The Growth Journey: Surviving Success
Predictable challenges and how to manage them as you move from startup to IPO
by Mark Bailey and Sam Fort, DFJ Growth Partners
Although the life cycle of a hypergrowth technology company brings with it challenges at each stage, a lot of what you’ll encounter is entirely predictable.
Indeed, over the course of our careers — particularly in the work that we do at DFJ Growth with extraordinary hypergrowth technology companies — we have seen certain recurring patterns and phases in the growth, maturation, and life cycle of these companies.
One constant: Being associated with a hypergrowth company is truly a transformative and exhilarating life experience which transcends the spectacular business achievements of the company.
We’d like to examine this “growth journey” by sharing practical advice passed along by entrepreneurs and executives about how to navigate the primary challenges you’ll likely encounter at each phase. Let’s take a closer look.
1. Survival: The Startup Phase (Revenue < $5M/year)
Great high technology companies often start with a vision of solving a problem with a new technology that offers customers a faster, cheaper, or better solution. Initially, this vision is often somewhat general and vague in the startup phase, when the company’s primary task is to survive. To survive, the company must turn its vision into a reality by engaging with customers, building a product, and beginning to close sales.
But don’t be surprised when things don’t go according to plan. Often, the initial assumptions prove incorrect. Why? Because there are often more questions than answers. Rapid iteration and hypothesis testing are the company’s friend during this phase. If something isn’t working, the best action often is to adjust quickly. Some describe this as fail fast and adjust.
While the mission may remain constant, there is no set path. It is a constant process of exploration and experimentation. Because of this uncertainty, this phase of the company’s development requires fast twitch personalities who are comfortable with plan du jour. As the company engages the market, constant adjustments are being made to the product, positioning, and distribution as the company empirically discovers the best and most efficient product/market fit.
While all this is taking place, the company is burning through cash during this phase. Therefore, speed is also your best friend, and it encourages a strong bias to action.
Action results in learning. Learning results in adaptive evolution. And if the company is smart and lucky, all of this results in survival.
2. Teamwork: The Small Company Phase (Revenue $5–20M/year)
As the company continues to grow, the primary developmental task shifts from survival to an emphasis on teamwork. Like a rock band, the company requires synchronized timing and complementary skills to emerge as the company finds its rhythm in identifying customers and competently satisfying their needs.
If the company has found a good product/market fit, the volume of work that must get done may expand much more rapidly than in the startup phase. The solution, of course, is to hire more people, and if possible, raise more capital.
Common challenges revolve around determining who does what, and when. It is not unusual for employees to experience task confusion as the organization rapidly scales. An expanding organization makes it necessary to determine how to complete tasks with more people involved. Hiring managers, who are already busy with running the business, must make time for rapidly recruiting and onboarding new employees. In addition, it may become apparent that the company is outgrowing the capabilities of certain early team members.
Rapid growth brings its own particular challenges. As they look to scale quickly, companies often neglect to install the appropriate management systems and metrics to ensure that roles, rhythms, and results are well-defined.
These are critical foundation stones for any business to execute effectively as it adds new employees who themselves are trying to figure out how to get things done.
Common tactics for managing through the small company phase include:
- Ensuring strong leadership which can overcome challenges; leaders can personally power through problems.
- Using Key Performance Indicators (KPIs) and management dashboards to identify problem areas that require further management attention.
- Adopting a more structured approach to defining roles, processes, and objectives for greater task clarity.
- Developing values and culture which can be immensely helpful in establishing hiring criteria and setting priorities.
The emergence from the small company phase is often accompanied by a solid base of happy customers, but the company is in many ways still in its adolescence. While it is more mature in certain respects, it remains awkward and somewhat immature in others. It is not unusual to see unevenness and gaps in general areas such as organizational structure, delegation and recruiting processes, as well as functional areas such as product management, marketing, and customer success.
3. Alignment: Large-small Company to Small-large Company Phase (Revenue $20–100M/year)
As annual revenue grows from $20 million per year to $100 million, organizations undergo a transformation from an oversized small company to a smallish large company. During this period of growth, the company’s key developmental task is horizontal and vertical functional alignment.
The business has now reached the point where it needs specialists in all areas. At the same time, it becomes important to align and coordinate the increasing number of specialized individuals and teams so that the company can efficiently continue to scale its critical business processes.
Common challenges experienced by companies during small-large company phase include:
- Misalignment between functions hampers company performance.
- Misalignment vertically inhibits functional execution.
- Specialized skills are often in short supply.
- An undue reliance on individuals resulting in organizational bottlenecks.
- Attracting the interest of large competitors.
- Expanding strategic scope; it becomes important to think about the business in a broader fashion.
- Growth through acquisition (M&A) can accelerate the business but can bring new business and cultural challenges.
Common tactics for managing through these challenges include:
- Empowering cross-functional teams to optimize and refine key business processes.
- Increasing coordination and specialization through systems, roles, and processes.
- Developing increasingly robust management information systems to identify variances.
- Ensuring an increasingly mature the finance organization to put in place planning, controls, and analysis to provide fiscal discipline and efficient use of resources at scale.
- Evolving and benchmarking M&A best practices and processes.
During the alignment phase, the company begins to look and feel increasingly like a corporation. The emergence from this phase is marked by noticeably more structure in both the organization as well as in the operational systems. Stronger functional leadership emerges with more robust systems to ensure organizational alignment across the larger and more sophisticated organization.
This phase is often characterized by “top-grading,” repurposing and transitioning personnel across and throughout the organization.
Increasingly, there is more energy and effort put into managing people as a critical resource and expansion of the Human Resource team.
All this preparation sets the stage for the next phase of the company’s development as thoughts of initial public offering (IPO) preparedness begin to occupy the minds of the management team and board.
4. Predictable Operations: The Corporate Phase (Revenue > $100M/year)
During this phase, the key developmental task is to develop predictable operations, which is a prerequisite for a company entering into the domain of the public markets.
Predictable operations require better information, more coordination, and at all levels of the organization, an increasing practice of “guard banding,” or making commitments with some meaningful cushion of time and resources.
This approach eventually leads to a “meet and beat” mentality and culture where the norm is meeting commitments and projections while ensuring there is a reasonable probability of overachievement. In some ways, this is a luxury that is often not consistently possible in prior stages of the company’s development.
Common challenges experienced by companies in the corporate phase include :
- Uneven information flow; there is often more than one source of truth.
- Individual employees start to wonder if they are making a difference.
- Where are we going? There is an increasing hunger for vision and mission.
- How will we get there? There is an increasing desire for corporate values and culture. If the company in its earlier stages hasn’t laid a solid foundation in this area, problems will likely emerge. Rapid organizational scaling can exacerbate the situation.
Common tactics for managing through these challenges include:
- Upgrading information systems, analytical tools, and management processes.
- Developing a “meet and beat” culture at all levels of the organization by rewarding predictability. Commitments include a margin for error.
- Testing employees for “line of sight” to high-level company goals.
- Cascading functional objectives to ensure alignment within functions.
- In each function, building out increasingly specialized expertise while maintaining vertical alignment with cascading objectives.
- Invoking corporate values while making decisions.
This phase of the company brings with it a new level of maturity and unavoidable conservatism in how the company conducts its business.
The company has now become a global commercial enterprise with predictable operations and a strong executive team with a span of control aided by delegation, business processes, management information systems, and strong cross-functional teams.
During this phase, the company evolves into an IPO-ready company. The IPO itself can then be done at the discretion of the management and board.
We hope this post resonates with your own experiences, and we look forward to comparing notes on best practices for managing through the fairly predictable, yet eye-opening, growth journey.