The Problem in Rate of Growth

2008-04-09T23:55:00.000-07:00

Difficulties in anticipating these shifts by recognizing signals and developing management approaches are compounded by growth rate. The faster the rate of growth, the greater the potential for difficulty; this is because of the various pressures, chaos, confusion, and loss of control. It is not an exaggeration to say that these pressures and demands increase geometrically, rather than in a linear way (see also about asset management).

Exhibit 8.2 Crises and Symptoms

Pre-Start-Up (Years -3 to -I)

Entrepreneurs

•

Focus. Is the founder really an entrepreneur, bent on building a company, or an inventor, technical dilettante, or the like?

•

Selling. Does the team have the necessary selling and closing skills to bring in the business and make the plan—on time?

•

Management. Does the team have the necessary management skills and relevant experience, or is it overloaded in one or two areas (e.g., finance or technology)?

•

Ownership. Have the critical decisions about ownership and equity splits been resolved, and are the members committed to these?

Opportunity

•

Focus. Is the business really user, customer, and market driven (by a need), or is it driven by an invention or a desire to create?

•

Customers. Have customers been identified with specific names, addresses, and phone numbers, and have purchase levels been estimated—or is the business still only at the concept stage?

•

Supply. Are costs, margins, and lead times to acquire supplies, components, and key people known?

•

Strategy. Is the entry plan a shotgun and cherry-picking strategy, or is it a rifle shot at a well-focused niche?

Resources

•

Resources. Have the required capital resources been identified?

•

Cash. Are the founders already out of cash (OOC) and their own resources?

•

Business plan. Is there a business plan or is the team "hoofing it"?

Start-Up and Survival (Years 0-3)

Entrepreneurs

•

Leadership. Has a top leader been accepted, or are founders vying for the decision role or insisting on equality in all decisions?

•

Goals. Do the founders share and have compatible goals and work styles, or are these starting to conflict and diverge once the enterprise is under way and pressures mount?

•

Management. Are the founders anticipating and preparing for a shift from doing to managing and letting go—of decisions and control—that will be required to make the plan on time?

Opportunity

•

Economics. Are the economic benefits and payback to the customer actually being achieved and on time?

•

Strategy. Is the company a one-product company with no encore in sight?

•

Competition. Have previously unknown competitors or substitutes appeared in the marketplace?

•

Distribution. Are there surprises and difficulties in actually achieving planned channels of distribution on time?

Resources

•

Cash. Is the company facing a cash crunch early as a result of not having a business plan (and a financial plan)? That is, is it facing a crunch because no one is asking: When will we run out of cash? Are the owners' pocketbooks exhausted?

•

Schedule. Is the company experiencing serious deviation from projections and time estimates in the business plan? Is the company able to marshal resources according to plan and on time?

Early Growth (Years 4-10)

Entrepreneurs

•

Doing or managing. Are the founders still just doing, or are they managing for results by a plan? Have the founders begun to delegate and let go of critical decisions, or do they maintain veto power over all significant decisions?

•

Focus. Is the mind-set of the founders operational only, or is there some serious strategic thinking going on as well?

Opportunity

•

Market. Are repeat sales and sales to new customers being achieved on time, according to plan, and because of interaction with customers, or are these coming from the engineering, R&D, or planning group? Is the company shifting to a marketing orientation without losing its killer instinct for closing sales?

•

Competition. Are price and quality being blamed for loss of customers or for an inability to achieve targets in the sales plan, while customer service is rarely mentioned?

•

Economics. Are gross margins beginning to erode?

Resources

•

Financial control. Are accounting and information systems and control (purchasing orders, inventory, billing, collections, cost and profit analysis, cash management, etc.) keeping pace with growth and being there as needed?

•

Cash. Is the company always out of cash—or nearly OOC—and is no one asking when it will run out or is sure why or what to do about it?

•

Contracts. Has the company developed the outside networks (directors, contracts, etc.) it needs to continue growth?

Maturity (Years 10-15+)

Entrepreneurs

•

Goals. Are the partners in conflict over control, goals, or underlying ethics or values?

•

Health. Are there signs of instability in any founder's marriage, health, or emotions (i.e., are there extramarital affairs, drug and/or alcohol abuse, or fights and temper tantrums with partners or spouses)?

•

Teamwork. Is there a sense of team building for a "greater purpose," with the founders now managing managers, or is there conflict over control of the company and disintegration?

