The news last year that Uber’s CEO was stepping down was probably not a surprise to those who had been following the company in the headlines.
In our work over many years, we have learnt enough to know that you have to be on the inside of any company to have the full picture of what went wrong and how. But we do know from our research that rapidly growing companies — especially unicorns like Uber — face a high risk of stumbling.
As a business term, ‘unicorn’ was coined to describe a rarity: In 2011 there were just 28 early-stage companies, still privately owned, with investment valuations of $1 billion or more. Today there are more than 200 unicorns, with a total value estimated by CB Insights at almost $700 billion. Uber is one of them: Its valuation rose to a record-setting $68 billion just seven years after its founding, despite reporting losses of more than $700 million in the first quarter of 2017.
But when we tracked those 28 unicorns (along with 11 similar companies with valuations of $600 million or more) over the period from 2011 to the present, we found that 33% failed to grow at all and another 28% grew less than expected. Nearly two in three died or stumbled. Unicorns and near-unicorns actually are much more prone to self-induced internal breakdowns than they are vulnerable to adverse events in the marketplace.
And they’re not alone. One of the hardest acts in business is scaling a business rapidly and profitably. Bain’s research concludes that of all new businesses registered in the US, only about one in 500 will reach a size of $100 million — and a mere one in 17 000 will attain $500 million in size and also sustain a decade of profitable growth.
Why internal threats are real
More often, they trip over themselves. Research for our book, The Founder’s Mentality found that 85% of the time, the barriers to growth cited by executives at rapidly growing companies are internal — as opposed to, say, external threats such as unreceptive customers, a misread business opportunity or the moves of a dangerous competitor.
The title of the book celebrates the internal energy and sense of insurgency that propels rapidly growing companies, but the book also warns of four predictable internal growth barriers that all too often trip up these companies during their pursuit of scale.
One of these is what we called the unscalable founder. We believe the founder’s mentality is a strategic asset. Nurtured correctly, it can help a company achieve scale insurgency — a company with the benefits of both size and agility. But many individual founders aren’t scalable. Individual founders can become a barrier to growth if they are unable to let go of the details and micromanage, fail to build a cohesive team around them, or allow hubris to get in their way. We found that 37% of executives at growing companies describe the unscalable founder as a major barrier to their success.
Scaling a business requires enormous determination — it’s like catching lightning in a bottle.
Typically, founders discover a repeatable model of success that is extraordinary and are rewarded for ignoring distractions and focusing ruthlessly on that single insurgent mission and the repeatable model that delivers it. But over time the market changes and the company needs to change its model. The same founder who was rewarded for ignoring distractions previously is often the last person to adapt.
The skills that help founders get their company to take off are often the opposite of those needed to sustain new growth. Founders focus on speed, ignore good process and relish breaking the rules of the industry they are trying to disrupt. They cut corners, ignore detractors, and avoid naysayers. Their Herculean efforts are responsible for the firm’s creation, but also its chaos. Once the company reaches cruising altitude, its leaders need to listen more to competing voices and invest more time in emerging stakeholders.
Founders are also often responsible for driving their teams to stretch and accomplish far more than ever seemed possible, sometimes at enormous personal sacrifice. Yet this can make it impossible for them to replace or supplement these foundational team members with new professionals who can take the organisation to the next level. The founder remains too loyal to the original team.
Founders who both create and successfully scale their company are like lightning striking twice — the miracle of creation and the miracle of sustainable growth in the same person. That is rare.
Internal breakdowns in action
The other three barriers described in our book underscore the challenge. Some 55% of executives cite the problem of revenue growing faster than talent: The company grows so quickly that it has trouble attracting the quality and amount of talent that it needs. And as growth creates complexity, complexity becomes a silent killer of growth: 22% of executives cite a lack of accountability as the company expands and the rules become unclear. At its worst, this can breed a toxic culture. Perhaps most perplexing, 25% of executives cite loss of the voices at the front line as the growing company becomes preoccupied with internal matters, numbing it to customer feedback that can improve the business model or to the concerns of frontline employees.
