Connect with us

Performance & Growth

Why Start-ups Like Uber Stumble When They Scale

High-growth companies will more often than not stumble and fall because of internal factors. Here’s what you should be paying attention to in your organisation if you have ambitions to scale.

Chris Zook and James Allen

Published

on

uber-growth

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.

Related: How To Drive Customer Referrals (When You Aren’t Airbnb, Dropbox or Uber)

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.

lightning-in-a-bottleOne 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.

Related: How Uber Grew To A Billion Dollar Business (And How You Can Make Money With It)

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.

Related: Should You Scale Or Should You Grow? (The 2 Strategies Are Not the Same)

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:

  1. Is your founder scaling the team at a pace to address the opportunities and challenges of a scale insurgent?
  2. Do we have a talent plan to match our growth plan? If not, how do we close the gap?
  3. Is the voice of the customer and the front line as strong as it used to be? How do we know?
  4. Is our insurgent mission, so inspirational in the early days, still strong, or is it getting diluted?
  5. 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.

Chris Zook is a partner in Bain & Company’s Boston office and has been a co-head of the firm’s global strategy practice for twenty years. James Allen is a partner in Bain & Company’s London office and a co-head of the firm’s global strategy practice. Zook & Allen are co-authors of The Founder’s Mentality: How to Overcome the Predictable Crises of Growth.

Continue Reading
Advertisement
Click to comment

You must be logged in to post a comment Login

Leave a Reply

Performance & Growth

South African Investors And Entrepreneurs, The World Needs You

With governments and corporations across the globe constantly on the lookout for innovators and entrepreneurs, time is most certainly against those who remain constricted by their limited citizenship portfolio.

Amanda Smit

Published

on

malta

Citizenship-by-investment (CBI) was once seen as something only reserved for the ultra-wealthy, but it is now also becoming the new normal for business investors and entrepreneurs wanting to expand their reach. We live in a highly globalised world where the flow of goods, people, and ideas means that the freedom to move and do business internationally has never been more important. With governments and corporations across the globe constantly on the lookout for innovators and entrepreneurs, time is most certainly against those who remain constricted by their limited citizenship portfolio.

How can citizenship-by-investment benefit South African investors?

First of all, entrepreneurs with multiple passports or residence permits are able to take advantage of the benefits and best practices of all the countries to whose jurisdictions they belong, while also being less vulnerable to a single country’s risks, shortcomings, and unexpected changing fortunes. The more jurisdictions an investor can access, the more diversified their assets will be and the lower their exposure to both country-specific sovereign risk and global volatility. By acquiring a higher quality nationality, one obtains greater global access and is better prepared for an uncertain future.

Nations within the EU, for example, offer citizens and residents access to all 28 member states, as well as to a number of other countries associated with the EU’s freedom of movement charter. In addition to expanded global mobility and a reduction in sovereign risk, alternative residence and citizenship also offer individuals access to career, educational, and cultural opportunities on a global scale.

Related: Funny Thing Happened On The Way To Global Expansion: We Met Our Doppelgänger

The benefits to governments and citizens of host nations

st-kitts-and-nevis

It would, however, be misguided to think that the advantages presented by citizenship-by-investment are for investors alone: for the governments and citizens of host nations the benefits are substantial. For governments, the inflow of extra capital reduces pressure on the treasury and protects national sovereignty by helping to mitigate the need for loans. Indeed, the establishment of a transparent, well-managed CBI program is not dissimilar to discovering a sustainable source of oil within the confines of a country’s national borders. Both scenarios create an immediate injection of new funds into the national treasury, which ultimately leads to greater long-term prosperity for the country and its people.

Successful applicants also bring intangible benefits to receiving countries, such as scarce skills and rich global networks. They add diversity and they uplift host nations through their demands for improved and novel services, which can create new opportunities for local communities. In Malta, for example, the establishment of a CBI program was as much about attracting rare talent as it was about generating much-needed capital in the aftermath of the 2008 financial crisis. Four years after the launch of the Malta Individual Investor Program (MIIP), Malta has one of the highest GDP growth rates — and one of the lowest unemployment rates — of any EU member state. In 2017, the country also reported a record-high budget surplus, with 90% of the gains attributable to the MIIP.

