Managing Risks Part 3
1. the carrying out or putting into effect of a plan, order, or course of action.
The Right Things at the Right Time in the Right Way
“How do you know it’s the right time to scale?” is a question we get all the time and for good reasons. There are many factors involved, from economic cycles and your market’s appetite for investment to competitive pressures and capital availability, just to name a few. These are both within and beyond your control and change often.
What does not change is your need to have a problem, solution, and business model that fit together tightly; a process for consistently evaluating the results of your actions; and a well thought out plan for scaling based on continued success. Yes, there are many stories of successful businesses which bet the farm and beat the odds. These are still around, so we hear about them. We also hear about the grand investment flops where hundreds of millions of dollars were lost. We don’t hear as much about the far more numerous failures where unproven sales practices, marketing campaigns, or product designs were replicated with little success and lots of expense.
In this, the third part of a multi-part series on managing risk in high-growth technology companies, we’ll discuss common errors made when scaling rapidly and discuss a way to manage those risks.
Managing Risks Series
- Defining risks around Product/Market Fit
- Business Model Risks
- Execution and Scaling Risks
- Identifying and quantifying risks
- Risks management strategies
- Prioritizing and optimizing risk exposure
As discussed during the 2 previous segments in this series, startup companies must first identify a problem, then find a solution the “owners” of this problem like, and then seek not just any business model that works, but the best business model for this problem/solution and product/market fit. Now it’s time to scale. Or is it?
Knowing When to Scale
Back to our opening question on knowing when to scale. More important than kicking off the “Scale the Company” campaign are building a long-term growth “engine” and managing your company’s exposure to high growth risks. So the right time to scale is when your business model work has identified a repeatable and profitable process, you are surpassing your traction goals, and you are able to manage your exposure to scaling risks.
7 Common Scaling Problems
Scaling Risks – The exposure to loss in profits, clients, reputation or other valuable assets due to investing in high growth activities.
Here are 7 common failures we see repeated as companies rapidly scale their businesses. Some of these cause you to burn cash too quickly, others are people related, while a third group is a lack of attention on testing and learning.
1. A Sample Size of One
A sample size of one, even if it’s the biggest company on Earth, proves only one thing. One client wants to hire your product or service to meet her needs. That’s all. Worse yet, it only proves that the way you promoted and closed the sale works for this client. Yes, the first customer is a big win. But it is just 1 win. You may be able to repeat it. You just can’t know that yet. Your uncertainty is less, but not by much, until you work through a few more sales cycles.
You also need to look closely at how the sale was completed, what concessions were given, and who was critical in the process. All too often, companies get traction with the founder or head of sales closing a few deals and then decide to open offices across the US. This leads us to the next problem.
2. Explode vs. Expand
Expanding the sales force is a balancing act. Grow quickly with the wrong sales process, and you’ve dumped a lot of time and money down the drain. On the other hand, adding one sales rep to test the process puts you right back into the small sample size problem. Therefore, it’s important to map out the sales force growth strategy with key targets for success and invest only as much as necessary to quickly test your next assumption. Prioritize your assumptions so you learn the most, quickly and cheaply. Then, as you hit your targets, move to the next expanding as you go. Miss a mark, then take action to fix it before preceding.
With short sales cycles, you learn rapidly and can move forward more quickly. A lower sales process cost allows you to run more experiments for the same money and delivers faster learning. Don’t walk, but jog before you sprint and always keep learning.
3. Stop Testing and Learning
It is critical to continue learning. In fact, the more you invest, the more important it is to measure early and learn quickly what works and where you are missing your goals. All stages of companies can fail to continue learning, but it seems to accompany startups with a small number of early successes more often than not. These are the companies which really need to continue rigorous testing and expand experimentation in order to manage their exposure to growing the wrong thing or growing in the wrong way.
4. I Think We Should
“What We Think Doesn’t Matter”, should be in big bold letters on the wall in every internal meeting. 99.9% of successful companies intentionally or accidentally follow the customers’ leads. The rest have great margins, tenacity, and good fortune to get it wrong a few times first. Don’t forget the Apple Lisa, Microsoft Windows 1.0, or FedEx ZapMail.
