This interview speaks to what I want to talk about most in newer articles, which is scaling and targeting companies that have some product market fit and are ready to begin growing.
What's your business, and who are your customers?
We help businesses with 5 to 200 employees scale their business by installing all the systems needed for strategy, management, metrics, process improvement, budgeting, and human capital.
Tell us about yourself
As a serial entrepreneur for 14 years, I built and sold four different companies, returning 25x ROI to my investors and over $1 billion in profits.
What's your biggest accomplishment as a business owner?
Disrupting the real estate industry by creating the first high-definition, remote touring for residential real estate. Also disrupted financial services with five different products and created The CEO Boot Camp (2004), where we have trained thousands of CEOs...
Contrary to popular belief, growth is not just limited by your ability to increase sales. It is almost always capped by many other things like management quality, financing, operations, training systems, hiring and other systematization. Many companies have gone bankrupt by simply increasing sales. When this happens without getting ahead of problems with customer service, production, working capital and financial controls, companies can not just ruin their reputations and spiral down but even go bankrupt.
If you are lucky or smart enough to have a product or service with a large market opportunity, your company’s growth will be mainly limited by your ability to hire and keep top people, especially managers. Building a high-performance and innovative culture is usually key to growth. This means having a vision of the future and solving big problems for people. And giving your employees good reason to care about their job and work too. Simon Sinek’s...
I believe a minimum of 25% should be planned for in growth as anything less will likely leave you behind competitors and being a follower, not a leader in the marketplace. I consider “Scaling” to be growth of 50% or more annually. That is far more difficult and requires a quality management team, strong internal processes (systematization) and likely some capital investment in addition to cash-flow.
If you can reinvest your cash-flow and/or get some low-cost debt, which usually requires at least eighteen months of profitability, you can maintain control and avoid the time and complications of raising outside capital. If your market opportunity has a limited time window, you would probably be better off raising some capital and growing faster.
You may also be able to create growth by getting better payment terms with vendors who may have a much lower cost of capital than you and wish to see you succeed, so you can increase purchases from them too. As a company...
Well, although this is not officially defined by anyone, growth is literally any growth at all. We define scaling as the kind of growth that venture capitalists seek for high returns on their investments, which means fifty-percent compound annual growth rate (CAGR). Typically, the math of this, which is reaching $100 million in sales in about five years, means a company will need at least 50% annual growth, and maybe 100%. Here is a table that shows this kind of growth and reveals that massive compounding factor of this kind of growth. And explains why venture capital must seek large opportunities to pay high yields on capital invested, which can only come from strong growth.
What this math says clearly is that a company that grows at 100% per year will be worth one hundred and twenty-one times more than a company that grows at 10% per year after eight years. This is what creates real wealth when compounded, and what venture capitalists seek. The truth is even...
The vast majority of companies will need outside capital to grow at more than twenty percent or so compound annual growth rate (CAGR). This can vary a lot by industry, sales cycle, margins and other cash-flow factors. Some industries are more capital intensive, requiring upfront investment in plants, equipment, people, research and development or other things. However, generally if you plan to grow a company over $1M in sales, you will need a working capital financing strategy projecting these needs over three or more years.
We define scaling as over fifty-percent growth. So, unless your gross profit margins are exceptional, and your sales cycle and costs are very low, you will likely need outside investors to grow this rapidly. You can always choose to grow more slowly at whatever rate your cash-flow can support, but that may cause you to lose potential market share, especially early in a markets' life. Or you can seek some debt financing which will require...
There is a ratio called span of control that says the most people directly reporting to a single manager should be seven. This can vary some based on the people, management systems and other factors, but it generally applies in most areas of a company. More direct reports means the manager will have little time for other work and activities like planning, strategy, communications with outside vendors, etc. Of course, not every manager has seven employees. Some may have only one or two. I usually differentiate this novice as a “supervisor” not a manager. They oversee an employee or two but may not have the harder management responsibilities like planning, hiring and interfacing with other departments. They are really a manger trainee but often giving the title of manager even though they lack the skills needed.
Also check out my blog where I have loads of articles on entrepreneurship, scaling and raising capital.
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This is a complex question, as there are many things that must evolve with growth. We break this down into the four “gear shifts” to get through the five stages of growth shown in the image below.
The numbers above are just an approximation and can vary widely by industry and company, but are guidelines.
Each stage requires very different management style, level of planning, people and risk management. These changes must be done, or the company will go sideways or fail. And often means giving up previous lessons learned and habits in the new stage.
Raw Startups require speed, high risk and micromanagement while the product market fit is figured out. Flexibility and agility are key, and easy to do with a small organization. Fast decisions, cheap testing and rapid feedback are required as cash-flow is likely negative and time is your enemy. The key goal is building the product and making sure it is valuable to the initial target market.
When the ...
Typically, product companies are more scalable than service companies because they are easier to scale and also easier to build barriers to entry around, which protects your margins from twenty clone companies. This is because anyone can hire your people and replicate most of your services. Many industries have near zero barriers to entry like real estate sales where you just rent a desk and join the MLS. It is also possible to have service companies that are hybrids because they have some proprietary processes, products and trade secrets embedded that help create some sustainable competitive advantage. H & R Block is a good example of this as they supply many systems for sales, tax prep and other benefits that enable the services, so an individual tax preparer has a tougher time competing.
Because scaling almost always requires outside capital too, you generally need strong margins and a large market opportunity to attract outside investors. This means you...
To me, scaling means growth over 50% per year, which can become exponential in a few years. That kind of growth requires that a company be very developed in its internal processes and systems. And it must also have a serious and experienced management team.
Planning this growth is complex and will usually also require outside capital. You also need complete systematization in each area of your business, not just to “Do it” but also to hire people, train people and manage those people too. So, with five departments this means four times five total procedures or systems to “do it” (i.e., sell, delivery, generate leads), hire, train and manage (by the numbers). Or about twenty total systems. These may be simply a few pages, and I usually recommend a flow chart as a visual helps people learn and improve these as more employees join the company.
Shifting gears as a company moves to rapid growth is very difficult, and few figures it out...