Phases of Growth in an early stage company...

This article tackles the phenomena of change in the management team of an early stage company it was written by Earl Smith who is Executive Director of Longview (www.lngvw.com). He provides senior advisory services, serves on Board of Directors, builds Advisory Boards as business development engines.

Battle at the Cottage Gate by Dr. Earl R. Smith II

I sometimes work with companies that are on the verge of leaving the ‘cottage stage’ and pushing into the great uncertainty of corporate adolescence. This push, and the stress which often accompanies it, is one of the seminal periods in the development of any company. By the time I arrive on the scene, battle lines often have been well formed and the organization has divided into two camps. The coming battle will present severe challenges for the founders, team and the company. The prevailing camp will get to decide what the future will hold for all involved.
Let me start by defining what I mean by ‘cottage stage’. First off, defining a company in terms of its gross revenue is not useful. I’ve seen organizations generating close to twenty million dollars in gross revenue while still operating within this paradigm. Secondly, the size of the organization in terms of its client base or human resources is also not a good indicator. I have encountered companies with twenty to thirty major clients and over a hundred employees that are still operating as a cottage business. Finally, the age of a company is an unreliable indicator as well. Once a company slips into what I call ‘life-style mode’ it enters a period of repressed adolescence that can last through its entire life span.
There are a number of indicators which are very useful in identifying a company which is still operating within the cottage industry paradigm and facing the complex issues of reinventing itself. The most notable of them are: the evolving nature of leadership, the changing nature of employees, the definition of span of control, the performance and behavior of the founders, the level of professionalism within the corporate culture and the ability of the company to allow its culture to evolve in order to cope with the increasing burdens that always accompany rapid growth and increased size.
The Evolving Nature of leadership: In the cottage stage, leadership tends to be defined by the founders. For many, because of their own rather limited management experience, their vision of leadership tends to be based on position and prerogative rather than inspiration and example. This can work during the early stages.
But, as the company grows, it comes under increasing pressure to bring in more experienced managers. These newcomers tend to pose an immediate threat to the prevailing theory of leadership. In a sense a new coin of the realm begins to compete with the old currency. Employees now face a choice that wasn’t available earlier on. On the one hand there are the founders who may continue to insist that they are the leaders and should be followed - often without question. On the other there are managers bringing new, and often very creative, approaches. Their leadership is based on the proposition of ‘do as I do’ rather than ‘do as I say’ - and they lead by example.
Founders are often the most challenged by this evolution in the operative concept of leadership. It takes an exceptional person to give up the security of the ‘I own the business so you will do as I say’ attitude in favor of the more risky and challenging approach of ‘follow me when I need to lead and I will follow you when it is better that you lead’ approach. How the founders react to this option has a major impact on the future of the company.
The Changing Nature of Employees: As an organization grows, and the pressures to generate higher performance increases, employees will seek out leadership and form allegiances which will empower them to solve new, and far more difficult, problems. New managers may have experience and skill sets that were not present in the original team. Some of them will take leadership roles in areas that have traditionally been seen as the prerogative of the founders - resulting in tensions that are felt company-wide.
Over time, two camps evolve within the company. The first, which I call ‘the traditionalists’, tends to find the changes unsettling. They often wistfully reminisce about the good old days when the company was more like a family than a business. They are bound together by a network of relationships, some of which are deeply personal. Their approach to the business tends to be conservative and focused on ‘growing without major changes in the corporate culture’. As the battle approaches they will often adopt a Fort Apache the Bronx approach - circling the wagons and defending what they consider to be the pure heart and soul of the company.
On the other side of this developing divide is the new breed of employee whose vision of the company generally extends farther into the future. Their vision involves not only substantial continued growth but an increasingly professionalized environment which includes a professionalization of the management team - a significant and sustained evolution of the corporate culture. These employees tend to lack the emotional connection to the early stages of a company’s growth. They’ve signed on not because they are true believers in the founders but were attracted to the opportunities that the company has now become able to offer.
The Definition of Span of Control: One of the early indicators of the coming battle is a widening disagreement over the concept of span of control. In traditional, modernist management terms the span of control is defined in terms of a list of those individuals who report directly to a given person. This ‘post Fordist’ vision is the most common one adopted by founders because, in the early stages, all roads lead to them. But this vision of organization is fundamentally flawed.
In truth this rather basic version only works in the most primitive of organizational structures when leadership is based upon prerogative and position. But things get considerably more complicated as the company’s operations expand. Informal reporting patterns begin to evolve based upon perceived competence and charisma rather than prerogative and position.