5. Too Many Hats
High growth is hard. Yes, it’s a thrill a minute when the company is flying high, you’re adding people, problem-solving is job 1, 2, and 3, etc.; right up until it isn’t fun anymore. Whether you hit the “not fun anymore” moment often boils down to management attention and to way over simplifying it, two different people missteps. The first is having too many people wear too many hats for too long. This could be as little as 2 people wearing 2 hats for 2 weeks. It’s a delicate balancing act. You don’t want to promote or hire a lot of managers until you have tested your sales process and proved you have the additional business to expand. Wait too late and too many juggling balls cause some to be fumbled through the cracks. This is closely related to the next problem, which we will define and then discuss ways to manage both.
6. Not the Right Heads
Things are going well and you need to add management. You have some dedicated, loyal, hardworking people who know the company, but not this new role. Hiring is time-consuming, carries risks of talent and cultural mismatches, and takes your attention away from customers. So, you promote from within across a number of areas. We fully support growing your people and putting them in stretch roles. Designing and building critical new processes are not the ideal places for stretch roles. Yes, some will succeed early on, while others will stub a toe and figure it out eventually. Some will likely fail at great cost to you and them. There is a better way.
You need the Right Heads under the Right Hats at the Right Time. Right Thing at the Right Time in the Right Way. You can have some on the job learning, but you don’t want too much of it and you can’t afford trial and error learning for critical process development. Get it done fast and right the first time, while training your people by bringing experienced management in to 1) run things in a proven way from the start; 2) identify the processes and people needed to grow the capability as the company scales; 3) evaluate and train your candidates to run it; all while 4) building out the processes alongside your new leaders. The best of everything without the risk of big failures from too much on the job learning. You want on the job training, not trial and error learning.
7. Cash’s Kingly Reign Ends
Investment is costly, growth burns cash, things take longer, and everything costs more than you expect even when you take everything costing more than you expect into account. Who is this Murphy guy and exactly how does that work again?
Most small companies have to pay things as they go with a few days float on payroll and maybe 20 days float on smaller expenses. Sell to large companies and your days sales outstanding will approach or exceed 90 days. Manage it daily and you may get it below 60, but in any event the faster you grow, the more working capital you require. Add in a telesales or direct sales force which takes 3, 6, or even 9 months to meet quota and a sales rep hiring success rate of 60%, maybe even as low as 33% and you can quickly see where cash burn can quickly turn into a total disaster. Explode the wrong model and you have spent 6 months to a year blowing cash on the wrong thing. Promote or hire poorly and you spent 6 months not getting the Right Thing built in the Right Way. Too many responsibilities on the same people and the Right Thing is not ready at the Right Time, simply due to ineffective management attention.
Set your plan, execute your experiments, measure diligently and act decisively when things go well and certainly when they don’t. Plan, Do, Check, Act
These are 7 of the key issues that companies we’ve followed have lost sight of causing them to stumbled or worse. Many discovered the error, recovered, and move forward. Many more discovered too little or too late and paid dearly for it. We find much of it to be simple, but simple does not make it easy and that’s why sayings about draining swamps and alligators are recited so often. Maybe a top ten list would be better and I’m sure these are not the top of the heap for many people and maybe not even for most people. So give us your thoughts in the comment below and we’ll update the list as needed.
What are the top High Growth Errors your seen or even made yourself?
About Merita Consulting – At the heart of Merita is a simple idea – Successful companies do the Right Things at the Right Time in the Right Way. Many High-Growth companies struggle with prioritizing and managing the range of issues scaling presents and with bringing onboard the broad set of skills needed to do things right the first time. I help people address this.
We use a proven framework to prioritize what is needed to quickly and efficiently reduce the biggest risks. When necessary, we bring in experienced managers to drive these activities forward and identify the full-time resources needed to execute any ongoing processes.
Key to our success is instilling a foundation for sustained growth. This is critical in order to maintain growth over a long period and includes activities from culture development, compensation practices, and onboarding processes to opportunity identification, capability development, and even meeting schedules. Getting into the right cadence is critical to repeatedly accelerate and then maintain that new momentum.