are separate and distinct locations, but look like additional restaurants. I’m also curious about the businesses that show up with values of just a few thousand dollars, like the fish and chips place 100 yards from me, which has been there for at least 15 years, but is shown as worth about as much as a used car. What’s up with that?

I checked a couple of alternative sources for formulas, and came up with the average restaurant in the US having gross sales of about $340K and being worth about .4 times sales, or 3.66 times earnings before interest, taxes, depreciation and amortization. So at least it seems like some of these estimates are in the right ballpark.

The hardest part is that while everybody calls it "valuation," and everybody pretty much understands that it’s what a business is supposed to be worth, there’s a huge range of interpretations. At one end of the range, with high-end mergers and acquisitions, valuation is usually a matter of applying special factors like growth and brand on top of formulas based on multiplying sales or profits by some so-called multiplier. So small but successful privately held software companies are going for something like 2.3 times revenue lately, except that actual transactions range from barely 1X revenue to 5X or 10X revenue depending on the details, such as who’s buying and why. On the other end of the range, valuation is done by experts certified by the IRS, and it’s used mainly for legal reasons; determining tax implications for donations and estate planning for instance, or managing values in divorce settlements.

The range of values gets awkward. If you’re giving shares of your privately-held company to your children, you want a very low valuation. If some big company is trying to buy you, then you want the very high valuation. Since both cases can come up, it might not be all that great to have some objective database available that sets a single valuation.

Tom ought to know. He’s the author of The Complete M&A Handbook and a well known financial writer whose work appears at Business Week, AOL, Forbes, and his own blogs. Still, he admits that BizEquity is just a start, with a long way to go:

"In building BizEquity, I got a big education.  And, it’s only the start.  Valuation is extremely difficult — especially for small businesses.  The data is hard to come by.  And, unfortunately, there is a lot of data that’s wrong — even though we get it from top sources (from credit bureaus like D&B and Experian).  No doubt, the small business market is highly inefficient.
So, our biggest priority is to seek out more third-party data sources as well as get data from our users.  We also will continue to work with valuation experts.  It’s definitely a long-term process."

Tom developed the site for Advanta, the major credit card company, recruited a solid team of advisors, and introduced it at demo. What’s there now is a function of several public databases, plus formulas, and with a lot of warnings and provisos about the danger of provisional and estimated data.

Do you own a business? Is it on the map? If it isn’t, the site invites you to add it. And if it is, but you don’t like the estimate, the site invites you to provide more information.

The best readily-available valuation of business consulting services is 1.12 times annual sales. For automotive repair shops, it’s .41 times annual sales. Physical fitness facilities are going for .66 times gross annual profit. Grocery stores are going for .28 times annual sales, and sporting goods stores for .34 times annual sales.

There’s a valuation report in Inc Magazine’s April issue that turned me on to Business Valuation Resources, which sells information like the above, culled from data on actual transactions.  I registered (free) to get a free download of a complex chart — sophisticated, innovative, imaginative, but really hard to read. And I gather that the underlying data isn’t cheap, because I can’t find anywhere to send you for a link to the data table, industry by industry, that I used to do the snippets in my first paragraph. 

Conclusion: if you’re dealing with valuation, this could be a good resource. Valuation information is something like insurance account numbers: you don’t need it very often, but when you need it, you really need it. Like when you want to sell your company, or sell part of your company, or predict valuation as part of an investment negotiation, or when there’s a divorce, and … well, you get it.

Gripe: once they’ve published the data and put it out into the world as hard copy, can I get it online somewhere? Oh yeah, I get it, there’s value to the data. Tough call for BVR, how much do you give away to promote your data?

Here’s an interesting research finding: "The hormone that drives male aggression and sexual interest also seems able to boost short-term success at finance." That’s from Randolph Schmid of AP, quoting a Cambridge University research study. And Randolph, presumably male, found a remarkably upbeat lead — men do better on the short term — to summarize the findings. Note the following paragraph in the same story: 

"If people want to get practical, it would be good for both banks and the financial system as a whole if we had more women and older men in the markets," said John Coates, lead author of a study appearing in this week’s issue of Proceedings of the National Academy of Sciences.

It turns out that the short-term success doesn’t last. Coates and his team studied male financial traders in London, taking saliva samples morning and night. Levels of male hormones affected trading. Competitors who win have higher hormone levels. 

In hormone research there is the "winner model," based on both human and animal activity, in which competitors have rising testosterone levels. When one wins, his hormone levels increase even more, while they fall in the loser.

That can give the winner an advantage in aggression and risk taking in the next competition, a positive feedback, he said.

Cool!  Bring it on. 

But then comes the bad news:

But after a while, the effect overreaches, and the male begins making stupid decisions.

Damn! Just when I was starting to like that story. I saw it in the San Francisco Chronicle, which added more salt to my wounds. 

The study comes less than two weeks after U.S. researchers reported that young men shown erotic pictures were more likely to make a larger financial gamble than if they were shown a picture of something scary, such as a snake, or something neutral, such as a stapler.

Money and women trigger the same brain area in men, those researchers said.

Harumph!  And I thought it was about aggressive growth strategies.