| 10 Steps To Second Stage Success For Your New Venture Posted: 30 May 2022 07:05 AM PDT
 Early-stage entrepreneurs rightly keep their focus on creating an innovative product or service. After celebrating success at that level, they often find themselves ill-prepared to move to the next stage, for scaling their business into a high-performing enterprise. That's where I see too much entrepreneur burnout, growth plateaus, and founders being replaced, to their chagrin.
By definition, second-stage ventures generally have 10 to 99 employees and/or $750,000 to $50 million in revenue, and see that as just the beginning. Of course, not every entrepreneur wants to tackle this challenge. According to one study a decade ago, only 45% of founders plan to exit after stage one, and my guess is that less than half the remainder survive the next stage in their own company. If you are one of the many entrepreneurs who aspire to get beyond the "art of the start," there are some proven principles to follow. In his classic book, "Second Stage Entrepreneurship," Daniel J. Weinfurter, talks about making the leap a couple of times himself, and the perspective he gained from many years of consulting with other companies who have done the same. I like the ten steps he outlines, which I characterize here as follows: - Seek major capital infusion. Very few startups are cash-rich enough to self-finance aggressive second-stage growth. They need a large infusion from venture capitalists, private equity, bank loans, or mezzanine financing. Of course, that means a new level of risk, giving up some control, and a new business plan. There is no free lunch.
- Install a real board of directors. Most entrepreneurs are mavericks, and their passion drove their new business. But to scale the business, they need the complementary expertise, experience, connections, oversight, and new capital connections of a formal board of directors. Recruiting, compensating, and engaging the board is a critical priority.
- Focus on creativity more than smashing competitors. To achieve second-stage growth you need to stay at the top of your creative game, more than a focus on beating competitors. Growth is more than simply repackaging existing products, and adding bells and whistles or slick incentives. Keep delivering something new and fresh.
- Hire more help than helpers. Smart staffing is a key step to ensure your success at the second stage. In addition to fresh products, you need people smarter than you for real help, with the right combination of skills, experience, and passion to foster and manage new growth. You don't have the bandwidth to keep filling positions with more helpers.
- Switch your attention from product development to sales. Second-stage growth usually requires a formal sales model, an experienced and disciplined sales team, and a well-defined process to meet your new goals and demands. These only come with the proper training, investment in tools, and focus on customer relationships.
- Managing business growth is more than metrics. You can hire the best salespeople, have great products and define good metrics, but without decisive and innovative managers, the sales organization will not reach its full potential. Leaders are needed to coach each salesperson, keep the team on message, and spur new growth and goals.
- Separate marketing from sales for further leverage. In the second stage, marketing and sales are highly specialized functions. Marketing shapes the concept, branding, packaging, pricing, and positioning. Sales builds relationships, translates needs, makes proposals, and closes the deal. The skills required are complementary, but not the same.
- Optimize the total customer experience. Successful second-stage companies often create an entire organization devoted to one-on-one relationships with their customers, not just customer service for exceptions. Delivering a superlative experience is the only way to get truly loyal clients, repeat business, and expansion through social networks.
- Build a winning culture and make it pervasive. In these rapidly changing times, in your own rapidly evolving company, culture will be the rudder that guides your path in a fashion that is consistent with your vision and values. Reinforce the values and operating principles with clear behaviors and guidelines to keep the culture healthy and thriving.
- Separate management from leadership, and provide both. Leadership is the quality that inspires people to do their best every day. Management guides people in what needs to be done, by creating sustainable and repeatable systems, with education and guidance to make sure all efforts are productive. Neither is effective without the other.
