A shortened version of this article was first published in the 43 Biz Journal city publications across the US.
Smaller companies that successfully grow to significant scale are rare. The barriers to growth beyond $5 to $15 million in revenues are high.
Some companies are founded with the goal of growing to scale and that is the expectation of its founders and investors. Others have been successful as smaller companies and the leadership team believes their business model can be successful in a larger geographic market, by capturing a larger market share or developing related products.
Whatever the circumstances, leaders of companies considering growing significantly larger must start with an understanding of the company as currently configured. They must evaluate whether they have a scalable business and financial model. Equally important will be a thoughtful evaluation of their goals for themselves. Are they prepared to risk failing to get past the barriers to growth. The skills and resources needed to run a smaller company are quite different than those needed to run a successful larger company.
The CEO and key partners – leadership team, investors, other key employees, and board members – must decide if they want, in effect, to re-launch the company on a trajectory towards significant growth. Staying relatively small with a successful business in a technology, product or geographical niche is an attractive option for many companies and their owners. The decision to grow revenues significantly beyond the $5 – $15 million range is a decision to change the company dramatically – the way it is run, the way it is financed, the way it connects with its customers and possibly its leadership.
What Is The Plan for Growth and Ownership?
For those that decide to significantly build their company’s revenues, a smart first step is to outline a game plan for the growth and ownership of the company over the next five years. Each key stakeholder – in some cases including core suppliers and customers – will want to know your plan. They will decide what role, if any, they want to play.
Here is a typical scenario. Your company has revenues of $5 to $15 million. You have demonstrated that your product satisfies a real customer demand. And you have demonstrated that the company can at least break even if not make a profit. The objective of your growth to scale plan could be:
- Grow the company to $30 to $50 million and hold at that level with the expectation that the current owners and key staff will maintain control and have comfortable incomes.
- Grow the company to $30 to $50 million and sell the company to a Private Equity firm or strategic investor who will take over management of the company.
- Grow to the point where the growth to scale model for your company has been successfully demonstrated and sell much or all of the company to a financial or strategic investor who will want your management team to stay in place.
- Grow to $100 million or more of revenue and pursue an IPO to finance further growth and liquidity for investors.
The Growth to Scale Plan™
Growing to scale is not a linear extension of your company’s path to success as a smaller firm. The growth and ownership plan will be developed in concert with a growth business plan – the Growth to Scale Plan™. This plan will include a profile of what the company will look like at scale and the transition plan for getting there. Most companies at this stage have already demonstrated that they can be successful as a smaller company. The issue is whether they can transform themselves and grow to a materially larger company.
The Growth to Scale Plan™ is the unifying concept that investors, your team and corporate partners will want to see before they commit to supporting the growth to scale initiative. The four primary elements of the Plan are:
1. Growth to Scale Profile™ – what the company will look like
2. Changes to core elements of the company to drive the growth
3. Schedule for growth
4. Financing and other resources are needed for success
The Plan will include the Growth to Scale Profile™ and must demonstrate a clear understanding of the company as it would be at scale including why it can succeed in the market place and be profitable. The case will be made that the growth targets can be realistically achieved with the funding proposed.
Overcoming the unique barriers to transitioning from a smaller company to a significantly larger company will be a focus of the Plan. Knowledgeable partners will look for your understanding of these challenges and how they will be addressed.
Growth to Scale Profile™
At the center of your vision for the larger company and the Growth to Scale Plan™ is what I call the Growth to Scale Profile™ – what the company will look like at scale. Core elements of the business model, financial profile, operations’ systems and corporate culture may need to change from what they are as a smaller company.
Your vision for the company at a significantly larger size will be unique to your company and your team. But start with a vision that your core team understands and accepts. The primary elements of the company’s business profile can usually be characterized in five components.
Leadership – leadership of the firm and cultural norms
Model – business and economic model
Products – customer demand for your products accessible by your company
Systems – control of accounting and operations
Finance – access to capital
The few companies that successfully relaunch themselves and grow to $50 or $500 million in revenues adapt to the scaling requirements of these categories. While every industry and every business is different, here are the fundamental barriers to growth in these categories that must be addressed.
