What It Takes
In our latest podcast episode, we take a look back at some of our happiest, smartest, funniest, and most difficult conversations from the past year.
Good Morning. And welcome back. I missed you guys!
Here are today’s highlights:
Michael Girdley explains why you—not HR, not a recruiter—should pitch job candidates.
It’s always a good time to manage your expenses carefully.
That pandemic wave of new business starts continues to build.
A study finds that artificial intelligence generates better business plans than elite consultants generate.
THE 21 HATS PODCAST
This Is What It Takes to Build a Business, Vol. 2: This week, we take a look back at the conversations we had last year, highlighting some of our happiest, smartest, funniest, and most difficult exchanges. Along the way, we discuss topics such as escalating salary demands, how much profit a business should make, a new way to sell a business, the problems with ESOPs, how to sell cookies on LinkedIn, breaking a million dollars in annual revenue, escaping the valley of death, and the pain of having to fire a long-time employee.
You can subscribe to the 21 Hats Podcast wherever you get podcasts.
HUMAN RESOURCES
Michael Girdley says you’ll hire better if you rely less on HR: “Great people choose bosses that inspire them. So don’t have HR or recruiters pitch candidates. Let you or your managers do the pitching, ideally as the primary point of contact for qualified candidates. It takes more time from the senior people, but you want to sell them on the job as much as they’re selling you.”
“Be honest. Most employers paint the company as perfect. Instead of selling the candidates, it makes them suspicious. Want candidates to trust you? Be transparent about your good and bad. If your employees start running into unpleasant surprises as soon as they join, your relationship is off to a very bad start.”
“I’ve run many searches where I failed to hire anyone. I could have hired someone who wasn’t great. But we let the process fail instead. And tried again until we found the perfect fit. Hiring the wrong person will cost you a lot more than waiting another few weeks.”
“Pre-employment assessments are controversial. But more people are using them all the time (me included). Done right, they can save you and your candidates hours of time. You’ll get a sense of their fit for the job. I do two: a personality assessment (I use Culture Index) and a cognitive assessment (Criteria Corp).” READ MORE
MANAGEMENT
Gene Marks has some advice for managing expenses—especially if your business is struggling: “As a certified public accountant, I always recommend that clients get reports of key financial information — like cash, receivables, orders, hours worked — at least a few times a week and keep an eye out for any unusual fluctuations from prior amounts. I also recommend clients to take an hour and read their general ledger — where every accounting transaction is recorded — monthly to spot any inconsistencies. I’ve learned that the devil is in the details.”
“‘The absolute biggest thing that I would say is not only doing your books regularly, but then actually having a discussion with your accountant or bookkeeper on what they see,’ [Brendon McCoy, a financial adviser based in Philadelphia] said. ‘Just because you started with $10,000 and ended with $11,000, doesn’t necessarily mean that it was a good month. There could be other things lurking.’”
“‘For us, shipping can be a killer to our margins,’ says Kimberly Davis, who owns Anima, a natural pet food products store in Old City. Davis says that while she doesn’t threaten her vendors, she does let them know that she is always considering alternatives.”
“Davis also keeps a very close eye on every supplier invoice she receives because she says that as many as 75 percent have had some type of billing mistake. Her biggest headache is vendors that automatically charge her for products before she officially orders them.” READ MORE
ENTREPRENEURSHIP
The startup wave is still building: “Before the pandemic, Andrew Levy described himself as a filmmaker, producing marketing videos for Fortune 500 companies. When the pandemic clobbered business in March 2020, he found a chance to reinvent himself as an artificial-intelligence entrepreneur. In January 2022, he and a partner launched AdPipe, a software company that uses AI to search existing video footage and turn the results into wholly new films. The AI software recently helped Ziegler CAT, a Minnesota- and Iowa-based Caterpillar equipment dealer, create a two-minute promotional film drawn from 25 terabytes of footage from the 110-year-old company’s archives, prompted solely by a marketing script.”
