Know your next growth hurdle - before it arrives. by Startup Company

Inspiration articles for start-ups Article #27 Version 1.4 Development Area: Business Concept (shaded area for development) Theme: Growth

Know your next growth hurdle – before it arrives As entrepreneurs, we face many challenges or hurdles at all phases of development from idea to growth. No matter how well we resolve each obstacle, it seems there are constantly new challenges which simply arise to fill the empty space. So how can we better predict some future barriers to growth and become better able to overcome them? By David Madié, cofounder and CEO of Startup Company

The vast majority of challenges, that start-ups encounter, matures. This is illustrated in the model “life-cycle” on the from early stage to the more mature are the same. This next page showing six stages of a company’s development: applies even though the start-ups are in completely different pre-start, start-up, pre-growth, growth, maturity and industries and sell different products and services. In the transition. same way that childhood diseases strengthen a child’s The division of these six stages is just one of many ways immune system, these challenges that all businesses face are we can consider a company’s life-cycle. The purpose of the necessary to build the company’s business immune system. Life-Cycle model is to interpret the different stages of a For example, when at the start, the business lacks liquidity, company’s development over time. Like the stages this stage forces a company to be good at collecting on its experienced in a person’s life, these stages of business accounts receivable or money owed. The ability to collect accounts receivable ensures the company’s survival when “In the same way that childhood diseases strengthen a later it looks to grow. child’s immune system, these challenges that all While the problems and conflicts present themselves on a daily basis, these businesses face are necessary to build the company’s business immune system.” challenges can be seen instead as belonging to natural and expected phases: challenges that a company must development have some common traits that many necessarily face and live through in order to evolve. One can companies experience in a similar way. The important observe in different companies how, almost identical understanding rests in the challenges that follow from the business challenges succeed each other as the company development phase of the Life-Cycle as the company grows

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The Lifecycle: The path to growth and beyond

PRE-START

START-UP

PRE-GROWTH

GROWTH

MATURING

TRANSITION

from from pre-start, through growth and to the transition stage. Beating around the bush in the pre-start phase The first stage in the start-up company’s life curve is the prestart phase. This stage takes place before the entrepreneur has even established the company, while the entrepreneur is thinking about and preparing for start up. What characterizes the pre-start phase is that there is great uncertainty about everything. The idea is still on the drawing board and has not yet be thought through and tested. But the entrepreneur feels strongly about the idea and believes in its sustainability. Positive attributes to this stage are passion and enthusiasm. Negative attributes to this stage are fear of the unknown and fear of having the idea stolen. The pre-start phase can also be characterized by the fact that there is not yet enough motivation to get started. That is why some entrepreneurs are still beating around the bush and are only thinking about starting. At the worst, this process can lasts for years or never end. At this stage, the danger is that the company, so to speak, dies before it was even born. To avoid this outcome commonly found in the pre-start phase it is important to create a lot of energy and motivation around the idea. If one were to point to one thing that is usually a driving force to help the company evolve from the pre-start phase to the start-up phase, it is sitting with another person. The additional person, that will have a motivating impact on moving the company from pre-start to startup phase, can be found in many different places. This person can be the first customer who is ready to submit an order. It may be a supplier who can provide products or subcomponents to the entrepreneur . It may also be a advisor who helps the entrepreneur to overcome his insecurities and his emotional barriers. Or maybe, you meet the person who may well become your business partner. The purpose of this

additional person is so the entrepreneur feels that there is finally enough resources to get the project off the ground. By establishing the right network of people around the company, it also becomes much easier to develop the idea for a business that can earn money. This network provides the entrepreneur with guidance and advice and motivates the entrepreneur to get started in taking initiatives that will begin to address the large volume of tasks that need to be accomplished in order to take the idea into reality. The difficult start in the early stage With the decision to start the business you are well underway in the start-up stage. In itself, this is a big step forward and a milestone to be celebrated. However once you’re there, the start-up stage holds many great challenges with many opportunities to become discouraged and unmotivated. One of the greatest challenges of this stage is an overabundant supply of ideas and an severe shortage of financial and time resources to allocate to the business. In the start-up stage it is important to have a single minded focus on locating where the paying customers exist, which can generate income for the fledgling business. Many entrepreneurs at this stage are not earning enough money to pay full wages to either the owner or to the first employees. This has consequences to the dedication of the team and the finite resources available to the project. Most entrepreneurs in the start-up phase, find themselves in the position, where they are burdened with the responsibilities of all the different jobs which need to be completed, which is of course an enormous workload. Burn out is not an uncommon experience for entrepreneurs in this phase and as a consequence the entrepreneur can lose the passion and drive and possibly even the company itself. On the flip side, when entrepreneurs are not committed to the cause and with the necessary passion and drive, this phase can drag on for years with some start-ups never managing to get beyond this stage. The companies finding

