September 28, 2018
By Dennis Wood and John Yoon
The transition from early stage or venture-backed companies to growth stage poses critical changes for the company and its leadership team. Outlining the critical changes that take place will highlight areas for entrepreneurs to focus on to ensure a swift and trouble-free evolution.
We love this space. Between the two of us, we’ve been in it for half a century. Through IPOs, buyouts and a couple of implosions, we’ve lived through this exciting transition many times first hand. Second hand, we see it every day, working in a private equity firm that makes investments in companies exactly at this stage.
So what follows are observations made and experiences earned to help you avoid the pitfalls plaguing companies at this evolution. These traps can slow or cripple your growth. Avoiding them will require you to change how you look at issues; some will require you to abandon the very best practices that got you here.
While a company’s seed and early stages focus on innovation and promotion, and the later stages are about sustaining, the growth stage is unique. It is principally about the transition. Many of the things you’ve done successfully in the past can’t scale.
Or, to paraphrase I Corinthians,
“When I was an early stage company, I hired, developed, marketed and sold as an early stage company. When I became a growth stage company, I put away such early stage things.”
These are the things you need to put away to go from ad hoc to ad astra.
You and your company stand at a transition into the growth stage. It does not have clear boundaries but it does follow a sequence.
Remember the children’s story, Stone Soup? It goes like this:
Some travelers came to a village, carrying just an empty cooking pot. The villagers were an uncooperative bunch, unwilling to share any of their food with the hungry travelers or even each other. Not to worry. The travelers went to a nearby stream and filled the pot with water, and dropped a large stone in it, and placed it over a fire. One of the villagers becomes curious and asks what they are doing. The travelers answered that they were making “stone soup”, which tastes wonderful and which they would be delighted to share with the villager, although it still needs a little bit of garnish, which they are missing, to improve the flavor.
The villager who anticipated enjoying a share of the soup, did not mind parting with a few carrots, so these were added to the soup. Another villager walks by, inquiring about the pot, and the travelers again mention their stone soup which has not yet reached its full potential. The villager hands them a little bit of seasoning. More and more villagers walked by, each adding another ingredient. Finally, the stone – being inedible – was removed from the pot, and a delicious and nourishing soup was enjoyed by the travelers and the villagers alike. Although the travelers had thus tricked the villagers into sharing their food with them, they successfully transformed it into a tasty and nutritious meal which they shared with the donors.
And this is how disruption happens.
The travelers (founders) identified a need and recruited villagers (co-founders, angel investors, early employees) to contribute to making something no one could have done without their vision and leadership.
They saw a need, acted and told a story of what could be. Ignore the part about the dissembling – it’s not a perfect analogy.
Everything else they did was ad hoc. They were stellar communicators who relied on vision to evangelize and capture support. They had a bias towards action. They were great ad hoc problem solvers. Most important, they did not have to wrestle with history, legacy or responsibility beyond their initial commitment – the soup.
The Mic Drop
So far, great. Full bellies and happy villagers and travelers alike. But now imagine something new. What would happen if there were a sequel to this story? What if the villagers, entranced by the soup from the day prior, appointed these travelers to village leaders and then looked to them for an encore?
This is the difference in the stages we are thinking about. To succeed in the long run, our clever inventors cannot rely on the stone. Put another way, entrepreneurs who have released minimum viable product and seen market validation will need to turn their creative intelligence to other operational issues to generate growth, sustain demand and expand operations
We like to think that these clever folks would use their newly-won good will to put together a market place that would encourage the villagers to trade their talents and resources, enriching all and making the village economy sustainable and productive. At least till the Mongols come.
Origination vs. Optimization
The biggest difference between the early-stage and all of its more mature later versions of itself is the emphasis on origination vs. optimization. Of course, companies at all stages originate and optimize, but the source of that originality and the focus of optimization is naturally and fundamentally different at the two ends of the maturity spectrum.
There’s just nothing like new venture creation. Founders cannot consult with experts in a field that does not exist. They can’t do a benchmark study because there’s no bench. And there is no conjoint product analysis to be done because there are no customers to ask. Even if there were, they won’t know the answer because they can’t comprehend the question. There is no existing brand to leverage, there is no launch budget and no QA department. The initial team works in an extreme cross-functional, claustrophobic environment every day.
The race for the founding team is simple: launch product, get validation and then scale. Most folks understand and if the product is good, they get 2. It’s #3 that trips them up. People ask, “In the growth stage, is it better to innovate or better to optimize?”
We always answer, “Yes.” Just like the chart says.
You need to follow through on the initial, innovative idea. If your 1.0 is really a classically minimum viable product, then you’ll have to flesh out features and capabilities, taking early adopter feedback to open up a lead because if you’ve done it right, you’re going to be chased. So there will be a need to continue the momentum of innovation.
At the same time, you’ll have to start adding structure and adding people. Like the dog that finally catches the car, it only becomes really useful if you know how to drive. Doing that means picking up some new things and putting away some old things.
Are We There Yet?
The growth stage is a lot like adolescence. It’s hard. Some have it easier than others. Ignoring it won’t make it better (might make it worse). There are going to be a lot of uncomfortable discussions. There can be mood swings and personality changes. Stuff starts growing in new directions. It’s all part of natural evolution.
How do you know when your company is at that stage? Well, are any of the following statements are true?
- Your CFO has said, “We need to get out of QuickBooks and into a more robust financial accounting system.” (or you have a CFO)
- Your dev team starts arguing in favor of a QA team to check their work in order to prevent (another) expensive release mistake.
- The senior team has figured out that at some point in the next year, you’re going to need to rebuild your code.
- There are more than 5 mid-level managers in the company.
- There are between 90 and 180 employees
- Your CAGR is > than 40% (duh)
- It’s a lot harder to recently to keep consistent communication in the company than it was 6 months ago.
- The culture seems to be drifting or (worse) new folks are not sure about what the culture really is.
- You’ve figured out your company’s LTV to CAC ratio (or you are desperately working to get your company’s LTV to CAC ratio).
- The Board has been asking for KPI’s but your executive team or managers keep telling you why they can’t know them for sure.
- You have been, or are projecting soon to, hire interdepartmental supporting roles such as:
- An FP&A Manager
- A Scrum Master
- A Sales Operations Manager
- A Head of Customer Success, or Customer Experience
- You have 3 or more dedicated FTE in human resources (including recruiting).
Does any of this sound familiar? Congratulations. You’re a growth stage company.
Dennis Wood leads the human capital practice at Mercato Partners
You can reach him at firstname.lastname@example.org
John Yoon leads the marketing practice at Mercato Partners
You can reach him at email@example.com