Inevitably informal span of control networks develop. Employees develop strong relationships with individuals they trust and respect and who relate to them in a supportive and empowering way. Pressures build when there is an increasing divergence between these informal and formal relationships.
The Performance and Behavior of the Founders: In the early stages of a company’s growth most founders tend to fancy themselves as chief of everything. They have ‘final say’ on virtually everything that affects the company. Few things are minor enough to escape their attention. But as the company grows this becomes practically impossible. (Although I have known several founders who have given the impossible a heroic and generally destructive shot.)
In purely human terms there is gets to be too much to understand and process – too many skill sets to master – too many places and people to be – for the founders to remain master of everything. Additionally the challenges that a company faces as it grows become both more complex and specialized. Solutions require extensive knowledge and experience in skill areas – skill sets that the founders often do not have.
If the founders try to maintain their control, the company will be limited in its growth to the size that that management approach allows. It will grow until the internal pressures threaten to cause an implosion. Most often, founders who cannot bring themselves to let go and delegate will (sometimes unconsciously) work to keep the company a ‘manageable size’. If the founders successfully reinvent themselves, the team will expand to include new members with more sophisticated knowledge in important areas – members who will take the lead in their areas.
The Level of Professionalism within the Corporate Culture: When a team first starts out to build a company, there are many areas where they are just ‘making it up as they go along’. Many of these are in the ‘non-technology’ parts of the business of growing a business. Finances can be managed out of the proverbial cigar box. HR is handled by visits to job boards or word-of-mouth searches. Decisions about which business opportunities to pursue are generally made opportunistically and with an eye towards survival. Little attention tends to be paid to the definition and evolution of a corporate culture – and the attention that is paid tends to be superficial.
There is some point in the evolution of every company that marks the beginning of the end of the viability of these kinds of ‘off-the-cuff’ strategies. They just don’t seem to be working like the used to. Things get more complex and the need to have systems that are robust and effective increases. Also, the impact of the failure of these strategies tends to increase and the founders can spend more and more time crisis managing.Professionalization of the team means bringing in new members who have deeper knowledge and experience in the process of running a company (and often little in the technology, product or service that is the company’s foundation). Some major areas of professionalization that can cause internal stress are: proposal development and delivery, capture, red-teaming, sales, HR, financial control and general management. That these new skill set are critical to the growth of any company is not the question. How a company deals with meeting or avoiding these needs is.
The Ability of the Company to Allow it Culture to Evolve: An adult will do poorly in most civilized societies if they have repressed the process of maturing and are still acting like a child. The same is true of a company and its culture. Growth means change - but it also means evolution in along well traveled pathways.
There are two broad paths that present themselves to a company moving out of the cottage stage and into adolescence. One road takes it towards what I call a ‘life-style’ company – one which meets primarily the needs of the founders leaving the rest of the team to decide whether their needs are being fulfilled. Along this road, employees have to accommodate the circumstances desired by the founders or leave in search of greener pastures – and many of the best often do. The second road opens towards growth beyond expectations and focuses on meeting the needs of an expanding team. This option requires the founders to evolve in ways that allow them to help the expanding team to meet their needs.
Corporate culture most evolve and become more adult-like if a company is going to grow sustainable – a company will insist on that evolution. The issue becomes whether it is going to have the chance.
The Ten Percenters: So how does a company decide between the paths of repressed adolescence on the one hand and maturing adolescence on the other? You probably noticed that I have made extensive references to the role and impact of the attitudes and capacities of the founders so it will come as no surprise that I believe, at least initially, the future is in their hands. The truth is that the founders make the first choices – choosing a path for their creation. These choices are often best if they are decisions to allow others to participate. Even so, these first steps are only the beginning of the battle. I have seen battles at cottage gates rage on for years - with both sides struggling for supremacy - while massive amounts of damage accrue.
I have watched founders, in reaction to perceived challenges to their supremacy, resort to the nuclear option – become true dictators in their own house. In those cases the results have been very bad. At other times one or more of them go through an evolutionary leap – reinventing themselves to a new type of leader and putting the status of founder on the shelf. Here progress is made and, over time, the battle may get resolved productively. On more than one occasion I have seen the newer, more professional team members get fed up and go off on their own – leaving the cottage to the traditionalists. That result puts the company back to square one in the process and the battle lines may tend to reform around the gate.
These battles rage on as long as the issues such as the ones described above are potent and until one or the other side totally abandons the field. Two roads diverge in a leafy wood and the company can only take one. One leads to limits and eternal adolescence until death - the other to a path to possible healthy adulthood. The future is in the hands of the founders and the outlook is not rosy. My experience has been that, by their actions, rather than their words, nine out of ten founder groups drive their company towards the first path.

