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.
Your Organisation’s Values Must Generate Value – Otherwise Why Have Them?
Your values have to be the foundation of your organisation’s present AND its future if you are going to ensure sustainable value for your stakeholders.
In the modern world of business, where social media compels organisations to tell the truth, transparency and ethics have become essential. Consumers no longer only care about getting value for money, but also about what your company values and how that transpires in what you offer.
Defining a set of values that describes your organisation’s heart, i.e. your organisational culture, is immensely personal and, if lived, immensely powerful. Successful leaders realise that an important factor in building brand loyalty is getting their organisations to wear their proverbial hearts on their sleeves and to authentically honour it in the way they do business. Sadly, many organisations define their values as a tick-box exercise that serves as mere decorations for their website.
Just think of infamous examples like KPMG, SAP and Steinhoff as well as more recent culprits like Bain and Gartner: Besides the millions many of them had to pay back, their severely tarnished brands are still costing them dearly. It is clear that if the values you proclaim to espouse are not overt in your client-facing staff and the way you do business; this lack of integrity will eventually catch up with you. As what happened with KPMG, this not only leaves you with less clients, but with a diminished team too. High potential employees do not want to be associated with leaders who don’t honour the organisation’s values.
Related: Here’s How To Value Your Business
For the organisation’s values to truly become visible in how they engage and do business, it has to start with the leaders and their message. Those we lead must see it in our example on a daily basis. Our organisation’s values serve as a moral compass, but if the leaders responsible for steering the ship do not abide by this compass, our crew can’t get us to where we want to go. Our team members either follow us, become disengaged or abandon ship. They will not make an effort to uphold the values within a business where the leaders themselves disown it.
As a business, we make a certain promise or commitment to our clients. However, if our values do not underpin this promise and if we, as the leaders, don’t role-model our values to achieve this, it remains an empty promise. Therefore, it is important to keep the following aspects in mind when selecting or re-viewing your organisation’s values:
- Before defining your values, you should ideally define what kind of culture you want your values to underpin. Consider what is important to you and what is important to your customers: Is your organisation’s culture customer-centric, as it aims to exceed customer expectations, or quality-centric because of its strong focus on excellence? Perhaps your organisational culture leans more toward being cost-centric, as providing real value for money is important to you. A service orientated organisational culture, on the other hand, implies that providing your customers with the best possible experience is top of mind for you. Your organisation’s culture could be one of the above, or your culture could consist of a bit of an eclectic mix.
- Once you have defined the above, choose values that will help your desired culture become a reality and that your team members and customers will buy into. Again, ensure that it captures the heart of your organisation.
- Values are personal and we all interpret them in our own way. Although we don’t want to promote a homogeneous culture, we do have to communicate what we mean by our values. Therefore, the next step is to craft a set of behaviours that describe how the individuals in your organisation will live these values. Again, it is important to emphasise that the example must be set by the leaders but that it is the responsibility of every team member to role-model these behaviours.
- Finally, your organisation’s values must come alive and inspire, as they are intended to, and it is your responsibility as a leader to make this happen. Ask your team and your customers to tell you how they will feel if these values are lived authentically, and then measure the organisation against their feedback. If your team and your customers do not experience your values in this way on a daily basis, chances are your values are probably still dormant.
It is the responsibility off all leaders to inspire hope and trust in the organisation’s future in good times as well as bad times. To keep your team engaged, you constantly have to paint an emotive picture of what the future looks like for your organisation. If you connect this picture to your values and role-model them as a leader, they become a powerful tool for fostering the emotions and engagement that will help your team members buy into your vision.
How You Can Achieve Growth Through Access To Markets
If your goal is to scale your business, you need to increase your sales and access to markets. We found the best way to do that was through key strategic partners whose existing clients were our target market.
Many sales-led organisations have come to the same conclusion at some stage in their business growth life-cycle: In order to build a sales-led business for scale, you need to adopt a multi-channel sales distribution strategy. In our world, this means a combination of direct sales (boots on the ground), digital marketing and strategic partnerships.
After five years we had grown Merchant Capital as far as we could organically. We needed a much larger sales distribution channel. Understanding the need for a multi-channel sales distribution strategy is one thing, execution is something else entirely. After paying significant school fees, our strategic partnership distribution strategy was crystallised, and off we went to bring our chosen partners on board.
