“Our board isn’t happy. It seems we don’t burn cash fast enough…” This rather strange quote belongs to a Belgian entrepreneur, working in Silicon Valley. An intriguing observation. Here’s another: opposed to any living organism, from microbes to baobab trees, there is no natural, intrinsic size for companies.
At first glance, these two observations don’t have much in common. But in fact, they do. Moreover, their connection is highly relevant, especially for start-ups.
If a child is born, the size of this new human being is more or less predetermined. Sure, there will be differences, depending on race, gender, place of birth and not in the least hereditary disposition (seize of parents and ancestors). But the differences between people of normal posture remain relatively limited. Especially when compared to companies.
In my home town, I am a loyal customer of a grocery shop that has been there for 3 generations. I imagine the initial shop wasn’t all that different from the grocery shop that opened in 1887 in a small Dutch village called Oostzaan. The shopkeeper in Oostzaan, however, lived by the name of Jan Heijn. That name might ring a bell. The shop in Oostzaan eventually grew to become the Albert Heijn supermarket imperium we know today. The difference between the shop in my home town and that in Oostzaan is infinitely bigger than that between a 1,55m jockey and a basketball player measuring 2,15m.
Every living organism has a build-in predestined size. Companies don’t. Companies do not have a ‘gene’ that defines their posture. Although almost every entrepreneur does have the undefined feeling that his company is bound to certain ‘natural’ limits, that are almost impossible to surpass.
Well, there aren’t.
Since there is no ‘gene’ that limits their growth, how is it possible that there are so few large companies? Why does a majority of enterprises remain small or at best reach a medium size? Obviously, some companies will never grow because there is no basis to build from. Because of a poor product portfolio or inadequate customer service, for instance. However, we found that an important number of companies that were doing extremely well suffered from an unexpected stand still. In search for the root causes, we discovered that, strangely enough, it was the growth itself that caused the status quo.
Our society has missed out on an astonishing number of large companies, because, at a certain stage in their growth process, they weren’t able to overcome their growing pains. Why do so few companies succeed in overcoming these hurdles? The fair answer is that these growing pains are dirty little devils. They disguise themselves and tend to keep on coming back in ever changing forms and shapes. More importantly even, they are protected by something that is printed in the human psyche: the force of habit. In our book ‘The Growth Paradox’ we have unmasked 10 of the most common growing pains. It can help start-ups keeping their wits about them.
"Growing pains are dirty little devils"
The quote on cash burning we started with, refers to one of these growing pains. Let’s be clear. We don’t believe that the Silicon Valley model should be implemented in our country. We simply don’t have the environment that matches this venture capitalist based model. The strange urge to burn cash as fast as possible in the average ‘valley company’, however, actually refers to one important growing pain. Companies tend to stay with their organizational structure and modus operandi, even though a larger company needs an entirely new set-up. And that is exactly what the board of the Belgian entrepreneur in Silicon Valley was referring to.
They wanted the company to seek extra people in sales, long before the organization would need them. Simply because it would take too much time hiring and training new sales people when done at the moment they were needed in the field. They would lose valuable time in reaching their most important goal: gaining an important market share as fast as possible. Venture capitalist do not want their money spent inappropriately. But they know that an organization that lags the speed of growth of a company, will slow down that growth. Extremely fast.
This is just one example of growth induced obstacles. There are many. A fast growing entrepreneur will have to pass several development cycles in a very short time span, each one filled with such growing pains. And they will have to do that in a time frame that is much shorter than that of most other entrepreneurs. From 0 employees to 3, from 3 to 8, from 8 to 25, … in two to five years. That’s a real challenge. It basically means that one has to build 3 to 4 entirely new business models and organizations.
In essence, a fast-growing entrepreneur heads an entirely new company every two year. He actually is a serial entrepreneur in one company. This implies that the entrepreneur will have to change his role and behaviour accordingly. Changing our behaviour is one of the most challenging things to do. It is hard when in a company in a steady-as-she-goes-situation. It becomes an act of heroic proportions if this change needs to be accomplished in a growth company where everyone and everything is under an ever-increasing performance pressure. On top of that, the ‘number one’ needs to guide his team through the same change process.
Correctly diagnosing growing pains is an imperative step for every start-up to quickly leave the pioneering stage. But it will also help manage their relationship with their private equity investors. Investors, especially venture capitalists, want you to reach a specific milestone, as this enables them to exit. In other words: sell their stake to another VC who is in the market of buying that specific milestone. The same is true for more long term value investors.
With a strong framework to analyse the symptoms and dig down to the root causes, you will more likely be able to translate that framework to your investors, and employees entering your new and constantly evolving organization. And if you make use of external advice, which is highly recommended to sustain the speed of your growth, you will be able to ask the right questions to your advisors. And select investors that fit your real growth needs, with commitment to help you grow through your consecutive development phases, both as an organization and as an individual as entrepreneur.
In that respect, growing fast is like sex in the 50’s: there are a lot of expectations, but no one explains what they really are, let alone teach you how to live up to them. Actually, there is help available. And in the middle of a growing cycle, where everything goes internally wrong, pressure is mounting economically, physically, emotionally … the entrepreneur should find that help. Because unlike in a marriage, one doesn’t get 40 years to find out the right answers by trial and error.
Written by Matty Paquay, partner of growth companies
Do you want to hear more about the subject?
On september 25, Ekonomica Leuven organizes a debate about "De Groeiparadox" in Wilsele. It's still possible to register for the event!