Survive the Small-to-Big Transition
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Your startup has enjoyed steady profits and your phones are ringing off the hook. But while your business is making more money, it's costing more and more to run it, and you don't know why; instead of relishing those constantly ringing phones, you dread them.
You could be in no man's land, a description used by Doug Tatum, author of No Man's Land (What to Do When Your Company is TOO BIG to Be Small but TOO SMALL to Be Big). Tatum's financial leadership business, Tatum LLC, sends CIOs, CFOs or technology consultants to businesses to help them grow out of this awkward "tweener" stage.
With nine out of 10 startups failing within the first three years, no man's land is a "real piece of territory" many businesses will face, Tatum says.
Essentially, it's a transition a company goes through when it's too big to be small and too small to be big, Tatum says.
It begins around 20-plus employees and reaches a crescendo as it approaches 100 employees.
"Entrepreneurs recognize it because they feel like they're losing control, and the old levers that they used to pull to move the business forward don't work anymore," Tatum says.
4 Pitfalls of No Man's Land
Tatum's book explains four common pitfalls associated with no man's land and how to resolve them: market misalignment, outgrowing your management, outgrowing your model, and outgrowing your money. If he could boil down all these tips--market, management, model and money--into a single phrase, Tatum says it would be: "The company has to become good at what the entrepreneur is good at."
With respect to adjusting your business model, "Some businesses don't have a unique value proposition that's scalable, and so they never would be successful [if they grew] larger because the business is based on the talent of the entrepreneur, and that talent can't be transferred to a business."
That's a key reason so many startups fail, Tatum says. Approximately 40 million businesses start up per year; an estimated 350,000 break out of the pack and begin growing, and about 35,000 to 45,000 make it. These businesses also provide the bulk of the net job growth in the U.S.
Another key reason a business may fail while it's in no man's land is because of capital gaps, where a business isn't big enough to attract the capital it needs, Tatum says.
While money is available for startups, growing businesses go through a stage when they need between $250,000 and $5 million, a niche that capital markets don't serve, Tatum says.
"Once the business has proven itself over time and gets large enough, banks and private equity investors will offer the business capital. The entrepreneur has to concentrate on the profitability of the business and has to spend time on managing its customer receivables carefully and its relationships with its suppliers. There is no shortcut, and the honest answer is not to spend a bunch of time looking for investors when the reality of the matter is that the capital needed to get a company through no man's land has to come from the business itself."
Tatum recommends hiring an accountant and providing him or her with decent accounting software with a goal of producing weekly operating reports that let the entrepreneur know where the business stands before the monthly financials are in.
Making a Model
Larry Meadows, 49, started the home improvement retail business American Exteriors in 1993 with "$35,000 in savings, cross-legged on the floor of a very small office with one employee," according to Meadows. He survived a three-year journey through no man's land. His company grew from a startup with $1 million in sales to projected sales of $30 million in 2008. He did it by investing in technology, thereby setting up a new business model that allowed his business to grow.
"We leverage technology any way that we can to make ourselves more efficient and have been very willing to, although kicking and screaming the whole way . . . OK, I wasn't willing. I was willing until it came down to writing the check," Meadows says. "It's about stepping out of your comfort zone and making that commitment to the unknown."
The technology, Meadows says, included a database for a marketing model he developed in the first American Exteriors location he opened in Colorado, as well as a call center. These marketing and sales models were easily transplantable when Meadows decided to branch out into another state, and then another, to a total of four locations.
Growing Your Management
Meadows also addressed another of Tatum's four steps by adjusting his management plan before his business could outgrow it, although he says he's never really given thought to when or why he decided to grow his company bigger. Indeed, expanding his business from a sole location in Colorado to a second location in Utah was a spontaneous, serendipitous move.
His company had a long-time employee, a Mormon, who had a burning need to move from Colorado to Salt Lake City for family reasons.
"It was a perfect fit. I will tell you that that played no small role in our ability to expand."
He knew the company had hit no man's land when sales stalled and even went down in 2002, when the company had reached its $8 million sales mark.
"We were in what I call a tweener stage," Meadows says, referring to the basketball term for when a player isn't fast enough to be a point guard but isn't strong enough to be a power forward--in other words, the worst of both worlds.
"It was clear to me that we were either going to have to get bigger or get smaller. Getting smaller didn't make a lot of sense in a robust business environment, so I chose to get bigger."
He brought on Ed Rand, a partner with Tatum LLC, as American Exteriors' CFO in 2002.
"We wanted to bring to the table the type of experience that a seasoned veteran like Ed Rand has, who's already had 30 years of Fortune 400-level experience under his belt," Meadows says.
Ed Rand stayed on with American Exteriors as CFO after resigning from Tatum LLC.
Rand says recapitalization started when Meadows decided to grow the company and was completed in July 2008. After expanding to Salt Lake City in 2002, American Exteriors opened a location in Omaha, Neb. It's in the process of opening another location in Wichita, Kan., which completes a market expansion to 10 states.
While Meadows was familiar with Tatum's book and was able to enlist Tatum LLC for help getting through no man's land, one reason many entrepreneurs fail is because they don't plan for or recognize no man's land, according to Tatum.
"I get upset when I see entrepreneurs on the defensive, because they believe that their own personalities are the reason their businesses are struggling; and they're very defensive about it because they've had nobody else tell them that the territory they're trying to drag their company through is really hard to get through," Tatum says.
He identifies three major mistakes failing businesses make when they encounter no man's land: "First of all, because they didn't know [no man's land] existed. Second of all, they didn't have a map or have someone explain it to them so they could sit back and say, 'Oh, that's what I'm going through and this is what I'm going to have to do to get through it'; and third, some of them have businesses that aren't going to be successful large, and they should never have tried to grow them large."
"People sometimes don't accept the fact that they've got a beautiful niche," Rand says. "I think that's probably the biggest pitfall."