Many startups are family businesses, and these don't need to be grown into large enterprises. Yet the steps outlined here still have value in building a business that lets you enjoy the entrepreneur lifestyle, and lets you work "on the business" once in a while, rather than "in the business" 24 hours a day, 7 days a week. On the other hand, if you aspire to be the next Bill Gates or Steve Jobs, these principles for aggressive growth to the enterprise level are absolutely required for survival. It really is a decision to grow and have fun, or die. Are you enjoying your entrepreneur lifestyle today? Marty Zwilling |
| 10 Real World Hazards With Taking Your Startup Public Posted: 29 May 2022 07:05 AM PDT  In the old days, every entrepreneur planned on taking their startup public, and making it big. Today the rate of startups going public (IPO – Initial Public Offering) is finally up from the dead zone of the last two decades, and is now double the rate back in 1999. Smart entrepreneurs are now starting to look at this option again, as well as the challenges of running a public company.
Last year was quite a year for IPOs, largely influenced by the significant rise in the number of special purpose acquisition companies (SPACs) who went public, despite almost uniformly negative returns. Thus, today around 90 percent of successful startups are still acquired by bigger companies versus an IPO, as the safer and preferred method of growth and funding. The reasons are a lot more complex than the meltdown of key investment banks in the US a few years ago, so don't expect any real change in the numbers soon, especially with recent stock market downturns. In my view, the key reasons that IPOs have lost their luster from an entrepreneur and investor perspective include the following: - The US IPO process has stumbled badly. Too many startups have experienced early financial losses and technical glitches, like Uber and the Zynga IPO a while back, which antagonized individual investors and startup executives as well. In addition, most ordinary investors are convinced that IPO rewards only go to insiders.
- Going public is an expensive process. Typical costs for startups today range from $250,000 to $1 million, even if the offering does not go through. In addition, huge amounts of executive time are required, as well as hits to key operational, accounting, and communication processes. The M&A alternative looks simple by comparison.
- Constant pressure to increase earnings. Because public shareholders usually take the short-term view, they want to see constant rises in the stock's price so they can sell their shares for a profit. Thus, there is tremendous pressure to increase current earnings, and little appetite for strategic investments.
- Startups going public are laid open to competitors and critics. Startups are typically run by a couple of executives who are reluctant to disclose via the prospectus and SEC reports all the decision-making criteria, operational financial details, and compensation formulas. With thousands of shareholders, dealing with critics is an onerous challenge.
- Complying with Sarbanes-Oxley requirements is a heavy burden. Public companies of any size must comply immediately with the full reporting requirements of the SEC. There is no accommodation for smaller public companies, who can't be competitive in their space with the new accounting, documenting, and reporting processes required.
- Public companies are always at risk for takeovers. Friendly or hostile takeover attempts are just a couple of the many ways that company founders sense a loss of control of their own destiny. The board of directors, as well as public stockholders, are no longer part of the inside team focused on the founder's vision to change the world.
- Increased liability risk exposure. Public company executives and directors are at civil and even criminal risk for false or misleading statements in the registration statement. In addition, officers may face liability for misrepresentations in public communications and SEC reports. Executives are also at risk for insider trading and employment practices.
- Violent market swings usually hit public companies first. Private companies in less-relevant market segments can often fly under the radar in turbulent times like the recent recession. Public stockholders are more easily swayed by emotion and the activities of the crowd, than real market conditions.
- Startup founders don't fit in a public company. Most just don't enjoy all the challenges of communicating to analysts, placating demanding stockholders, and keeping up with legal reporting requirement. They know they can be quickly tossed aside for not maintaining the right image and the right relationships with people they don't like.
- The image of large public companies is negative. In the last few decades, the paternal image of large multi-national company leaders like Thomas Watson at IBM and Henry Ford is gone. Now the mistakes of large companies like Enron and BP have set a new image of public companies as being led by greedy and uncaring executives.
