Summer Reflections Part Two: Growth

In my previous summer reflections blog I considered how to navigate the ‘Death Valley’ of $1m to $10m and plan for growth capital and cash usage.  Now I turn to reflecting on Scale-ups who struggle to cross the ‘Death Valley’ of $1m to $10m by looking at the two broad factors that can hamper strategic progress; ‘Founder syndrome’ and ‘Organizational readiness’.

Why do scale ups fail?

This is the big question.  Lots of books are written on the successes and failures of businesses during the scale-up phase.  But to be reductive, many of the companies who fail to cross the chasm, can boil it down to two significant factors - the influence of the Founder and the readiness of the Organization to drive success.  

The role of the Founder

From my experience, every Founder I have encountered is so different and some are very good at inspiring prospective customers, partners and employees with their compelling vision.  (As a side note, I’d suggest that, in comparing European vs USA Founders, European Founders need to be better at understanding how important it is to build a powerful narrative as a way to convey the compelling vision).  

As the company grows and thrives, every Founder comes up against issues and challenges that they need to tackle.  One such major issue is when the Founder responds poorly to coaching or doesn’t listen.  As we know ‘Feedback is the Breakfast of Champions’. Sadly, this is one that cannot be turned around as time shifts from being a friend to the enemy.  Additionally, sometimes you see the ‘Martyr’ and ‘Hero’ syndrome where ego gets in the way and the Founder is unable to see the need to ‘kill off’ a pet product/project or hire talent and replace a person where an upgrade is required.  

For every Founder, there are points of self-reflection of when to step down and bring in a CEO and other Execs to take the business forwards. Hiring the right talent with the right attitude is one of the most critical aspects of scaling and building value - hiring ‘proud people who refuse to fail’ and who prove themselves to be better than yourself, as the founder is a real skill. Hiring great execs and giving them space is one of the most important aspect of growth through ‘Death Valley’. It is tough to let go as a Founder and to avoid micro-managing; not doing so is frustrating to the talent you have hired and risks leading them to consider leaving.  It’s a truism that brilliant technical or brilliant Sales/Marketing Founder are not inherently brilliant leaders – it’s often the case in sport your best pitcher or goal scorer are not your best coaches.  

As the Founder and CEO, it is vital to set the ‘tone at the top’ and define the culture. Confident CEOs build a compassionate culture where every individual can be themselves at work and be comfortable with who they are.   Founder CEOs can always be supportive of all the early employees but at the same time, ruthless on the issue of performance but many Founders fail to coach or demand high performance teams. This is because it is often the case that many Founders are conflicted with personally ‘being liked’ rather than seeking to address who is best to grow the company to the next stage. Founders (or the Board) need to see the future and build the teams/competence/leadership today for tomorrow. Therefore, many Founders’ minds are clouded by inability to have what they perceive as ‘difficult’ conversations – when in fact, these are the simple honest conversations putting the best interests of the company’s growth and success at the heart of the conversation.  A good guide is to drive every team/function, as you grow, ‘as hard as you drive sales’.  

From what I have seen, some CEOs lose ambition and become overly risk adverse post the initial start up phase. This is why there are far more ‘Lifestyle’ companies outside California than thrusting, high growth companies; they can often happy enjoying the lifestyles of being a founder owner than those who want to drive and take bigger perceived risks. And linked to inability to take risks is the inexperience of actually failing (and learning from failure as a result). I remember when I was interviewing way back in 1997 in California at an early stage company, Chordiant with the Visionary Founder, Carol Realini.  Carol concluded the interview by saying “you tick all the boxes.  But wow - it would be great if you scaled a company before and ideally experienced a few failures and learnt from the experience”.  Wise words. Fortunately, Carol hired me and the team at Chordiant ended up achieving Deloitte Fast 50 status and hit $75m revenues after four years with a successful IPO. I guess the inexperience of failing didn’t weigh too heavily on us but the point remains valid; failure teaches us valuable lessons.

As I hope you’ll have seen above, with the right attitude, the Founder can be the driving force of propelling Scale Ups forward.  But conversely, if they slip into Founder ‘syndrome’ the danger for the organization flatlining is very real.  

Organizational readiness for ‘Scale’ 

Let me start by asserting that the most important factor is the Management Team capability.  Think about it; you are trusting the Management Team to navigate the perilous stages of growth beyond initial success to viable (and sustainable business) - the ‘scale’ stage.  Are they ready for it?  Have they done it before?  Do they know what to expect?  Does everyone know their role in the team and committed to the team success? Truthfully, none of us know if we are personally scalable until we have tried it and come out the other end.  It is a tough call to decide whether the core management team can grow until they try, unless they have done it before in similar circumstances.  And linked to this is the willingness to learn, coach and delegate (not abdicate) - having the right attitude here across the Management Team is key. 

Driving to scale also requires having the right incentives in place; both short-term and with adequate long-term equity left. There is a strong sense of fairness and ‘we are all in this together’ when all the early stage employees receive some equity – however modest the stock grant. The employees can model the future based on the company growth and resulting valuation – the CEO/CFO can help bring this to life for employees in the internal communications.  I am sure that many top execs at Oracle in the early 1990s vividly remember when Ray Lane, President presented the vision and resulting chart with a five-fold stock increase. I bet many of the execs that very weekend went home and modelled the stock value on their spreadsheets.  It was a powerful reason to both stick around, double down and also drive for growth.

One of the nuances of the technology and product businesses, is that there is a stronger cadre of excellent Product Marketing and Product Management talent in the USA.  Silicon Valley doesn’t have a monopoly on companies achieving product market fit, but it does have a massively outsized proportion of companies that convert from product market fit to global champion. There are lots of views as to why but personally I believe many companies fail because they fail to build a scalable, repeatable ‘Go to Market’ model. This is enhanced by creating the playbooks and implementing standard models with the Customer & Market at the heart.  This reflects the scarcity of experience and talent in European countries compared to the US – from top rate CMOs to product marketing. It’s much easier to sit in Europe and execute someone else’s strategy created on the West Coast - it’s another to come up with it yourself and own end-to-end.

I have seen Boards lose conviction and spends disproportionate time on ‘exit’ rather than supporting Management to grow organically and acquire competitors or enter related adjacent markets. The culture of ‘exit’ becomes a cancer for growth companies and typically the mentality switches to ‘short-termism’ where the company is 'polished' ready for sale whereas a potential buyer wants to buy a strong, scalable, sustainable business. This is the antithesis of culture I experienced in Silicon Valley where ambition is global market leadership and becoming the gorilla in multi-billion market.  This ambition is infectious and energizing for employees, customers and partners as well as investors.  Because of this, organizations need to select Board members for expertise and ‘what they can do’ for the business. Many boards lack deep domain knowledge/experience and past ‘street-fighting’ operational experience to support (and sometimes challenge constructively) the Management team to build truly customer-obsessed businesses, managing risk, maximizing growth and creating of value. Many of the examples where I have seen companies fail to drive out of ‘Death Valley’ is poor execution - ‘A’ class strategy with ‘B’ class execution will always be inferior to ‘B’ class strategy with ‘A’ class execution!

To conclude, cracking the code for ‘Scaling Up’ is essential for growth and in my experience it rests on the role of the Founder and the Organization being set up for success, and I hope my points above illustrate how to tackle both factors in the right way, to enable fast & sustainable growth.    I’d urge you to start with the end in mind and live in the future when you are beyond $10m and create the plans working backwards.  Think about the barriers you will face and the team to win with you.  Next time, we will take a look at hiring the CEO and creating the business model for success.