Author: Jeff Cornwall

Dr. Jeff Cornwall is the inaugural Jack C. Massey Chair in Entrepreneurship at Belmont University in Nashville, Tenn. Dr. Cornwall's current research and teaching interests include entrepreneurial finance and entrepreneurial ethics.

Dr. Jeff Cornwall is the inaugural Jack C. Massey Chair in Entrepreneurship at Belmont University in Nashville, Tenn. Dr. Cornwall's current research and teaching interests include entrepreneurial finance and entrepreneurial ethics.

Hard Lessons Learned

What's next?
Image by Gerd Altmann from Pixabay

Not if, but when.

In every horror movie there comes a point when you know something is going to happen.  You don’t always know what and are never quite sure when. That’s where I think we are right now.

It could be an economic crisis. It could be another pandemic. No one knows what, and no one knows when.  But something will happen that disrupts the economy and puts many entrepreneurial ventures at risk. It could happen this year or it could happen sometime in the next several years.

We’ve seen this movie before.  COVID. The Great Recession of 2008. The dotcom bubble bursting. As someone who entered the workforce in the 1970s, I’ve lost count of how many economic shocks I’ve witnessed firsthand.

Economic shocks can be devastating for small businesses, but they also can create amazing opportunities.

Prepare Ahead

Be ready to act decisively and quickly. When the next bad time comes, it may come with very little warning.

For startup entrepreneurs, you need to be lean from the get-go. New businesses will still be forming, even when the economy takes a turn for the worse. Some of these new businesses will be opportunistic entrepreneurs who see ways to meet the needs created by the dramatic changes taking place in our economy and society.

Bootstrapping is always a good approach to entrepreneurship, but it becomes essential when times get tough.

There is less money being invested in, and lent to, new small businesses right now. Be prepared to find creative ways to get the resources your business needs. When things take a turn, the money flow may dry up almost completely.

Watch your overhead carefully, and know what you can cut quickly when the economy turns south. Pay down debt and take good care of the customers you have so you don’t lose them to stronger competitors.

Hire new staff prudently. I am not saying that you should not grow your staff, but make sure you have the cash reserves and/or cash flow to support each new hire.

Opportunities Await on the Other Side

Opportunities will present themselves if you are prepared for the next downturn and manage to muddle your way through it.

As the downturn unfolds, more of your competitors will probably fail, which presents an opportunity to attract new customers to your business.

This can be an excellent time to expand and take advantage of a larger market share. If you do expand, continue to bootstrap and try to keep your use of debt to a minimum. Labor and real estate costs will likely come down, making expansion more affordable.

Don’t be afraid to use this time as an opportunity to innovate.

In 2018 and 2019, Ryan Pruitt’s business, Frothy Monkey, was getting ready to grow:

“We spent 2018 and 2019 learning how to operate what we have created for ourselves, beefing up our admin team, working on our processes, learning the beauty of systems, such as ops systems, and checklists.  These are all bad words for entrepreneurs.  You sit in meetings, and you start hearing, ‘This is going to make us too corporate.”’ People work here because they don’t want to work in corporate.  And so we began that beautiful tension of having enough systems to set yourself up for success and some scale, but in a way that supports the creative and emotional leaders that we have in our company.” (“Ryan Pruitt,” from Entrepreneurial Voices)

Just as they were about to open a new location in East Nashville, a tornado struck the city on March 3rd, and then the world shut down due to COVID less than two weeks later. Like almost all small businesses, Frothy Monkey was forced to drastically downsize and try to find a way through the pandemic. By listening to their customers and taking quick action, Frothy Monkey made it through. Said Ryan about what came next:

“Our loyal customer base rewarded us.  Quick decisions rewarded us. And we’re very happy to say that we’ve not only made it through, but we’re a company three times stronger than we were before.  We’ve opened our first out-of-state location since then. We’re up to 342 employees, seven locations open, and the eighth one, Knoxville, getting close. We’ve also just announced location number nine for 2023, which will be the second one in Birmingham.  This will be our first time opening three locations in a twelve-month period.” (“Ryan Pruitt,” from Entrepreneurial Voices)

Fresh Eyes See Opportunities for Innovation

Entrepreneur, creativity, innovation
Image by Tumisu from Pixabay

Sometimes, an outside perspective can shed light on new ways to run a business. Fresh eyes may even see opportunities for innovation in an industry.