My Comments:

I have worked with a few early stage companies and founded my own, the description given by Earl is something I have observed in all of the early stage companies I have worked directly with and as a consultant. I use a quick 10 question approach to finding where a company sits on it’s growth stage, and use the Greiner Model to explain where I see the company sitting..and where it needs to go in it’s evolution / revolution
http://www.financinggrowth.co.uk/english/PDF/Final%20John%20Bates.pdf
(Link to Greiner Model….sorry if I am teaching folks to suck eggs…)
good article Earl, I wish more founders understood these challenges at the outset and planned for growth from the start…
I have also been in a company where they ported in a CEO from a large multi-national to run a start up in it’s later stages…I wonder why these guys would want to and I have my own thoughts w.r.t that, but 9 times out of 10 they crash and burn, they have the strategic vision but they lack the ability to get down and dirty with the hard core of the company, they have lost the ability to people manage, because they have not needed to in there previous corporate role, this usually means they have no ability to influence hence the ability to lead, as Leadership= Influence. It is inevitable that an early stage company growing will need to bring in a management team if they are to succeed, but in the selection process, look for the cultural characteristics in your on organisation and match them to the candidates you bring on board, use a large pool of existing employees to meet the candidates and use there feedback, the choice is your own, but be guided.

Slainte
Gordon

Sound advice for the early doors Scottish entrprenuer

Law No 1 from the book of Gordon = Revenue minus expense equals profit

Ask any experienced entrepreneur who's been through the startup ringer what the most basic formula for a successful startup company is, and they will likely give you this response:
-Revenue minus expense equals profit-

This may sound like an overwhelmingly obvious point, but you'd be surprised how many startups screw up this formula from the start. And you may be one of them.
While no startup succeeds without revenue, plenty of startups fail because they can't manage expenses. Experienced entrepreneurs know that in order to keep the ship afloat, you need to reduce as much weight as possible. This means shaving every possible expense you can find – even the ones you thought any startup should have.
When I help companies review their business plans, there are three areas that consistently waste the most capital. They're the biggest obstacles to getting to the profit part of the equation. Let's take a look at the biggest offenders.

Ditch the Office Space
The premature office space lease is the single worst expenditure you can make. The thinking goes that if you have a place to work from everyone will be more productive and you'll look more like a real business. It's true, you will definitely be more productive in a shared space and you will look more professional.
But at what cost?
Office space is never cheap, and the overall benefit rarely outweighs the associated cost. The lease alone is rarely the largest cost, since once you move in you will need extra phone lines, office furniture and services just to maintain the space. More startups create cash liabilities from office space leases than productivity bonuses that generate real revenue.
Instead of rushing out to get an office, find a free place to gather your team (your living room or a local Starbucks) and hold your meetings there. If you need to meet with a client then consider a neutral meeting location. Your tiny office space is only going to make you look tiny, not professional, there are plenty of serviced meeting venues that will be more cost effective, And the money you save on not signing a lease can go toward expenses that generate more sales, not additional costs.

Forget About Hiring
The second worst offender on the cost analysis is headcount. Entrepreneurs tend to think that businesses are only real if they employ other people to help spread the workload. Another myth. Hiring staff in startup mode is generally a horrible idea.First, you have no income. That means what little money you do generate is going to go to everyone but you. To some degree that's to be expected every business starts by paying more people than the founder when it launches. But it's also an enormous liability.Instead of taking on staff, consider nothing but paid project assignments with contractors and work-for-equity or stock options arrangements. The only asset you don't have right now is cash, and that's the one asset staff is going to eat up quickly.
In order to keep the income flowing to the right places (like your pocket) you'll need to hold off on hiring as long as possible. If that means more nights and weekends at your personal expense, so be it. It's the one expense you can afford to pay.

Write on Your Hand
On your quest to create a real business,you've probably also thought about buying all of the usual staples that you generally see in offices ,computers, post-it notes, furniture and the like. Together, they make for the kind of office you worked in at the big company that paid you a salary before you started this venture.But startups don't need office supplies. You need a barebones computer a cell phone (your company's new main number), and the back of your hand to write on. Anything else is an expense.

Only Spend on Stuff That Makes Money
If you want a simple way to determine what to spend money on, ensure every expense directly relates to income for example, marketing and sales. If you can deliver your product or service without an expense, then it's not essential.
You'll find that by adopting a no expense is necessary mentality, your road to profitability will be much shorter. Then, when the cash starts tumbling in on the profit side of the equation, you can put a little in your pocket. Even a dollar of income goes straight to the bottom line when you've learned how to cut out all of the expenses. For this reason, it's best to think of expenses as the last luxury that your new business can afford. The only line item that matters right now is income, and hopefully profit. Everything else doesn't fit in the equation.

Always remember you get the monkey (Venture capital /Investors) of your back when you start to make profit...and they you have a real company..

Tomorrow

Law N0 2: leadership equals Influence

Slainte

Gordon