Without continual growth and progress, such words as improvement, achievement, and success have no meaning.
—Benjamin Franklin
If you think that attempting to cover business law or accounting in a single chapter is trying to do a lot with a little, imagine doing it for the management and growth of a successful business. A whole business library at a place like Dartmouth has only the smallest fraction of the existing knowledge and literature, yet if you want to make a vibrant, valuable enterprise out of your start-up, you need to learn this. There are not many alternatives: maintain a small company that provides you and your team a nice living—a so-called lifestyle company, because it supports a particular lifestyle—or sell the company early for whatever it will bring.
Managing growth differs from conceiving and launching. It involves not only new challenges but a different experience and requires a different mindset. Starting a company is obstetrics; growth is pediatrics. In this book we’ve focused on conceptualizing and launching a business to the point where the business is viable and capable of growing. In one sense, once you’re established, the start-up job is done. But remember that how you launch often has a profound effect on your chances of surviving and growing the enterprise to its full potential. Many things you do in those early stages set up or foreclose opportunities in foreseeable ways. From the start, be growth-oriented and plan for growth. The thoughts that follow may help frame your expectations about that postlaunch future, sharpen your sense of the possibilities and the challenges, help you imagine what you may see when you get there, and give you options for what you can do about it.
Almost 50 years ago the sociologist Arthur L. Stinchcombe compared outcomes for older, established organizations and new ones. He found significantly higher rates of failure in new organizations. He proposed the term liability of newness for this phenomenon. He wrote: “New organizations, especially new types of organizations, generally involve new roles, which have to be learned; … the process of inventing new roles, the determination of their mutual relations and of structuring the field of rewards and sanctions so as to get the maximum performance, have high costs in time, worry, conflict, and temporary inefficiency.”1 The new enterprise has to learn or invent new roles, processes, and tasks, all of which can be costly diversions from pressures of operations and selling. The new company lacks a track record with outside buyers and suppliers.
These are significant challenges for a new enterprise. The liability of newness has been studied extensively, and not surprisingly, a number of researchers have confirmed that failure rates roughly track the age of an organization—the older the organizations, the lower their rates of failure.2 Looking more carefully, it turns out there is a large range in the outcomes of survival and success.3 One of the drivers of success is leadership: leaders who “can and do influence the performance of firms, particularly young and small ones.”4
If you launch successfully, it seems the liability you face is not being new but having to grow up. Not surprisingly, this has been studied too. When you look more carefully you see an important stage that comes after first growth. A term for this phase has been proposed: the liability of adolescence. Here the challenges shift from honing an idea, devising an executable strategy, securing resources to launch, and proving the viability of the idea making sales to customers, and setting up operational and managerial functions.5
In one sense, this sounds like the same survivability problems Stinchcombe identified, but we miss an important point by thinking that the risk of failure is highest at launch and declines steeply afterward. This leads to a sense of complacency, a feeling that if you launch successfully and prove your idea in the marketplace, it will get easier from there—the risk will go down. In fact, the liability of adolescence highlights a crucial point: The risk curve is U-shaped. Mortality risks actually peak between 1 and 15 years after a successful launch: “In an early phase, referred to as adolescence, death risks are low, because decision makers are monitoring performance, postponing judgment about success or failure. Meanwhile, organizations often live on a stock of initial resources. In a later phase, initial monitoring has ended and organizations are subject to the usual risks of failure.”6 In other words, the risk goes up after a successful launch:
instead of being a time for entrepreneurial celebration and relief, a period of over 50% growth is a time for wariness and some very difficult decisions. Such firms face a fragile transition: they are beyond being intimate, cohesive entrepreneurial ventures, but they have not yet become secure, stable entities. Not only are they in flux, but these firms are often disoriented by the pace at which change is occurring.7
This is less appreciated by most entrepreneurs than it should be. When you assume that your risks are dropping when in fact they are increasing, you find yourself lulled into misplaced complacency. Worse, you start to focus on solving the wrong problems. The implication: If you have been worrying about launching successfully and now you’ve actually cheated fate and done it, this is the time to start really worrying. Not only do you have new things to worry about, there are more of them. The skills and mindset that got you this far probably are not going to be useful for addressing what’s next. The challenges are no longer about proving the market and increasing sales. They have shifted to learning how to build a viable, efficient organization—in short, not just a proving machine but a going concern. Further, the focus shifts from how to launch and whether to pursue to whether to grow and how to do it.
