Growth Margins: Part 2
January 11, 2019
By Dennis Wood and John Yoon
“Happy families are all alike; every unhappy family is unhappy in its own way.”
-Leo Tolstoy, Anna Karenina
Keys to Successful Navigation
Here’s the big takeaway. <reference part 1> The things you did that got you to this point won’t get you to the next. In fact, they can actually stop you cold. Navigating through the growth stage requires changes in behavior. The transition through growth stage will not take care of itself with the passage of time. You and the leadership team will have to take deliberate action to get through this exciting but strenuous period.
Shrinking to Grow
Founding teams have to obsessed with growth to get to the growth stage. The answer to most problems in the earlier-stage environment was to add more. More money, more customers, more product capability, more employees. Fundamentally, the company needed nourishment. But now here’s the twist: to be successful in the growth stage, these leaders must introduce a new concept into their problem solving toolset: pruning.
You don’t prune the branches of a seedling but you do have to trim branches in a sapling as well as fertilize the roots. Pruning is deliberate and thoughtful that does three things. First, it creates room for the organism to grow. Second, it shapes the direction of growth, pinching off unproductive branches and redirecting resources to desired areas. Finally, the very act of pruning signals the tree that it’s time to grow. Saying “no” to distractions now becomes as important as attracting possibilities once was. Many founders find this transition difficult.
To help drive this shift in thinking, it’s helpful to divide the problem into three areas: people, processes and culture.
“We’re gonna need a bigger boat.”
–Police Chief Martin Broady, Jaws
“Who’s the New Guy?”
In the early days of your company, recruits were people you knew or referrals from people you knew. As you’ve grown, it’s been necessary to implement systems to recruit, interview, onboard, and assess talent. For the first time, you may not remember the new hire’s name when you see her in the break room. Don’t feel bad. To do bigger things, you need a bigger team. The way it was done in the past does not scale.
In the growth stage, hiring has an oversized risk of diluting or reshaping culture. When you were small, you could curate every hire. When you become really, really large, individual hires cannot rock the boat as much as they would when the boat was smaller. Bad candidates will still hurt. They just won’t kill.
Also remember that your new size means you are seeing a different pool of candidates. A person willing to be employee 5 likely has a different risk/reward framework than a person who signs on as employee 5,000. Be aware of this and compensate with a stronger emphasis on culture because the tendency will be to use cash in lieu of true motivation alignment.
This is where people and culture are inextricably tied. The most important thing your leadership team can do is recruit and hire the right people who will, in turn, recruit and hire the right people. If you want wool, it’s better to raise lambs than criticize calves.
How do you do that? Remember when you’re hiring that there’re really only three basic questions
- Can she do the job
- Does she want to do the job
- And can we stand her while she does the job
Fail any one of the three and you have to move on to the next interview.
A lot of hiring managers stop asking at question number two. Some stop at question number one but if you want to preserve your culture you have to ask all three. It can it can be simplified into three words: competence, commitment, and compatibility. The most important thing is to look for folks who checked all three boxes.
Change the Horse, Keep the Saddle
The hard truth about the change from start-up to growth stage is that the roles and in the actors in those roles will very likely have to change.
In the early days, most companies are a small team with pockets of expertise but a lot of generalists. As you grow and the needs increase, you’re going to bring on people with highly developed skills and experience, often in a more narrow scope. It’s the concept of breadth in class giving way too best in class. The original team will feel pressure from two areas. One is the loss of authority as it gets shared among a larger pool. The second happens as you bring on the best and brightest and they change the way things are done. There is wounded pride of ownership. Turf battles can ensue.
The only way to effectively handle this is head on. Know this is going to happen and have the talk. This is the end you had in mind when you began the journey. Not all responsibilities are going to change, but inflexibility in the original team during this transition will poison culture and stifle growth.
You may have to change salespeople to find the ones who are willing and able to be more accountable to use systems and to behave in a predictable way. You may have to change engineering staff for folks who understand the importance of thoroughly tested code and adherence to schedules. You’ll have to hire interstitial positions and whole new departments; jobs that currently don’t have anyone doing them like sales ops or marketing operations, customer service, or testing.
Win By Giving Up
You’ll also have to change yourself. Brace yourself. Give up control. Delegate authority. Actively push power is far into the organization as possible. Make sure the people know why they are there and then give them the power to decide and be accountable. This will drive execution and results.
Here’s a good litmus test–if you’re doing the same set of tasks you were in early-stage then you are bottlenecking growth by not delegating responsibility. You got to give up authority to get down to business.
“Plans are of little importance, but planning is essential.”
“If you don’t have time to do it right, when will you have time to do it over?”
―Hall of Fame basketball player/coach John Wooden
Strategy and Tactics
When crossing the threshold from early stage to growth, you may still be revolutionary in your strategy but you cannot remain revolutionary in your tactics. Revolutionaries topple the government by blowing up train tracks. However, once they win, people will want those same trains to run on time. These are different skills and operations and you have to make a conscious transition to pull it off or the next bunch of revolutionaries (or entrepreneurs) are going to start blowing up your train tracks. Revolutionary strategy, conventional tactics.
