Your company is still young, but things are changing. The business just doesn’t “feel” like it used to, probably in a number of different ways. The change has been good! You’ve been growing, but still, some of the things happening can become unsettling. You know that as a CEO – or other C-Level manager – you probably need to start doing some things differently. But what? We’ll examine some common and important considerations for exiting the startup phase below:
When is a startup “grown up”?
The reality is that there are many startup stages that a mobile software, SaaS or hardware tech company goes through. There are many different views on how to divide and recognize these phases. For companies that go down the institutional funding path there are thought by some to be three phases, generally defined by having met milestones appropriate for different types of funding. For example, 1) Friends and Family Round 2) Seed Round 3) VC/Growth Round. There are many different but similar variations out there on this theme for companies on a VC funding track, but I’m sure you get the idea. Unfortunately, this approach doesn’t apply to the great majority of startups that don’t raise institutional equity funds. A more generalized breakdown of startup phases I’ve seen goes something like this:
- Commitment (Form the company)
- Initial Traction
- You’re established (probably still growing, but not at the dramatic scaling rate)
My own take; I would describe the key phases as:
- Company Formation & Initial Capitalization
- Initial Sales (building the reference list)
- Breakeven/Cash Flow Positive (or could be if you chose to do so)
- All Grown Up
So there are almost unlimited ways of dividing up a startup’s life into phases. However you prefer to define these phases, recognition of them is usually more gradual than sudden. There usually isn’t a specific day the management team comes in and concludes “we’re no longer a startup!”. But you will generally get a strong feeling of change as you enter each new phase. So the important thing is to recognize those changes, and take any appropriate actions on how you are operating with a perspective of looking forward.
Key indicators of the ending of the startup phase
- You’re no longer looking at your checking account balance on a daily (or hourly) basis.
- You and your co-founders can’t manage everyone directly anymore. You not only have managers reporting to you; in some departments those managers also have managers reporting to them
- Have reached profitability or at least cash flow positive
- Making sales seem to be coming easier all the time
- Potential customers, employees, partners, etc. are increasing coming to you, rather than you having to do all of the chasing
What to leave behind as your company matures
- Marginal hires: You may have had no choice in the startup phase because you needed someone; but there was not enough money, the company may have been viewed as too risky, or not generally attractive enough to attract better candidates. Now that you can, stop doing that.
- Top Management: Does the top management team still have the right folks for the next phase? If you are the CEO, you even need to take an objective look at yourself. Some people thrive in the startup phase because their skill set is appropriate for it, or they just love the energy and chaos of a startup. As the company starts the transition into an established company, those skills and motivations are often less appropriate. At every inflection point of a company’s life, looking hard at whether you have the right people in the right roles LOOKING FORWARD (not backwards) should be a mandatory task. And yes, sometimes you need to fire yourself or your good friends.
What to hold onto as long as you can
- A little bit of chaos: Many readers may think this is odd, or even crazy advice! Especially those highly organized types who detest chaos. You know who you are; your desk is clean, with paper neatly stacked in piles orthogonal to your desk edges, with pens lined up in perfect order next to them. But my experience has been that if there isn’t a just a LITTLE chaos, you’ve probably got too much process. And too little free thinking and innovation is the result. Remember, this is the tech business and innovation is the life blood of a tech company. Innovation will naturally slow down as you get established and grow bigger, but it’s important to not suppress it any more than necessary. Again, in my experience you generally have to put up with a bit of disorganized behavior if you want to foster fresh thinking and innovative activities in your business. But this is tough for certain types of managers, often including people you bring in with big company backgrounds as you grow.
- Your company culture: Strategy, tactics, processes and the like will all morph over time as you company grows in and out of different stages. But it’s important that your culture doesn’t (assuming culture was a strategic advantage on the way up). Try to maintain your basic mission, principles and big-picture operating philosophy as long as it’s working for you. Don’t let it fade into the background when hiring and making other important decisions.
- A bit of paranoia: There is a natural tendency to relax a bit as you exit the startup phase. While you don’t want to be constantly living on that startup edge if you don’t have to (it’s not really healthy in the long term), don’t relax completely. A small bit of paranoia is always appropriate in fast moving hardware and software tech markets.
What you need to add
- A LITTLE additional process: You will probably need to add processes and become a bit more formal as you exit the startup phase. But don’t overdo it; processes tend to stick whether they are helpful or not, and the book of policies and procedures can become thick and a drag on your ability to move quickly if you’re not careful. The key is to add new processes only as absolutely necessary, and use a test period before institutionalizing anything new for the duration.
- A real CFO: Maybe you have one already. If you’re VC-backed, you may have had one for quite a while. Many companies may have been using a fractional CFO consultant up until now. But at the stage of exiting the startup phase, most substantial companies will have outgrown the Director of Accounting type who may have been your top financial employee to date (and may even have been given a CFO title). At this point you probably need to add a senior financial executive with the broader experience and viewpoint to guide the company through such issues as long term capital needs, regulatory concerns, etc.
- A VP or Director of HR: In the startup phase many can get by without any HR personnel for quite a while, or like the CFO role above may have used a part time contractor. Again, VC-backed companies likely filled this role a while back. For all companies, at this point it’s usually important to formalize the HR function and hire an appropriate full time leader.
- Consistent marketing spend: In the startup phase, often there isn’t a real marketing budget. Money is spent as it’s begged for and available. This isn’t advisable, but sometimes necessary. Marketing works best if it’s consistent, as well as constantly testing new approaches. If you haven’t already, formalize a budget and let the marketing professionals decide how to use it.
- Some formal employee communication methods: Before you were such a small team, everyone knew what was going on. But when people get a step or two away from the senior team, employees can feel disconnected from the mission. Don’t do away with your informal communications, but add a monthly email or all hands meeting (which you may have felt you didn’t have time for before) to the mix.
- An added emphasis on career development: The employees that join later don’t have the same motivations as the startup team, which is focused on becoming a going concern and likely are incentivized with a large amount of stock options that go with that startup stage. Later hires are often more concerned about career paths; you need to recognize this and include it in your management approach.
What you should avoid at all costs
Trying to go from a startup to a “big” company overnight. Many tech entrepreneurs admire some of our industry giants and aspire to become them. As a result, they are in a hurry to emulate them as soon as possible. While there are many attributes that it makes sense to admire among our most successful companies, it’s important to remember that these giants weren’t “born that way”. In most cases, they didn’t operate as they do now as industry behemoths back when they were still “growing up”. In fact, some of the very ways that they are now able to operate as an industry giant might have killed them, if they had used those methods and strategies while they were still “growing up”. There are many examples, but here’s a few:
- As mentioned earlier, avoid putting excessive emphasis on process by creating a LARGE book of burdensome processes to follow
- Pause before spending a lot of money on “branding” campaigns
- Allow yourself to “smell the bacon”. Take a deep breath, but avoid getting too comfortable
- DO NOT start hiring simply “because you can”
- Think hard before moving into a fancy new office (that may be either unnecessary or maybe that you can’t afford)
The lists above are fairly random and based upon my own experiences. I’m sure you can add many more many more items and may disagree with some I’ve listed. Also, many of the items listed aren’t inherently “bad”. Many are just best left to really big companies. Big companies can afford those branding campaigns without blinking and have the resources to make them effective. As you’re exiting the startup phase, your company almost certainly doesn’t.
That’s my too-long dissertation on navigating your way out of the startup phase if you’re a tech CEO. Please add or subtract to the points I’ve made above, given your own unique experience. Give us the benefit of your perspective by using the comment field below.
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