June 2010

"The entrepreneur in us sees opportunities everywhere we look, but many people see only problems everywhere they look. The entrepreneur in us is more concerned with discriminating between opportunities than he or she is with failing to see the opportunities."

Michael Gerber

Growth is a risky but necessary procedure for startups to survive. Growth may be assessed in the context of employees, customers, revenue, liquidity, profit, geographic locations and a variety of other dimensions. Regardless of the growth type, hurdles always exist. An entrepreneur who understands the risks, and knowingly takes them, will have a chance to grow; whereas one who is not willing to take risks will not.

This article describes both the risks and benefits associated with growth. It then examines six hurdles entrepreneurs face when attempting to grow a company: compnay culture, networks, strategic planning, money, company strucutre, and skill development.

Growth Risks

All companies undergo periods of growth. Periods of growth are turbulent for any company, as they are inherently unstable and carry risk. In practice, there will always be barriers impeding growth. It is both the will and the ability to overcome these barriers which enable a firm to grow. The will, as an extension of the entrepreneurial spirit, is needed as there are many companies which stagnate due to their unwillingness to take the risks associated with growth. While growth may appear risky compared to temporary stability, stagnation in a high-tech company increases the risk of failure. Innovating in response to changes in the market is a good way to mitigate risk. Careful planning can decrease risk. Being able to anticipate the majority of risks involved and successfully navigating them is what allows firms to grow.

Growth Benefits

Growth helps firms to establish legitimacy, creating new options to grow. Larger firms are statistically less likely to fail, encouraging trust in costumers and potential investors. It is during and right after a period of growth that firms find it easiest to acquire investment capital. Firms which are perceived as having crossed their initial startup hurdles are seen as being stable. With size comes an increase in profitability and liquidity for the firm. This gives a firm a history, which partners and investors are more willing to trust. Assets and finances will thus become more attainable than they were before. With growth, the firm forms new connections and is able to access new markets. This results in an increase in sales, profitability and influence.

Company Culture and Networks

The personalities of the founders of a startup can be an important driving force in the growth of the startup. The founders will determine the scope and vision of the company, as well as the risks and deals the company will take. Founders are responsible for shaping the culture of the company. As the company grows, the founders will make national and international connections with suppliers, competitors, customers and investors. Founders with national and international connections are more likely to grow their companies than those with only regional connections. A large network allows companies to easily expand and find partners in new regions which in turn allows them to quickly expand their customer base. Being able to choose from a variety of markets, as well as the ability to innovate internally, gives a company a greater ability to adapt to a globally changing marketplace. This in turn allows for steady growth.

Strategic Planning

Firms require strategic planning, both short and long term, in order to succeed. Long term success requires effective daily management and strategic decisions. It also requires that these are not at the expense of the long term plan. Firms that do less short and long term planning are at a greater risk for failure. Many firms pursue short term contracts and quick profits without considering the long term impact of their choices.

It is easy for a firm to get discouraged when a long term strategy does not net immediate results. Firms often do not realize that setting a long term goal, and making strategic choices for that goal, will not give immediate positive results. Being able to execute short term plans while aligning with long term goals may be difficult, but is necessary to give the firm a vision which allows focus and unity amongst the employees. A firm which only chases short term returns may be able to make profit for a while, but will have a difficult time attempting to grow. Being able to set frequent milestones and to guide actions towards a long term goal can be an effective way to manage short term tasks. This allows short term goals to be put in the context of the larger picture, while allowing for the tackling of each individual instance to be molded for specific circumstances. It is a good idea for a company and its employees to know their 1, 2, 3 and 5 year plans to unify the goals and allow transparency on how the company is reaching its milestones.

Money Matters

Many companies plan poorly or take too many risks and face fiscal issues. Lack of capital is a characteristic of a startup. Over-optimism on the cash that will be available may be a deadly characteristic of a startup. Due to the high failure rates of startups, it is difficult to secure large amounts of financing if one cannot guarantee a return on investment. Most banks are unwilling to fund startups. Venture capital and angel funding is also difficult to obtain as there are many more companies seeking such funds than there are funds being given out. For many, government programs which are usually less well known and thus have less competition provide an alternative funding source. Trade credit with suppliers is also a possibility.

Many startups bootstrap as a means to get started, as this method will not incur a large debt. The best form of financing for a startup is from the customer that buys products and services. This method allows for growth with a predictable increase in income. Fiscal problems are common and repetitive during a startup's lifecycle. Being aware that these problems will occur, and being prepared with a plan to proceed with a limited budget, allows for a startup to grow with much less risk than one which assumed that the money would be there when it was needed. The company must plan for the possibility that it will not have the entirety of the finances it needs, and come up with contingencies. Financial planning needs to be an integral aspect of short and long term strategic plans, with allowances for there never being as much money as a company wants or expects.

Company Structure

When a company is small, it is possible for all information channels to be centralized around one person, usually the founder, enabling that person to make decisions quickly based on information directly from the source. During and after growth, as the firm loses some internal transparency, it is often not possible for a single individual to keep track of all the information without setting up formal communications channels. As the company expands, managing daily operations will become exponentially difficult, if the same managerial structure is kept. This creates a double impact, giving the central figure less time to communicate with others, as they spend increasing allotments of time attempting to manage operations. Many firms find this difficult in the first growth cycle as the founder will often not feel psychologically comfortable with giving up direct control over all aspects of the company. Having a deep structure of shared rules and beliefs within the company will allow such transitions to flow smoothly. This allows the employees to work towards a purpose rather than work at a specific job. The purpose will remain the same even during turbulent growth, letting employees know what is expected and what they should do.

Skills Development

Inter-company training is a good way to accomplish stability during growth. Training of employees should focus on the needs of the company, rather than what is available externally to the company. Through a holistic training approach, it is possible to create a deep structure which encourages employees to focus on goals and to strive towards them. Training allows growth transitions to pass easier as employees know what is required of them in the overall context of the company, which allows them to continue to effectively function even when the individual details of their jobs change. Training instills a sense of career into individuals who expect to stay and grow with the company. Training makes it possible to switch employees' mindsets to that of the company's culture, making them a better fit for the company.

Closing Thoughts

Growth carries risk and the greater the growth, the greater the risk. It is not possible for a startup to grow without being exposed to risk. Waiting for a period of no risk before attempting to grow will cause stagnation. The entrepreneurial spirit of founders allows them to take risks and find opportunities for growth in a variety of circumstances. It is the ability to face failure, and the refusal to get discouraged which leads to success.

There are numerous benefits to growth, as long as the growth occurs with an overall long term purpose in mind. Every startup will run into funding issues, at conception and during growth cycles. Success will come to those who plan and do not give up or stagnate. Growth will be turbulent for a company, so a company will have to be flexible and adaptable during and after a period of growth. Having a future vision and setting policies which everyone knows can help mitigate the turmoil. One cannot plan for all risks, nor can one succeed without being able to take risks. The successful entrepreneur will be flexible enough to work with any issue that arises, while not losing focus on their long term goals.

 

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