For smaller economies that face increasing trade and industry competition on the global stage, such an outcome can be transformative. Take the Caribbean nation of St. Kitts and Nevis, for example. Three years after relaunching its CBI program in 2007, the program accounted for around 5% of the country’s GDP. A year later, this figure had doubled, and after the sixth year, the figure had doubled again to 20%. By 2014, the St. Kitts and Nevis CBI program was responsible for approximately 25% of the nation’s GDP.

Related: From Local To Global – How To Expand Your Business Internationally

Moreover, other projects made possible through Caribbean CBI programs have had the knock-on effect of boosting employment and contributing to the greening of their economies. For instance, in Antigua and Barbuda an award-winning 10 MW clean-energy project cluster was realised within two years of launching its program. In addition to large-scale installations, over 50 schools and other government-owned buildings have been equipped with sustainable solar-energy systems in order to benefit from the new clean-energy supply. Such innovations were only made possible through the funds conferred by the country’s CBI program.

Thus, the inflows of funds from citizenship programs can be considerable, and the macro-economic implications for most sectors can be extensive. Just as traditional foreign direct investment (FDI) increases the value of the receiving state, bringing in capital to both the public sector and the private sector, so the benefits proffered by CBI — a form of FDI — rapidly turn the fate of a country away from debt and dependency and towards independence and stability.

Conclusion

In short, citizenship-by-investment is a boon to both host nations and investors alike. For South African entrepreneurs and investors who find themselves burdened by visa restrictions and red tape, acquiring a second citizenship is a simple means of expanding global reach, getting ahead of competitors, and giving something back to host nations that are only too grateful to have these talented individuals as part of their community.

Continue Reading

Performance & Growth

First Rule Of Securing Growth Capital: It’s Not About The Product

Paragon CEO, Gary Palmer, discusses the pitfalls facing business owners searching for capital to fund expansion.

Gary Palmer

Published

on

growth-capital

A common mistake made by entrepreneurs looking for growth capital is fixating on which product they should choose. When looking to finance growth in your business, the decision process should be focused on longer-term strategic priorities and then finding a partner to help you access the right product to deliver on those goals.

Let’s get real

At the outset business owners need to look at their business realities and decide whether they should be looking for debt or equity financing. For example, if a business can only support debt of 2.5 times EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation), and they are already at that limit, then they will need to look for equity financing to achieve their growth goals. In many instances, a combination of both debt and equity financing will hold the key, allowing the organisation to benefit from cheaper debt funding, but ensuring that it is not overextended.

Related: Dragon’s Den Polo Leteka Gives Her Top Tips To Attract Growth Capital

Even if the growth project can be funded through debt alone, business owners face the challenge of dealing with a multitude of institutions, each of which puts emphasis on different aspects of the deal. No business owner can know the minutia of their requirements, and so working with a partner who can help you prepare your presentations is a must.

The challenge becomes all the greater when companies may be looking to finance a non-traditional project. We have a client who is looking for finance to build roads leading to his development. This is not something traditional lenders usually deal with, and so in this instance he will need to access more creative funding options not offered by the banks. Another example is when a founder is looking to buy out other partners, this too may need to go to a lending institution which is able to structure deals for out-of-the-box requirements.

Square pegs, round holes

A common frustration faced by business owners is that some lending institutions sell products rather than solutions. Too little time is spent understanding the needs of the client and designing an appropriate solution, tailored to the client’s unique requirements. These lenders are literally forcing the client’s needs into the limited number of financial products they offer.