“Some 1.6 million new businesses were formed in 2023, through November, up 38 percent from the year before the pandemic and the most since records began in 2005. That is based on issuance of employer identification numbers for the type of business that tends to hire other workers, as opposed to sole proprietorships.”
“Michael Davis spent most of his career working in business strategy and tech startups in New York and Seattle. But Seattle’s pricey real estate made homeownership a reach. He and his wife, who works in biotech, in early 2021 moved to Atlanta, where housing costs are half that in Seattle.”
“In June, Davis co-founded Homegrown, which provides revenue-based financing and strategic support to local bricks-and-mortar businesses looking to expand. The companies Homegrown has funded include co-working spaces, restaurants, coffee shops and bars, and employ 500 people. Davis is working with firms in other industries, including healthcare, pet services, boutique hotels, and fitness.” READ MORE
FINANCE
Long the best option for many small businesses, America’s smallest lenders are in crisis: “Industry Bancshares, with some $5 billion in assets, is the parent company of six banks with more than two dozen branches scattered across stretches of farms and ranches in eastern Texas. It is one of the small banks in rural America whose local focus has long been a strength, inspiring years of loyalty from their neighbors to keep money down the street. Many of these banks are now reckoning with decisions they made when money was abundant and rates were low, crunched by the Federal Reserve’s rapid interest-rate increases.”
“Community banks typically focus on plain-vanilla lending, making a lot of small-dollar loans to businesses and households that fuel local economies. They also usually stay close to home, serving deeply loyal depositors but limiting their diversity and reach. In the wake of the pandemic, that business model has proven problematic.”
“Industry is currently more than $75 million underwater because it piled into long-term bonds when rates were low. Those bonds plunged in value and the bank’s liabilities have been exceeding its assets since soon after the Fed started to hike rates in 2022.”
“Fewer community banks, which are sometimes the only ones around for miles, would ripple through local economies. When they leave, credit often goes away, as do sponsorships for hometown sports teams and parades.” READ MORE
THE ECONOMY
The slow housing market is producing ripple effects in other industries: “The contagion from the slowdown in the housing market last year has been wide-ranging. Professionals like real estate agents and mortgage providers are the most visible collateral damage, but other service providers — such as title insurance companies, escrow companies, home appraisers, and inspectors — are also seeing business dry up. Other once-hot markets are seeing a similar shift. ‘Our best year in the business was 2021, at the height of Covid,’ said Scott Patterson, owner of Trace Inspections, which provides home inspections in the Nashville area. ‘Then interest rates started going up, and people just stopped buying homes unless they really needed to.’”
“Demand for storage units boomed during the pandemic as people spent more time at home or took advantage of lower mortgage rates by buying a home. Developers capitalized on this, with investor funds fueling the construction of new storage facilities around the country. ... As pandemic-era consumption patterns have waned, some companies have struggled.”
“As of the beginning of September, Placer.ai found, visits to home-goods retailers were down roughly 15 percent from a year earlier, and visits to electronics stores were down 12 percent.”
“Companies involved in moving and storing people’s belongings are also coping with a slowdown that executives attribute to slumping home sales.” READ MORE
Defying expectations, holiday spending increased: “Despite lingering inflation, Americans increased their spending this holiday season, early data shows. That comes as a big relief for retailers that had spent much of the year fearing the economy would soon weaken and consumer spending would fall. Retail sales from Nov. 1 to Dec. 24 increased 3.1 percent from a year earlier, according to data from Mastercard SpendingPulse, which measures in-store and online retail sales across all forms of payment. The numbers, released [last week], are not adjusted for inflation. Spending increased across many categories, with restaurants experiencing one of the largest jumps, 7.8 percent. Apparel increased 2.4 percent, and groceries also had gains.”
“Solid job growth is allowing people to spend more. And even though consumer prices have risen a lot in the last two years, wages have grown faster on the whole.”
