Stanford, CA (June 2011) — For many, achieving the American Dream means taking control of their destiny, quitting their 9 to 5, and opening the doors to their very own business. These brave entrepreneurial souls have shaped American enterprise, and today, they’re playing the very important role of helping to drive the nation’s economic recovery. And if you’re one of these brave souls—pouring your blood, sweat, and tears into running your own business— Professor Ed Hess stresses that there’s no time for rest. Once you’ve got your start-up off the ground, he says, the daunting task of growing your business to the next level must begin.
“Growing a business presents a whole new group of challenges for entrepreneurs,” says Hess, author of the new book Growing an Entrepreneurial Business: Concepts & Cases (www.EDHLTD.com) and professor at the University of Virginia’s Darden Graduate School of Business. “The good news is that most businesses experience the same or very similar challenges when it comes to growth. There is no need for any entrepreneur to reinvent the ‘growth wheel.’ You just have to be willing to learn from those who grew before you.”
With his own research and his new book, Hess aims to make the growth process even easier to navigate for the nation’s brave entrepreneurs. He recently studied 54 high-growth entrepreneurial companies based in 23 different states, all of which were designated as successful growth companies by leading magazines or accounting firms. His research findings are the subject of an MBA course he teaches at the Darden Graduate School of Business and the subject of Growing an Entrepreneurial Business, which he wrote for entrepreneurs and students.
The 54 companies in Hess’s study operated product and service businesses, had been in business on average 9.6 years, and had reached an average revenue level of $60 million with the range being from $5 million to $350 million. Some of them, such as Eyebobs in Minneapolis, Trilogy Health Services in Kentucky, Defender Direct in Indianapolis, SecureWorks in Atlanta, and Mellace Family Brands in California, were well-known companies. The research was supplemented with case studies of other successful entrepreneurial growth companies like Room & Board in Minneapolis, C.R. Barger & Sons in Tennessee, and Enchanting Travels in India.
“What I found was that these successful companies all faced very similar challenges when it came to growing,” says Hess. “But what sets them apart from those companies that didn’t survive or didn’t reach the same level of success is how they approached that growth. The companies in my study understood that growth is change and change is risky. Entrepreneurs who understand this and the challenges that come with it are the ones with the best chances for successful growth.”
Read on to learn more about the top nine growth challenges facing today’s entrepreneurs:
Getting overwhelmed by growth. Growth is change. Growth requires more processes, controls, and people. Too much growth too quickly can create financial, quality, and reputational risks that if not properly managed can lead to the demise of the business. Keeping tabs on all of these factors can easily overwhelm business owners. “Growth is like Mother Nature,” explains Hess. “She can be good or she can wreak havoc with hurricanes, earthquakes, and floods. To properly manage company growth, successful, experienced entrepreneurs recommend the ‘gas pedal’ approach—when you start to feel overwhelmed, let up on the gas to allow processes, controls, and people to catch up.”
Knowing when to say “no.” Most successful start-ups have a plethora of opportunities. The challenge is choosing the right ones. Good opportunities are those that will enhance your company’s strengths and result in a compelling customer value proposition. “Opportunities that don’t fall into that category should be met with a ‘no, thank you,’” says Hess. “The problem is that too many entrepreneurs never learn to say ‘NO!’ In an effort to get their business off the ground and keep it up and running, they say ‘yes’ to everything. They end up trying to do too much for too many, which dilutes their focus and often the quality of their product or service. Determining and having the discipline to maintain a narrow strategic focus is critical to success, and that will require that you turn down certain opportunities. Successful entrepreneurs often call it ‘sticking to your knitting.’”
Learning to effectively delegate. For a business to grow, the entrepreneur must grow. When growth begins, you’ll quickly find that you can do only so much and that you need help from others to properly serve customers. You must evolve from being a doer to a manager of employees and then eventually to a manager of managers (a leader). “This may sound easy but it isn’t,” says Hess. “Most entrepreneurs don’t like to give up control of any aspect of their business. Facing the fact that they can’t do it all on their own and that they must learn to rely on others to complete certain tasks (and not necessarily exactly how they themselves would do them) can be a very hard reality to swallow.”
Transitioning from owner to leader. When you get to the point where you’re delegating tasks and relying on your employees to drive your business, you must also transition from thinking of yourself as just a business owner and start developing as a leader and coach. Evolving toward becoming a leader and coach is challenging, because both roles require emotional intelligence, people engagement, and the ability to relate to individuals in a way that they find meaningful.
“Coaching requires that time be spent getting to know people, listening, caring, understanding their emotional needs, and helping them grow,” explains Hess. “Coaching takes patience and a degree of personal emotional intimacy that many entrepreneurs are not able to achieve. It requires a continuation of the mind shift from ‘me, the entrepreneur’ and ‘my way’ to ‘it is really all about them.’”
Hiring smart. Hiring mistakes are costly, time consuming, and create quality and financial control risks for small businesses. When confronted with impending growth, entrepreneurs often panic and hire employees too quickly, making snap decisions based on little data.
