GROWTH SECRETS: Avoid the major hurdles

With this insight, I have restated the earlier table but used the 14 principles from the High Growth Wheel of Success as the elements to estimate the probability of growth success. Emerging businesses have to establish many of the attributes which a more established business can take for granted. The early stage venture has more challenges to overcome, setting up a management team, establishing distribution channels, building a stable innovation capability and so on. Thus the number of hurdles to overcome increases and thus the probability of success, or even survival, is much lower.

In this next example, using the 14 principals of high growth, each of the important characteristics had a relatively high score – but look at the combined outcome.

Under this scenario, even if you did everything reasonably well at 80% of excellent, you would only have a 4% chance of achieving high growth. This result lines up well with the earlier data from the ABS on firm size where only 6% of all businesses had revenue exceeding $2 million. At 90% on each of these elements, the success rate jumps to 22%, but for that to occur, the venture would have to be exceptional across a wide range of attributes. You can see from this model that one weakness, say at 40%, can substantially undermine the outcome.

From what we can see from the ABS data, the VC success model and my own 14 principles is that high growth is a challenge and few enterprises will establish the capabilities and capacity to reach reasonable levels of revenue and profit.

Where to from here?

My own experience over several ventures has shown me that growth can be elusive. My first business, Pioneer Computer Group, grew from three partners working in a dining room to 160 employees over three continents 12 years later, a compound growth rate of 36%.

However, during the early years, we were close to insolvency several times. This was a classic case of feast or famine due to the size and timing of large deals. During the middle years our business was disrupted by litigation which we brought against the prior owners of our subsidiary in the US. Just before we sold out, we were faced with a significant decline in revenue and profit as the UK went into recession. Some years we would grow dramatically and in others we would go backwards. But recall that this business was still able to raise US$1.5 million for a 20% stake as it was seen by the investors as a successful business model.

In the case of my last business, Distinction Software, we also raised venture capital. In that case, $2 million for 20% equity. That business seemed to have all the attributes necessary to assure success. The business was staffed by very experienced managers and employees. It sold back into a known niche market.

The product suite had a very rapid payback for the customers. Basically, it looked like a very good VC investment. However, sales were slow because customers could do without the product – a low compelling need to buy. In the end, the business went into severe decline when new competitors entered the market.

It is impossible to foresee everything which can go wrong, however, with a better growth framework, we can avoid some of the worst mistakes and hopefully engineer our ventures to give them a greater chance of driving growth in a sustainable manner.

My personal experience suggests that you cannot fix most of the fundamentals of a business. If you have the wrong product or the wrong market it is doubtful that you can fix it later on. However, if the market characteristics are right for growth, a lot of the execution issues can be dramatically improved with good people, good advice and good internal monitoring and governance systems.

Without exception, high exit values and thus significant rewards to the entrepreneur and founding shareholders and investors are created when growth potential is a dominant characteristic of the venture. But as we have seen, ventures which pursue high growth are more likely to fail than succeed and more likely to stall than sustain long-term growth. Only the exceptional venture has the characteristics to get to a size which allows an IPO or a good EBIT based trade sale.

From my own observations, entrepreneurs fail to build the solid foundation for growth. What is required is both a comprehensive understanding of growth attributes but also the willingness to change direction to implement the necessary foundation components so that growth has a better chance to develop.

Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the former Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia. A series of free eBooks for entrepreneurs and angel and VC investors can be found at his site here.