The leadership and cultural change from a successful startup or an established smaller company to rapid growth to scale is often the most difficult transition. Loyalty to the team must change to a culture of performance. Many startup co-founders and other key staff do not want to be in a more structured work place and may not have the needed skills or temperament. Different skills are needed from the CEO to the production staff. Some can make this transition. Some cannot.
Startups and small businesses often rely on intense collaboration with the customer and inexpensive yet highly skilled staff. The product or service is customized and the costs of production and delivery are below market. For a startup trying to demonstrate that a new technology or service can gain customer acceptance, this is often the necessary approach. In some smaller companies, the owner is involved with selling and perhaps delivering the product. The business model – how do you make money – should be reconsidered as part of the transition to scale. Can the company’s core competency translate to sustainable revenues and profits? To grow to scale, the company must deliver its products in high quantities at a quality acceptable to the customers with market rate costs. The company must be able to generate EBITDA/profits at scale.
The company needs to demonstrate access to a large addressable market to substantiate its revenue projections. The product strategy – what product are you selling – should also be reconsidered as part of the transition to scale. Moving from selling the hardware to selling the service of using the hardware or giving the “product” away and selling access to your customers are changed product strategy examples. Will customers buy in quantity at the price point needed for profitability? High touch selling to a small number of clients does not scale to successful arms-length selling. Who will sell the product or service – direct, distributors, resellers, etc? The firm must demonstrate that it can convert accessible customers to paying customers with a realistic level of customer contact and a sustainable customer acquisition cost.
Start-ups and small companies can get by with simple accounting and operating systems with minimal need for integration and specialized IT infrastructure. Growth requires more robust, integrated enterprise-wide ERP and operating systems. Accounting and financial systems must be scalable. Large scale systems enable efficient operations and require dedicated information technology resources within the company. The costs and delays inherent in the systems transition are a reality of this process.
Cash and credit fuel growth. The Catch-22 is that without demonstrating that the successful small company can transform its Leadership, Model, Products and Systems the funding will not be available from investors, lenders and suppliers. The passion and commitment that convinced the founders, their contacts and perhaps angel investors to take a chance and fund the startup will not, by themselves, bring institutional and professional investors and lenders to the table.
Significant new capital will be required for most companies growing materially larger. The issues around raising capital will not be addressed here. But the requisite for approaching investors and other financing partners is a clear vision of where the company is going and the plan for getting there. With the Growth to Scale Plan™ in hand and a well done investment proposal, the company can start the long, difficult campaign to secure growth financing.
A special execution challenge for growth companies is changes for the people involved. Often the staff who were essential in making the smaller company successful will not be able to or want to be part of the growth trajectory. Key leadership changes may be necessary. Sensitivity to both the needs of the business and the experiences of the people directly impacted is an important component of the execution plan.
Improve Your Chances for Success
If you are considering growing your company to significant scale, these steps will improve your chances of success.
1. Deeply understand your customer and the value they see in your product. Innovate and adjust.
2. Demonstrate that you have a product or product concept that is scalable.
3. Demonstrate that you have a business model for producing, selling and delivering the product that can grow profitably.
4. Have an open and honest conversation with your team about what this means for them and why you and they should follow this path.
5. Bring your key stakeholders into the process and make sure they are on board. Give shareholders who are not on board and exit now.
6. Develop a Growth to Scale Profile™ of the company – what the company must look like to be successful at a larger scale.
7. Develop a realistic Growth to Scale Plan™ for transitioning the company to the Profile at scale covering the business, product, management, systems and financial elements required for success.
8. Answer the question: Are you the best leader or leadership team for this new phase of the company’s life?
9. Answer the question: Are you and the team prepared to transform the company to be close to the required Profile and execute on your plan?
10. Get funding commitments to support your growth to scale plan before starting.
11. Get ready for a wild ride!
The companies that succeed are those that innovate, build a strong foundation, create a culture of performance, establish a business and financial model that can grow and be profitable, gain access to capital, and align all stakeholders. These are the rare companies that make the transition from initial success and re-launch themselves to significant growth.
[Photo Credit Biz Journals]