Entrepreneurial Start-ups Ain’t Easy

Giants Causeway
Giants Causeway, Northern Ireland. Jeff Cornwall

Start-ups ain’t easy. They can be exhilarating, rewarding, exciting, and sometimes terrifying. But they ain’t easy.

Semi-Controllable Challenges

Entrepreneurs face a myriad of challenges with their business models during the start-up process. As they engage their customers, they work at finding a real problem and a solution that fits the customers’ needs. Early on, they also face the challenges of finding the right business partners and building the right team. And then there’s the never-ending challenge of securing the finances and other resources to feed the growing business.

Starting a business is hard enough in and of itself, but start-ups never happen in a vacuum.

“Life Goes On” Challenges

The normal rhythms of life continue no matter what. People get sick. Families fall apart. Personal tragedies happen. Entrepreneurship is a vocation that exists within the context of our complex and often disrupted lives.

When people talk about the challenges of work-life balance, it is almost always unidirectional. How do the challenges of a start-up impact my non-work life and create a work-life imbalance? However, the reality is that challenges in our non-work life can create even bigger challenges in our work as entrepreneurs. Sometimes, the non-business challenges entrepreneurs face can create the biggest risk for growing entrepreneurial ventures.

Tyler King, the founder of a personal chef and catering business called Tastify, faced significant health issues during the early stages of his business that could have led to the failure of his new company. First, he had to endure back surgery, which made the physical work of catering impossible for a time. But, Tyler faced the biggest challenge during his recovery from back surgery:

“After I had gotten through back surgery, I had scheduled a wedding for 150 people. It was going to be at the 30-day mark after surgery. I’d be useful, but I needed to delegate a lot of tasks. But a few weeks after surgery, I got infected. It was pretty serious stuff. My surgeon instructed me to go straight to the hospital because I was vomiting. That’s how I found out that I had a staph infection.

“It was about four days until the event. I had people that had been working for me, but nobody that really seemed to stand out except for this one girl that had worked about five events with me, who just seemed to really care. I gave her a call. It was funny. This girl and I actually used to date. We had stopped dating, and she reached out to me a few months later and said, ‘Hey, I need a job. I know that things didn’t work, but I need a job.’

“So, I gave her a call and said, ‘Hey, so this is going to sound kind of crazy, but I have to go back in and go back under and have the staph infection cleaned out. And I’m going to be on very, very heavy antibiotics for the next few days that are going to make me very sick. And we have a wedding for 150 people this weekend. I have some of the food orders in. I know you’ve never been to this venue, I know you’ve never met half my employees, and I know you’ve never met this client, but I need you to handle this for me.'” (from “Tyler King” in Entrepreneurial Voices).

Tyler overcame this set of health challenges and now runs a successful business. How did Tyler do it? One word: resilience.

Resilience

Experts are paying a lot of attention to the importance of resilience in entrepreneurs’ success. Researchers examining resilience find that positive personality, motivation, confidence, focus, and perceived social support all play key roles in protecting people from the negative effects of stressors (Fletcher and Sakar 2012).

Victoria Usher, founder and CEO of GingerMay.,  suggests that there are three specific steps an entrepreneur can take to improve their resilience:

  1. Face your challenges head-on. In the example of Tyler King, he did not wallow in his health challenges. He faced them head-on and sought solutions to make it through each challenge.
  2. “Innovation”. Usher suggests that entrepreneurs should look at each challenge as a problem-solving opportunity. Innovation is a process that often involves several attempts to reach a solution. Each attempt generates valuable information that will eventually lead to a solution.
  3. “Mentorship”. Seek advice, coaching, and counsel from mentors who can help you improve your business and yourself. From the coaching I do for entrepreneurs, I know that some of the most impactful sessions are those when I help them see above the “fog of battle” when dealing with the challenges they face in life and business. I rarely offer brilliant insight into their problems. Instead, I simply remind them of things they already know but have lost sight of while trying to manage a challenge or crisis.

Usher calls resilience the “new cornerstone for entrepreneurship.” Entrepreneurs find success in start-ups through a combination of adaptation and innovation, a constructive mindset, and a strong network of coaches and mentors that all help to build resilience. After all, start-ups ain’t easy.

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.

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.