In our study of unicorns, we took a closer look at ten that stumbled the hardest, companies like Groupon, Zenefits, Jawbone, GoPro, and Zynga — a group that experienced a peak-to-trough valuation decline of about 75% on average. We concluded that about half encountered major external market challenges that clearly contributed to the decline; we found that these external factors always impeded the progress of the company in combination with a well-documented internal breakdown.
For instance, GoPro discovered that to really fulfil its growth potential it was going to have to not just become a manufacturer of small camera devices — a difficult business to defend against the large consumer electronics companies like Sony — but also create an ecosystem of services (uploading to the Cloud) and products (drones with cameras) that would differentiate it in the future. This is what founder Nick Woodman described as becoming a sort of ‘mini Apple’, a much harder strategy to successfully execute. That challenge was reflected in a near 50% revenue shortfall in 2016 from what analysts had expected, ultimately triggering a decline in the company’s valuation down to $1 billion from its onetime high of $12 billion.
In contrast to the moderate frequency of external breakdowns, literally every one of the fallen unicorns we studied encountered well-documented internal issues that contributed to or actually caused the stumble. Consider Zenefits, a provider of efficient online employee benefits services for small and medium-size companies.
In early 2015 Zenefits announced that its revenues were going to increase by a factor of ten that year, to $100 million, causing investors to flood it with money at a valuation of over $4 billion. The core idea for the company had been well proven, the market was certainly large and untapped, and Zenefits was clearly in the lead. Yet according to the company itself, Zenefits stumbled because it wasn’t prepared internally for scaling up.
When its valuation collapsed by 55%, and its CEO-founder was replaced, the new CEO wrote an email to staff noting, “It is no secret that Zenefits grew too fast, stretching both our culture and our controls.’’ For instance, the company’s ‘frat-like’ culture became too dysfunctional to run a tight operation in a highly regulated industry, and some of the measures taken to certify new employees in health insurance law became severely compromised.
Assessing your ability to Scale
If these are the rock stars of business — surrounded by the best investors, boards and advisers — what about the rest? To dig deeper into the challenges facing high-growth companies, we held more than 25 workshops across the world, assembling a group we called the Founder’s Mentality 100: Companies that attained early success and scale, and showed further promise and desire to grow by five or even ten times over the coming years. When we surveyed executives in these private discussion sessions, we found a consistent story:
Only 15% of the time did these leaders feel that the primary threat to achieving their plans was external (a superior competitor, a new business model, government regulation, market shifts or saturation). The majority were internal factors — factors they should be able to control.
When monitoring our health, doctors use a set of proven questions and tests. With so many company growth stories coming undone because of internal causes that their leaders could have controlled, what is the equivalent protocol to diagnose growing companies? We suggest asking these five questions to assess the general health of a business and its ability to grow to large scale:
- Is your founder scaling the team at a pace to address the opportunities and challenges of a scale insurgent?
- Do we have a talent plan to match our growth plan? If not, how do we close the gap?
- Is the voice of the customer and the front line as strong as it used to be? How do we know?
- Is our insurgent mission, so inspirational in the early days, still strong, or is it getting diluted?
- Do people still feel an owner’s mindset that drives accountability and immediate problem solving?
If you are part of an organisation with bold growth ambitions, make sure you are asking these five questions early and often.
What’s Stopping Your Business From Growing?
Three masters of scale unpack the reasons why you might be failing at growth – or in danger of doing so.
So, what’s stopping you from scaling? If you ask Rich Mullholland, founder of Missing Link, the reality is that most entrepreneurs don’t need to understand what it takes to scale. “Scaling speaks to exponential growth,” he says, “which for the vast majority of business owners simply shouldn’t be a consideration. Growth by itself is okay, and even then, it should be growth as and when it’s required.”
Rich’s key point is that growth for the sake of growth should never be a business owner’s primary goal. Growth should be strategic, and good for the company. Growth without a solid foundation can actually harm – or even kill – your company.
If your goal is growth though, here are three key points to keep top of mind.
