VenturePORT Series - Scaling Your Business
Your business has taken off. Sales are growing rapidly. You have begun to make money. It's clear that you could grow even faster if you could open new offices, expand marketing, improve distribution, enhance technology. This is when it really gets interesting. Because with early success and growth come new challenges, perhaps as big as the ones you faced getting started. Believe it or not, some highly successful small businesses collapse when they try to scale up because they lack the management, systems, and financing necessary to make it at the next level.
Management
Now's a good time to make sure you feel qualified to take the business to the next level. Setting up multiple locations, hiring people nationally, dealing with new accounting issues and perhaps more financing, tackling new legal issues, etc. — these require yet another level of organizational skills and expertise. Recruitment of management, sales, and marketing personnel likely will become a major priority. However fast-paced your business, the pace will increase even further. With enough profits or financing, you're possibly at a stage at which you can afford to bring in a chief operating officer, someone from your field experienced at managing or expanding mid-sized companies. In fact, if you get venture financing at this stage, your investors might expect you to hire a chief operating officer, particularly if you are young and have never run a mid-sized company before. You should be so lucky as to be in a position to have to face this issue.
This type of self-analysis takes a lot of courage. Make a checklist of your strengths and weaknesses and make sure you don't come up short in the skills related to hiring people, retaining people, dealing with financing and accounting issues, etc. You have no reason to feel ashamed if you conclude that your company can now benefit from professional management. In fact, you will probably feel happier in the long run, because this will likely leave you with fewer day-to-day worries and more time to focus on what you enjoy most, which could well be creating and/or selling yet more new and innovative ideas and products.
Of course, the decision to bring in professional management requires a careful search to make sure the person has:
- Demonstrated skills managing a mid-size company, especially in your field.
- A management philosophy similar to your own in terms of priorities related to the overall business direction, processes, customers, and employees.
- A personality compatible with yours.
- A demonstrated commitment to stay at one company for a period of years.
- Clear abilities related to organizational structure, financing, real estate, technology, or other issues related to the requirements of your scale plan.
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People
The larger you scale, the more people you undoubtedly will have to hire. This may also mean hiring mid-level managers to oversee these people. Hiring a relatively large number of managers and employees rapidly requires excellent planning and processes not only to identify and hire the right candidates, but also to make sure your mid-level managers have experience and an understanding of the vision, values, and culture of your organization.
Rapid growth can lead to quasi-chaos, when you have new managers hiring and managing new employees, with the blind leading the blind. People may be unclear as to the priorities of the organization, of what they specifically have to do on their jobs, or how their job affects the company as a whole. This is the time to pay particular attention to the issues addressed in the chapter on Staffing and Management; i.e., setting up a system to identify the best possible candidates and providing a proper orientation and/or training program for each employee so he or she has a clear sense not only of his or her responsibilities but of the organization's goals, measurable objectives, and overall strategies. This applies even more to the direct supervisors in charge of these people. When possible, you can try to promote some of your original team to take over these supervisory roles, but you need to make sure these people have the personal or professional qualifications to take on leadership roles.
Your move to the next level of business will go far more smoothly if you use this transition period to develop more formal people systems, perhaps by hiring a part- or full-time human resources person or staff to help you set up a formal system for recruiting, training, retention, benefits, professional development, etc., for all levels of your organization. You want to make sure that, no matter how big you grow, each employee has a clear sense of his or her role and of what your organization expects of them.
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Systems
At this stage, your early efforts to set up systems will pay off. The ability to replicate any business on a larger scale requires a deep understanding of the steps required to efficiently deliver your product or service. At this point, you will have to have a means of making sure your systems can be adapted to handle greater demand or output. This is no trivial matter. Your business can crumble fast if your system fails to meet the expanding flow of orders on time or at required quality levels. You don't want to wait until your ability to deliver has collapsed before you address this issue.
One of the reasons for bringing in a chief operating officer experienced in your field is to make sure you have someone who has managed a company operating at your scale or greater. He or she should be able to help you identify the best way to adjust your operations to handle the greater demand.
However, you don't necessarily need to hire a chief operating officer to get guidance on how to scale your systems. We know of a small, rapidly growing technology company that instead chose to hire a consultant with extensive experience managing larger software projects to help it develop processes required to handle multiple development projects at the same time. Once those systems were safely set up, the consultant was needed only for occasional trouble-shooting or for assistance with specific, challenging projects.
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Infrastructure
Everything changes when your company scales. You may have to rethink every aspect of your business operation, including your location, logistics, technology, etc. You will want to make sure that the decisions you make can take you to the next level, and not simply bridge a temporary gap. This is not the time to make hasty decisions if you can avoid them. You don't want to have to go through the entire process yet again in another year by skimping on infrastructure decisions at this crucial juncture. Of course, at the same time, you have to carefully weigh the necessary investment so that you don't overcommit and throw yourself back into a financial hole.
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Legal
With more sales, employees, customers, locations, you will begin to run into greater risk of litigation, whether from a disgruntled employee, distributor, or customer. The larger you become, the more you become a target for people who believe that a threat of litigation will prompt you to pay them to go away. No matter how benevolent you are as an employer, no matter how honest you are with your customers, when you have lots of people involved with your business, it only takes a few to make a lot of legal trouble.
Now is probably the time to make sure your company has a lawyer on retainer to help you with issues that may arise. You may also want to consider talking with your insurance agent about getting a more serious corporate liability insurance to help underwrite the cost of defending yourself from an employee, business, individual, or shareholder.
Those of you expanding to additional states will also have to consider the fact that employees in those states can sue you in their own state courts, requiring you to hire local attorneys licensed to practice in that state.
Whenever possible in any legal agreement with customers or employees, add a clause requiring matters to either be settled through mediation or in the jurisdiction in your state.
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Finance
The good news: Once you begin to scale, it becomes much easier to get money. Profitable companies have little difficulty getting bank loans, either in the form of credit lines or in the form of fixed notes that you pay off in a specific period of time, usually several years or more. In addition, if your sales have grown into the millions of dollars and you have demonstrated rapid growth, you might now get on the radar screen of venture capitalists. You'll have to decide how much capital you need, and what you're willing to give up to get it. Fortunately, at this stage, your track record should be sufficient to make sure you can retain a controlling interest in the company. You didn't come this far to suddenly have bosses, which is the net effect of selling a controlling interest to investors.
Make certain that you carefully assess your financial needs and avoid taking on more debt than is absolutely necessary. Just because you successfully beat the odds and have created a going, profitable enterprise, doesn't mean you should risk destroying everything you built by expanding too fast. You want to ascertain to the extent possible the trajectory and sustainability of your growth so that your debt or other financial obligations remain just a small percentage of your fixed overhead.
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