Scaling Up: 2 Key Questions for CEOs to Answer for Successful Growth
By George Dobbins
The pressure on Scale-Up Founders has been dramatically ramped up in recent years. Increased investment (up 61% for the first 6 months 2021 on the same period the year before), intensity to scale quickly, mission-driven values and a competitive landscape for talent have all combined to make a cocktail that requires Founders to invest in themselves more than ever before. This is particularly relevant as businesses transition from ‘start-up’ to ‘scale-up’ (around Series A/B) when the strategy moves from establishing Product-Market Fit to growth. From our experience working with Founder-led businesses, there are two critical questions which Founder-CEO’s can ask themselves in order to prepare for the challenges ahead.
The basic definition of scalability involves business expansion. However, the nitty-gritty definition involves preparing a business for increased adaptability, flexibility and the ability to take on a larger workload without compromising performance or losing revenue. This is no easy feat; it needs a great deal of awareness of what changes and resources are required and the implementation process. Asking questions early will help with making sure that change is seamless. The big challenges CEOs will face during scaling will involve building great teams with the right talent and acquiring new customers. These challenges come fast and all at once. With these challenges in mind, you might be wondering what the chances are of you successfully scaling up.
The statistics and the media tell you that the probability of failing is high; 20% of start-ups fail in their first year and around 60% will go bust within their first three years. However, if you have a sound strategic approach to avoid the common pitfalls, you have all the opportunities you need to succeed. But what is a critical factor is the ability for the leadership team, and the CEO, to quickly adapt their skills in line with the growth of the business. For anyone who has read ‘No Filter: the story of Instagram’, or listened to the podcast “How I Built This”, you will have encountered many growth journeys that have valued the role of quality investment in leadership development for the executive team. Alongside executive coaching, what are some of the key challenges for the CEOs of scale ups to address?
1.What are your goals?
Without a destination or a target, you will have no way to measure your progress. Many start-ups do not set clear objectives, which makes it that much more difficult to become one of the few that successfully achieve take off. Clear goals and objectives increase employee participation and commitment. According to the book ‘Scaling Up’ by Verne Harnish, goals can be split into four focus areas: people, strategy, execution, and cash.
People: Who do you need to recruit (culture fit and skills)?
Strategy: What are your revenue and gross margin targets and does your current strategy allow you to meet them?
Execution: What do you need to do to streamline processes and ensure a sustainable start-up?
Cash: How much cash do you need to generate internally to sustain steady business growth?
Alongside this, one of the most well-researched dilemmas for Founders is the concept of “Cash or King”. As many founders will attest, in the early years of a start-up, you could often receive a higher salary in another organization that isn’t bootstrapping. As you scale, there remains a constant tension between your own earnings and having sufficient budget to recruit the key individuals that will achieve your equity valuation. Defining the long-term strategy early on allows a Founder and CEO to properly allocate resources to achieve these competing goals, and to invest in the right people to surround yourself with to achieve an exit, or an IPO.
2.Do you have the leadership team for a successful scale up?
The leadership team for a start-up is different from the one needed for a scale-up. Start-up leadership often focuses on technical product development and creation, as the primary goal is product-market fit. In contrast, scale-up leadership needs to be equipped for growth, marketing and customer acquisition. The role as CEO commonly shifts from creativity and genuine entrepreneurship during the start up phase, to operational expansion, people leadership and financial leadership during the scale-up phase. An effective leader will inspire others to reach greater heights by cultivating an atmosphere of trust. The leader keeps the team accountable, taking a versatile and flexible approach to reach targets. Research shows that VCs place a great deal of importance on the quality of the management team when selecting investments.
A recent study of VCs across 681 firms, published in the Journal of Financial Economics, highlighted that the quality of management team is shown to be the most important factor when choosing companies to fund. Need further contemporary proof? Kevin Systrom, co-founder of Instagram, received $500,000 of VC investment even though the investors didn’t believe in the app, but they did believe in Kevin. The reputation of the CEO plays an important role in the image of the company and this is the person everyone will be counting on to make key decisions. The role of the CEO is stressful, which means that you need an environment where you are well supported to shape the culture and execute the long-term vision. A culture that promotes autonomy, personal growth and two-way dialogue will be the one that gives you the competitive advantage.
‘To open a business is easy, to keep it open is an art’
Having worked and supported various start up and scale ups throughout the UK, Europe and the US, we can attest to the challenges, but rewarding journeys that founders go on. There are no shortcuts when it comes to scaling up. Having precise goals and a strong leadership team that catches the eye of VCs is critical to company success.