Growth alone does not necessarily guarantee rich enterprise value, but the two tend to go together. Profitability is important too, but acquirers generally pay most aggressively for growth. Static earnings bring poor multiples on cash flow. Growth actually promotes viability: “An enterprise that is self-sustaining can enter a virtuous cycle: expectations of longevity attract customers and other resources that further consolidate [a company’s] position and open new opportunities.”8
Generating consistent growth is not easy, and growing brings a raft of challenges and problems. However, not growing often brings risks of its own: losing competitiveness, failing to innovate, eventually being forgotten in the market. Always maintain the search for new opportunities and competitive advantages, but at the same time be vigilant that you and your company do not lose focus. Yes, entrepreneurship is the pursuit of opportunity without regard to the resources available and no doubt it’s opportunistic skill that got you this far, but chasing too many opportunities can be just as fatal as not seeking enough. “Left untended, growth will eventually overwhelm an organization.”9
How do you grow in a healthy way? Often entrepreneurs prioritize building sales revenue over preserving profitability. The idea is that conquering market share is more important and the company can be concerned with profitability later. Venture investors like to see their companies invest heavily in building sales volumes and revenue and shift to a few quarters of profitability just before going public. In the crazy Internet boom years, even the shift to profitability was forgotten, with mostly disastrous results for investors and companies.
When successful growth drivers are studied, it turns out that profitability is a better focus if your goal is long-term survival and ultimate enterprise value. In other words, growth for its own sake, at the expense of profitability, usually doesn’t work out well. Researchers at the Queensland University of Technology in South Brisbane, Australia, studied 3,500 small businesses over time, looking at the relationship between profit or growth orientation and successful growth. They found that “for both young and old firms a focus on achieving above-average profitability and then striving for growth is a more likely path toward achieving sustained above-average performance than is first pursuing strong growth in the hope of building profitability later.”10
Managing growth means focusing on two dimensions simultaneously: external and internal. Externally, the focus is on market forces, customer segments (are there more?), innovations, rivals and substitutes, resources, and suppliers. Often the markets that launch a company are too small to sustain growth. Remember Moore’s early adopters and majority markets. There are almost always more market segments to go after once an initial segment has been proved. Suppliers and vendors, especially outsourced manufacturing and services, may have to be changed to meet increased volumes. Competitors who ignored you on launch probably will take you seriously now, confronting you with new challenges, forcing you to focus on substitution, potential intellectual property infringements, switching cost issues, and stresses in the market. Brand building becomes important. Access to additional capital and resources becomes an issue at a new level of volume and, often, complexity.11
Internally, the people, the structures, and even the culture that got you this far often are not adequate for the next stages. What internal management processes will you need to change and build now? Most likely, you will conclude that the answer is almost everything and all at once. How can all this change be reduced to defined execution plans that can be structured and coordinated? Who will do the work? We’ll discuss this further in a later section.
Dealing with accelerating growth (early) and dealing with slowing growth (later) pose different problems calling for different responses and often different people. Perhaps most challenging and alarming, who you are and what you are good at may become one of the biggest issues of all.
If you have launched and are growing, your focuses and challenges will change dramatically, not least with respect to yourself—your sense of who you are and where you fit in the organization. No doubt you brought important entrepreneurial skills needed to launch and grow: boundless optimism and self-confidence, opportunism, flexibility and agility, a willingness to do anything and everything that had to be done at any given moment. As the enterprise grows, however, new skills and operating behaviors will be needed: delegation, cost control, efficiency in operations, people management skills. Whereas once you had to be on top of everything—perhaps to the point where nothing material could happen without you—as you grow, you’ll find that you can manage less and less hands-on (see Figure 21-1):
In seeking higher growth entrepreneurs will need to rely on capable managers—leadership teams with entrepreneurs in more specialized roles suited to their expertise and interests (marketing, technology). … To pursue growth they must delegate responsibilities to others, work as a member of an effective leadership team, and in some cases, step aside and let others make key decisions.12
If the company is going to grow, the founders have only three options: grow with it and build their leadership skills, bring in experienced leadership and take an alternative position, or leave the company. The pace of growth affects the nature of management skills you need (Table 21-1).13
Figure 21-1 As the company grows, the founding CEO’s role shifts from hands-on to managing the work of others.