These negatives have largely overshadowed the potential IPO positives of increased capital for the startup, possible huge increase in personal net worth, broader access to investors, market for their stock, the ability to attract top-notch professionals, and the peer prestige of running a public company. Thus most startups I know don't even mention the IPO exit option, when applying for angel funding, and most angel investors will react negatively if you do mention it. As best, you should reserve this option for later stage VC discussions, once you have a well-proven business model, large market following, and substantial revenue. More importantly, make sure first that you really want to give up the entrepreneur lifestyle for the challenges of a public company executive. I'm betting that Mark Zuckerberg of Facebook fame still has second thoughts from time to time, with all the political scrutiny, despite being worth over $70 billion as a result. Marty Zwilling |
| 7 Key Ingredients to Address the Challenge of Growth Posted: 28 May 2022 07:05 AM PDT  Once your business is running and sustainable, everyone these days expects it to grow, as an indication of long-term health and competitiveness. Thus continued growth becomes the biggest challenge for many of you business owners I meet in my consulting practice. Everyone is looking for that magic strategy that will keep them growing, even during market and company changes.
In fact, I have long believed continual growth gets more and more difficult as your company gets bigger and more mature, as your organization develops repeatable processes and adds overhead to reduce risk. I found this perspective confirmed recently in a new book, "The Crux," by Richard Rumelt. He focuses on how business leaders have to become strategists to address this issue. I support the key strategies and priorities, summarized here, that Rumelt offers for all companies to address the continuing challenge of growth, no matter what their size and position today: Deliver exceptional value to an expanding market. This may seem obvious, yet many companies ignore the keyword "exceptional" or they count on an existing market that is not "expanding." In addition, you need to focus on the unique value you bring, and maintaining the gap between what customers are willing to pay versus your best cost. Obviously, the attributes of the solution you offer have much to do with whether your market is expandable and the value is exceptional. Therefore, one key aspect of every strategy should be regular updates to every solution, no matter how strong it is initially. Trim your overhead and reduce spent resources. Activities, or whole chunks of your business, may have built up over time, but are not contributing to the bottom line. The resources may be money, public controversy, or management attention. To grow your company, get it trimmed and focused on the business areas that have growth potential. Many advisors have likened this strategy to regularly weeding your garden. Keep your company focused on the business areas and functions that fit your strategic direction, by periodically eliminating non-contributing activities, organizations, and business units. Improve reaction time to competitive situations. With growth opportunities, the first capable response often wins; not necessarily the first mover, but the first one to provide a competent reaction. Large complex organizations usually cannot move quickly, unless there is strategy, unity, and trust among the major actors. Optimize your ability to react. Business agility can also be improved by proactively looking ahead – for new trends and technologies that will likely attract competitors and customers. Don't wait a growth crisis to begin your efforts. Smart companies always have a few "experiments" in process. Use acquisitions to complement organic growth. Look for economies of scale, complementary skills and technologies, or access to a broader and stronger market. This strategy should not replace organic growth efforts, but should expedite them. Smart companies use acquisitions to enhance momentum and accelerate revenue growth. When contemplating a merger or acquisition, you should never overlook the human factors of post-acquisition integration, such as stress among existing employees, IT incompatibilities, and employee turnover. In many cases, the return is not worth the cost. Avoid overpaying by buying nonpublic companies. Public companies usually only come at a premium over value, or even premium on a premium in a bidding war, big brand names, or overconfidence. Do your homework privately to assess realistic value, intellectual property, and build relationships. Avoid stock deals, and pay with cash. Plant seedlings outside the core for safe growth. These need to be cultivated and shielded from your core management process, which is usually hampered by power games and conflicts of interest. Successful companies often maintain six or eight seedlings, and always highlight the learning, rather than punish the failures. Don't use accounting tricks to fake expansion. Financial assets can be quickly bought and sold to generate gains that look like growth, but you will only fool yourself in the long run. Spend your IQ on how to be transparent to constituents, simplifying your core processes, better understanding competitors, and reacting quickly to market changes.
Finally, remember that your growth strategy can never be static – it needs to evolve and adapt as the market and competitors change. Your challenge is to build a team and an organization which operates close to your customers and the market, and is nimble enough to change as required by competition and the environment. Only then can the business survive and thrive for the long-term. Marty Zwilling *** First published on Inc.com on 5/12/2022 *** |
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