At the heart of this need for process is the truth that success brings size and size brings complexity and complexity leads to error. Break this cycle by judiciously adding processes to manage complexity and thus reduce error. It’s a fine balance. Too many of the people you’ll be talking to will have the deeply held belief that process is everything. Politely wish those people the best of luck in their future endeavors. If you’re feeling especially salty, remind them that one can make an ISO9001 compliant life jacket filled with rocks. The process just means the jackets will be remarkably consistent, one to the other.
Good Outcomes = Value x Process
The basic math is multiplicative. Good outcomes are the natural result of good value to the customer multiplied by good processes that make you efficient, and effective. If either “value” or “process” are zero then the result is zero.
In the beginning, getting minimum viable product out the door was your obsession. A handful of developers need only the bare minimum framework to get the job done. Testing is minimal. Finance is straightforward. Marketing, basic. Who has time for lines?
What is your plan for product enhancements? How do you get feedback and prioritize it to move from MVP (minimum viable product) to MDP (market defining product)? Who are you selling to? What messages resonate with them? How will you fill all of the openings in engineering? How do you quintuple in revenue, double in headcount and still preserve the culture of the original company?
So what are good processes? There are many articles on the KPIs. If you’re interested in specifics, there are more thoughts here on best practices but the overall message is you’ve avoided pants-on-fire mode but you need to move from seat-of-the-pants mode and into seat of power mode.
Rules and processes are important for consistency and order. They can also add drag or perceived drag to the creative process. This is the time to remember the Navy SEAL mantra, “Slow is smooth and smooth is fast.”
You should have your marketing processes down pat including messaging, demand generation, and content creation. Financial systems need to be robust and drive clear-eyed decision making and planning with information on LTV and CAC. Sales has to be able to generate and deliver on forecasts. Development needs formal tools for check ins, feature releases, regression testing and using market feedback. HR needs processes to attract, onboard and motivate team members while preserving and promoting culture.
“How you climb a mountain is more important than reaching the top.”
―Yvon Chouinard, Let My People Go Surfing: The Education of a Reluctant Businessman
The biggest part of culture is people. In startup land, culture was what you and the fellow founders brought with you. Accountability came from personal commitment and an inability to pass the buck or shift the blame. The people you hired were often folks you knew or were directly referred to you. Everybody got it and everybody got along (mostly and most of the time).
The culture was centered around survival and developing the first product. Milestones came quickly and people could see the results of their efforts clearly. The feedback loop was tight and accretive.
Thousands of books have been written on the importance of culture The key to culture is to think about it to live it and demonstrate it. To do that you have to hire to it hire well .
Assuming you’re hiring carefully and well, the second biggest trap that companies going through this transition fall into is inconsistency in culture. Saying one thing and doing something else; having one set of rules for the executive team and a different set for everyone else; having one culture for the founding fathers and mothers and a different one for the new hires.
Inconsistencies will sabotage culture as sure leave as drilling a hole in the bottom of your boat and just as quickly. If foosball tables and free snacks guaranteed positive culture there will be no terrible places to work.
Okay, you have consistency in the culture. Great. Now you have to take feelings and ideals and translate them into something you can use to define yourself, your product and your relationship to the market. The best way to do this is to articulated your mission and values.
Work your leadership team defining your mission statement. That can be hard. Not because the ideas are so foreign or unknown; quite the opposite. To your team, the ideas that underpin the mission are so painfully obvious, do you even have to write them down? Yes. You do. Then put it away for a few days and look at it again. Take out your markers and make changes and let it sit again. Keep the old copies just for fun. Most teams are amazed at the evolution. If you’re not sure how to run this process, there are consultants and articles and books in abundance.
You will know you can stop if you have something that articulates what you do, why you do it, who you do it for, and how you do it better than everyone else who is or ever was?
It has to be both grandiose and succinct. Too many times we see mission statements that seem timid or apologetic. It has to be unique. Too many times we see companies trying to get their team excited about a mission where we can swap the names of competitors like some sort of sad, corporate Mad-Lib.
Mix it Up, Mix it In
Once you have your agreed upon mission statement, the next challenge is to soak the team in it. Does everyone know it? If we walked into your reception area or wandered through accounts receivable, would everyone know? Can your clients describe you in a way that makes you happy?
The reason why this is the last and most important step is that this identity will serve as your ever-vigilant cultural hall monitor/cheerleader/three-headed dog. What you and the founders used to do in person is now fluoride in the water. Every day, team members make thousands of small decisions. If they do it in the framework of a strong culture, they are pulling in the same direction. Think of it as self-micro-management.
We leave you with a chart of ideas of things to think about in these three domains; behaviors or ideas that you should stop doing, others that you should start, and finally those that you need to continue.
There are so many other things that influence the transition into and through the growth stage. We’ve picked the three that show up most often as hotspots: people, processes, and culture.
Great companies manage these three areas well. Companies who struggle, often do so because of problems in one or more of these areas. Just thinking about them can make you and your team better equipped to take on that next and most exciting stage in the evolution of your organization. Good luck!
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