Table 21-1 Growth Considerations at Three Levels
The entrepreneur has vision and creates companies out of opportunities. The manager is an organizer and a planner. The entrepreneurial leader blends the two, working at a high level to ensure that culture, systems, and operations maintain an opportunity-driven corporate personality while protecting competitive advantage and maintaining profitability.14
The roles of entrepreneurs, managers, and leaders are detailed in the list that follows.
Locate new ideas.
Establish and implement a vision.
Build whatever organization they can to pursue the opportunity.
Lead and inspire.
Maintain operations.
Plan.
Organize.
Staff and control.
Enhance efficiency.
Supervise and monitor.
Maintain consistency and predictability.
Maintain core businesses while exploring new opportunities.
Establish a vision and empower others to carry it out, ensuring accountability.
Maintain culture, structure, and systems.
Remove barriers.
Develop people and groups.
Orchestrate change.
Delegation does not come easily to many entrepreneurs even if it does free up their time and energy to focus on what is important, not merely what is urgent. Delegation means organizing people and turning them loose to carry out objectives. It does not mean controlling them closely, doing their thinking for them, or, worse, doing everything important oneself. Admittedly, delegation often starts as assigning specific tasks, but eventually it means assigning problems, not procedures, and letting people work out solutions for themselves, even if at first the solutions seem less effective than the ones you would have come up with yourself. This is part of developing people, not just developing controls and systems. It means letting people make mistakes and learn from them, something not every manager or employee can embrace.
Not every entrepreneur can make the transition through these roles. When this is the case, the question becomes whether the entrepreneur can give the company freedom to make the transition or will hold the company to the pace of growth he or she can manage personally. At a distance, the choice of prioritizing company growth or personal control seems a dispassionate one, a choice that seems should not be either-or. In the heat of the moment, though, it is not nearly so cut and dry, and that is why the heat of the moment is not the time to think about it. Many entrepreneurs fail to think about these things at the beginning: who they are, what they are capable of, and what they really want. Then, when the time comes and circumstances demand that they share control so that the company can grow, they find themselves unable or unwilling to do it.
This issue has been studied, and the findings are clear: Few founders can take a company the distance if growing to the full potential of the idea is the goal. In the late 1990s and early 2000s Noam Wasserman at the Harvard Business School studied 212 companies, looking at the question of success versus how much control the founding CEOs maintained.15 “By the time the ventures were three years old, 50% of founders were no longer the CEO; in year four, only 40% were still in the corner office; and fewer than 25% led their companies’ initial public offerings.” Four out five were forced out by investors. Wasserman concluded, “The manner in which founders tackle their first leadership transition often makes or breaks young enterprises.”16
The transition to structure, policies, and procedures is often a hard one, and not everyone on early-stage teams makes it. As an early-stage enterprise moves from the chaos of the launch to the discipline of structures and systems, it is necessary to think about some of the wide areas of activity that need structures, processes, and people to manage all the mushrooming detail. Administration and operations expand with growth in the following areas:
Cash management
Transaction processing
Payroll processing
Time and expense reports
Benefits plans and administration
Accounting and reporting
Inventory planning, systems, and controls
Fixed assets management
Insurance
Equity/incentive compensation plans
Office operations
Board and investor relations
Tax accounting processing
Information technology infrastructure
Legal
Regulatory compliance
Executive teams must recognize when it is time to put procedures and policies in place to create what Peter Drucker calls “purposeful innovation” or “entrepreneurial management.”17 However, putting structures and procedures in place requires employees to adjust, to change their habits. Adjustment almost always creates issues, but management practices can help in this area.
Michael J. Roberts of the Harvard Business School has a helpful hierarchy for thinking about this transition:18
1. Doing it yourself.
2. Managing the behavior of others.
3. Managing just the results (setting goals, measuring results) and letting people work out how to get there.
4. Managing context—the people, mission, values, culture, and direction.
The primary concerns are as follows:19
Recruiting and hiring good people to build a professional team, especially managers (this was covered in Chapter 10).
Coordinating among a growing array of independent work groups and departments.
Balancing profit and growth.
