A formula for growth after the start-up stage
Much attention is paid to how entrepreneurs create an innovative product or service and bring it to market, pivoting quickly to solve financial and logistical challenges along the way. But after the start-up buzz wears off, owners must figure out how to scale their businesses for long-term, stable growth.
Rather than simply working harder, a new report suggests, second-stage companies should consider a different strategy to reach the middle market, incorporating five conditions that were compiled and tracked by Truespace, a consulting firm, and the analytics firm Gallup.
They looked at nearly 2,500 entrepreneurs in the US over five years to create the model that is geared toward businesses with $2 million to $10 million in annual revenue that are struggling to become midsize firms.
“After you get to this post-start-up phase, you have to fundamentally almost recreate the business,” said Joe Daly, senior partner at Gallup. “That’s what begins to create the conditions for the next leap in growth.”
The report, released on Thursday, identified the five conditions that small businesses should consider adopting: organisational alignment, operating discipline, predictability of performance, endurance of stakeholders and value creation.
The project’s data shows that the tighter a company’s focus on its market, the stronger its revenue will be, said Charles Fred, chairman and chief executive of Truespace. But most entrepreneurs do the opposite when faced with flagging sales, and end up dissipating their energies without the desired results.
Second-stage companies may have trouble growing if they do not take a strategic approach to their expansion, said Gad Allon, a professor of operations, information and decisions at the University of Pennsylvania’s Wharton School.
“Where these firms usually struggle is that the opportunistic approach that brought them to where they are doesn’t work as the firm grows,” Dr. Allon said.
He added that the framework provided by Truespace could be useful, but that it was unlikely to be able to predict performance. “It’s good advice, but there’s nothing new in this good advice,” he said.
Damian Salas, assistant dean at Drexel University’s Charles D. Close School of Entrepreneurship in Philadelphia, agreed that the ideas behind the five conditions were not new, but said their combination was novel and could offer second-stage companies a way of moving to the next level.
“Small businesses are generally reactive organisations, and growth is often just another challenge to meet,” he said.
For some business owners, the framework has already helped increase revenue.
Surgireal, based in Loveland, Colorado, builds task trainers to help medical professionals acquire skills they need like giving injections or sewing sutures. It is “on the cusp” of $2 million in annual revenue, said Andrew Hendrickson, the company’s chief executive. He had been trying to sell the products in about half a dozen markets, but he found that growth was well short of its potential. “We were past the point of being a like a true start-up but not quite at middle market yet,” Hendrickson said. “It was time to graduate to someone who was going to help us do scaling.”
He added that the Truespace strategy had sharply focused the company’s efforts.
“We had cast our net too wide,” he said. “Rather than looking at five or six market segments to be tackled individually, we were tackling them all at the same time, which prevented us from really penetrating one to a greater extent.”
Now the company is concentrating on selling to just one market segment within the medical industry.
Shawn K Smith, the chief executive of Modern Teacher, an educational technology company in Chicago, had a similar experience. The company has been using the Truespace model for two years, and Smith said it had increased the company’s enterprise value up to seven times its revenue, from one to two times revenue.
Smith said the model had allowed the company to go from essentially being a consultant dependent on non-recurring revenue to being one with sustainable income and a clear path to growth.
With current revenue just under $3 million a year, Modern Teacher aims to hit $5 million in 18 months, he said.
Other consulting firms and colleges offer guidance on business strategy, but much of it is geared to start-ups or larger companies, Smith said, and there’s not much help out there for firms in his category.
“There was so much clarity in it,” he said of the Truespace programme. “We had some of the pieces in place. But alignment to the market was critical for us because what that produced was predictability.”