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)

“Mount St. Helens” Recession

Perhaps the recession we are entering into should be called the “Mount St. Helens” Recession.

Mrs. C. suggested this to me on one of our walks this past week.  When she said that the events surrounding the 1980 eruption reminded her of the current state of the world, I knew it was the perfect metaphor for our current and future economic conditions.

A History Lesson

Although us older folks remember the eruption of Mount St. Helens like it was yesterday, many of you were probably not around when this volcano erupted in Washington State forty years ago.

Scientists saw signs that Mount St. Helens was coming to life years before it erupted.  However, concerns heightened in 1980 when the mountain’s activity created thousands of small earthquakes. Then the volcano began to change shape.   The movement of magma upward created a huge bulge on the side of the mountain. As the mountain came to life, it spit out steam and ash.  As the earthquakes and small eruptions intensified, experts predicted an eruption was imminent.  They could not, however, predict the exact time and date.

On May 18, 1980, a massive earthquake from deep within Mount St. Helens caused a huge landslide on the north side of the mountain.  The landslide was followed by a lateral eruption that sent gas, rock, and ash out at over 600 mph, devastating an area of 230 square miles.

The lateral eruption was unusual, so dozens of people who were observing the volcano or just waiting it out in an area they assumed was a safe distance were killed by the blast.

After salvaging much of the lumber leveled by the blast, officials decided to let nature take its course and heal the landscape.  Over the coming years, vegetation grew back, animals returned, and the lakes and rivers that had been choked with mud and debris returned.  For a detailed history of this event, see this link to The History Channel’s website.

The Lessons for Today

As evidence showed that an eruption of the volcano could happen at any time, people were warned or given precautions to take – some listened, some chose not to.

Just as the days, weeks, and years before Mount St. Helens erupted, we had signs that we might face a crisis. Epidemiologists warned of a possible pandemic. Economists insisted that the economic boom that we faced was becoming fragile and unsustainable.  But just as with Mount St. Helens, nobody could have predicted when things would turn, nor the immediate devastation that would result.

The coronavirus pandemic seemed to come out of nowhere.  We were living our lives, planning for our spring breaks, starting new businesses, getting ready for new careers, and then suddenly everything catastrophically changed in what seemed like an instant.

The landscape after the eruption of the volcano looked like a moonscape.  How could it ever return to normal after such devastation?

And yet, it did return.  Not exactly like it was before, but it did return to a thriving ecosystem, and much more quickly that many experts predicted.  It showed the resiliency of nature.

If we let things take their natural course, our society and economy will come back.  Not quite like before.  Hopefully, through all of us working together, it will be a bit better.  Consumers will begin to spend again. Small businesses will start back up. Entrepreneurs will find new opportunities in the ashes of this recession.

A Note of Caution

One of the lessons of Mount St. Helens is that something like its 1980 eruption will come again, if not on that mountain, on one of the string of volcanoes that make up the part of the ring of fire circling the Pacific Ocean that cuts across the Western US.  It may not come for many decades or even centuries, but it will happen again.

My parents and grandparents never forgot the lessons of the Great Depression.  They tried to pass them along, but over the generations, memories faded.  None of us alive today will ever forget these challenging times. But to our grandchildren and grandchildren’s children, the events of 2020 will just be a vague part of history.

Let the wafts of steam that still come out of Mount St. Helen today act as a warning:  sometime in the future, generations to come will also face devastating events in their lives.

But just as nature is resilient, so are we.

Photo credits:  Jeff Cornwall

 

Resolve

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Image by symphonyoflove from Pixabay

What I am hearing in the texts, emails, and calls I am getting from entrepreneurs is resolve.  They are determined to get through all of this, by doing whatever it takes.  These entrepreneurs have the resolve to learn from what we are going through. They are committed to becoming even stronger on the other side of this chaos.

Countless Stories of Resolve

One of my alums, who is a tech consultant, texted me yesterday. He told me that, in one single day, they lost all of their anchor clients.  His next comment?  He said that it is an important lesson in managing risk that he wants to share with others going forward. Resolve.

I have several alumni entrepreneurs (and several friends) who own businesses tied to the music industry.  One of them emailed me to let me know that all of her planned activities tied to live concerts were indefinitely suspended. She went on to tell me that she is pivoting her business model.  She is building her platform to help keep artists and fans connected during this time of cancelled concerts. Resolve.

Another alum told me they were temporarily closing down their operations, which are in multiple cities across the country.  His next sentence was an offer to help Mrs. C. and I if we need anything. Resolve.

Countless restaurateurs who I know are scrambling to sell gift cards, build up their take out business, or deliver prepared meals as a new service for their customers until they can open again. Customers are doing what they can to support these small business owners. Resolve.

An alum whose business is tied to live speaking events (all cancelled for next several weeks) encourages all of us to take what comes next “one day and one step at a time.”  Resolve.

We’ve Seen This Before

In looking through past posts at this blog, it surprised me to see how many have been about recessions.  I guess that happens when you’ve been blogging for 16 years.  In the early days of this blog, back in the early 2000s, I found several posts that lauded the entrepreneurs’ critical role in the expansion that had followed the 2001 recession. This recession came on the heels of the dot.com bubble bursting and 9/11.

