Tuesday, August 28, 2007
Growing pains that afflict corporate adolescents
By Richard Evans
Tuesday, August 15, 2007, FT
Entrepreneurs have been responsible for much of the job creation in the US in the past 25 years. Yet nine out of 10 start-ups there fail in the first three years, says Doug Tatum, founder and chairman of Tatum LLC, a US financial and technology consultancy.
So why do so many start-ups fail? And how can entrepreneurs survive the years when a company is growing quickly but does not yet have the resources to make the leap to become abig, established brand?
Tatum focuses on three core failings of many small growth companies: a lack of cash, inappropriate management and an inflexible business model.
The author draws on personal experience and a variety of obscure case studies of US start-ups in sectors as diverse as technology, food service and musical instrument retailing. He points to recurring failings when entrepreneurs seek to move their companies through an "adolescent" phase - in which they earn $10m-$50m in annual sales. Most of these companies don't make it beyond adolescence. They either stall, fail or are sold to larger firms.
Perhaps the biggest barrier to growth is inability to raise capital. In their early days, start-ups are typically funded by an entrepreneur's own money, contributions from family and friends, credit card debt and bank lending tied to assets such as homes and land. Steering a start-up successfully through adolescence, however, requires a step change in financing. Infrastructure must be beefed up, external managers hired, and new products and services developed.
"At a certain point, the business needs more capital than the entrepreneur can repay," Tatum writes. "Unfortunately, most banks and private equity firms make it very difficult to provide capital to these firms."
The author cites the case of DocuSource, a Californian start- up providing computer-based document-management systems to businesses. After nine years, the company had grown to more than 100 employees and $21m in sales by 2001. Then it hit the wall. In spite of its impressive growth and record of stealing customers from larger competitors, DocuSource could not find a bank to back its expansion plans. Instead of being able to meet growing customer demand, it was forced to cut its salesforce. Revenues stalled.
"We were in a cash stranglehold with [our] current lender," says Les Walker, chief executive of DocuSource. "The banks tightened up their lending criteria." After failed attempts to raise $1m in subordinated debt, Mr Walker was left reluctantly considering selling the company.
The best way to attract capital, of course, is to reduce the risks that frighten banks and private equity firms. To do this entrepreneurs need to hand off functions such as operations and finance to professionals, even if it means demoting or firing colleagues who have been on board since the start.
Tatum says growth companies that cross that no man's land to become $1bn-a-year sales behemoths do so with a mixture of entrepreneurial vision and sound management. What is needed, at a bare minimum, is a "mess up" guy with great sales skills and an innate sense of customer needs, and a "clean up" person who knows how to control costs and prioritise. The founder is almost always the "mess up" guy; the "clean up" person is hired from outside.
Also vital to success is the ability of a growth company to shed its original business model once it has outgrown it. Almost all start-ups initially thrive on a "high performance/cheap labour" business model. The entrepreneur and team work absurdly long hours, pay themselves virtually nothing and yet offer superior products and services. Eventually, though, the business grows to a point where that model becomes untenable.
"Ultimately, you can't build an organisation on superhuman effort," Tatum says. "Sustainable profits must be built on normal people doing normal things for normal compensation." This requires standardised business procedures that can be easily taught to new arrivals. Above all, the business model must be "scalable" - adaptable to larger volumes, wider product ranges and greater geographical scope.
No Man's Land offers some useful rules to aspiring entrepreneurs, and benefits from Tatum's insights. But its folksy style - with jokes about raccoon hunting - may bemuse international readers. The last chapter contains a critique of US local and national government policy regarding growth companies that some could find provincial.
Not all the book's case studies are entirely convincing. They are let down by the author's tendency to jump from story to story without providing enough focus or detail. Perhaps theseare the inevitable traits of the serial entrepreneur.
Tuesday, August 15, 2007, FT
Entrepreneurs have been responsible for much of the job creation in the US in the past 25 years. Yet nine out of 10 start-ups there fail in the first three years, says Doug Tatum, founder and chairman of Tatum LLC, a US financial and technology consultancy.
So why do so many start-ups fail? And how can entrepreneurs survive the years when a company is growing quickly but does not yet have the resources to make the leap to become abig, established brand?
Tatum focuses on three core failings of many small growth companies: a lack of cash, inappropriate management and an inflexible business model.
The author draws on personal experience and a variety of obscure case studies of US start-ups in sectors as diverse as technology, food service and musical instrument retailing. He points to recurring failings when entrepreneurs seek to move their companies through an "adolescent" phase - in which they earn $10m-$50m in annual sales. Most of these companies don't make it beyond adolescence. They either stall, fail or are sold to larger firms.
Perhaps the biggest barrier to growth is inability to raise capital. In their early days, start-ups are typically funded by an entrepreneur's own money, contributions from family and friends, credit card debt and bank lending tied to assets such as homes and land. Steering a start-up successfully through adolescence, however, requires a step change in financing. Infrastructure must be beefed up, external managers hired, and new products and services developed.
"At a certain point, the business needs more capital than the entrepreneur can repay," Tatum writes. "Unfortunately, most banks and private equity firms make it very difficult to provide capital to these firms."
The author cites the case of DocuSource, a Californian start- up providing computer-based document-management systems to businesses. After nine years, the company had grown to more than 100 employees and $21m in sales by 2001. Then it hit the wall. In spite of its impressive growth and record of stealing customers from larger competitors, DocuSource could not find a bank to back its expansion plans. Instead of being able to meet growing customer demand, it was forced to cut its salesforce. Revenues stalled.
"We were in a cash stranglehold with [our] current lender," says Les Walker, chief executive of DocuSource. "The banks tightened up their lending criteria." After failed attempts to raise $1m in subordinated debt, Mr Walker was left reluctantly considering selling the company.
The best way to attract capital, of course, is to reduce the risks that frighten banks and private equity firms. To do this entrepreneurs need to hand off functions such as operations and finance to professionals, even if it means demoting or firing colleagues who have been on board since the start.
Tatum says growth companies that cross that no man's land to become $1bn-a-year sales behemoths do so with a mixture of entrepreneurial vision and sound management. What is needed, at a bare minimum, is a "mess up" guy with great sales skills and an innate sense of customer needs, and a "clean up" person who knows how to control costs and prioritise. The founder is almost always the "mess up" guy; the "clean up" person is hired from outside.
Also vital to success is the ability of a growth company to shed its original business model once it has outgrown it. Almost all start-ups initially thrive on a "high performance/cheap labour" business model. The entrepreneur and team work absurdly long hours, pay themselves virtually nothing and yet offer superior products and services. Eventually, though, the business grows to a point where that model becomes untenable.
"Ultimately, you can't build an organisation on superhuman effort," Tatum says. "Sustainable profits must be built on normal people doing normal things for normal compensation." This requires standardised business procedures that can be easily taught to new arrivals. Above all, the business model must be "scalable" - adaptable to larger volumes, wider product ranges and greater geographical scope.
No Man's Land offers some useful rules to aspiring entrepreneurs, and benefits from Tatum's insights. But its folksy style - with jokes about raccoon hunting - may bemuse international readers. The last chapter contains a critique of US local and national government policy regarding growth companies that some could find provincial.
Not all the book's case studies are entirely convincing. They are let down by the author's tendency to jump from story to story without providing enough focus or detail. Perhaps theseare the inevitable traits of the serial entrepreneur.
Labels: SME
¶ 5:48 AM