Creating controls and systems (especially performance assessment reporting and management; this was covered in Chapter 19).
Defining structure, policies, and lines of reporting.
Creating reporting systems and using them to manage larger groups of people.
Defining operating procedures and authorities.
Defining policies to ensure proper compliance and operations.
Creating and perpetuating culture.
Gathering intelligence and information: Where will input come from? Scanning the environment is critical, for example, getting ahead of changes in the environment or business cycle such as recessions and high-growth periods.
Budgeting, controlling costs, and making efficient use of capital and human resources.
Launching new initiatives to maintain competitive advantage.
Managing an expanding universe of stakeholders: customers, vendors and suppliers, boards, investors, owners, employees, community.
While doing this, it is necessary to maintain the entrepreneurial culture that created your success in the first place. This is hardly easy.
Corporate culture is one of those buzzwords that can be used to mean so much that it ends up meaning little or nothing. Still, it’s a critical concept. At its most basic, it refers to the way the people in a company think, act, and relate to one another. It includes values, practices, presumptions and accepted knowledge, ethical frameworks, and even basic behaviors and protocols. You probably won’t be surprised to hear that emotions are a key factor in corporate culture and that culture is fundamentally influenced by founders and leaders. Daniel Goleman has written a number of books on emotional intelligence and corporate culture.20 Corporate culture always exists, whether it is deliberately fostered or happens on its own, and it generally reflects the individual culture, values, and personality of the leaders. It can be transformed, but leadership has to do it.
Here is the issue: Making the transition from launch to growth means that the culture has to change. In the early days of the venture, company culture is a natural outgrowth of the core people: a set of assumptions and shared values, a work style and ethic. A good culture is critically important as a performance driver and, in a start-up, helps foster creativity, diligence, and a sense of ownership in the founders and employees. However, the very traits that often make the difference between success and failure—freewheeling innovation, high flexibility so that anyone can pitch in to do almost anything, fluid structure, moving fast without lots of controls and reporting—all can be fatal to more complex and high-volume operations. The transition to growth requires that you preserve the optimism, creativity, and faith in your products that made the launch successful while at the same time settling into more managing, structuring, and results-focused reporting. Developing a persistent corporate culture and, more important, preserving it and disseminating it across a larger and more diverse group of people becomes increasingly complex and difficult. But it is increasingly important as the head count and scope of operations grow, because the founders no longer can reinforce all those things in one-on-one interactions. Company performance and the ability to attract and motivate the best people depend on a vibrant and positive culture.
Many people who are attracted to the start-up world love the atmosphere, the lack of structure and rigidity, and the chance to improvise and be creative. The unrealistic ones believe it can always be that way, but you can’t avoid the challenges to culture that growth brings. A smart founding team faces up to this reality from the very beginning and goes into the start-up with full acceptance of the fact that the fun, freewheeling stage eventually will end and that making a transition to more structure and less improvisation is a sign of success, not failure. When expectations on this point are more realistic, the transition can come sooner and more smoothly, and the company can remain a fulfilling—if different—place for the team members who made it possible in the first place.
Eventually almost every successful company grows to the point where it needs a professional management team and becomes less and less a place for people who love the early stage. Experienced start-up entrepreneur types have been through this enough times to know that it is natural and inevitable. Generally they make the cultural transition or move on gracefully when the structure gets to be too much for their taste. For others it may not be so seamless. With this in mind, from the beginning you should create a fluid system that keeps the team and the corporate structure stable while members join and leave. Among other things, this means good vesting policies and clear work or employee agreements with team members. Most of all, it means managing expectations from the very beginning so that the changes surprise no one. If you do it correctly, changes will be seen as a positive, not a tragedy in which something good and beautiful was ruined by success.
Overhead is costly. Having too many people around weakens a culture of efficiency and productivity. It’s tempting to hire too quickly as growth takes off. No doubt you have to grow to meet the demands of an expanding business, but take care not to build expensive staffing levels that may be difficult and costly to shed if times change and you find you have overrun your needs. It’s never easy to down-size a company for the people whose lives are disrupted and for the company that’s left behind. When you can, define what you think is the base load need for people—the level of staffing you need to handle workloads near the low end of the range—and outsource to fill the greater needs that happen only occasionally in peak periods.