“In my research, bad hiring practices often continued when entrepreneurs tried to hire managers who needed to have functional or technical experience,” notes Hess. “In many cases, the companies had to make multiple costly hires for the same position before finding someone with the right competencies who also fit the company culture. Many of these entrepreneurs frequently stated that they should have ‘hired more slowly and fired more quickly.’ They made much better hiring decisions when they learned to hire against a competencies and cultural scorecard; conduct multiple interviews; have multiple people interview prospects; hire on a trial basis; establish mentors for new employees; develop a good on-boarding process; and encourage good employees to make hiring referrals.”
Managing cash flow. Many times entrepreneurs get overly engaged in the joy of growth and lose sight of the need to manage cash on a daily basis. Cash flow management during growth periods is critical, because in many cases growth requires investments in people, technology, supplies, etc., ahead of the receipt of cash from customers. Thus, there is often a mismatch between expenditures and receipts.
“This might sound simple, but it can be a major issue if not handled properly,” notes Hess. “Entrepreneurs have to understand that they may not be able to afford all the available growth. The amount of cash available for investment can limit growth, especially in today’s economy when many small businesses can’t get loans or credit lines. And finally, I can’t help but stress the importance of cautiously managing your checkbooks, credit cards, and online accounts. If you do decide to delegate this task, choose the employee you trust the most and set prescribed monetary limits. Check your payments and accounts every day, because frauds do occur.”
Spending too much time putting out fires. A high-growth environment is hectic, sometimes chaotic, with multiple mistakes needing to be corrected almost every day. “Entrepreneurs can easily get sucked into playing the role of ‘firefighter,’” says Hess, “spending their days putting out fires. The problem with that is that growth requires the entrepreneur to plan for more growth, to put in place new and better processes, and to be constantly upgrading processes and resetting priorities. It is very difficult to find the time to do all that when your time is eaten up mediating employee conflicts, correcting inventory orders, calming angry customers, and so on. Entrepreneurs in my study found that they had to be disciplined in getting away from their businesses for short periods of time to think and plan. They needed ‘firehouse’ time away from the daily ‘fires’ that pop up when running a business.”
Creating a high-performance “family.” Entrepreneurs often struggle with creating a high-performance “family” or team environment. The challenge, of course, arises when someone in the “family” just isn’t meeting expectations and has to be terminated because they couldn’t grow their skills as the business grew. “Here entrepreneurs face an uphill battle in balancing loyalty and changing performance needs,” notes Hess. “Let someone go who everyone else at the company loves and you’ve created morale and emotional issues. Let a poor performer stay and you’ve created morale and emotional issues. See the challenge? The entrepreneurs I researched learned that you can have a ‘family’-like culture and high performance by having clear job expectations; a fair, transparent, and frequent feedback process; and by giving people a fair chance to improve or to step into a role that they could do well.”
Understanding that upgrading never ends. The people, processes, structure, and controls needed to manage a business with $1 million of revenue generally do not work for a business with $10 million of revenue.
“Entrepreneurs often learn the hard way that growth means continual change,” says Hess. “And as you grow, the solutions that worked at one level will most likely not work at the next. Inflection points for the companies I’ve studied occurred frequently when they expanded to 10, 25, 50, and 100 employees. When these changes take place, entrepreneurs often realize their hope of having a smooth-running machine is an elusive dream. Successful entrepreneurs and their employees are open to learning and adapting in an incremental, iterative, and experimental fashion. The hard truth is that growing businesses generally do not experience much sameness or predictability until they become quite large—for example, larger than $100 million in revenue—but learn to manage these changes properly, and you can keep the ship pointed in the right direction.”
“Growing a business is an evolutionary process,” says Hess. “Growth is messy. Growth is change. Growth has spurts, detours, downturns, and spikes. Growth requires constant learning and improvement. And if not well planned and managed, it can outstrip the capabilities of companies.
“These are important points that must be heeded,” concludes Hess. “Growth should be a strategic decision made only after the risks of growing and not growing have been assessed. My advice is that rather than focus on growing for growth’s sake, base your goals around how you can constantly improve your business. When you do this, you will be able to meet the challenges of business growth head on and with great success.”
About the Author:
Edward D. Hess is author of Growing an Entrepreneurial Business: Concepts & Cases and is a professor of business administration and Batten Executive-in-Residence at the Darden School of Business, University of Virginia. He is the author of nine books, over 60 cases, and over 60 articles. His work has appeared in over 200 media outlets around the world including CNBC, Fox Business News, Dow Jones Radio, WSJ Radio, MSNBC Radio, NPR, Forbes, Bloomberg, BusinessWeek, CFO magazine, Financial Executive, Journal of Applied Corporate Finance, Big Think, the Washington Post, and Financial Times. His book Smart Growth: Building an Enduring Business by Managing the Risks of was named a 2010 Top 25 Business Book for Business Owners by Inc. magazine.