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LIFE STAGE

PRE-START

START-UP

PRE-GROWTH

GROWTH

MATURING

TRANSITION

TYPICAL COMPANY SITUATION

THREE TYPICAL GROWTH CHALLENGES

• The company is still at the drawing board. and the idea is still fragile and not yet thought out. • Sufficient motivation for starting the business has yet to be established. • There are great insecurities about various circumstances as well as fear of others stealing the idea. • The company has been started but isnʼt making any money. • Many different ideas are up in the air, and new business ideas keep arising. • The company isnʼt making enough profits to pay a full salary to the owner or the first employees. • The company has regular customers and a steady income. • The company is very busy and everything is to some extent a bit chaotic due to lack of systems. • The sales efforts are sporadic or reactive because a lot of customers come on their own. • The company has built an attractive business concept and has the employees to sell and deliver it. • New employees are being hired every month. • The liquidity of the company is under pressure from investments and the increasing volume of orders. • The company is well-functioning, and the different departments, divisions or subsidiaries are autonomous. • The liquidity is good and there is capital enough for further investments. • A competent management group with complementary skill sets has been hired. • The market suddenly disappears due to new competitors, technologies or trends. • The owner group is breaking up or key employees are leaving the company. • The company is bought up or merged.

themselves stuck in the start-up phase are companies thathave commonly experience uncertainty regarding their ability to pay the staff’s month salary. The solution to the “start-up” crisis consists of several actions that must take place simultaneously. These actions are necessary to develop momentum that can propel the company from the start-up phase to the next level, the pregrowth phase. This momentum will be realized by securing a good or great customer – a customer who may submit orders for a full year’s work, or as part of an agreement on a long term partnership or contract. With such a client, the company is suddenly able to afford time to prioritize the actions in order to focus on what it would take to develop the right product portfolio, one that is attractive to customers, as well as to understand with greater focus how to master the basic disciplines of the business and optimize the systems to build a strong company. Deficiencies of the pre-growth stage When the company begins to have a steady income and regular customers, it has survived the start-up phase. What lies ahead in the pre-growth stage are many barriers to growth which must be overcome to move forward. In the pre-growth stage, the owner/operator will have achieved sufficient income to provide a stable salary and good benefits for himself and possibly other staff. While this scenario

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To find the right idea and develop the idea into a business idea. To establish the right network around the company (first customers, suppliers, advisors and partners). To take initiative and do all the tasks. To find the right customers who creates turnover in the short and the long run. To develop and create the right product portfolio that is attractive for the customers. To learn all the basic disciplines of business design. To systematize the sales efforts and ensure a continuous stream of customers from existing or new markets. To establish systems that document the business processes in order to be able to delegate tasks to new employees. To find the right market position and make the company an attractive alternative to the competitors. To control the liquidity and secure financing for further investments that can help the company grow. To recruit the right employees who can rise to the occasion and turn into leaders. To develop a management culture and develop the entrepreneur into a CEO. To sustain the innovation and make room for the development of new business areas or spin-outs. To keep the good employees and build a strong and healthy organizational culture. To develop the competitive performance in relation to new competitors in the market. To reinvent the business concept and the business model of the company. To create new partnerships with suppliers and distribution channels. To implement change and establish new momentum for the new development of the company.

sounds attractive, it is not necessarily satisfactory for companies which seek to further develop and grow. Many companies have the ambition to move forward to improve upon the initial successes to further develop their businesses. It might seem that there is nothing standing in the way of moving forward to realize these dreams, but in reality, it’s as though when the entrepreneur goes to step on the accelerator there is no more power in the engine. The entrepreneur moves to shift gears, but there are no more gears left. Nevertheless the company is busy. What prevents the company from moving forward is the same reason that the existing customers are happy. The company is driven by passionate entrepreneurs that are very invested in their work- a very attractive business offering. Unfortunately the desired growth requires systems which enable the ability to do more than purely use the passion and energy of the original entrepreneurs, but rather to meet the existing customer needs. Generally in a start-up, the founding team is a small number of people who work very hard to bring the company to realization. When the company wants to further develop and grow, it needs to have systems which can communicate with new employees and existing employees harnessing the knowledge and passion of the original entrepreneurs. Therefore, it is precisely the lack of systems which provides the greatest barrier for a pre-growth stage business. When the entrepreneur is required to make all the decisions, the

