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Rapid expansion should be the goal for any company, right? What entrepreneur doesn’t look at the exponential success of companies like Facebook and feel pangs of jealousy? What could possibly be bad about something so fortuitous as growth?
And yet, in truth growth can be as much friend as foe.
Entrepreneurs are often the types of people who build the ship while they sail it. This works in calm waters, but can become a whole lot more challenging when there are 50 foot waves, or suddenly one million customers.
Just ask the founders of Teespring.
Teespring, an ecommerce company “that empowers anyone to design and sell products that people love”.
The first year, Teepring just didn’t grow. And then in December of 2012, a few customers figured out a new way to use Teespring – using social media to help their designs go viral. Customers began selling hundreds of thousands of dollars worth of t-shirts. “From there it was a roller coaster,” says co-founder Evan Stites-Clayton.
But the company was ill-prepared for that much production.
The Teespring team needed to increase staff, manufacturing, and fulfillment services to match this incredible level of growth. The team went from a few college kids in 2011 to one of the fastest growing companies in the world in 2014 and hadn’t built their systems to accommodate six million orders a year.
While Teespring ultimately survived and thrived, many companies meet their demise at the hands of unexpected growth. The Kauffman Foundation and Inc. Magazine conducted a study of companies five to eight years after being featured on the magazine’s list of the 5,000 fastest-growing companies. Two-thirds of the companies had either shrunk in size, gone out of business, or been disadvantageously sold.
Why are some companies, such as Teespring, able to survive while so many companies crumble?
Below are the five key strategies and systems that determine life or death in the face of unexpected expansion.
1. Have a business growth strategy
Most companies set short term immediate goals and long term “ideal world” goals, but often don’t plan for the period in between. Business leaders should develop a strategy that includes plans for their operational, financial, and human resource needs in the eventuality of rapid growth.
This enables businesses to build the appropriate level of flexibility into their systems so that they can react quickly when they begin to scale.
2. Focus on back-end support systems, delivery, and order fulfillment units
Critical to the growth plan is building scalable back-end systems for delivering services. It’s common knowledge that businesses live and die by their ability to keep customers satisfied.
To do this they need to be able to deliver the right products on time, with the expected level of service and quality. By having an effective system of operations and administration, companies can keep the ship sailing on time… even in the face of rapid growth.
Yet, many start-ups in their early stages rely on the talents and know-how of a few individuals, usually the co-founders, to manage daily operations, causing obvious challenges as founders need to increase staff and delegate quickly in order to scale. As a result, businesses that expect to succeed need to develop operational plans, systems, and processes for delivering their service that are as frictionless and repeatable as possible.
Leadership and staff need to be ready to rapidly iterate and develop new systems that work at scale.
3. Plan for the financial implications of rapid growth
Firms that act quickly to institute formal financial mechanisms – as operation budgets, cash budgets, and financial monitoring systems (tools that measure profitability, customer acquisition costs, variance from actual budget, and so forth) are in the long term proven to be more successful.
While a similar lax strategy to finances and accounting – keeping your records in a shoe box and only keeping track of revenue and expenses – can work for small companies, when sales and expenses suddenly increase 10 fold, so too will any flaws in financial management systems. This can quickly spiral out of control and lead to decisions driven by misconceptions about financial health.
In many cases, entrepreneurs just assume that as their top line is increasing – driven by sales – profit will also necessarily increase. This is demonstrably not the case. As a result, it is critical that business understand their finances beyond just the revenue line on the income statement.
Instead, businesses need to understand:
- What are their operating costs and how this will evolve as their business grows? For example, a business should expect that with rapid growth their margins might be put under pressure. Understanding operational costs can clarify at what point decreasing margins are no longer offset by growth in sales.
- Businesses should also understand their working capital needs. In other words, how much cash do you need to conduct daily operations? This can enable a business to understand how much cash is required on hand at each stage of growth and where and when it might make sense to take a loan or pursue investment.
- And finally, what are the potential human capital costs associated with growth. Businesses need to plan for the costs of scaling teams up and down to meet changing business and talent needs. This means planning for human resource needs and costs to match medium term goals.
To ensure businesses are equipped with the right financial tools to facilitate growth, they should work with qualified tax experts on a regular basis and not only when it’s time to file. Additionally, companies should develop key performance indicators so they can understand the ever-changing financial positions caused by various indicators rather than merely revenue factors (cash available, status of accounts receivable, inventory).
4. Subtract deadweight customers
One of the fastest ways to overextend a growing company is to try to serve everyone.
Often in an effort to expand, companies build and build and build on top of their minimum viable product to attempt to increase their growth potential. This often means building products and attracting customers that do not drive the most efficient value. One advantage of growth is that businesses can finally afford to eliminate their worst customers and products.
While it might seem counterintuitive to eliminate customers when a company is undergoing rapid growth their capacity to maintain quality in products and services faces critical challenges that can be mitigated by dropping the dead weight and focusing on products and customers (some version of the MVP) that are core to the business. Companies that are expanding rapidly should determine which products are selling the best and which customer segments are driving the most value.
5. Leadership and team
Ultimately, the most important factor in the success of a business is leadership and team. It’s imperative to instill a leadership that can be both flexible and agile enough to adapt their vision and strategy to the unexpected challenges of scaling. Additionally, they should attract a team that is also flexible and agile enough to facilitate this changing vision, and intrapreneurial enough to develop new products and new processes as customers’ needs and demands also alter.
Once a company begins expanding, the quality of new hires becomes more critical than ever because each employee will be required to take on constantly evolving and broadening responsibilities and roles in oder to put out fires, manage growth, and continue the same level of innovation that made that company disruptive enough to scale rapidly.
As a result, the right talent at both the executive and staff level can make or break a successful scale.
Like what you’ve read? Want to learn more about what this means for your business? Discover more about TMF Group and how it can help your business grow.