In previous post I’ve covered topics related to business formation and new market entry, incl. business model development, prototyping minimal viable product or service, valuating new venture, making it investable, and getting founded. In this post, I relate to a phase of company’s development following market introduction –so called growth phase.
G. Duruflé, T.Hellman and K. Wilson in From Start-Up to Scale-Up Examining Public Policies for the Financing of High-Growth Ventures define scale-ups as start-ups that have successfully established market presence and experienced rapid growth.
For the sake of this post let’s assume that new market entrant finds itself in the growth phase when its product has been already tested and market demand for it exceeds its initial operations capacity. Growth phase for new ventures is intrinsically related with phenomenon of scaling-up – enlarging market presence and growing company’s operations capacity, understood as ability to manufacture and deliver product or service.
Scaling up has been recently wider discussed in entrepreneurship and innovation policy making discourse. This phase of growing new businesses has proven to be critical for their survival and performance, and is often backed-up with new employments. Growth is also a phase when many new companies become overwhelmed with unexpected and surprisingly high demand for their products and services, and due to that they often fail by loosing production capacity or financial liquidity.
Scaling-up requires different set-up of methods and tools from public entrepreneurship ecosystem stakeholders. Recent research results published by Innovate UK pointed out factors contributing to successful scaling-up process. I’ll focus on those I find the most challenging and crucial – people, strategy & cash.
As strong management team is critical to a successful scale-up, company founders need to enlarge original team to find time for other matters, such as e.g. strategy. This requires recruiting right people and avoiding miss matches. One of approaches that helps that is value-based recruitment focused on assessing match of candidate with values and culture of the company.
Why it’s important to focus on values? They seem to be often inherent, whereas skills can be learned and mastered. In value-based recruitment you might request the candidate to imagine they come back home extremely happy and excited after work in your company and then ask to explain to you what could have happened during the day in the firm so they feel like that. You’ll learn also learn about their values, motivations and development plans by asking what could have happened if they came back home sad and depressed.
In scaling-up phase you’ll rather follow lean approach toward recruitment which is also about using your network, asking for references and second opinions to find right candidates. You can find some more tips related to growing team in early stage venture at blog of Ben Yoskovitz.
In relation to people in growing phase you are also in situation of thinking on more or less formal organizational design, which might vary from functional, divisional through matrix ones – at least before maturity of your organizational allow you for to self-organizing teams and give individuals broad freedom to choose their own priorities and tasks. It’s also the moment you intensify thinking about harmonizing individual efforts toward defined goals of organization through set up of objectives and performance indicators for your co-workers. Some food for thought in this context comes from Peter Thiel – co-founder of Pay Pal we wrote about some time ago.
Second important item related to scaling-up is strategy. By strategy I understand not getting first paying customers, but rather rigorous way to answering the question on where you’d like to be in the marketplace and how you’d like to get there in time for 3 to 5 years. You get there through strategy development process requiring formulation of ideas & options, their evaluation and selection, setting up main strategic direction backed up with clear objectives, resources you control and action steps you set-up and execute. And yeah, if you offer acouple of different products or services, you develop separate strategy for each and every of them.
Business strategy is not the mission and vision your customers will find on your website. When the outcomes strategy development start saying about market share you plan to own and profit margins you want to achieve – that will be pretty close to what business strategy is about. After time when you get convinced it’s your biggest trade secret embracing insights and know-how straight from the crater – you are there.
Here you’ll find some tools pretty useful in strategy development process, especially for market-position analysis part, which precedes discussion on strategic development directions. Some other approaches useful for analysis of your competitive environment might incl. Porter 6-forces, product life-cycle, or benchmarking. You can also get answers to questions asked by rigorous application of SWOT analysis framework.
Although the process and tools might sound abstract, as entrepreneur you should take your first steps to have strategy developed. Just consider to designate small strategy development team of your employees and ask them to meet regularly for advancing strategy formulation. In between, they can talk with vendors and customers and prospects, research competitors, and try some strategy development tools , which anyway will lead you further than not trying to tackle strategy at all.
As noticed by V. Harnish in Scaling Up nothing consumes cash as fast as growth phase. Therefore third most important ingredient in scaling-up is cash flow management. V. Harnish advices a proactive approach toward management of growing company liquidity through conscious cash flow management and building reserves through e.g. dynamic pricing, competitive sourcing, lowering operating costs, collecting due amounts faster, reducing inventory and acceptable delaying payments to others. Some concrete practices the author recommends to consider relate to preparing in advance and sending error-free bills to customers on time or keeping 60 days’ cash on hand to cover potential expenses and avoid difficulties, which in scaling-up should never be fixed with lines of credit.
Some non-obvious ideas for lowering operating costs and increasing company’s performance can be found in Exponential Organizations written by S. Ismail, M. S. Malone and Y. van Geest. Authors preach approaches of smart partnering, exploiting and leveraging other people’s assets and resources if one have none, using games, challenges, quizzes and competitions to tap mind power of people in their communities and engaging them in creating value which originally was though as something to purchase from the outside.
So, in what stage of development is the venture you support?