1. Too many business owners don’t understand what it takes to scale a business
“Entrepreneurs are so focused on getting through the month with their cash flow intact that they often fail to lift their heads and look to the horizon,” says Allon Riaz, CEO and founder of Raizcorp. “Scale requires strategic thinking, while most entrepreneurs are in operational thinking mode.”
Howard Mann, president at Brickyard Partners and a US-based business turnaround specialist, advises business owners to stop focusing on revenue growth alone. “Scaling a business is about balance and too many entrepreneurs just focus on the speed of revenue growth. When revenue grows without the infrastructure to support that growth, clients leave as quickly as they come in.
“Instead of focusing on top-line growth, focus on maximum profit margins. This will completely change where you focus your efforts. I would rather have a $10 million business with 50% margins over the false glamour of a $50 million revenue business with razor thin profits.”
2. Without the right systems, process and people, you’ll never be able to scale
Allon believes the biggest mistakes entrepreneurs make are:
- Not arranging sufficient cash reserves for a growth period
- Believing that the people who brought you to point A are the same people who will take you to point B
- Having insufficient systems to scale the business
Rich agrees, adding that you need to focus on the business you want to be, and not the business you currently are. “Businesses often commit legacide,” he says. “They allow the legacy systems, put in place for a business of a smaller stature, to hold them back. Not to get too cheesy here, but to quote the Great One, NHL hockey legend Wayne Gretsky, you need to skate to where the puck is going. The systems you put in your business should be systems appropriate for the business you want, not the business you have. Sure, you’ll possibly be paying more in the short term, but it will be a fraction of what you lose trying to play catch-up later.”
Howard believes that losing track of managing the expenses required to manage growth is one of the biggest stumbling blocks entrepreneurs face. “To intentionally over simplify it, you want to figure out the most efficient and effective way to rapidly attract and close new clients while being able to serve and delight them at the lowest possible cost,” he says.
“Another mistake is taking on too much debt in the name of growth. We are all mesmerized by VC backed start-ups that put out press about their massive growth. You do not see how much cash they are burning through and that most of these companies have net losses that are growing as fast (or faster) than their revenue growth. Again, protect your profit margins. That is your growth fuel and protection against shocks in the economy.”
3. Growth for the sake of growth can actually kill your business
Before you embark on your growth journey, understand that growth, without sufficient structural foundations, can often lead to a business collapsing. “Some scale has the opposite of economies of scale, and actually becomes more expensive as the business becomes more complex,” says Allon. “It’s important to restructure the model as the business grows to ensure the highest possibility of economies of scale.”
Howard warns that a business structured to lose money as it grows is a poorly structured business. “Making the switch back to strong profitability after a growth phase is difficult to pull off,” he says. “Yes, we all know Amazon.com eventually did it. You are not Amazon.com. Growing with a net loss is a straight road to the business graveyard.”
Rich disagrees with the notion that growth in and of itself will lead to death. He believes that growth is, generally speaking, healthy. “I’ve seen businesses grow too quickly and not know how to deal with it, and I’ve seen businesses that out-grow the maturity of their management teams and get strangled by the firm hold the management team try to keep,” he says, but for Rich, this is the product of a business ill-prepared for growth, rather than a product of the growth itself.
“This is why slow is often better, as opposed to scale,” he says. “I remember when my son was young, and I was still his hero. I couldn’t imagine him shouting at me the way I did to my folks as a teenager – I’d be destroyed. So, I asked my dad about it, he smiled and said, don’t worry kiddo, they ease you into it, it all happens over time. By the time they start screaming, you’re ready. That’s true too for business growth. Most entrepreneurs are running their businesses as a real-time business school. You can’t always rush that education.”
Allon: One top tip for business owners on scale is to remain strategic by knowing what you want to create and by ensuring a healthy balance of capital resources, sufficient people skills and the appropriate support systems.