Motivating, retaining, and developing employees are critical to the success of a company. In the early days you won’t have much time to think about this and not many employees to make you worry about it. When growth demands that you expand the employee pool, you should plan to shift increasing amounts of your time to recruiting and hiring good people (Chapter 10) and then think about how to get the most from them. This is often a jarring transition for founder-leaders. You must decide to what extent you want to promote from within or hire from the outside. You should invest in helping existing employees with education, training, and systematic advancement. This is a great motivator and an effective recruiting tool, but it can be costly and time-consuming. It often takes more time than you have to get the talent levels you need, and frequently people don’t develop the way you would like. Hiring from the outside can bring experience in-house, but often this creates hiccups around corporate culture and fit or disruption caused by misjudgments in hiring. Bringing in unknowns from the outside always carries a measure of uncertainty that you don’t have with existing employees you already know, though uncertainty means newcomers can be better than you expect or worse. There is no right answer. In any case, always plan on spending at least some HR dollars on education and training both as an employee benefit and to build more value into your people. Over time, decisions will have to move closer to the action through decentralization, but people need to be prepared for this. That’s the job of a good training and education program.
Early in your growth bring in a professional experienced in both of the main areas of HR and in working in an early-stage, growing company. This person will help you with recruiting; with the policies, procedures, and structure; and with ongoing programs to incentivize and develop employees.
Motivating people is the last issue we will mention here. How you do it will change as you grow, of course, but it should be part of the corporate culture from day one. Motivation starts with what researchers and consultants call employee engagement. Employee engagement generally is seen as a combination of emotional commitment, attachment, and behavior that leads to a heightened effort on the company’s behalf. Consultants and researchers look at how people feel connected to their jobs, how satisfied they are, how hard they choose to work, especially how far to push in going the “extra mile,” and how likely they are to stay with the company (retention). Good employee engagement is linked to good outcomes. “There is clear and mounting evidence that employee engagement is correlated to a number of individual, group, and corporate performance outcomes including recruiting, retention, turnover, individual productivity, customer service, customer loyalty, growth in operating margins, increased profit margins, even revenue growth rates.”21 Engagement correlates strikingly with job performance as rated by supervisors.22
A 2006 metastudy of 12 major research studies on the drivers of employee engagement found eight major factors that enhance employee motivation and engagement:23
1. Trust and integrity. The degree to which employees believe managers are concerned about their well-being, tell the truth, communicate difficult messages well, listen to employees, and follow through with action demonstrates the company’s goals and values through the managers’ behavior.
2. Nature of the job. The content and routine of the job, the degree of emotional and mental stimulation it affords, autonomy, and opportunities to participate in decision making.
3. A sense of impact. Seeing a line of sight between individual performance and company performance, understanding company goals and performance, and knowing how the employees’ efforts contribute to success.
4. Career growth opportunities. The degree to which employees see future opportunities for growth and promotion and have a sense of a clear career path to advancement.
5. A sense of pride in the company. The amount of self-esteem an employee derives from being associated with the company. This is important in motivating employees to proactive actions beyond the bare scope of a job: creativity, valuable ideas, referring customers and prospective employees.
6. Coworkers and team members. The tenor of relationships with other people in the company.
7. Personal development. The degree to which an employee feels that specific efforts are being made to develop her or his skills and knowledge.
8. Personal relationship with managers. How valued personal—not professional or job-related—relationships with direct managers are. Some studies show that this is the single biggest driver of engagement and motivation.
Note that pay and benefits are not on this list. That is not because they weren’t investigated. It’s because pay and benefits generally don’t turn out to be major drivers of employee engagement and motivation.24 This finding has persisted over many years and a number of studies. When managers are surveyed about what they believe to be drivers of employee engagement, they usually put benefits, working conditions, and pay, especially incentive pay, at the top of the list. It turns out that pay and benefits are important recruiting and retention tools and that their absence causes dissatisfaction. However, they have limited value in motivating employees, especially if one is looking for internal motivators that lead to extra effort, creativity, and initiative to go beyond the defined limits of a job and generate value for the company.
