In order to help shape the odds in their favor, many people choose to study. The surge of MBAs around the world is testimony that and the number of educational establishments that specialize in teaching entrepreneurship and MBAs has also grown.
Babson College in Boston, US, is one such establishment with about 2,200 undergrads, 800 graduates and many who pass through the exec programs. The entrepreneurial department at Babson is the largest on the campus and today boasts a 70-strong team, with managing growth being the hot topic. According to Professor Ed Marram of Babson, growing a company is unique and complex, but predictable.
“Growth is where the value gets generated. If you don’t grow your startup you don’t generate a lot of value,” says Ed.
According to Ed, startups scale to the size of the population and there are three million startups in the US, which if applied to an eight-hour day, means there are more startups than babies being born per minute, more business gets started. And in total there are 28 million companies with most employing ten people or less.
However, the majority of businesses don't survive more than four years. Ed claims that higher growth companies seem to do better and he highlights attracting and keeping the right people as a crucial element to success.
“If you're going to build a company,” says Ed, “you’ve got to have the right people and it's not easy. You've got to have a good strategy and know how to execute it. I've seen a lot of companies have a great strategy but somehow they don't know how to execute. And then of course you've got to have enough money to put up with the storms. Because I promise you there's always a storm around. There are always times when you're going to run out of money or you're going to need more money than you thought.”
According to Ed, who has also created, grown and sold his own companies, if you want to grow, you have to delegate, build a team. “This is why, at least in the United States,” he explains, “in a lot of high-tech companies, the founder becomes the CTO and brings in a CEO because this is a tough path that takes you away from what you like to do. Here you’re doing, here you’re a manager, here you’re a manager of managers. Do you want to be a manager of managers and be away from the thing that got you involved in the first place? That's what you need to think about all the time.”
So starting a business is easy, growing is hard, and growth takes cash.
“In a growing company you have to make choices, you don’t have an infinite bucket of money, but isn’t that a bit of what a good board should help you with? To grow you need cash and to have cash you need sales,” says Ed.
You also need the right people, he stresses. “My focus is owner-manager companies, because in owner-manager companies the owner's values are involved in the company. It's a more complex arrangement than in big companies where the management is up there: they don't own it they just run big companies like IBM.”
According to Ed, every company should have a board of advisors. “You need people who have been to where you want to go. They can make that road so much easier for you, and get you to where you want to go. You don't have to pay these boards or at least you shouldn't have to pay them to begin with. These should be people who care about you, who want to help you get to there. An advisory board should bring you ideas and concepts and new ways of thinking that you don't have.”
The Professor is not a huge fan of venture capital investment for growth. His own path has been one of organic growth with a view to building a company that lasts, rather than one that’s sold to give profit to VCs in five years’ time.
He does believe in giving equity to employees though, rather than VCs. “I think giving equity to employees is a good idea to get them involved. I think that's a great idea. Initially if you can't afford to pay them, you get them and they're now interested in growing your business.”
But how are we measuring growth in this context? The Professor likes a mix of cash flow, number of customers, number of employees, number of products
Ed illustrates the importance of cash flow with a personal story. “So I'm growing my company, we're in the INC 500, one of the fastest growing companies in the United States. We're in the service business. All of a sudden on the Wednesday, the bank says to me that I've got payroll on Friday. And the bank says: ‘We're not going to give you any more cash.’ So what do you do? I've got to pay my employees on Friday and I have no money. Growing 35 per cent a year and I have no cash to pay them. What do you do? I'm profitable, with great customers, great revenue, and growing 35 per cent. What’s the problem? Profitable, positive growth, good revenue - no cash. What does that mean?”
In the story Ed explains that as a result, half the people leave. “People that have families and need the money, good people. So you lose a good chunk of your staff, not because they're mean but becausetheyneed the money. And then you have the people that don't need the money so much they hang in with you. And then you straighten it out. And everybody gets paid. The people that stayed you give a little equity to.”
Ed was ‘lucky’ and managed to find a CFO who was willing to delay his salary until the company was in a better situation. The solution found was to renegotiate more favorable payment terms from a client, changing them from 145 days to 45 days, which generated cash.
It’s all about keeping a keen eye on operational metrics, says Ed. "There are day metrics, week metrics and month metrics. If you grow your company you want metrics that alert you to potential trouble ahead. That's what you really want. The metrics are not like a balance sheet and income statement, something that happened 30 days ago. If you wait for that you've got a problem, and if you have problems you're already 30 days behind. So you need metrics that give you an indication - we call them leading metrics - and cash is definitely one of them.”
So, whilst a healthy cash flow is crucial to growth.
And Ed’s parting comment: “Growing a business is working like most people won't, so that you can live like most people can't.”
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