Howard: Famed business owner Ricardo Semler said “Only two things grow for the sake of growth: Businesses and tumors.” Get crystal clear on why you want to grow. Once you do, find your balance between accelerating new business and the cost to manage that business.Scaling, like a scale, needs balance
Rich: Stop thinking about scale, and start thinking about solving an important problem that world has, even (especially) if they don’t know it yet. It the problem is real, and big enough, you will have a scale-able business.
See Allon Raiz, Rich Mulholland and Howard Mann live at the first Secrets of Scale event, which will be taking place at the MESH Club in Rosebank on Thursday, 24 May. Buy your tickets online here: www.qkt.io/secretsofscale
You Too Can Grow A Successful Subscription Company. Here’s How
Dog toys? Baby stuff? Puzzles? Makeup? How can you think ‘outside the box’?
Subscription companies have a unique opportunity to connect with their customers. By offering a recurring product, they get multiple chances to interact. Products range from razors like those sold by Dollar Shave Club to wristwatches like the ones we offer at my company, Watch Gang. Then there’s BarkBox, which treats your dog to a monthly shipment of toys and treats. These companies are vastly different but share a common goal: Curating a high-value experience for members.
Thousands of businesses have adopted the subscription model. We’re seeing new companies launching all the time, in every niche, from Sock Work, which sends monthly socks and donates some of its revenues to veterans, to iFind Seekers, sending monthly puzzles.
What may be surprising to some is that businesses offering a recurring product have been around since the dawn of commerce: The Romans sold and delivered food and newspapers on a repeating schedule 2,000 years ago. In this country, weekly milk deliveries were common even before the Constitution was written.
Interested in establishing a subscription business for your product? In my experience, I’ve come to recognise what I call the “five pillars” for the foundation of a successful and sustainable subscription business. Those pillars – community, value, discovery, service and integrity – are exactly what you should focus on:
Pillar 1: A thriving community
Having a community of enthusiasts speaks volumes about your company. It’s a sign of trust and brand affinity, and proof that people are genuinely interested in what you have to offer. They are willing to share their experience with others.
Your community is a trusted group of peers who are more than ready to authenticate a product, provide feedback on the service and help create a sense of belonging for like-minded members.
Your community drives your business forward, motivates you to improve and helps you craft service improvements. You have to be dedicated to growing and nurturing your community, because ultimately it is the backbone of your business.
Pillar 2: The delivery of value
Consider this: Why would customers want to “set it and forget it” when they can just order when it’s convenient for them? Why would they agree to a recurring payment every month for your service? The answer is value.
People have to get a product far more valuable than what they are paying for, which means you as the company founder have to go above and beyond to deliver added value.
Watch Gang, for instance, has price levels to fit all budgets, from $29 to $999 a month, and the watches members receive have a value that’s higher than their membership fee. At Barkbox, a $20 box is valued at over $40. Bluum, which offers a box containing the best-reviewed baby, toddler and mom products, has a monthly subscription fee of $34 with the box’s guaranteed retail value at $45. These are tangible savings, and for customers they provide convenience.
Apparently, customers agree. A Gang member recently sent a testimonial that stated, “My Watch Gang subscription is the only bill I actually look forward to paying every month.” A bill that’s welcome? This tells me that we have honored our commitment to delivering value.
Pillar 3: Opportunities for discovery
Subscription companies need to serve as a point of discovery. One of the reasons why subscription businesses continue to be so successful is because of the element of surprise — people love to open a box without knowing what’s inside. Subscription boxes give members the opportunity to discover new brands and styles.
Companies today are engaging members beyond just the monthly shipment. Birchbox offers loyalty points and money back for purchasing the full-size version of samples. At Watch Gang, we launched the “Wheel of Watches,” where members can spin a virtual wheel full of watches they may be interested in.
They earn points to apply to the wheel every month they remain a member. This has become one of the biggest draws at Watch Gang, because it provides an entirely new kind of discovery experience – and it’s fun.
Pillar 4: Amazing customer service
While not a subscription box, Zappos has repeatedly been recognised as a shining example of how to treat customers. The often forgotten, but arguably crucial, benefit you can provide to a member of a subscription company (or any company) is world-class customer service.