Outsider Changes Live Show Lighting

Gordon Droitcour, CEO and co-founder of Cour Design, was trained as an audio engineer. Gordon tells about how he got into live show lighting in his interview in my new book, Entrepreneurial Voices:

At this time, I was getting a little bit worn out by audio and touring. This is where I kind of had a major, very clear “aha” moment.  I said, I know I do audio, but I’m around these lighting people and know enough about it to be dangerous.  I realized that there is a way to use the audio software almost all bands already use to trigger lighting and video cues. This can eliminate some of these expensive people. I think that can work.

Most bands have a piece of software that plays their backing tracks.  It’s like having an extra band member on stage to play the instrumentation that you don’t have a person for.  This might be a beat, a vocalist line, or a violin line. You put that into software called Ableton, which is a software that plays back the tracks.  But everyone uses that for audio only. I realized that this software gave you the ability to lay out MIDI triggers, which are primarily made for audio.  These MIDI triggers sent “go” messages to different pieces of software and hardware to make them react automatically. I also found out that the lighting software also accepts these triggers. Instead of it triggering musical notes, you can make it trigger a lighting console and say, “Kick, snare, flash, flash, flash” the lights.  And so, we just connected those two things, and it removed such a highly skilled person out front triggering the lighting.   Because at the end of the day, they’re just doing it to the music anyway. It is automated this way and it gets locked in.  Honestly, some of this was used already at the arena level, but no one wanted to focus on a solution for these smaller bands.

Bringing Change from the Outside is Not Easy

Although they met some resistance to change, this rag-tag group of audio engineers broke into lighting and design for live shows with their fresh perspective and helped change how business was done. Gino Cattani and Simone Ferriani, who have been conducting studies on outsider-driven innovation for the past decade, state that often, the most challenging part of bringing innovation from the outside is selling the new idea to insiders. Disruption rocks the boat, and the truth is that most people prefer stability to change, even if it offers a clear improvement.

However, Cattani and Ferriani believe that persistence pays off:

“The very traits that make outsiders so disadvantaged within established occupational structures and professional categories are often precisely those required for the pursuit of exceptional entrepreneurial achievements in art, science, and business.”

Not All the Best Ideas Come From the Outside

Ben Jones, a professor of strategy and entrepreneurship at Kellogg School of Management, argues that not all good ideas come from outsiders and that insiders may, in fact, have a distinct advantage. He says:

“If you’re familiar with the ins and outs of an industry, having worked in it, and you have a strong professional network, your odds of success are greater.”

HR consultant Dr. Greg Willard has found that even if an innovation comes from the outside, it is often up to inside experts to bring the new idea to life.

Innovation Partners

My own experience suggests that most innovation requires that insiders and outsiders working together is what brings change and disruption.  For example, companies like ours that brought significant innovation to healthcare in the early days of managed care, were most successful when we built a team that included open-minded industry insiders and outsiders with a fresh pair of eyes.

Catching a Wave Early

Panama City Beach after the storm
After the storm at Panama City Beach. Jeff Cornwall

Surfers often stress the benefits of catching a wave early.

David Allee, owner of Almond Surfboard and Design, puts it this way:

“My personal experience surfing, as well as watching other surfers in the water, seems to continually reaffirm the fact that the ability to consistently catch waves early in their formation results in far greater overall success.”

It is often advantageous for entrepreneurs to also catch a market wave early.

Escape Rooms Come to America

Brothers Jonathan and James and their co-founder Mark caught an entrepreneurial wave early in the escape room craze when they launched their business, The Escape Game. Jonathan shared how they caught that wave in my forthcoming book, Entrepreneurial Voices:

The TripAdvisor wave carried us through the first launch.  We didn’t start the business with a grand scheme to grow. We started the business thinking this is really unique.  There is no analog.  There are no national brands.  There are no global brands.  There is no company that has more than two of these in the world right now. That’s where the world was in this industry at the time.  We said, “Let’s do one; let’s do it really well. Let’s see what becomes of it.”  TripAdvisor really helped launch that first store. And then three months in we said, “This is going so well. We have to do more of these.”

