A Closer Look: 5 Crucial Phases of Startup Growth

Mohan Sawhney, professor at Northwestern's Kellogg School of Management, recently published a research-based list of five transitions companies need to make in order to scale.

As difficult as it can be to go from startup to viable company, the next transitions in business growth--from small business to midsized one, or from midsized to large--can be even more difficult.

"The organic nature of early-stage growth can often leave companies relying on a handful of talented leaders to handle everything from acquiring new clients to managing functions in an informal, reactive way," writes Mohan Sawhney, professor at Northwestern's Kellogg School of Management, in an article on the Kellogg site. "Once a company achieves a certain size, the needs of the business typically overwhelm these ad hoc approaches."

Here's Sawhney's list of five transitions companies need to make in order to achieve scale:

1. Opportunistic to strategic. "Executives should seek to narrow their markets and focus on targeted customer segments," he writes. That may seem like surprising advice--growing by narrowing your markets--but the idea is to avoid spreading yourself too thin. Many growth companies make the mistake of performing any and all services for any and all customers. That's a great way to grow to a certain level, but it's not scalable. To scale, Sawhney suggests making bigger, bolder bets (but fewer overall bets) in the areas where you anticipate the most demand, growth and profitability.

I asked Sawhney if he could provide a few overarching principles that CEOs could use to determine which segments to focus on--and which ones to drop. He suggested using a simple model that he called the 3 Ms: momentum, margin, and materiality.

"Momentum basically means to what extent are your sales growing, how much traction are you getting, what is the market's response," he explained. Margin is exactly that--the areas in which you have profitability. Materiality is Sawhney's term for the size of the market space. Specifically, you need to gauge how much room you have to grow in a given market space. Say you have $100 million in business in a given space; that's nice, but if the size of that space is $120 million, the opportunity is limited--it's not where you should place your bets.

2. Projects to products. When you're small, you and your team can learn (and make mistakes) at the client's expense. But what happens when your team can't manage every project, all of the time?

The answer, says Sawhney, is to "identify patterns in the delivery of services and then design products based on what can be repeated." If that sounds easier said than done, don't worry: Here's the blueprint 37signals used to go from projects to products.

3. Ownership to partnership. It's common for startups to control every step of the sales cycle, from product development to supply chains to sales channels. To scale, you'll probably need to form partnerships--to reach customers that you don't currently have access to.

I asked Sawhney to assess the risks of a partnership approach. After all, the most powerful partners are likely to be larger entities who don't always have a small business's best interests in mind.

"The first thing to realize is that every partnership is a risk, because your partner can also become potentially a competitor," he said. Another risk, if you're accessing markets through parnerhips, is that your brand is not always in front of the customers--you can get buried behind the brands of other products, or the partner itself.

To some extent, these risks are the inevitable by-product of entering any partnership where the other entity has more power. All you can do, says Sawhney, is exert whatever leverage you have. That leverage might be some protected intellectual property, which prevents the partner from replicating you.

Another form of leverage is relationships: Perhaps you have access to people or networks that a larger entity could benefit from. The best form of leverage is to make sure you have a strong brand that resonates with customers. If customers crave your brand, then larger partners will always be motivated to cooperate with you in a win-win fashion.

4. People to process. At small companies, one key group of gifted employees is usually the driving force. "When this core team can't scale, the shortage of talent can quickly become an impediment to expansion," writes Sawhney. This is why the core team needs "to embed expertise into the company's processes and structure to lessen its reliance on a few key people."

That sounds logical, but executing it is another story. How do you actually go about embedding expertise?

Sawhney's recommendations--software, systems, training programs--aren't surprising. The biggest hurdle, he says, is not the "how" of embedding expertise; it's whether the CEO and leadership team have the self-awareness to let go of their own private savvy, in order to disseminate their know-how throughout the organization. It's not easy, because relinquishing their stranglehold on key knowledge can make the CEO or the leadership team feel as if they are less indispensable.

Moreover, it's usually the founder/CEO's private drive and hunger and knowledge that helped the organization grow from nothing to the point where it's ready to scale. To suddenly act in a different way, for the best interest of the organization, can seem extremely counterintuitive and uncomfortable. "Entrepreneurs are very used to managing everything on the back of napkin and in their head. They are not comfortable letting go of control," says Sawhney. He is fond of the maxim, "You have to let go to grow," as well as its sibling, "You're not going to grow until you let go."

5. Relationships to brands. What happens when important members of your sales team leave the company? For small companies, a big risk is losing the key relationships that drive sales. But the stronger your brand is, the less you're at risk for customer abandonment when a key salesperson departs. "This process involves delinking the brand from relationships while still embodying the critical attributes that the company has delivered in its relationships," writes Sawhney. In other words: Define your brand not only by what it says, but also by what it does. That's the best way to form an enduring--and loyalty-inducing--brand identity.
BY ILAN MOCHARI @ILANMOCHARI

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