7 Common Elements When Transitioning from Founder to CEO

Image by Gerd Altmann from Pixabay

When entrepreneurs start their first business, not only is it their first time as a business owner, but also their first time as a CEO.

Being the “CEO” means very little in the early days, but as the company grows, the title of CEO takes on more meaning. Defining your role and your style as the CEO of your company takes planning and specific effort on your part. It may even feel a bit awkward at times, but you have to establish what your role will be as the CEO.

Growth Changes Your Job

Many entrepreneurs start their businesses because they like the hands-on part of their business. Engineers like to engineer. Furniture makers like to build stuff. At some point in the growth of the business, the entrepreneur begins to move away from the hands-on part of what their company does. This can be a painful and frustrating period.

As they move away from the hands-on, entrepreneurs must learn the other strengths and weaknesses they bring to the business.

If you have a knack for numbers, keep the financial management of the business part of your core responsibilities.  If you are good with customers, don’t be in a hurry to give up selling and customer relations.

Your “job description” as CEO should be a reflection of your skills, abilities, and knowledge.  However, no matter what your specific role as the CEO is in your business, growth demands you start to build your team.

Delegation Hesitation

There are three common mistakes that entrepreneurs make when delegating.

The first mistake is being hesitant to delegate.

When first beginning to delegate to employees, some entrepreneurs might feel that no one can do what they do as well as they can do it. Employees might not care quite as much as the entrepreneur does. After all, this is your business, and your reputation is tied to its success. To employees it is simply a job.

To overcome this hesitancy to delegate, entrepreneurs should remind themselves that sometimes “good enough is good enough.” While employees may not carry out the tasks delegated to the level of perfection you would, they can learn to perform these tasks well enough for the business to run smoothly and for customers to stay satisfied.

Moving Too Quickly

The second mistake entrepreneurs make is rushed delegation.

Rather than being hesitant to delegate, entrepreneurs who make this mistake seem as if they can’t wait to get tasks off their plates. We see this quite often with serial entrepreneurs who are so eager to get to their next new business idea that they don’t take the time to get their current one running properly before moving on.

These entrepreneurs delegate without providing proper training and without giving clear expectations for performance.

In the rush to delegate, tasks and responsibilities can also end up being assigned to the wrong person or mistakenly to multiple people simultaneously. This can lead to chaos and frustration.

To overcome rushed delegation, develop a clear and detailed plan that includes what needs to be delegated, who should be assigned the task and what needs to be done to prepare employees for their new responsibilities.

Trust

The third mistake is undermining the delegation process.

Even after the delegation of tasks and responsibilities, employees will still tend to want to go directly to the entrepreneur to get an answer to a question or to make a decision, instead of going to the person now assigned to that area. If the entrepreneur answers that question or makes that decision, it will completely undermine the authority of the person it has been delegated to.

I developed a “seven-second delay” to avoid this mistake. When I was asked for an answer or a decision I would always pause for a few moments to ask myself, “Is this still my responsibility or have I delegated this to someone else.”

If I had delegated it, I’d answer by sending them to the employee to whom I had given that responsibility.

Delegation is a lot like raising teenagers. At some point you have to begin to let go so they can learn — and grow up. With your business, if you don’t learn to let go and delegate, your business will never successfully “grow up” to the next stage of development.

7  Common Elements of CEO Job Description

As founders build their team and delegate responsibilities to their leadership group, they must pay attention to seven elements that are part of every entrepreneur’s job description as CEO:

  • Growth can be stressful for everyone in the company.  The entrepreneur must remind everyone of the vision as to where the business is headed and provide inspiration for the company’s potential.
  • The entrepreneur must be the keeper of the culture and lead the efforts to create an intentional culture that represents the founders’ values.
  • Growth requires resources.  As the CEO, the entrepreneur is responsible for securing the necessary resources to ensure successful growth.
  • The entrepreneur must work with the leadership team to create systems that will support ongoing growth and ensure customers’ needs are being met.
  • The structure of the business should never “just happen” as people get hired into the business.  The entrepreneur must ensure that structure is tied to the strategy, culture, and business model of the company.
  • As CEO, every entrepreneur must be prepared to be the chief strategist and adjust the direction the business takes based on changing market demands and opportunities.
  • Finally, as CEO, the entrepreneur serves as “emotional shock absorber” to keep a positive climate in the business, even when the business faces the inevitable challenges that are part of growth.