As Jonathan rightly points out, being a first mover into a new market can have significant advantages. The advantages of catching a wave early include helping set the standard for the new market and building brand loyalty before others move in.

After about ten years of growth, with the help of an infusion from a private equity group, they now are in 37 locations in 18 states and the District of Columbia, serving more than seven million players since their launch in 2014.

The Perils of Catching Waves Early

There are also disadvantages to being a first mover into a market.  Several disadvantages center around the business model.  Early entrants often miss the mark on who the market actually is, what that market really wants, and how to connect with them.  They can squander precious resources trying to pivot their business model to what it actually needs to be.

And even if they get the business model right, they may not be prepared for the challenges that rapid growth may throw their way! Growth is the most perilous time for an entrepreneurial venture. As my late father often said, “The single biggest cause of business failure is success.”

Or, as SurferToday points out:

“When it breaks, a huge wave can break bones, keep someone underwater for a long time, and even slam a surfer against the ocean floor.”

Fortunately, Jonathan and his co-founders navigated the perils of catching their entrepreneurial wave early. But not all first movers make it to shore unscathed.

New Adventures

Sunrise on 30A over Gulf of Mexico
Sunrise over the Gulf of Mexico. Jeff Cornwall

Well, my retirement has looked nothing like I imagined.

During the first six months, I filled my time with as many projects as possible. I went from working full-time for the University to working full-time on various interesting projects. I enjoyed everything I was doing, but it looked nothing like retirement.

Then, in early 2023, I was diagnosed with non-Hodgkin’s lymphoma. Chemotherapy was not on my bucket list for retirement, but it is what dominated much of last year.  The good news is that my treatment was successful, and I was told I was cancer-free after my last round of chemo.  I am so grateful for all the prayers and support we received from friends and family.

Our New Adventure

Toward the end of treatment, I was sitting on our back porch feeling miserable. I wondered why we needed our big house. As Ann always said, we lived in only a small part of it. When Ann got home from pickleball that day, I asked her if she was really serious about downsizing. She assured me that she was.

So, we sold our house, got rid of eighty percent of the “stuff” we owned, and moved into a small apartment a few miles from our house. We then began the process of exploring what our next adventure would be. We knew we were ready for a warmer climate and ready to live in a community with people at our stage in life. We have always enjoyed Hilton Head, but it can get almost as cold there in the winter as it does in Nashville. So, we settled on Florida.

Specifically, we decided to move to the panhandle of Florida, along the area known as 30A.  It offers a nice climate and is easy to get to from Nashville, where our kids and grandkids all live. We bought a lot and have begun the process of building our new home in Latitude Margaritaville Watersound.

Entrepreneurial Voices

Since I retired from the University, I have been working on my new book, Entrepreneurial Voices. My progress was slowed a bit during treatment, but I have been plugging away at it for the past eighteen months.

I’ve been talking about writing this book for decades.  It is inspired by the book Working by Studs Terkel, in which he interviews more than a hundred and fifty people from all walks of life about their work.  Most of his book contains direct quotes as people talk about “what they do all day and how they feel about what they do.”  My wife and I have always believed it would be compelling to develop the same type of book about entrepreneurs and small business owners.  When I retired, Ann said, “You now have the time to write this book!”

So, I spent much of the first year identifying dozens of interesting business owners and conducting long-form interviews about their journeys as entrepreneurs. Like Terkel, I wanted to capture not only what they have done as an entrepreneur but also the affective side of owning a business. The book presents the lessons and challenges of entrepreneurship from the business owners’ own voices.  The world is full of books in which authors give their views about entrepreneurship, including several written by me. This book offers lessons and insights from the words of entrepreneurs.

Entrepreneurial Voices will be published sometime in 2024.

My next several blog posts will offer my reflections on the lessons from various stories in the book. Although the chapters in the book are in their voices, my upcoming posts will offer my reflections on these interviews. Conducting, transcribing, and editing these interviews not only inspired me but also taught me many important lessons about not only the process of entrepreneurship but on being an entrepreneur.