Opportunity

•

Economics/competition. Are the products and/or services that have gotten the company this far experiencing unforgiving economics as a result of perishability, competitor blind sides, new technology, or off-shore competition—and is there a plan to respond?

•

Product encore. Has a major new product introduction been a failure?

•

Strategy. Has the company continued to cherry-pick in fast growth markets, with a resulting lack of strategic definition (which opportunities to say no to)?

Resources

•

Cash. Is the firm OOC again?

•

Development/information. Has growth gotten out of control, with systems, training, and development of new managers failing to keep pace?

•

Financial control. Have systems continued to lag behind sales?

Harvest/Stability (Years 15-20+)

Entrepreneurs

•

Succession/ownership. Are there mechanisms in place to provide for management succession and the handling of very tricky ownership issues (especially family)?

•

Goals. Have the partners' personal and financial goals and priorities begun to conflict and diverge? Are any of the founders simply bored or burned out, and are they seeking a change of view and activities?

•

Entrepreneurial passion. Has there been an erosion of the passion for creating value through the recognition and pursuit of opportunity? Are turf building, acquiring status and power symbols, and gaining control favored?

Opportunity

•

Strategy. Is there a spirit of innovation and renewal in the firm (e.g., a goal that half the company's sales come from products or services less than five years old), or has lethargy set in?

•

Economics. Have the core economics and durability of the opportunity eroded so far that profitability and return on investment are nearly as low as that for the Fortune 500? (see also about opportunity investment)

Resources

•

Cash. Has OOC been solved by increasing bank debt and leverage because the founders do not want—or cannot agree—to give up equity?

•

Accounting. Have accounting and legal issues, especially their relevance for wealth building and estate and tax planning, been anticipated and addressed? Has a harvest concept been part of the long-range planning process?

These seminars were held at Babson College near Boston between 1985 and 1999. A good number of the firms represented had sales over $1 million, and many were growing at greater dian 100 percent per year.

Growth rates affect all aspects of a business. Thus, as sales increase, as more people are hired, and as inventory increases, sales outpace manufacturing capacity. Facilities are then increased, people are moved between buildings, accounting systems and controls cannot keep up, and so on. The cash burn rate accelerates. As such acceleration continues, learning curves do the same. Worst of all, cash collections lag behind, as shown in Exhibit 8.3.

Distinctive issues caused by rapid growth were considered at seminars at Babson College with the founders and presidents of rapidly growing companies—companies with sales of at least $1 million and growing in excess of 30 percent per year.* These founders and presidents pointed to the following concerns:

•

Opportunity overload. Rather than lacking enough sales or new market opportunities (a classic concern in mature companies), these firms faced an abundance. Choosing from among these was a problem.

•

Abundance of capital. While most stable or established smaller or medium-sized firms often have difficulties obtaining equity and debt financing, most of the rapidly growing firms were not constrained by this. The problem was, rather, how to evaluate investors as "partners" and the terms of the deals with which they were presented (see also about Debt Capital).

•

Misalignment of cash burn and collection rates. These firms all pointed to problems of cash burn rates racing ahead of collections. They found that unless effective integrated accounting, inventory, purchasing, shipping, and invoicing systems and controls are in place, this misalignment can lead to chaos and collapse. One firm, for example, had tripled its sales in three years from $5 million to $16 million. Suddenly, its president resigned, insisting that, with the systems

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that were in place, the company would be able to grow to $ 100 million. However, the computer system was disastrously inadequate, which compounded other management weaknesses. The generation of any believable financial and accounting information that could be relied upon was not possible for many months. Losses of more than $1 million annually mounted, and the company's lenders panicked. To make matters worse, the auditors failed to stay on top of the situation until it was too late, and they were replaced. While the company has survived, it has had to restructure its business and has shrunk to $6 million in sales, to pay off bank debt and to avoid bankruptcy. Fortunately, it is in the process of recovering. Decision making. Many of the firms succeeded because they executed functional day-to-day and week-to-week decisions, rather than strategizing. Strategy had to take a backseat. Many of the representatives of these firms argued that in conditions of rapid growth, strategy was only about 10 percent of the story.

• Expanding facilities and space and surprises. Expansion of space or facilities is a problem and one of the most disrupting events during the early explosive growth of a company. Managers of many of these firms were not prepared for the surprises, delays, organizational difficulties, and system interruptions that are spawned by such expansion.

Investment Capital

The Problem in Rate of Growth