Scale-ups are special players in the entrepreneurial ecosystem. According to the OECD’s official definition, they are companies with annual sales growth of at least 20%. Their products or services are highly successful, and they are entering a phase of rapid growth.
It is important to note that this phase of rapid growth is not automatic and immediate after the creation of a startup. For example, it took Apple almost 25 years to move into this phase, prompting Steve Jobs to point out the impressive length of time it took to achieve so-called “overnight success.” Moreover, it is statistically proven that 96% of a company’s value is created after its tenth anniversary.
This trajectory is not linear, as any entrepreneur can testify. Phases of growth alternate with crises or periods of stagnation. However, the main aim is to stay in this phase as long as possible.
The growth phase is an exciting time for the company and its team: sales take off; the team expands and strategic objectives are achieved; the purchases and investments needed to support this growth can be made; additional staff can be hired. Revenues grow faster than expenses.
It is not uncommon to see a reduction in sales efforts during this phase, as the order book is full. This is a dangerous time when you may be tempted to over-recruit, often by hiring people by default, or to spend unnecessarily, motivated by ego or vanity, on luxury offices or sponsoring extravagant events.
Avoiding the valley of death
The stagnation phase that follows is less pleasant than the previous one, because it involves overcoming very specific obstacles. Sales stagnate, no longer allowing for significant expansion, and productivity declines. Is the offering sufficiently scalable?
What’s more, major investment is needed to kick-start the next phase of growth. In service-based businesses, this often means making a crucial decision about hiring. The focus is always on sales, generating revenue so that qualified staff can be recruited. The feeling of being understaffed is constant, as is the lack of cash and time. It’s important to be aware of the risk of burnout during this phase.
This phenomenon is well known, and phases of stagnation are often referred to as “valleys of death.” Many companies get stuck at this stage. According to Statista, depending on geography, between 87% and 94% of companies do not achieve a turnover of €1m.
It is therefore essential to correctly assess the company’s current phase and take the appropriate measures to capitalise on the sales momentum and maintain sustainable growth.
Surprisingly, these barriers to sustainable growth are well known and predictable for entrepreneurs and managers.
One of the main reasons why most entrepreneurs don’t want to work with other employees is their reluctance to delegate. This is why 94% of businesses with a turnover of less than €1m have fewer than 10 employees, and the majority have fewer than three. Making the decision to grow is not an easy one.
It’s made all the more difficult by the fact that the ultimate goal of any entrepreneur is to make his or her operational role redundant so that he or she can concentrate on developing the business. This means recruiting people who can do the work for the entrepreneur. If this is not possible, then the entrepreneur has a job, but not a business. To increase sales, you first need to recruit someone capable of developing them. Too many entrepreneurs wait for sales to take off before hiring a sales professional, but that doesn’t really change the situation. A management structure needs to be put in place so that the entrepreneur can concentrate on his or her true role as team leader and architect of growth.
With a management structure in place, activities can be systematised. This makes sense, because structure and systems are the answer to the growing complexity of the expanding business. The entrepreneur no longer has the time or ability to reinvent the wheel every time, but must be able to rely on clear, tried and tested procedures, whether for setting salaries, evaluating performance or drawing up the budget. It is important to note that former employees of large organisations are not necessarily the best choice for establishing order or setting up processes. Often, the processes of large companies are too cumbersome and far removed from the real concerns of scale-ups. It is preferable to develop in-house talent and, if necessary, temporarily support them with experts in the field.
The ultimate aim of introducing structures and systems is to achieve predictability. Unless a company can determine where it is today and project itself into the future, be it next week, next month or this year, it is not in growth mode, but in survival mode. This applies just as much to the financial aspects, such as gross margin, as to measures such as customer and team member satisfaction. With growth, the stakes are higher and the room for manoeuvre smaller. Without figures, it’s impossible to stay on course and control activities.
These obstacles represent just three of the six major challenges to thoughtful, sustainable growth. Scale-up is precisely about overcoming these obstacles and developing a frame of reference for sustainable business management, without drama or exhaustion.
*Jean-Marc Fandel, a recognised expert and coach in scaling up businesses in Europe and the United States, is one of a select group of 250 coaches specialising in scaling up worldwide. He draws his expertise and experience from 30 years of operational and strategic activity as an entrepreneur and CEO in startups, scale-ups and large companies. Fandel holds a doctorate in economics from the HEC School of Management at the University of Lausanne, and is a certified ILA/INSEAD administrator and an alumnus of the Harvard Business School AMP.
This story was first published in French on . It has been translated and edited for Delano.