By integrating these elements into your job description, you will be on the path to becoming a more effective CEO of the business you founded.

Symptoms of Growing Pains

Image by PublicDomainPictures from Pixabay

“The biggest cause of failure in business is success.”
(A favorite saying of my late father, RM Cornwall)

“Every time the business owned by an entrepreneur who banks with us starts to grow, I get nervous.  And if it grows quickly, I go on high alert!”
(A banker who wishes to remain anonymous)

When I look back at a failed entrepreneurial venture, its demise can most often be traced to one of two causes.  Either their business model was flawed from the start or they were not prepared for their business model to succeed and had trouble handling the growth that followed.

Business Transitions

During growth, entrepreneurs must lead their businesses through various stages of development.  One of the best models to help entrepreneurs understand these changes was developed by Eric Flamholtz.  In their book (now in its 5th edition) Growing Pains, Flamholtz and Randle present a practical model that helps entrepreneurs understand the stages of business growth.  A fellow entrepreneur gave me a copy of this book in its first edition while we were managing the rapid growth of our healthcare business back in the 1990s.  I have been recommending it ever since, and have had the authors as our guest speakers at Belmont several times over the years.

In the early stages of growth, the entrepreneur engages in what Steve Blank refers to as the Search Process for the basic business model.  The entrepreneur is finding a gap in the market, and developing a product or service to address that market need.  This is where the testing and pivoting of the business model occurs.

Building a Business

Once the business model begins to show signs of market traction, the next stage is to secure the resources the business needs to grow.  The entrepreneur must secure the cash, talent, materials, facilities, and so forth needed by the business to support its growth. If the entrepreneur fails to secure necessary resources, even the most promising business model can fail.

In the ensuing stages, Flamholtz and Randle chart the path to successfully navigate growth.  First comes the development of critical operating systems, including financial systems, marketing systems, production systems, and human resource systems.  Next comes the development of key management systems, including planning, organizing, leadership development, and performance development.  Finally, the entrepreneur must build an intentional culture to ensure the sustainability of the values and beliefs the founders brought to their business at its inception.

New Challenges Around Each Bend in the Road

Each stage in the development of the business leads to specific new challenges in the next stage of growth.

The entrepreneur must watch for a wide array of critical symptoms that warn of impending crises involving customers, employees, and the organization itself.  If these symptoms are detected early enough, the entrepreneur can act to prevent significant challenges or even the possibility of business failure that can come from poorly managed growth.

Symptoms of Customer Challenges

Customers are the proverbial “canary in the coal mine” during growth.  Customers provide the earliest warning signs that growth is not being managed properly.

A fundamental growth challenge for early stage business is selling more than the company can possibly deliver.  In their zest to build a successful business, many entrepreneurs get out ahead of their capacity to produce their product or provide effective service.  When this happens, the company’s reputation in the market suffers.

Another symptom that a company is having challenges is when it starts to lose good customers. This may be the result of poor quality, poor customer service, or both.  Customer retention should be a key ratio for every entrepreneur to watch on their dashboard. When customer turnover reads exceed expectations, an entrepreneur should quickly diagnose the problem and take appropriate actions. Customers have little patience with a business that no longer delivers its promised value proposition.

Symptoms of Employee Challenges

Employees are also an important early warning system for growth problems.

Certainly, the entrepreneur should pay careful attention to staff turnover and employee morale during growth.  It can be hard enough to recruit enough new employees to support growth. Needing to also recruit employees to replace disgruntled workers can make it an almost impossible task to keep up with the company’s hiring needs.

Rapid growth often negatively impacts employee efficiency and productivity in their jobs. Employees never seeming to have enough time to get their basic work done or spending most of their time putting out fires may be sure signs that the entrepreneur should slow down growth and take corrective actions.

Other employee related symptoms of growing pains includes poor communication, a lack of understanding of the vision, and a general insecurity among workers.

Symptoms of Organizational Challenges

Finally, there are symptoms at the organizational level that also need to be monitored.

A constant shortage of critical resources, overwhelmed operating systems, and ineffective planning can all be signs that an entrepreneur is not prepared for the growth of the business.  I will address all of these more in future posts.

The most disconcerting symptom is when sales are growing, but profits are plateauing or even declining.