Of course it’s easier and cheaper to outsource customer service or offer email-only support to cut costs. But you have to remember that every call, every customer and every situation is unique. Your customers deserve exceptional service from real people whom you’ve empowered to solve their problems.
Some of the most important changes your company can make may revolve around your customer service department. A single phone call can have immense impact. Having a well-trained customer service team gives your company the opportunity to learn from valuable feedback.
It’s crucial to give your team members a voice in your business and encourage them to share what customers are saying, both positive and negative. These team members are on the front lines with your customers every day, so they need to be adequately supported and compensated.
Pillar 5: A high standard of integrity
Without a sincere commitment to the above four pillars, your subscription business may never be profitable or sustainable. That’s why maintaining a high standard of integrity means you put people over profit. You need to take a stand to help your customers and deliver on your promises – even when that might cost you.
Every time a customer reaches out for support, you have an opportunity to demonstrate your integrity. It’s not an opportunity to make more money from the customer or even to deter him or her from canceling. It’s an opportunity for you to shine, as a beacon of good morals.
Set an example for all your employees and team members from the top, and it will trickle down to all day-to-day dealings within your company – with your customers, with your shareholders and with the public at large.
Today, anyone can launch a subscription business and start selling memberships; however, the businesses that will stand the test of time and truly become successful are those built with a solid foundation using these five pillars.
Investing time and resources into these five areas will help you not only grow quickly but also stand out as a company committed to taking care of its customers and employees.
This article was originally posted here on Entrepreneur.com.
Are You Prepared To Listen To Your Board Of Directors?
If you want to drive growth in your organisation, you need to listen to your board at critical junctions.
In speaking with shareholder-managers about creating a board of directors, at some point the most critical question of all raises its head. “At the end of the day, will you actually listen to them?” Having a board of directors is a great driver of profitability and performance as we have traversed in previous articles. However, if you are not prepared to listen to them you will not receive the value from having them there.
Listening at critical moments
It can be very easy to respond to this challenging question by saying, “Of course I would listen to them.” In practice, it can be a much harder reality.
More specifically, it can be one thing listening to your board when you like what they have to say, and another thing entirely when you disagree or do not like what you are having to hear. When your board is challenging you, making you feel uncomfortable or suggesting you are going down the wrong path, this is the time to sit up and take notice.
Being the shareholder-manager and the entrepreneur means having to take a step back and take account of what others are saying. It can be an interesting change. I am sure that on your entrepreneurial journey you, as have I, have occupied that comfort zone of “what I say goes.” In the boardroom though, the last thing you want your non-executive directors to do is to turn-off because of the way you respond.
Do not avoid the tough discussions
As a non-executive director, I am not one who avoids the tough discussions. In a board meeting I once chaired, the board felt that whatever we asked or said about a particular issue we were told we did not know the context or management explained how much work had already been done. It was as though the entrepreneur had decided what was happening and did not want the board to get in the way.
The project in question was at an early stage and while it was a good idea it was going to require guidance and critique to support its success. The discussion got to the point where I turned to the shareholder-manager and asked, “What questions are we actually allowed to ask?” It was in a slightly heated tone, I will admit.
There were a few moments of silence while the room took stock. The point was made and management relaxed a bit. We then worked through the issues as a team. The entrepreneur still refers to that discussion and the fact that if he is not prepared to hear the board, then what is the point of having a board.
It takes two to tango
If you are not getting this sort of level of challenge and debate, it may not only be your fault as the entrepreneur. It may not be because you have shut down conversations or stopped lines of questioning you have not liked. It could be because you do not have directors who are naturally challenging enough. If you have a board of directors, including independent non-executive directors, my question for you is, “When was your last tough discussion?” If this is a difficult question to answer then you should ask yourself, “Has my board turned off the tough discussions because of how
I respond?” or “Do I need to find non-executives who are really willing and able to challenge me?”
Building a high-performance board is a journey, not a destination. It is critical that you have the right people around the table to tango with you.
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