“‘We’re now entering the period, and we’re seeing it to some extent during the holiday season, where consumers have built up real purchasing power,’ [Michelle Meyer, Mastercard’s chief economist,] said.” READ MORE
ARTIFICIAL INTELLIGENCE
A study of elite business consultants finds that A.I. produces better work and much unease: “The study recruited management consultants from Boston Consulting Group, one of the world’s largest management-consulting firms. The company had barred its consultants from using A.I. bots in their work. ‘We wanted it to involve a large set of real workers working on real tasks,’ said François Candelon, a managing director of the company who helped design the experiments. The volunteers were split into two groups, each of which worked on a different management-consulting problem. Within each group, some consultants used ChatGPT after 30 minutes of training, some used it with no instructions and some did not use it. One of the tasks was to brainstorm about a new type of shoe, sketch a persuasive business plan for making it and write about it persuasively. Some researchers had believed only humans could perform such creative tasks.”
“They were wrong. The consultants who used ChatGPT produced work that independent evaluators rated about 40 percent better on average. In fact, people who simply cut and pasted ChatGPT’s output were rated more highly than colleagues who blended its work with their own thoughts. And the A.I.-assisted consultants were more than 20 percent faster.”
“On a task that required reasoning based on evidence, however, ChatGPT was not helpful at all. In this group, volunteers were asked to advise a corporation that had been invented for the study. They needed to interpret data from spreadsheets and relate it to mock transcripts of interviews with executives.”
“Here, ChatGPT lulled employees into trusting it too much. Unaided humans had the correct answer 85 percent of the time. People who used ChatGPT without training scored just over 70 percent. Those who had been trained did even worse, getting the answer only 60 percent of the time.”
“In interviews conducted after the experiment, ‘people told us they neglected to check because it’s so polished, it looks so right,’ said Hila Lifshitz-Assaf, a management professor at Warwick Business School in Britain.” READ MORE
POLICY
Often a trendsetter, California has a slew of new laws taking effect: “Some of the most notable laws are measures that will increase the state’s minimum wage, such as one law increasing wages to $16 per hour for all employers starting on Jan. 1. Meanwhile, fast food employers will be required to pay workers a minimum of $20 an hour beginning April 1. Health care workers are also receiving a pay bump to $18 per hour starting June 2024 and will see an additional increase to $25 per hour in June 2033.”
“Another new law going into effect on Jan. 1 will make it illegal for employers to discriminate against and penalize employees if they’re found using cannabis away from work—except during pre-employment screenings. The bill provides exemptions for certain employers, such as those in the building and construction trades.”
“A law to end some questionable marketing practices will ban hidden fees, which lure in customers with deceptively low prices—only to tack on additional charges later. The practice is standard on apps such as Airbnb, where sellers often add cleaning fees and service charges late in the buying process.”
“A new law, SB 616, will require all California employers to give their workers at least five days, or 40 hours, of sick leave every year. Previously, California law guaranteed employees a minimum of three days, or 24 hours, of sick leave. However, the requirements varied by county, causing complications for larger employers. The new law aims to standardize the policy statewide.” READ MORE
21 HATS LIVE: FORT WORTH
We only have a couple of slots left for our next in-person event: There will be no speakers, only participants. We’ll have two deep-dive peer group sessions, and everyone will help choose the topics. Bring your own challenges! Bring your own opportunities! The event will feature good food in private restaurant rooms, visits to cool businesses—especially Laura Zander’s Madelinetosh manufacturing operation—and most importantly, the priceless opportunity to compare notes with other business owners who are on similar journeys.
TAXES
The Employee Retention Credit has cost the government four times more than expected: “Stephanie Murphy needed an idea. Fast. It was early 2020, and the Democratic congresswoman saw the coronavirus pandemic posing a catastrophic economic threat to her Orlando, Fla.-area district. By mid-March, the Disney and Universal resorts closed. Murphy and her staff hunted for ways to help workers and businesses and prevent mass unemployment in the tourism industry. They latched onto a policy implemented in disaster zones after 2005’s Hurricane Katrina. The result: The employee-retention tax credit, or ERC, a new nationwide incentive for businesses and nonprofits to keep workers on payrolls.”