This is where the intangible motivators are critical. “An employee’s sense of achievement, opportunity for advancement, and recognition by one’s manager were shown to be ‘motivation factors’ which led to greater overall satisfaction with one’s overall job experience,”25 and they cost little or nothing. Employees often say one of the biggest drivers in motivating them is to say thank you—and mean it. Leadership ought to pay a lot of attention to this simple and effective practice. The bigger and more decentralized a company gets, the more important it becomes. Research bears out the idea that small companies have a decided advantage in terms of reported employee engagement.26 Sadly, for many larger companies, this often gets lost altogether.
The time to anticipate sustainability and growth is the day you first start business planning. You don’t need to plan every detail, but you need to plan a business that won’t just launch successfully but grow and prosper. Many of the things you put in place—from expectations, to culture, to the people you choose—will have a huge effect on the chance that you will transition successfully from proof of concept to a profitable, growing, going concern. If you get it right, you not only will have fun and make profits but will have something to sell for a great price someday, if and when you’re ready.
What is your plan for growth? How much do you want and how soon?
How will you know when it is time to start structuring?
What will be your philosophy on policies and procedures? Do you have one? If not, how will you go about thinking this through? Who will be involved?
Where do you see yourself fitting in as the company grows?
1. Stinchcombe, Arthur L., “Social Structure and Organizations,” in Handbook of Organizations, James G. March, ed. (Chicago: Rand McNally, 1965): 148–149.
2. Brüderl, Josef, and Rudolf Schussler, “Organizational Mortality: The Liabilities of Newness and Adolescence,” Administrative Science Quarterly 35, no. 2, (September 1990): 530–547.
3. Cafferata, Roberto, Gianpaolo Abatecola, and Sara Poggesi, “Revisiting Stinchcombe’s ‘Liability of Newness’: A Systematic Literature Review,” International Journal of Globalisation and Small Business 3, no. 4 (2009): 374–392.
4. Eisenhardt, Kathleen M., and Claudia Bird Schoonhoven, “Organizational Growth: Linking Founding Team, Strategy, Environment, and Growth among U.S. Semiconductor Ventures, 1978–1988,” Administrative Science Quarterly 35, no. 3 (September 1990): 504–529.
5. Brüderl and Schussler, 1990.
6. Ibid.: 530.
7. Hambrick, Donald C., and Lynn M. Crozier, “Stumblers and Stars in the Management of Rapid Growth,” Journal of Business Venturing 1 (1985): 31–45.
8. Bhide, Amar V., “Building the Self-Sustaining Firm,” 1995. Harvard Business School Case 395–200.
9. Bygrave, William D., and Andrew Zacharakis, The Portable MBA (Hoboken, NJ: Wiley, 2010): 363.
10. Steffens, Paul, Per Davidson, and Jason Fitzsimmons, “Performance Configurations over Time: Implications for Growth and Profit-Oriented Strategies,” Entrepreneurship: Theory and Practice 33, no. 1 (2009): 125.
11. Bhide, 1995.
12. Bygrave and Zacharakis, 2010: 358.
13. Ibid.: 359.
14. Ibid.: 372–373.
15. Wasserman, Noam, “The Founder’s Dilemma,” Harvard Business Review 86, no. 2 (2008): 102–109.
16. Ibid.: 102.
17. Drucker, Peter. Innovation and Entrepreneurship. (New York, NY: Collins Business, 1993): 28, 143, 188.
18. Roberts, Michael J., “Managing Transitions in the Growing Enterprise.” Harvard Business School Case 393–407, 1997.
19. Ibid.: 389–390.
20. Working with Emotional Intelligence (1998); Primal Leadership: Realizing the Power of Emotional Intelligence (2002); Primal Leadership: Realizing the Power of Emotional Intelligence, with Richard E. Boyatzis and Annie McKee (2004); The Emotionally Intelligent Workplace: How to Select for, Measure, and Improve Emotional Intelligence in Individuals, Groups, and Organizations, with Cary Cherniss (2001); Promoting Emotional Intelligence in Organizations, with Cary Cherniss and Mitchel Adler (2000).
21. Gibbons, John, “Employee Engagement—Current Research and Its Implications,” Conference Board Report Series (New York, 2006): 10.
22. Corporate Leadership Council, “Driving Performance and Retention through Employee Engagement,” Corporate Executive Board, 2004.
23. Ibid.: 6–7.
24. Ibid.: 6–7.
25. Ibid.: 7.
26. Ibid.: 7–8.