Entrepreneurs led the recovery after the 2008 real estate collapse.  A post that stood out was one based on a talk I heard from venture capitalist Tim Draper, who founded the firm now known as Threshold.   I wrote in that 2009 post:

The genesis of the tech boom of the past decades began during the recession of the early 1980s.  Microsoft was born during the recession of 1974.  Semi-conductors first came to market in the recession of 1957.  Even during the Great Depression we saw the founding of Hewlett Packard, Texas Instruments and United Technologies.  He assured us that “innovation is relentless.”

Draper predicted we would see “pilotless electric cars,  e-education for the masses, all computing from the clouds, genetic disease prediction.” These and many other innovations Draper foresaw have all come to be over the past decade.

We know that it is the creative destruction and innovation from entrepreneurs that creates real economic growth.  Schumpeter helped us rethink the role of entrepreneurs in our economy almost eighty years ago. He helped bring entrepreneurs out of the shadows of economic theory.

My Own Journey

In reflecting about all that we are going through, I have been remembering the challenges in my own journey.  I prepared a couple of slides to share with my students.  They will get this presentation this weekend online, since that is how we will be meeting for the rest of the semester (which would have been almost impossible a decade ago).

The first slide highlights the five major economic downturns that I have experienced in my work life prior to the one we are about to experience.  The downturns are shaded in grey, and the events surrounding each are in red.

And yet, life goes on.

This slide shows how Mrs. C. and I continued to move ahead with our lives during all of these ups and downs.

After the back-to-back recessions in the 1970s we went to college.  We saw a better life ahead of us if we pursued a college education. During and after the severe double dip recession in the late 1970s and early 1980s, we got married, I went to grad school, we started having a family, and we bought our first house (with a double-digit interest rate mortgage).  The 1991 downturn came at the same time we were raising money to expand our healthcare business.  After the 2001 market crash and 9/11 we sent our kids to college.  The events in our lives around the 2008 recession involved the next generation in our family — marriage, grandchildren, homeownership, and business startups.

The resolve we are seeing among entrepreneurs will pay off for our economic future.  It will take time and hard work, but these entrepreneurs are the ones who will lead us into our next economic expansion….and we will have one!

May Updates on Small Business Economy

While April showers have brought wonderful May flowers in our backyard, entrepreneurial economy is not blossoming going into the summer.

Here are some highlights from various indicators:

  • 71 percent of small business owners still believe the United States economy is in a recession according to results of the 2012 U.S. Bank Small Business Annual Survey
  • The SurePayroll Scorecard data shows that month-over-month, hiring and paycheck size show little change, both down 0.1%, while year-over-year, hiring is down 1.5% and paychecks are down 1.1%. Optimism among small business owners is also down from last month.
  • Intuit’s Small Business Revenue Index shows that revenues have been growing slowly, while their Small Business Employment Index shows that employment is growing slowly, by 0.2 percent in May.
  • Data from nominees to Ernst & Young’s Entrepreneur of the Year program, shows that over the last two years employment growth in this select group of high-growth companies was 31% job growth. While this sounds promising, these businesses are hard-wired for growth, so in many ways these figures are not as robust as I would hope to see.
  • William C. Dunkelberg at NFIB said this today about their latest small business survey, “May was a stagnant month for employment in the small-business sector, with the net change in employment per firm, seasonally adjusted coming in at ‘0’.”

Small Businesses Still not Hiring

It is getting to be a broken record — we need small businesses to lead us into a real recovery that is based on job growth, but small businesses are just not ready to increase their workforces.

Two job indexes released this week show mixed results.

SurePayroll Scorecard data shows that month-over-month, hiring is down -0.1% and average paychecks are down 0.3%.  Looking at this year compared to 2011 at the same time, hiring is down 1.3% and paychecks are down 1.3%.

The same survey showed a drop in optimism among small business owners to 65%, down from last month’s 70% finding.

Like the recent NFIB surveys, those small businesses looking to hire are finding it a challenge, particularly when it comes to finding qualified technology, sales/marketing, customer service, administrative workers.

The Intuit Small Business Employment Index shows that small business employment increased slightly — 0.2 in April.

Taken together it paints a familiar picture — no recovery led by small businesses is visible at this time.

There’s a Storm Brewin’

Recession clouds appeared in the skies over Main Street, according
to the most recent National Federation of Independent Business Small
Business Economic Trends member survey. The NFIB Index of Small
Business Optimism fell 3.3 points in March to 89.6 — its lowest
reading since the monthly surveys were started in 1986, and the lowest
quarterly reading since the second quarter of 1980. The decline was
driven by a sour outlook for business buy phentermine/topiramate conditions and real sales growth,
accounting for half the decline in the Index. Weaker plans to create
new jobs accounted for 21 percent of the decline.

“We are seeing recession readings,” said NFIB Chief Economist William Dunkelberg.

What is worse is that the labor market is still somewhat tight and price pressures continue to push costs up.

More signs that stagflation might be on the horizon.