“The credit, designed as a temporary $55 billion lifeline for struggling employers, has cost the government about four times that much—and counting. It is a big reason why federal revenue missed projections in 2023.”
“The ERC’s authors and backers say it initially served the country well, offering relief so small businesses and nonprofits could survive and minimize layoffs. But the seeds of problems existed from the beginning.”
“Loose legislative language allowed a flood of claims, some encouraged by firms that charge fees to help employers apply. The IRS—prodded by employers and lawmakers—gave priority to pumping out money and didn’t pause the cash flow until it had determined that fraud was widespread. And employers, who say the credit was a lifeline in tough times, can still claim it for another 16 months.” READ MORE
MANUFACTURING
Is American manufacturing in a slump or a renaissance? “U.S. manufacturing is entering a golden age, with government subsidies sparking a boom in factory construction. Yet the industry is also mired in the longest slump in more than two decades. Activity has weakened for 13 straight months, the longest stretch since 2002, according to surveys of purchasing managers by the Institute for Supply Management. Behind that split-screen image: U.S. manufacturing is large and varied. Investment in factories has occurred in the most high-tech sliver of the sector while other industries struggle with a pandemic-induced inventory overhang and higher interest rates.”
“This divergence won’t last forever, economists say. They expect factory output to pick up as the Federal Reserve cuts rates and the lagged effects from the inventory buildup of 2022 and early 2023 fade. Bringing the new factories online would further support the sector’s growth.”
“Manufacturers surveyed by the Institute for Supply Management expect revenues to grow 5.6 percent in 2024, up from 0.9 percent in 2023.” READ MORE
PRIVATE EQUITY
Surprising no one, it turns out medical errors rise after PE firms buy hospitals: “The study, published in JAMA [last week], found that, in the three years after a private equity fund bought a hospital, adverse events including surgical infections and bed sores rose by 25 percent among Medicare patients when compared with similar hospitals that were not bought by such investors. The researchers reported a nearly 38 percent increase in central line infections, a dangerous kind of infection that medical authorities say should never happen, and a 27 percent increase in falls by patients while staying in the hospital.”
“Over the last two decades, private equity firms have become major players in health care, purchasing not just hospitals but also a growing number of nursing homes, physician practices and home health care companies.”
“The firms pool money from institutional investors and individuals to form investment funds, often buying hospitals and other entities through high levels of debt, with an eye to reselling them in a few years.”
“‘We were not surprised there was a signal,’ said Dr. Sneha Kannan, a health care researcher and physician at the division of pulmonary and critical care at Massachusetts General Hospital, who was the paper’s lead author. ‘I will say we were surprised at how strong it was.’” READ MORE
IN CASE YOU MISSED IT
Over the holidays, we published two specials: One was a collection of 2023’s most important stories, posts, podcasts, lessons, analyses, and profiles. In reviewing the best of the best, some trends emerged quite clearly. For example, there’s pretty much no limit to what people will spend on their pets. TikTok has become a serious marketing channel for all kinds of products targeting all kinds of demographics. Private equity is devastating big swaths of the economy. Post-pandemic business models continue to evolve, and they’re going to keep evolving as artificial intelligence takes hold. READ MORE
The other special was a bonus podcast episode with Muhammad Abdul-Hadi, who discussed the business plan he used to create a remarkably successful pizza joint: First, he bought a building in one of the most troubled neighborhoods in one of the poorest big cities in the country. Then he opened a restaurant despite having no experience in the food industry, and he did it during the pandemic when many restaurants were failing. Plus, to staff the business, he hired only convicted felons. Today, Down North Pizza, which has been featured on best-of lists in national publications like Bon Appetit and The New York Times, is looking to expand.
You can subscribe to the 21 Hats Podcast wherever you get podcasts.
Thanks for reading, everyone. — Loren