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company is limited by what one person, or a small team of injections from investors. Capital must also be allocated for people can decide. Only when business processes are the recruitment and development of key employees, such documented by way of example, pricing policies, operational that staff can grow in their jobs and eventually become manuals or checklists will there be an ability to delegate leaders of the company. At this point, it might even be more tasks and more responsibilities to other employees, so necessary to recruit a CEO who can take over the company the management’s time is freed up to the jobs that will lead founder’s role and provide the needed corporate leadership to growth. for the company (skills, that the original founder might not The lack of systems can cause deficiencies in many areas possess). Sometimes the company’s founder can be the of the business. For example it is often found that lack of a biggest barrier to business growth. systematic process for new customer acquisition means that the sales effort is sporadic at best. Responsibility for Prosperity in the maturing stage acquiring new customers lies with the owner-operator and it When companies successfully come through the growth is an area that is only worked on when there is time for it. stage they reach a maturity stage. Here the owners are The company can get away with this, because a certain amount of customers come by themselves and at this stage a number of loyal customers or long-term “The cash flow pains of the early days might contracts has been secured, but to create growth seem like a nice memory when the reality of the requires a systematic marketing effort to ensure an monthly cash requirements are realized during ongoing number of customer are approached from existing or new markets. In companies where the this time of growth.” sales process already works well, it may instead be a lack of focus on developing other areas of your reaping the fruits of the serious efforts that have been business - e.g.. the business model, supplier relationships or invested in building the company. The company is now company brand. As entrepreneurs are constantly pulled in functioning on a daily basis, and perhaps has even different directions, and when there is no systematic way to established subsidiaries or separate, autonomous units. One approach the business it is easy to find yourself in difficult of the reasons behind the success of the company is that a situation to overcome. well-functioning leadership group has been acquired or Turbulence in the growth stage If the startup manages to grow beyond the initial customers, its owners can rejoice that they have made the right decisions, and that time they have spent time on specific work which has led to the right results. The entrepreneurs have created an attractive business concept, built an organization to sell and deliver, the customers are satisfied and returning, and the company has sufficient control of its operations, such that the company manages to earn a profit. Of course now at a new stage of development new challenges arise. In each stage there are always pitfalls that can destroy a company. The growth stage is one of total change which if not very carefully maneuvered can result in crisis and disaster for the company. Most dramatically, liquidity plays a central role of the growth company’s challenges. One of these potential pitfalls can occur, for example. in the recruitment of new employees every month. This can prove to be not only a great strain on the physical environment but also on management resources and company culture, which changed along with the new situation. The company's liquidity is also under pressure from the investment in staff and the growing order book. The more units sold the more money must be used to buy raw materials, build inventory or to manage new employees, who first earn their pay at a later date. One might think that it was in its early stages, there was the greatest shortage of money, but the most severe liquidity crises are often seen in growing businesses. The greatest task for a growth company is to manage liquidity and provide funding for continued investment to sustain growth. This can happen in a couple different ways: either through good credit lines at a bank, or by getting cash

developed, where members’ skills complement each other. Because the company is profitable, there is also capital for continued investment in developing products or new markets. It sounds almost too good to be true and it also is. For mature and healthy companies of course there are also challenges, they must be aware of - especially challenges that come from competitors. Competitors can be just as strong and may also be experiencing growth that has been in part to general growth of the market space. Depending on the relationships in the market, there may be a race to establish market penetration and market share. The race may be about to the ability to sustain innovation and create a space for developing new areas of business or establishment of new subsidiaries ("spin-outs"). Additionally, competition will play out in several other areas including competition in attracting and retaining the best employees. There are companies that succeed and move into the maturity phase who then are unable to maintain their competitiveness and ability to retain customers. However, those that do find the ability to remain competitive enjoy prosperity. Changes and transition phases For most companies, stages of maturity unfortunately do not last forever. Rarely do businesses today exactly resemble the form in which they were originally established. The reason is that some events occur that require that the company must transform itself in order to survive. It may be that the market for your product or service suddenly disappears, because there arises a new, strong competitor, a new breakthrough technology or a new trend or it may be that the internal circumstances of the company are creating a need for comprehensive change, e.g. there may be a disagreement

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among its owners that leads to a break-up, or it may lose employees who sits in a key management positions or specialists who are indispensable. Finally, and most drastically, it may happen that the company will be merged or acquired - which in itself can ensure the continued growth or survival, but where all systems and norms must be rationalized with another company. A transition phase can kill a company - but it can also be the basis for a new development that brings new growth to the business. It may require the owner/operator to reconsider its mission and its business model to create renewed partnerships with suppliers, or to establish new distribution channels, for example when some companies choose to create an online platform for their sales. At each of these transition phases, the experiences of the fledgling pre-start phase can be recalled. Transition phases will again use the entrepreneur’s skills to think creatively, implement change and create momentum for its new development.

Growth can be learned Even though life curve illustrates some classic challenges that most entrepreneurs will recognize, there are differences in when and how quickly the challenges come. Some entrepreneurs can go through the whole life cycle in less than one year, while the other can go for years before their business evolves from one life cycle stage to the next. Whatever the time horizon, these familiar patterns of development make it is possible to both predict the next challenge and to observe what other companies have done in these situations. By assessing and acknowledging your growth stage, there can be great insight and inspiration on how to conduct business. For ambitious entrepreneurs there is a recipe for growth and it is possible to learn. By learning and understanding the challenges of the different stages, entrepreneurs have the ability to be visionary. And when an entrepreneur can imagine what the future of the company may look like before it exists, the company is already on the right track to becoming reality.

Suggestions for next step: • Use the Life cycle as inspiration for determining which growth challenges are completed and which await your company. • Do some research on how other start-ups have dealt with their growth challenges and learn from them. • Have a meeting with your board, an advisor or someone else who can give constructive feedback and discuss the steps you are going to take to get ready for the next challenge in the company’s development.

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