As featured on Fortune Term Sheet
Congratulations Ms. Entrepreneur. After years of toiling and challenging insurmountable odds, you’ve finally moved through the gates of start-up hell. You’ve established product/ market fit, you’re 10x better that your competition and you’ve begun to scale customers and revenues. You’ve also assembled a talented and passionate team who is bought into your culture. Take a breath. Take a bow. Now, come to the frightening realization… if you want to build a big company, you’ve got much more work ahead.
The moves you make at the growth stage are increasingly important. Different challenges emerge and the bets become bigger, the stakes higher. Below are four keys you’ll need on the journey as you transition from start up to growth stage mastery. This isn’t an exhaustive list but these four are a good place to start.
Hugely successful companies have a few guys or women who are 10x better than everyone else. These people are often not executives, but rather individual contributors with special gifts. Typically they’re not easy to spot in interviews, and they come in many shapes and sizes – different execs have told me about their “secret weapon” being a sales person, a product designer, a developer.
These hidden gems are so important because they can drive highly disproportionate value. For example, a top notch growth stage CEO confided in me that one guy, a sales engineer, drove half of the $200M exit price he achieved on his first company’s sale. When this CEO joined his second company, he brought this secret weapon with him. The CEO took this second company public and ultimately sold it for over $1.5B. He credits the same hidden gem for creating approximately 25% of the value. One sales engineer. Nearly $500M of value created across two companies. Yes, hidden gems can really move the needle.
As you move from start up to growth stage, you need to identify your hidden gems and find ways to leverage their talent as much as possible. One way to do this is via emulation. For example, if you have a sales person who sells 3-5x more than anyone else, study closely what he or she is doing. As Chip and Dan Heath encourage in “Switch,” are there any “bright spots,” or uniquely successful behaviors, you can isolate and train your other sales people to emulate?
Another way to get the most out of your hidden gems is to keep them focused on what they do best. The temptation with great performers is to promote them. If promotions take these gems away from their core competency (eg, a great sales engineer losing touch with customers as she is moved up to manage all the other sales engineers), you’re detracting from value creation. Find a way to balance career development with keeping your all-stars playing the positions they were born to play.
Find Your Flywheel
As you move from start up to growth stage, your absolute growth targets get larger. For most companies, it gets increasingly hard to scale at rapid rates as the law of larger numbers takes over. As discussed in a prior post, one key to building a really successful company is to get better as you get bigger. Just as a flywheel collects energy over time and then delivers it at rapid and increasing rates, you need to cultivate and nurture sources of potential rapid growth that you can unleash when needed to help propel expansion. How can you do this?
One source of aggressive growth for some successful companies is partners. As Google was ascending to prominence in the mobile market with Android, a symbiotic relationship developed with Samsung that has helped both companies flourish. In the early days of enterprise software, Accenture ignited explosive growth for several application companies such as Peoplesoft. Although you need to be careful – no company is in business to help your business flourish – mutually beneficial partnerships can help propel growth for periods of time.
Sometimes partnerships that drive growth are developed in the field. Other times, especially when you’re trying to get the attention of a much larger company, you may need relationships to help. Cultivating the right set of independent board members, advisors and investors is key. They can help. And, if you’re able to get a flywheel going, growth will get a lot easier.
When you begin to see your core business ramp, it’s tempting to assume you’ve nailed it and start looking for expansion opportunities. Mistaking early success in your core business for an ability to succeed elsewhere can be fatal however. In a world of limited resources, you risk failing to capitalize on the opportunity you’ve created in your core business by letting your focus wander. When payroll outsourcing firm ADP first went public in the 1960s with four main business units, the big question on Wall Street was what would become the “fifth leg of the stool” to fuel future growth. Fast forward 50 years – ADP has a $30Bn market cap with only two business lines, actually shedding two of its original businesses and focusing on core payroll to grow.
Of course you need to continually re-evaluate the marketplace as it shifts and consider options for future growth. In fact, the best growth stage CEOs with whom I’ve worked have all been adept at placing several “small bets” in areas adjacent to their core business, such as international markets, alternate forms of distribution and product extensions. But, these bets are best designed to avoid distraction from the core business, made with limited resources and killed quickly if they’re not working.
Professionalize Your Processes
As a growth stage company, your success is going to be measured on things like revenue growth, operating margin expansion, market share gains and the size of your total available market opportunity. Gone are the days when getting a product out on time, hitting cash burn targets, or hiring a key executive was considered a major victory.
With this shift in expectations, you need to invest in professionalizing the process of running your company. Perhaps most important here, you need to develop of set of metrics that really helps you assess the long term health of the business. Devise these metrics to give you early indicators, or warning signs, of what’s coming up ahead for the business. You may discover that additional capital, for instance, can be invested for high return and growth. Conversely, you may recognize the formula isn’t quite solved yet and that you need to keep iterating before pushing for rapid expansion.
Although your start up culture might not have supported process professionalization, find a way to fuse your culture with the benefits of additional structure. Developing a robust budgeting process may not sound appealing, for example, but if it helps your company serve customers better and in a more timely manner, you’ll get buy in. Similarly, closing the books promptly after a reporting period will add stress on an organization, but if it helps attract new investors, you can link the arduous task to a win for the company.
Nobody said going long to build a highly successful company was easy! But, those in the growth stage who find and manage their hidden gems, nurture flywheels, stay focused and professionalize process will set themselves up for success.