No Single Cure

Overcoming the causes of these and other symptoms is no easy task.  There is not one magical thing an entrepreneur can do to achieve pain free growth.  Over the coming weeks I will be looking in depth at what entrepreneurs can do to help ensure successful growth in their business ventures.

 

Do You Really Need a CFO?

Image by Oliver Menyhart from Pixabay

“Maybe it’s time for you to get a Controller.”

I have said that to entrepreneurs more than once over the past few months.  In every case, all of these companies had already brought in a person designated as CFO (Chief Financial Officer) to lead the financial aspects of their company.  And in every case, that was the wrong type of person to hire for the specific needs of these companies.

What Should be Your First Hire?

Entrepreneurs who experience significant growth in their business may eventually hear this advice, be it from their CPA, their banker, or other entrepreneurs. Financial management in a growing business can become strained.  Eventually, the time will come when the entrepreneur needs to upgradecertain members of the team.

The first instinct of most entrepreneurs seems to be to hire a CFO.  In some cases this may be the right choice, but in many situations a controller or even a senior level bookkeeper might be what is really needed.

Let’s assume what you need to get done is the following:

– Keeps accurate records of financial transactions and also creates basic financial statements (Income Statement and Balance Sheet) using accounting software.

– Performs basic accounts payable management — makes sure bills get paid and records these entries into the accounting system.

– Performs basic accounts receivable management — if the business has to send invoices to customers to receive payment, sends out invoices monthly.

If this is the list of functions that need to be taken care of, you really need a senior level bookkeeper. These are the functions that would be in the job description of an experienced bookkeeper.

What Comes Next?

As a company grows and becomes more financially complicated, a controller adds more horsepower to the financial management team. Depending on the nature of the company, this often happens when the business grows to about $1 million to $3 million in revenues.  (Although, I have seen companies much larger than that get by with a solid bookkeeper and a hands-on outside CPA).

A controller does the following tasks:

– Performs all of the functions of a bookkeeper or supervises the staff that does.

– Creates customized daily, weekly and monthly financial reports to meet the specific needs of a specific business.

– Chooses and maintains financial software.

– Provides basic cash flow management of the business. Major cash flow decisions should still be made by the entrepreneur, however.

Good controllers can pay for their salaries in a growing company.  They do this by helping to create needed financial systems, by keeping costs under control, and by helping to manage cash flow more effectively.

When Do You Need a CFO?

One situation that may require a CFO is if a business must raise a significant amount of outside funding to get off the ground.  This is particularly true if the CEO/founder does not have a strong financial background.

Some businesses may grow to the point that they need a CFO, but this is not true for every business. Many very large organizations don’t have CFOs. If the capital needed for growth must come from complex debt instruments, private equity, or venture capital, a CFO is likely to be an important addition to the leadership team.

A CFO does the following tasks:

– Performs all functions of a Controller or supervises a staff that does these tasks.

– Structures and negotiates complex financing — including both debt and equity.

– Creates complex financial projections to aid in strategic decision making and is an active player in the strategic management of the business.

– Manages banker and other financial relationships for the business.

The Risks of Adding the Wrong Position

One risk of hiring the wrong person is that you end up overpaying for what you really need done.  The typical salary of a controller can often be at least twice as much as the salary of a senior bookkeeper and an experienced CFO earns easily twice as much as a controller.

If a CFO does not have enough work to do in the financial management of the firm, idle hands can become the devil’s workshop.  I have seen CFOs who become overly involved in the strategic decision making that should be the domain of the founders, sometimes creating unnecessary descent and conflict.

The titles “bookkeeper”, “controller” and “CFO” often get tossed around rather loosely. Many entrepreneurs give the title of CFO to people who are not qualified to be one.  They may do this to help bolster the external perception of the company, or simply to offer a nominal reward to someone in place of higher salary. However, to bankers and investors, titles within the financial management of a business have specific meaning.  If you give the title of CFO to someone with the knowledge and qualifications to be a senior bookkeeper, you may destroy the credibility of your business with bankers and investors.

Finding the Right Person

Use your advisors, CPA firm, your banker, and your network of experienced entrepreneurs to determine what type of financial professional your business actually needs.  Once your needs are clearly established, these same people can also help you find a pool of candidates to interview.

Good Debt. Bad Debt.