1. Finding strategic partners
Re-calibrating our sales strategy led us to the conclusion that we needed a strategic partner who could bring us ‘one-to-many’. In other words, we needed to identify potential partners (‘one’) who have ‘many’ sweet spot clients who are also our target clients, and whom they are already servicing with other products daily.
The end result of this three-year process has been strategic partnerships with Standard Bank and Discovery Insure. In the case of Standard Bank, every business that utilises a Standard Bank point of sale (POS) system can apply for a cash advance from Merchant Capital. Thanks to the partnership, Standard Bank POS merchants can access a cash advance within less than 24 hours of application.
It sounds incredibly simple and straightforward, but the process of identifying the right partner, creating the value proposition and then building a relationship that can result in such a partnership is anything but.
The most crucial element in this process was identifying partners who could benefit as much from a relationship with us as we could from them — in other words, ensuring a strong mutual value proposition.
When you have a business need, it’s easy to convince yourself that your prospect or potential partner needs you as much as you need them. Unless you are absolutely sure that this is the case however, there’s a strong possibility that you end up having a life-changing initial meeting and then never hear from them again.
This can happen for one of two reasons: Either you haven’t found the right partner who will also benefit from a partnership with you, or you haven’t been able to adequately distil that value. If this happens, very often you’ve missed your opportunity and won’t get a second chance.
We therefore had to be extremely disciplined in identifying which partners we wanted to approach. We focused on removing any subjectivity from the process by building an objective ‘partner scorecard’ that allowed us to weight certain attributes of the partner (such as a large client base, deep client relationship and mutual value proposition) with what we could offer them. This empowered us to make educated decisions.
2. Making first connections
Identifying the right partners is only the first step — now you need to make contact. By design, the partners we had identified were behemoth corporates with much larger priorities than meeting us, and convincing them on the upside of a strategic partnership needed to be robust and well-articulated.
Step one is getting your foot in the door. We began the process by identifying ‘champions’ within the partner organisation. This process takes time. We were able to secure meetings and found that running pilots was a good way to provide demonstrable evidence of the proposed ‘win-win’ proposition.
Early on in a business life-cycle (before any traction and brand equity exist), we found that leveraging off our network of shareholders and mentors to make introductions to the appropriate decision-makers within the organisation was of great assistance.
When we signed our previous investment deals, this was actually a key consideration for us. For obvious reasons, growth funding holds value, but the network and mentorship that the right board and shareholders bring to the table can be much more valuable.
Until you’re able to build brand equity and gain traction with a partner (or client), the right networks, introductions and referrals help you secure the meetings you need to prove yourself. And then you need to start small. Don’t expect a meeting with the CEO. Start with someone who could be your champion within the organisation.
3. Finding your champion
Finding a business sponsor to champion the partnership within the corporate partner is fundamental to your overall success. They will understand the internal friction and potential hurdles in navigating the naysayers within the organisation.
There will always be people, and rightly so, who challenge the partnership and ask why they can’t just do it themselves. If you don’t have an internal champion who is engaged and passionately buys into the partnership, then the initiative will most likely fall over and die.
Being the first mover in a partnership with an innovative start-up has many advantages if the product takes off. Often, these people want to be involved on the ground floor.
That said, big corporations are still taking a chance teaming up with young companies (brand risk and financial losses, to name a few). The upside of having already landed a smaller partner where significant traction can be demonstrated goes a long way in softening the initial concerns and risks from the large corporate’s perspective.
4. Nothing worth having can be rushed
The one word that comes to mind when thinking about this journey and the past three years is grit. In our experience, landing great partnerships takes many years of relationship-building and demonstrating solid business metrics and track record.
As I’ve already mentioned, our discussions with Standard Bank began three years before doing the deal. What we found useful in the early days of the partner discussions was communicating that in the next quarter we were going to achieve certain results and then coming back the following quarter and presenting the fact that we had hit our milestones, or hopefully exceeded them.
Just as you would do with an investor, this built a track record and credibility. The rhythm of checking in every few months and reporting back on progress is a great way to build the relationship over time without being too pushy as well.
