Growing from a Startup to a Mid-Market Software or Hardware Company

Every stage of a company’s growth holds unique challenges. In my opinion, the startup phase until about $2M in revenue for a software company is the hardest. The “hardest” analogy for hardware companies would be around startup to $10M. That’s because hardware company revenue is usually higher at the same “stage”. But growing a business is almost always hard! And there are several natural revenue levels where startup and mid-market companies tend to “get stuck”.

Similar to the hardware/software contrast above, revenue levels for different business models can be quite different as well. So it’s hard to generalize strictly upon gross revenue levels. But there are distinct stages that every company goes through (startup to profitability, profitability to stable small company, stable small company to mid-sized company, etc.). These stages define points of inflection in terms of how a company operates. For a simple example, you need quite a bit more formal process to operate a large company than a very small one. Also, the methods of capitalizing a large company are very different from a bootstrapped or VC-backed startup. There are many more relevant examples.  I’m sure you get the picture. For this article, we’ll focus on growth into the Middle-Market stage.

First, there is no exact definition of a “Mid-Market” company. People have defined it in many different ways. Some of those ways include number of employees, revenue level, and many other factors. For this discussion, we’ll define a Mid-Market company as one having between 100 and 999 employees. Let’s take a look at some of the major changes required to  grow successfully from a startup to a mid-market-sized company:

Hiring software and hardware company employees in middle-market companies

As a startup or smaller technology company, you’re often restricted in hiring by resource realities. Startups are often forced to hire people with less direct experience than they’d like. And need to pay them less than the going rate in cash compensation. So you often can’t fill every hole, even all those you think are critical. People have to wear two or more hats.  The type of people you can attract might be only those who prefer the small company environment.  Or those are dreaming big dreams based upon the potential of stock options. In short, hiring is a continuous compromise between being able to attract who you’d like vs. what you need. As you grow into the mid-market size, you have more resources to pay market rates.  The larger company is generally more attractive to a larger pool of employee prospects.

But please, be careful. Just because you can hire differently doesn’t mean you should! I’ve seen folks get drunk on hiring during this growth phase. The company gets loaded down with overhead that makes running the business to optimal profitability quite a bit harder. As you grow there is also a tendency to go after people with big, blue-chip company resumes. This sounds great on paper but can be very dangerous. If these candidates don’t also have experience in smaller companies, you’re setting yourself up for a very premature and usually inappropriate culture change. It’s important to guard against building a big company bureaucracy too quickly in a middle market-sized company.

Business processes for mid-market tech companies

Much like in hiring, there is often a tendency to want to add too much process, too soon. I believe this is the absolute biggest danger executive management needs to guard against during this transition. The CEO and senior team are usually very aware that the business is outgrowing its current level of checks, balances, and controls. Inevitably there is a need for additional and more formal processes. The typical mistake I see is that instead of adding processes carefully, gradually, and ONLY as absolutely needed, management wants to radically change the business overnight. The result is often a still-modest-sized business operating like one with 50,000+ employees. This almost always means operating VERY SLOWLY. Guard against this! Mid-market companies still need to rely on speed and agility to compete with the corporate giants who have many more competitive advantages that you can’t yet replicate.

Scope of target software or hardware market

Around the mid-market stage, a single-product or single-market-segment company may run out of room to grow at its historical rates. This is a day of reckoning and a danger point that stops many promising companies in their tracks. If you need to expand into new products or markets, make sure that you do so rationally. Avoid going out and acquiring a company in a completely different business because your investment banker thinks it’s undervalued and a great buy. Do “diversify” into “adjacent” markets. Take one of your existing technologies into a different market, or introduce a new technology or product category to your existing market segment.

Middle-market tech company capitalization

This is the stage where you need to hire a serious CFO with financial market savvy and connections. Many startups have someone with a CFO title whose background is in accounting and basic financial controls. Or possibly up till this point you’ve gotten by with an outsourced, part-time CFO. Either of these is usually fine up to this stage.

But once you are talking about opening new offices, funding a new market focus, or a whole new line of product technology, the capitalization game has changed. The skill set of controlling the company’s simple expenses and dealing with a small number of angel and VC investors now becomes inadequate. The company needs someone who understands how to raise money in institutional financial markets. Not to mention the contacts that go with that knowledge. Budgeting and controls will also become more decentralized and/or complicated. This requires a different financial management style, as the company continues to grow into the upper end of the mid-market phase.

Tech market distribution and regional offices

As your business grows into new markets and product categories, your distribution system must often change and grow with it. This might be when you begin to open offices in all the key geographic markets of the world. But don’t do this “just because it’s time”! It should be done only for good business reasons.  Good reasons like increasing marketing in countries where a distributor won’t or can’t do what’s necessary to accelerate local growth. It might also be when a single distribution channel business needs to become a multi-channel one. For example, a direct-only company adds retail or VAR channels to the distribution mix. Again, avoid the temptation to do this only because your business has grown to a certain size. More distribution channels add complexity and overhead to your business. So make sure there are sound business reasons for the change.

Product Development

Moving to a different target market or new base technology can have a profound effect on the product planning and development process. It is often in the middle market stage that you must stop relying on a single set of market veterans or insiders. They may have successfully brought out your initial products. They did so strictly because of deep, long-term domain knowledge in your original market/product focus. Now is often when you broaden the number and scope of development projects. As a result, there needs to be a more standardized and professional product planning and development process.

The bottom line is that to continue strong growth as you grow out of the technology company startup phase into the middle market, you need to adjust how your business operates. But do nothing “before its time”! The biggest danger, in my opinion, is trying to “get big” before your time. The big blue chip companies are often admired and envied by smaller companies. But trying to duplicate their current mode of operation while you’re just entering the mid-market stage is probably the best way to ensure that your company will never reach that blue-chip status. Go about “getting big” operationally cautiously. Because once you’ve bureaucratized your business, it’s very difficult to go back.

That’s my take on going from a startup to mid-market. Please your own growth stories with us, good or bad, to expand on the topic.

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