Entrepreneurial Challenge: ‘Choking on Growth’

Starting a venture is tough. But successfully growing an early stage business and surviving long term is even tougher based on experience and statistics. This seems counterintuitive to many who feel the hard part is done. Products developed, ‘proof of concept’ completed, the many pricing, product positioning, marketing, distribution and management decisions all done. The business is up and running, maybe cash flow positive and profitable, positioned for growth. Maybe the business reached this milestone, as most do, with careful planning, much trial and error, many false starts and plain old luck.

Entrepreneurs at this point usually take a deep breath, believing they have made it through the toughest part. Yes and no. Statistics vary widely but most agree about 45 to 50 percent of new ventures fail within the first year, increasing to over 55 percent in high technology sectors. The good news- reaching the critical one year ‘survival’ milestone. The bad news- more formidable and challenging decisions lie ahead.

Why? Most early stage companies often ‘choke on their growth,’ unable to develop transition strategies, technologies, sales and marketing, management, systems and corporate culture to meet growth challenges. These new skills differ from those needed to conceive and launch the business. Many believe money is the answer. Working with many early stage companies, I often hear “… if we secure funding of $xxx, we hire more staff, increase sales, develop new products and so on.” Looking closer, you realize no effective growth strategy exists. Hiring new sales staff does not, by itself, maximize a company’s probability of future success and, in many volatile markets, survival.

So on one hand growth is critical, but on the other hand growth may sink the company. What are the lessons to be learned here; what is needed to win?

Here are some recommendations for early stage firms, which may sound counterintuitive:

Take a longer view and think like a larger company

What products, markets, strategies, corporate infrastructure and management team are needed to support growth? What are the key performance indicators (‘KPIs’) to keep score, i.e., how do you know you are winning — successfully managing growth, or “choking?” Increasing sales with declining profits is a common early problem indicator. Successful companies must go beyond this red flag and answer the ‘why and what’ questions; why are profits sinking and what do we do to fix it

Manage innovation not invention

Early stage companies often measure ‘innovation’ success, focusing on technical developments, the need to create new technologies, products and/or services. Long term success demands moving the focus from invention to innovation, i.e., the “commercialization” of new technologies. Even major companies often fail to capitalize on breakthrough technologies- remember Xerox’s failure to commercialize their early PC technology. Many also do not know that ATT developed the transistor in the late 1940’s- selling these rights to Texas Instruments, Sony, others for $25,000- ATT missed the semiconductor market. Early stage companies face similar challenges- effective commercialization strategy is essential, demanding new management skills.

Acquire adequate capital resources to support growth

Companies need capital for growth and governance, not just technology development and sales. Investors must understand the company’s business model, value proposition, the opportunities and risks. Smart investors understand transitioning from an entrepreneurial to a professionally managed firm is one of the highest risks and a major hurdle for most. Demonstrating clarity on plans and strategies to address growth challenges improves probability of securing growth capital.

Develop new complementary entrepreneurial management skills

Moving beyond entrepreneurial, ‘start your own business’ skills, early stage, high growth firm executives need to acquire new management skills which can be learned. Seminars and university programs play a role here. Examining case studies of entrepreneurial successes, failures, and best practices is a valuable learning tool. Consider two often cited examples – Osborne and Compaq Computer. Both firms were 1980s’ startups in the explosive PC growth market. Sales and profits ramped up quickly- Osborn achieving monthly sales of $10 million within less than 6 months; Compaq first year sales over $100 million. Compaq did well and survived. Osborne is fodder for business cases. Why? Compaq successfully moved from an entrepreneurial mindset to a professionally managed firm, quickly evolving its systems, infrastructure and culture to address the growth challenges; Osborn choked on growth. Many other industry examples can be cited as well.

Many senior executives of high growth firms believe sales and capturing new business is their critical survival issue. If new business is good, then even more business and high growth should be better, or so the logic goes. The concept of ‘choking’ on too much business is tough for many senior executives to accept. Unfortunately their company’s long term survival may depend upon understanding and addressing ‘choking on growth’ challenges.

Paul B. Silverman

October 31, 2009