It’s going to get more complex

Another challenge for business owners is the sheer number of institutions out there. New funds, new lenders and the plethora of fintech offerings are making it harder for growth companies to find the best offer available. In the US and Canada, more than half of the big property deals are now funded by non-banks. We believe South Africa is headed the same way. The added competition, is of course great for the market and will encourage better service and more creative options, but it does make it difficult for business leaders to keep track of everything available.

Don’t fall prey to borrower’s remorse

In so many cases, companies are in a rush to secure funding and often end up choosing a product which is not suited to their longer-term strategy. Getting out of a transaction can be exceptionally difficult. Far too often companies wake up to better options too far down the line. If more appropriate finance is found, companies will be left carrying the settlement fees attached to their previous funding, not to mention the administrative pain of changing lenders.

Related: Funding Growth

Paragon has over 150 lenders on its books and a network of angel investors which we can access to find the right deal. It’s our job to know exactly what is available and more importantly, to work with business owners to ensure they access lending which is not going to result in borrower’s remorse. The only way to ensure good results is to start the lending hunt with a partner who can help you first determine the right lending strategy, based on your business reality. The alternative could prove both expensive and painful.

Continue Reading

Performance & Growth

How Well Do You Really Know Your Customers?

Staff are more secure, and turnover is decreasing.

Nathalie Schooling

Published

on

customer-service

All businesses go through 4 distinct stages of growth. In the early start-up days everyone is thinking on their feet, few formal processes are in place and sales funnels are still being constructed. Then the business enters the growth stage where things become more formalised and client relationships are maturing into the three to four-year mark. Staff are more secure, and turnover is decreasing.

Next is into the maturity phase, growing by about 5% annually with early employees entrenched with 8 – 10 years’ tenure. This is the stage where you feel most secure, with operations being predictable and revenue steady. But it is also the most critical period in your company’s life as this is when complacency may set in. This leads to the last growth stage for a business – renewal or decline.

Renewal equals customer growth

Your business’s final growth stage must start with identifying what customer value is still untapped in the business. The Pareto Principle or 80/20 Rule, says that 80% of your business wealth will come from 20% of your customer base. Since it costs 10 times more to acquire new clients than to sell to the ones you already have, focusing on existing clients should be a no-brainer.

To talk to and retain these all important existing clients, it is essential to provide value through the entire customer lifecycle; from when you acquire them to engaging them in meaningful conversations to retaining them by continually providing value – ultimately turning them into brand advocates.

Related: 5 Reasons Why Your Business Is Losing Customers

Key relationships not just transactions

Engaging with your customers this way moves you away from a transactional approach to a more long-term partnership. But to do this your clients need to trust your company. Not just the sales team, but everyone at every touch-point. I have found this to be especially true for the B2B market. Clients want to do business with a business that continuously adds value to them – not taking their account for granted and making them feel that their business is important.

This more long-term approach means greater value to the right clients, in the right ways at the right times. Collectively, the long-term effect should result in greater customer retention, preventing churn and attrition, turning your clients into loyal advocates. So it is vital to have an ongoing and robust helicopter view of your clients’ sentiment. Don’t put your head in the sand. Be brave, ask the tough questions and then listen to the answers.

It’s not just up to Sales

Identifying who you regard as key clients must be done carefully with clear criteria, leaving you with a core group (your 20%) that is a manageable size. Implementing a more customer-focused approach is a different way of doing business and will require buy-in and advocacy from the highest levels within your organisation.

There will need to be acknowledgement and agreement to work differently with certain priority clients. If a key account is promised priority access to urgent products or service, Operations will need to provide it, not Sales.

Protecting your business against decline can most simply be done by growing value that is already in your business, both by investing in staff and by growing revenue from your key clients, renewing not only your business strategy but also your relationship with the people that enable you to do business.

Read next: Effective Ways To Bring Customers To Your Door

Continue Reading
Advertisement

SPOTLIGHT

Advertisement

Recent Posts

Follow Us

Entrepreneur-Newsletters
*
We respect your privacy. 
* indicates required.
Advertisement

Trending