 

 

 

It’s the Cashflow, Stupid

Profits are an illusion created by accountants.

You can’t grow your way out of a flawed business model.

Cash is King, Queen, Master of the Universe, and Emperor for Life.

These are mantras I’ve been telling entrepreneurs for years.  Nothing matters more to the life of a business than its cashflow, which is why a good cash forecast is so important to a growing venture.  Derek Baker at Cashboard offers his five reasons cash forecasts are inaccurate.  Great post, via CJ Cornell’s newsletter.

The Power of the Value Proposition

I have written before about the challenges new businesses face as they try to get established in the market and build revenues.  In one post, I compared new businesses to annoying little gnats flying around in the face of the market.

At the heart of early success for a new business is identifying a compelling value proposition that you can offer to the market.

Your marketing mix, that is the combination of your product positioning, promotional plans, and pricing strategies, all need to reinforce the value proposition you are offering to your customers.

Andrew Gregson explains how pricing reinforces the value proposition in a post at StartupNation.

The most popular pricing strategy for startups and small businesses is to follow the lemmings and charge what everyone else charges or to calculate the costs and target a certain margin. Both are disasters. Following the pack leads to average profits at best. Marking up from costs leaves money on the table.

Even though getting pricing right is tough, it is critical to put in the time to ensure your pricing reinforces your value proposition.

 

The Beast Comes Roaring Back

The beast is back.  Inflation is roaring, and showing no signs of letting up.  Small business owners concerned about inflation has increased from 74% in Q4 of 2021 to 85% in a recent update of the Metlife/Chamber of Commerce small business index.

Vulnerability of Small Businesses

The problem for smaller businesses is that they are less able to adjust to inflationary pressures.  Small businesses are the weak player when it comes to market power.  Time is your enemy right now, as inflation is raging at levels we have not seen in decades.

If you have big suppliers or customers, they can tie your hands.  Your costs go up, but you are unable to pass along these costs with higher prices quickly enough to keep up with the inflationary squeeze.

An additional worry is that we have a weak economy with inflation — this is called stagflation.  In this scenario, customers begin to sit on their hands.  When you raise prices they either buy less from you or even decide not to buy at all.  Consumers go out to eat less often and when they do, they buy less expensive meals.  They travel less and choose cheaper options.  They postpone buying new goods.  They also postpone maintenance on our big investments, such as houses, cars, and appliances.

Employee costs were already on the rise due to recent labor shortages, but now will likely accelerate as a result to their own challenges with inflation in their everyday lives.

What to do?

When inflation heats up even a little, be aggressive with frequent small price increases rather than waiting and trying to catch up at
some point with one big jump. Don’t let yourself get behind, as small businesses can almost never play catch-up if the delay price increases.

This can be tough to implement for some businesses, particularly if you publicly list your prices.  For example, it can get very costly to print up new menus each month for a restaurant owner who wants to follow this strategy.

But be vigilant.  Customers are less likely to pay attention to price increases if they are small, so it is essential to find creative ways to communicate your pricing to allow you to implement this strategy during inflationary times.  For example, a restaurant may use menu inserts that can inexpensively be replaced.  This was actually very commonly used in restaurants during the 1970s and 1980s when we had high inflation.

In addition, prudent management of finances can help a business survive inflation:

  • Find ways to cut expenses without impacting the core value offered to customers.
  • Keep overhead low.
  • Build cash reserves to buffer short term price increases that precede your ability to get higher prices from your customers.  I know this sounds contrary to the investment advice we are now hearing about holding cash during inflation.  Don’t think of this cash as investment — it is your lever to hold back the rising tide of inflation.  Think of it as an internal line of credit to hold off the impacts of inflation.
  • Watch your margins carefully. Worry about growing profits, not sales.
  • Don’t lock into long-term contracts that have narrow margins with large customers.
  • Pay down variable interest loans ASAP, especially now that interest rates are temporarily relatively low. As soon as inflation heats up, interest rates will continue to rise.  And given the stubbornness that the Fed is now showing with interest rates, we may soon see huge spikes in rates over just a few quarters as inflation takes hold.