Image by walkerud97 from Pixabay

Young entrepreneurs generally seem to be reluctant to consider using debt to help finance their businesses.

The reasons they cite are many.  Often, they are concerned that they already have a heavy debt burden due to student loans from college.  Others tell me they watched their parents get deep into debt and don’t want to do the same.  The requirement to sign personal guarantees for business debt terrifies many young entrepreneurs.  More than a few tell me that Dave Ramsey’s anti-debt message shaped their negative perceptions about debt.

When I tell my students that, generally, I prefer debt over equity financing, I see shock on many of their faces.

Bad Debt

There are certainly many instances when taking on debt financing for a business is not a prudent decision.

When I hear of entrepreneurs maxing out credit cards to finance a startup, it sends shivers down my spine.  I know that there are countless stories in entrepreneurship magazines about “heroic” entrepreneurs who went tens of thousands of dollars in debt with credit cards to create incredibly successful businesses.  But for every successful use of credit cards to launch a business, I have seen dozens who end up with failed businesses and mountains of credit card bills that haunt them for years.

Bankers can tell countless stories of business owners with business models that are no longer competitive seeking loans to keep their failing businesses afloat.  Rather than keeping these businesses on life support by continuously pouring money into them, these entrepreneurs need to come to the hard realization that they have come to, what I call, an “Old Yeller” moment.  Sad, but true.

Some debt funds short-term needs for cash, while others fund longer term investments in your business.  However, sometimes we use debt for the wrong purpose.  For example, when I was a young entrepreneur, I used a line of credit to invest in things that were actually tied to growth capital.  A line of credit is meant to fund short-term timing issues with cash flow, such as funding inventory purchases or paying for payroll on a project that will be billed upon completion. I used it for hiring staff and adding new space that would take much longer to generate cash flow. 

Fortunately, I had a good banker who helped coach me on the proper uses of lines of credit. He also provided us with a long-term term loan to use to fund the investments we needed to make in staff and space to grow our company.  I never made that mistake again!

Good Debt

Good debt begins with debt that your business and you can support.  This is how bankers make decisions on making loans.

Bankers always look to multiple means of repayment when making business loans.  The first source of repaying is a healthy business with more than enough cash flow to fund the debt.  The second line of defense to ensure loan repayment is the personal guarantees of business loans by the business owners.  If your financial house is not in order, your chances of getting a loan for your business are diminished.  Finally, bankers will use assets pledged as collateral to pay off business loans, but only as a last resort.

“Bankers only give loans to people who don’t need it,” is a common refrain I hear from small business owners.  The reality is, bankers only give loans to people who they are highly confident can repay those loans.  After all, it is our deposits in the bank that they are using to fund loans.

Bankers understand what makes good debt, and you should understand and follow their criteria for using debt. 

Use With Caution

The requirement of personal guarantees are a sobering aspect of taking on a loan for your business.  Keep in mind, personal guarantees are not only a financial tool used by banks.  It is also a psychological tool.  If you are not confident enough in your business to personally back the loan, then why should the bank?

Another risk with taking business loans is that although your business might be solidly bankable when a loan is made, times can change.  We need to look no further than the thousands of loans that went from safe and solid earlier this year, to being rated as highly at risk for default after pandemic took hold.

When you need to use debt, make it a priority to pay down your business loans as quickly as possibly. Certainly, don’t pay off your loans so aggressively that it hurts your cash flow. However, once you have a good cash position, the next most important goal is to pay off your loans.

The reason I prefer debt to equity is that debt is like a house guest.  When you pay it off, it goes away.  Equity is like adding a new member to your family.  Once you take their money, they are there to stay!

Help for Growing Small Businesses

Owners of growing small businesses are facing unprecedented challenges due to the coronavirus.

Amplify, founded by Belmont University alum Ben Cooper, connects growing small businesses with a team of outsourced COOs.  In the midst of the coronavirus outbreak, Amplify is offering two programs to help small business owners.

Programs

  1. Amplify is partnering with the Austin Shopify Meetup group to host a video conversation next Thursday night (3/26/2020): On Coronavirus: How to Calmly Navigate Through the Storm
  2. Amplify is blocking out 30 minute time slots to help e-com business owners think through and get a fundamental strategy in place for the coming weeks and months (link here)

Ben is a bright guy and someone you can trust.  I highly recommend anything he has to offer.