Pulling it all together
There are two types of growth: Organic growth and scale. We’re an organisation that wants to scale. We’re aiming for exponential growth. This wouldn’t be possible without exponentially increasing our access to market.
We identified that the best way to do this was through the right strategic partner, but there are many channels that business owners can consider.
The important thing is not to just do what you’ve always done, unless you’re comfortable with organic growth. Evaluate your current model, and critically examine what you need to do to increase your sales, distribution and access to market. There is no one right way to do this. It took us time, and we needed to learn a few tough lessons before we were confident in the direction we wanted to take.
Related: My Business Is Growing… What Now?
5 Lessons On Scaling Up Your Company From An EOY Winner
It takes a combination of grit, hard work and the right strategies to navigate the challenges of the scale up journey. What do some entrepreneurs do differently to make it to the top?
Building a successful company is really hard. Even when you have made it through the start-up phase – product development, market fit, building a team, earning first traction – the process of scaling up remains a challenging road.
Louw Barnardt CA(SA), recently named the Emerging Entrepreneur of the Year at the Sanlam/Business Partners Entrepreneur of the Year® Awards, shared his five top lessons learnt from fast-growing clients and from their own journey of scaling up Outsourced CFO to twenty five full time professionals.
“There are many stumbling blocks that hinder exponential growth at the scale up phase. Successful start-up founders do not always have the right skill set and experience to build a business from five to fifty people or from twenty to two hundred.”
Louw and his team have taken the concept of an ‘Outsourced CFO’ – a go-to finance person for emerging companies – and built a very exciting business from it. “There are hundreds of lessons one learns on the journey of building a scale-up company. These five stand out among all of the biggest lessons learnt.
1. Invest in People
Doing business is all about people. In start-up phase, founders are able to manage almost everything. From the social media post to the invoicing to the recruitment – it all falls on you. One founder can manage this for a short while and a founder team for a bit longer, but somewhere between five and twenty people this changes. The founders can no longer make every call, have every meeting, answer every client query.
It’s critical to build a solid leadership team and then to equip them with enough autonomy and authority to run with the various portfolio’s within the company. Put a head of HR, head of sales, head of client engagements, head of operation and head of finance in place as soon as you can and keep investing in them – it’s the only way to scale out of start-up mode.
2. Manage Cash Flow
The finance function sits at the heart of every business. If the numbers don’t add up, everything comes to nothing quite fast. Founders need to make sure that they have a firm eye fixed on financials. New cloud systems enable entrepreneurs to have access to every detail of revenue, profitability, debtors and cash flow in real time.
That’s right – exact live financial information at your fingertips for decision-making. Foreseeing cash crunches ahead of time and actively being able to navigate to avoid them makes all the difference in the scale-up process. Growth eats cash, so be sure to manage yours on the way up.
3. Streamline and Automate
A start-up can afford to do what needs to be done in the moment. Scale-ups cannot. Automation of company processes is key to enable scale in various company functions.
Automate your sales process with a tool like Sales Force or HubSpot. Automate your marketing with a tool like Hootsuite. Automate your finance with a tool like Xero. Automate your company culture input with a tool like Hi5. Putting a good system in place and investing in the understanding and utilisation of all of its functions is a prerequisite for high growth.
4. Prioritise Strategy
As execution becomes a bigger and bigger part of your company, the strategy that directs that execution plays an ever-increasing role. The most successful management teams set and stick to good habits around strategy: Annual breakaways to direct long term strategy. Quarterly strategy days to cement key strategic priorities for the next 90 days and the likes.
It may seem counterintuitive to have your full management team out of action for so many full days of work, but putting the right strategy in place to execute is the real deep work required to scale.
5. Brand and Awareness is key
The value of owning a top brand and of being top of mind with all your stakeholders cannot be overstated. A stronger brand lifts the market’s perceived value of your offering. Continuously starting conversations and finding ways of reminding your networks and target market of who you are and what amazing things you are doing opens up ever-bigger opportunities that play a huge part in creating scale for our top entrepreneurs.
“Building a company is hard work. But if you do it smartly, the juice is worth the squeeze many times over. Make these five lessons your own to hack the scale up journey as you build the business of your dreams.”
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